The reality of AXS’s $102 billion bloodbath amid recession warning: ‘Just’

Stock market crashes come in different forms. Sometimes it is a sign that a recession is imminent. Sometimes, a stock market crash can create an unusual panic, causing an economic crash. Finally, falling stocks can be the bursting of a bubble, which can have economic consequences if it is large enough.

The problems we have seen in global stocks over the past few days have, so far, been of the latter variety, but they are still likely to be large enough to disrupt the business cycle. .

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AI encounters danger

Artificial Intelligence (AI) has been a hot topic in the sharemarket over the past 18 months. This led to widespread speculation for open AI firms.

The “Magnificent Seven” American IT giants have reached high valuations on AI’s promise to bring increased productivity and profits.

Some of these estimates are bubble-like. However, as a general phenomenon, the rise of the stock market was not comparable to, say, the great technology bubble at the turn of the Millennium.

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In 2000, unprofitable businesses were trading at very high prices. This time, there is no such problem after the non-profit technology has been reduced during the recent period of profit growth.

In addition, megacap tech stocks have large earnings and strong growth prospects and AI adoption.

Their sell-off is a major reaction to a broader environment of mounting risks that include the US election, slow but not damaging US growth, and China’s deeply troubled economy.

The Australian bubble

Surprisingly, the Australian stock market shows a greater tendency to bubble than the US. Our biggest investment portfolio has been in banking, rather than technology.

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For example, CBA recently traded 24 times next year’s earnings, which is almost double its traditional number.

This has made it more valuable than Google, without any growth prospects. It has also made CBA the most expensive bank in the world, so it is not surprising to see it go bankrupt, there is more to come when the mind can be restored.

Fear of growth

To see this correction as something worse, we would have to assume that the US economy is in trouble. There is no doubt that it is slow and destructive, which is why the Federal Reserve will reduce the interest rate at its next meeting.

This change in government often comes with uncertainty about how much the economy will decline and its incomes.

Furthermore, unemployment recently rose by 0.5 percent in the US, triggering “Sahm’s law”, a very reliable warning that a rise in unemployment of that magnitude never happens in except for recession.

But there is one thing that is very rare in the US today to end Sahm’s law. Like Australia post-Covid, the US has seen a huge increase in immigrants, about 11 million workers. Naturally, that brings fears of supply, which suggests that unemployment is not a concern.

No harm was done

So far, the macroeconomic effects of the small market collapse have been small.

Even if it doubled from today, to a 20 percent correction, it probably wouldn’t do as much damage.

For real damage, a correction would need to turn into a bear market that indicates the potential for recession in Australia and overseas.

Or, the market volatility will need to cause greater market risk.

If a large hedge fund, or bank, another market player is caught on the wrong side of a structured business, it can become systemic and threaten an extraordinary event.

However, at this stage, we can say that the balance of risks suggests a stock market that needed to clear the snow instead of exploding the world.

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