Personal Finance Topics / Macroeconomic Trends and Risks
No. of Recommendations: 9
Just in the last few years we’ve seen mini booms and busts in:
Semiconductor chips
Vaccines
A land grab for engineering talent
Warehouse and distribution centers
GLP-1 weight loss drugs
The Metaverse buildout
Electric Vehicle investments
Environmental, Social & Governance initiatives
Most recently, data centers and power (this one is still squarely in boom phase)
Throughout history, humans have reliably swung from extreme to extreme, but it sure seems like the sums being devoted to these mini (or not so mini in some cases) booms is substantially increasing over time.
Some of the biggest spenders in AI are Microsoft, Amazon, Alphabet, Meta, Nvidia, and Oracle. Those six stocks represent about 27% of the S&P 500. If those stocks pull back 50-75% on average during the down leg of this capital cycle it would pull the index down 15-20%. That’s before considering the fear and contagion that may spread to similar sectors or trigger an actual recession in the economy. JP Morgan recently estimated that 41 AI-related companies make up 47% of the S&P 500’s market capitalization. The other 459 stocks represent 53% of the index. The S&P 500 has essentially become an artificial intelligence ETF, and we’ll see how that goes if the current spending spree proves overdone. It may work out just fine, and it may follow the patterns of history, time will tell.
https://open.substack.com/pub/eaglepointcapital/p/...
No. of Recommendations: 29
On the subject of the possibility of markets behaving badly, this is a thoughtful article, written by the former chief economist, and former deputy managing director, of the IMF.
Probably paywalled.
"Gita Gopinath on the crash that could torch $35trn of wealth"
https://www.economist.com/by-invitation/2025/10/15...A couple of snips:
"At the heart of this concern is the sheer scale of exposure, both domestic and international, to American equities.
...
To put the potential impact in perspective, I calculate that a market correction of the same magnitude as the dotcom crash could wipe out over $20trn in wealth for American households, equivalent to roughly 70% of American GDP in 2024. This is several times larger than the losses incurred during the crash of the early 2000s. The implications for consumption would be grave. Consumption growth is already weaker than it was preceding the dotcom crash. A shock of this magnitude could cut it by 3.5 percentage points, translating into a two-percentage-point hit to overall GDP growth, even before accounting for declines in investment.
The global fallout would be similarly severe. Foreign investors could face wealth losses exceeding $15trn, or about 20% of the rest of the world’s GDP. For comparison, the dotcom crash resulted in foreign losses of around $2trn, roughly $4trn in today’s money and less than 10% of the rest of the world’s GDP at the time. This stark increase in spillovers underscores how vulnerable global demand is to shocks originating in America.
...
In sum, a market crash today is unlikely to result in the brief and relatively benign economic downturn that followed the dotcom bust. There is a lot more wealth on the line now—and much less policy space to soften the blow of a correction. The structural vulnerabilities and macroeconomic context are more perilous. We should prepare for more severe global consequences."
Jim
No. of Recommendations: 3
Some of the biggest spenders in AI are Microsoft, Amazon, Alphabet, Meta, Nvidia, and Oracle. Those six stocks represent about 27% of the S&P 500. If those stocks pull back 50-75% on average during the down leg of this capital cycle
Well, maybe. I suspect there will be some pull back if/when AI doesn't deliver as much as expected. However, let's look at it individually. If Googles spending of $100B on AI is for naught, and had ZERO return, how much do you think the stock would go down? Would it go down 75%? Probably not. Google is still primarily an advertising company and still derives most of its revenue/profit from advertising.
Or take Meta for example. Let's say they invest $70B in metaverse, and it all comes to naught, no real return. What will happen to the stock over the next few years? Or in this case, what happened?
JP Morgan recently estimated that 41 AI-related companies make up 47% of the S&P 500’s market capitalization.
"AI related" is a very nebulous term. You could even say that ALL companies are AI related because they are potential customers of AI or AI-related services.
No. of Recommendations: 14
>>In sum, a market crash today is unlikely to result in the brief and relatively benign economic downturn that followed the dotcom bust. There is a lot more wealth on the line now—and much less policy space to soften the blow of a correction. The structural vulnerabilities and macroeconomic context are more perilous. We should prepare for more severe global consequence<,.
There’s truth in that. But many people will be faked out early.
What’s truly interesting is how it plays out after the initial shock.
Because this time, we have a playbook. And it has worked.
We rolled it out after we voluntarily put our economy—and much of the world’s—into a coma just five years ago. We literally shut it down. Trillions of dollars in stock investments rushed for the exits.
And then we learned something critical.
We learned that we can rescue the system. We can lead with fiscal shock-and-awe—putting trillions of dollars directly into the hands of anyone with an internet connection almost immediately, and into the hands of those without one within days.
We also learned that the Treasury and the Fed can go further—buying stocks and indexes outright to stabilize prices.
All of this has occurred within just the past sixteen years.
If it happens again, stocks and Treasuries will be propped up. Interest rates will go to zero or below. Investors will be told not to worry about owning businesses whose revenues and profits will soar—artificially—as newly printed money floods into the hands of consumers who are presently broke.
Shower the economy with cash in soon-to-be devalued dollars, and the government carries the same debt burden—just in weaker currency.
The real massacre won’t be in equities.
It will be in long- and intermediate-term bonds. Credit quality will be largely irrelevant.
The Fed may temporarily halt that damage—but only briefly, setting the stage for an even more violent long-bond collapse later.
Here’s what we learned—and what I believe is likely to happen again:
People will still buy plenty of Coke. They may buy MORE at HIGHER prices! Because they’ll do it with far more cash in their pockets than they have today—while paying twice as many devalued dollars to do so.
Consumer baselines matter. Most people who buy Coke today can’t handle a $500 cash emergency. In a crisis response like 2020, they suddenly can. For them, a stock market crash is a Netflix sideshow. And a cash bonanza. Broke now--cash THEN. Like 2020.
Don’t worry about Coke.
Worry about Coke bonds.
And that may explain why absolutely pristine, fully guaranteed credit quality—despite slightly higher yields—holds no attraction for Buffett
No. of Recommendations: 10
We learned that we can rescue the system. We can lead with fiscal shock-and-awe—putting trillions of dollars directly into the hands of anyone ...
Nobody disputes this. It was well demonstrated. The question is how many times can you do it? Last time we did shock and awe, the Fed added trillions to their balance sheet. Most of it is still there. Can we do more trillions? Can we load the debt up from 100% of GDP to 150%? To 200% To 250%? How high can we go before the system breaks? Or before inflation eats our lunch (everything)?
No. of Recommendations: 8
How high can we go before the system breaks?
Dunno, but the US GDP debt to GDP ratio is about 125%, and that of Japan has crested as high as 240%.
That doesn’t mean I think it’s a good idea, just that there are similarities (strong underlying economy, similar social structures, etc.) as well as differences - and Japan has managed not to fall into the abyss over this debt load. They haven’t exactly prospered, either, with a stagnant stock market for 20 years (more!) and a recent lack of innovation, at least so far as the comparison with Silicon Valley is concerned.
But: there’s not rioting in the streets, the grocery stores are full, people are still buying cars and homes and such. It would appear the limits of debt for modern countries is a kind of stretchy-thing, and we won’t know how much until it snaps.
No. of Recommendations: 9
<<Nobody disputes this. It was well demonstrated. The question is how many times can you do it?<
We own a printing press that prints dollars. And given the present level of electronic transactions, we don’t even need to afford as much ink as in the past. To answer your question? At least one more time. Probably many times. And we hold the devaluation card if you’re worried about debt levels —they can be monetized. The people who LEND to Uncle Sam are the ones who need to really worry: China and grandma are both in that boat.
No. of Recommendations: 3
Two points:
For those who believe the impact will be limited to bonds (pick the duration of your choice), I would point out that margin as well as the shadow banking structure has reached unprecedented numbers. Once debt begins to crumble, the effects on stock prices will be amplified and, because of the prevalence of ETF's far broader than just the companies having immediate issues. This self-fulfilling prophecy of "eating the young" can become an uncontrollable vortex.
To those who feel that the finite exposure of, say Google, to a downturn is quantifiable as an expected risk value, I would remind you that the stock market can quickly move to "uncertainty mode" and the results are psychologically more qualitative.
It will also likely spread globally for a number of reasons (probably best discussed on the METAR board.
Jeff
No. of Recommendations: 3
In Ben Bernanke’s autobiography, he points to the difference in business culture between the US and Japan as precisely why it took Japan so long to financially recover from the post-1980 crash. He shared ideas for getting the correction over with faster, but they already knew, they just prioritize different things.
It’s a matter of prioritizing saving face, and preserving jobs over getting it over with quickly. I’m not convinced our billionaires have what it takes to prioritize keeping regular joes employed and companies functioning over quickly returning to profitability.
No. of Recommendations: 6
I completely agree with LongTermBRK.
The government response to Covid and its impact on economy and stock market are similar in impact to changes brought about after the Great Depression - Social Security, Unemployment insurance, FDIC, etc.
This is a massive game changer. The incentives of almost everyone in a position of power and the broader populace is aligned with how the government responded during Covid. It is a template for responding to future economic problems.
This means there is more tail risks related to inflation (a huge negative to bonds, even TIPS) and a massive reduction in tail risks to stocks.
Market has correctly responded to this by valuing stocks higher.
Of course, people who are warned us about S&P 500 being massively overvalued when it was at 1200 in 2010-2011 or so continue to come up with reasons why we should keep worrying...
No. of Recommendations: 9
I was a long time reader of Economist. I realized that as far as economics and finance goes, their articles are the distilled essence of conventional wisdom that is wrong. They have been wrong on pretty much every single major issue related to economics and finance over the past two decades.
You should read it to get a gist of what dumb money is thinking.
No. of Recommendations: 6
Maharg34:This means there is more tail risks related to inflation (a huge negative to bonds, even TIPS) and a massive reduction in tail risks to stocks.
Market has correctly responded to this by valuing stocks higher.
So, it's different this time? Cool!
No. of Recommendations: 18
The government response to Covid and its impact on economy and stock market are similar in impact to changes brought about after the Great Depression - Social Security, Unemployment insurance, FDIC, etc.
This assumes we have a competent government in power when the crisis occurs. I’m not so sure we can rely on that anymore.
No. of Recommendations: 4
Maharg34:This means there is more tail risks related to inflation (a huge negative to bonds, even TIPS) and a massive reduction in tail risks to stocks.
Market has correctly responded to this by valuing stocks higher.
So, it's different this time? Cool!>>
No, its not at all different. Did you miss when we recently played these cards?
After a one-month stock market blood bath/crash the Fed bailed out the stock market to all-time record highs, easy peasy! Still plugging higher!
As warned --Fed actions boosted the inflation rate which skyrocketed to NINE PERCENT--4 times higher than pre COVID. Oh well...
The game plan has been laid out perfectly. And the administration warns " we're gonna run it hot". Supersize it. Next month--just to make sure-- we'll get the Fed Chairman who will assure there's no confusion. This plan is recently TIME TESTED.
Like it or not, this IS the plan. And it seems to have bipartisan political support.
