Opinion: Good vibes are masking a reset in markets
At this halfway point of the year, it looks like business as usual in markets.
The war in Iran proved to be a blip for investors, the threatened invasion of Greenland (remember that?) didn’t leave any obvious mark, and all the big, broad measures of stock market performance have trundled higher, powered as ever by the miracle that is Big Tech. Everything is hunky-dory and markets are always more resilient than you think.
For most of us, this is great news. I’m aware I’m afflicted with a sarcastic tone of voice but I’m being serious — most ordinary humans’ interaction with financial markets is limited to index-tracking passive investment in our pensions, so a near 10 per cent ascent in US and global stocks will do nicely, thanks very much. Don’t worry, sleep easy.
Behind the blunt measures of market performance, though, two things are worth noting. One is that the tectonic plates are shifting — indices are disguising a serious rethink in where investment returns will come from in the coming months and years. The other is that the chorus of warnings about cracks in the foundations of the AI business model, its wildly bubbly characteristics and its centrality in propping up financial markets, is becoming deafening.
On that second point, the past couple of weeks have been packed with distress signals from numerous directions. They are coming from the corporate debt markets, where new bonds issued by Elon Musk’s SpaceX are feeling the heat of bond investors’ trademark scepticism. The bonds enjoyed very robust demand at the point of issuance, but some see that as a problem in itself. Allianz’s chief investment officer has described the market’s willingness to hand money over to Musk as a clear sign that we have moved from “a healthy boom, a stretched boom . . . into bubble territory”. Ominously, the bonds have weakened since they launched.
Central bankers are also fretting. Sure, that’s their job. They are tasked with spotting risks to financial stability, some of which materialise, and some of which don’t. Still, the latest annual economic report from the Bank for International Settlements makes for sobering reading, studded with warnings that the AI investment “exuberance” could flip into a bust.
Even in stock markets, it is obvious something is amiss. It has been a comfort to stock investors for some time that runaway share prices have been supported by runaway corporate earnings expectations. But what if the expectations themselves are in a bubble?
Read the full article by tapping on the link.