Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Wall Street wobbled and gold had its biggest fall in two months on Thursday, backing off from record highs as investors pondered whether a deeper correction might be in the offing amid continued uncertainty caused by the U.S. government shutdown.

More on that below. In my column today I consider what is behind the increasingly loose fiscal policy in many developed economies despite sticky inflation and record public debt. Falling living standards for the younger generations could be a factor.

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Bubble sirens get louder

The stock market bubble warnings from on high are picking up. This week we have had the Bank of England, IMF and now JP Morgan boss Jamie Dimon weigh in on the risk of a painful correction and the economic damage that could unleash.

Is it different this time? Perhaps - interest rates are falling, not rising; there's no household or business credit bubble; leverage is generally low. Yet the surge in prices, tech valuations, and market concentration is eye-watering. The AI frenzy is surely unsustainable, right?

* Private markets reel

The bankruptcy protection filing by U.S. auto parts firm First Brands - and mysterious disappearance of $2.3 billion - is intensifying speculation that all is not rosy in the private credit garden. Could this be where bubble risks lie, rather than public markets? 

Shares in firms heavily involved in private markets like KKR, Carlyle Group and Blackstone are getting slammed as investors fret First Brands's murky finances are not an isolated case. "The opaqueness is part of the process. That's a feature not a bug," investor Jim Chanos told the FT last week.

* U.S. earnings season kicks off

The Q3 earnings season kicks into gear next week with mega financials - Goldman Sachs, BlackRock, Citi, JP Morgan, Morgan Stanley etc - all reporting. The focus, however, will perhaps be on the tariff-affected consumer and retail sectors and, of course, Big Tech.

How does the big picture look? The consensus estimate according to LSEG is 8-9% earnings growth. But LPL Financial analysts reckon GDP growth of around 3%, AI capex booming, and a weaker dollar, means another quarter of low-teens growth is likely. Health warning though - 70% of the consensus estimate is from the biggest six tech firms (Mag 7 minus Tesla).    

If you're wondering why there is so little desire anywhere in the developed world to tighten fiscal or monetary policy, take a look at a chart published this week by the International Monetary Fund. It is worth a thousand words.

In a preview of the Fund's upcoming World Economic Outlook, Managing Director Kristalina Georgieva presented a chart taken from a paper by Harvard-based researchers showing that the likelihood of young Americans growing up to earn more than their parents has never been lower.

Barely half of Americans aged 30 are earning more than their parents, compared with more than 90% half a century ago, the study finds. It's a stark statistic that calls into question not only the "American Dream" but also a fundamental pillar of liberal capitalism, the idea that each generation will enjoy higher living standards than the last. 

While the paper was published in 2017 and thus focused on "Millennials", it is safe to assume the subsequent "Gen Z" and "Gen Alpha" cohorts are not faring much better. They are coming of age in a post-pandemic world marked by polarized politics, inequality, unaffordable housing, the AI disruption, dwindling pensions, and rising retirement ages. 

These threats reflect what Georgieva calls the "deep undercurrents of marginalization, discontent, and hardship" impacting young people around the world, not just in America. 

Growing fear of this deep disillusion may help explain why policymakers across the developed world are seeking to juice their economies by simultaneously revving up their monetary and fiscal engines - even in the face of the AI capex boom, above-target inflation, ultra-loose financial conditions, deteriorating public debt dynamics and record-high prices in many financial markets.