Bubble or no bubble? Not all stock market falls are necessarily bad news

The week of the ‘big reckoning’, as the Wall Street Journal called it, ends with some good news from the labour market: in October, there were 165,000 more people in work, bringing the unemployment rate down to 4.1 per cent. The real economy is thriving, whilst the financial sector is faltering. Following Thursday’s slump, when the Nasdaq fell by 6 per cent, the index rebounded yesterday, as did the Standard & Poor’s index, which tracks the top 500 US companies. In some respects, this is further confirmation of the stark duality of the US economy, bordering on schizophrenia. However, if we step back from a political and partisan perspective, we must conclude that the fall in the stock markets is also a positive sign, and it will be a good thing if share prices – which have reached the limits of reality – come down to earth once more. The bubble is far too inflated; it is better that it deflates before it bursts. After all, the financial markets have simply brought AI’s soaring ambitions – and everything associated with them, from data centres to chips – back down to earth. And Donald Trump has been punished for stroking the fur of a ‘beast’ that can become ferocious, as Dario Amodei put it. Even Anthropic’s forthcoming IPO is set to be less unrealistic, the Wall Street Journal adds.

It may not reach 1,500 billion dollars – which is by no means a small sum. All the more so because the prospectus submitted to Consob admits that there is no sign of profits as yet; debts are therefore mounting, and it is unclear whether or when they will ever be repaid. There is no certainty about the future.

Employment figures also reveal other sides to the American economic picture. The positive aspect is that job growth is concentrated mainly in professional roles within the vast services sector. This is a sign that, so far, artificial intelligence has not caused the mass job losses feared by many. The negative aspect is that the effects of the crackdown on immigration are becoming apparent. Whether repatriation happens today or tomorrow, there is a shortage of workers in key sectors – in industry and the service sector, not just in agriculture. In the long run, this will push up wages: salaries have risen by 3.1 per cent – still less than price rises – but labour-cost inflation is on the cards. The Federal Reserve will therefore keep interest rates high, above the 4 per cent threshold. A further rise is on the cards, and Governor Warsh has reiterated that his focus is now on prices, given that the labour market is strong. The stock markets will come to terms with this, and that is a good thing.

European stock markets remained in negative territory for much of yesterday, following the lead of Asian markets (Milan down 1 per cent, the German DAX down 2 per cent), but the recovery on Wall Street brightened the day. After all, it has been rising and falling in constant fits and starts for some time now. The first setbacks date back to March and April 2025, then again in October; last June saw a plunge of 1.87 trillion, followed by cumulative losses of nearly three thousand billion on 22 and 30 October, down to 2,490 on Thursday. It is as if, time and again, the valves were opened to let out a bit of air, only for it to return in subsequent trading sessions. It is likely that things will continue in this vein, in the hope that a crash is avoided.

What needs to be put into perspective is the fear that the Democrats in Congress will make a shambles of things, as their room for manoeuvre is limited. According to economist Barry Eichengreen, a professor at Berkeley, in reality it will be a succession of Manzonian outcries with little practical effect. War, for example, depends solely on Trump. Monetary policy depends on the Fed. Fiscal space is constrained by the colossal debt of over 40,000 billion dollars (126 per cent of gross domestic product), with a deficit exceeding 6 per cent of GDP. It is true that neither Republicans nor Democrats seem concerned about this, but the markets are – and this is evident from the performance of government bonds. The crackdown on immigration will be eased, partly because the labour shortage has now become a dangerous bottleneck and the Latino vote has sent a political signal. Fears regarding data centres remain, and Big Tech’s alignment with Trump’s White House has not paid off.

The more realistic Democrats, even in Texas, are calling for the vast deserts – of which there is certainly no shortage – to be used, rather than building them on the outskirts of cities or even within them, or for the project to move out to sea, into the Gulf of Mexico – or rather, ‘Trump’s Gulf’. It would be more of a nemesis than a mockery. Of course, no one can rule out the possibility of an alliance forming between the courts and the ‘No Data’ movement. Italians are well aware of what can happen; one need only look at Taranto. It remains unclear how much influence the Socialists actually wield. An additional threat could emerge from the combative Elizabeth Warren, who would like to chair the Senate Banking Committee, which wields considerable powers. As for the tax on great wealth, it has been scrapped in California. Proposition 40 wasn’t actually that terrible; it provided for a one-off levy of 5 per cent on assets worth over a billion, yet the public referendum rejected it. It is unlikely to pass in far more conservative states. But, as we have seen, the US always has big surprises in store.