Ex-IMF Economist Warns $35 Trillion Market Crash Could Rattle Global Economy
Former IMF Chief Economist and now Deputy Managing Director Gita Gopinath is sounding the alarm on a looming financial correction...
Quick overview
- Gita Gopinath warns of a potential financial correction that could erase $35 trillion in global market value, driven by the current AI stock market rally.
- She draws parallels to the dot com bubble, highlighting that today's interconnected markets could exacerbate the fallout from a correction.
- Gopinath estimates that a downturn could result in a $20 trillion loss in US wealth and an additional $15 trillion loss globally.
- Experts recommend diversifying portfolios, reducing exposure to overvalued tech stocks, and investing in safe-haven assets like gold.
Former IMF Chief Economist and now Deputy Managing Director Gita Gopinath is sounding the alarm on a looming financial correction that could wipe out an eye-watering $35 trillion or so in global market value. She’s sounding a warning that the US stock market rally, driven largely by people’s enthusiasm around AI, could be due for a nasty pull back and that would be pretty bad news for the world.
In her latest take on what’s happening with the markets, Gopinath’s drawing parallels between the current excitement and the dot com bubble back in the early 2000s, and her point is that this time around things could get a lot more messy because markets are just so much more interconnected these days.
“There are some pretty good reasons to be worried that this rally could be setting the stage for another dreadful market correction,” she writes, basically saying that the vulnerabilities that are lurking in the background are a whole lot more serious than we should be comfortable with.
Her numbers suggest that if things do go wrong then about $20 trillion of US wealth could vaporise – that’s roughly 3.5% of the country’s GDP – and investors from other countries might lose another $15 trillion – that’s nearly 20% of global GDP outside the US.
The AI Bubble Starts to Look Overvalued
Gopinath is worried that the current obsession with AI driven companies and the tech stocks that are being driven by this in US equity valuations are getting a bit out of hand. According to JPMorgan we are now looking at 44% of the S&P 500‘s total market value being driven by companies that are pretty heavily exposed to AI, which is more than double what it was at the start of 2022.
That’s generated about $5 trillion in gains for individual investors since the pandemic as people have flocked into tech and innovation tied stocks. However, some economists are warning that all this momentum might be masking some deeper economic issues – like slowing productivity growth and an increase in corporate debt.
Some of the key sectors that are vulnerable to a correction are:
- Tech and AI infrastructure – that means semiconductors and data centers
- Energy suppliers who are powering these large computing operations
- Financial companies who are exposed to tech driven investment funds
If all the AI driven equities were to take a hit the effects could spread fast, causing a wider economic slowdown on Wall Street and Main Street.
What to Do In Case of a Crash
While a crash isn’t a certainty, most analysts agree that people should keep a close eye on things. Experts say that what you should do is focus on diversifying your portfolio and striking a balance between risk and security.
Financial experts are saying that you should:
- Reduce your exposure to overvalued tech stocks
- Get into safe-haven assets like gold, which has been doing pretty well lately
- Keep some cash on hand to weather the ups and downs
Gopinath’s warning is echoing what a lot of global policymakers are saying – that unchecked speculation in emerging AI sectors could be the trigger for the next big financial crisis.
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