AI Bubble's Latter Stage, Watch Bond Market

Adding to this, caution over Samsung Electronics' provisional earnings announcement and the thick resistance formed around the 7,000 point are further burdening the market.

The current market is judged to have entered the latter half of the AI bubble cycle. Analysis of three bubble collapses over the past 120 years shows that a sustained rise in interest rates was a common precursor to bubble collapse.

Therefore, at this point, the most important task is to pinpoint when the bubble will collapse and prepare to liquidate assets in anticipation of a downturn.

The second condition is even more critical: the 'no way back' sentiment where despair dominates the market, believing that interest rate hikes are not temporary but will continue to rise.

With the 10-year yield currently above 5.3%, it is crucial to closely monitor if the stock market has room to rebound should rates fall again.

Currently, despite rate hikes, it's hard to say inflation is fully entrenched, so future price trends should be watched through Bloomberg's CPI forecasts.

Experts anticipate inflation will enter the 2% range starting from the second quarter of next year, and the market implicitly expects interest rate cuts due to this deceleration.

This expectation acts as a core driver for the US stock market, helping it withstand a downturn.

Justifying stock prices solely on good corporate earnings is a dangerous judgment; historically, stock prices always fell before earnings estimates did.

By the time an earnings decline is confirmed, stock prices are likely to have already hit bottom, so market direction should not be judged by earnings alone.

Contrary to market hopes, a re-acceleration of inflation, causing prices to rise from the 2% range back to 3%, should be seen as a warning sign.

If inflation and interest rates rise together, capital providers may reduce investments in AI, potentially accelerating the AI bubble's collapse.

This is supported by past bubble collapses, where rising interest rates and inflation preceded a decline in corporate profits.

Specifically, fiscal issues like war spending are a core cause of rising interest rates, and large-scale bond issuance by AI-related companies is also analyzed as a factor pressuring rates.

Amid a deepening decoupling of interest rates in Western and Southern Europe, political instability is growing as populist and far-right/far-left parties in European countries like France and the UK gain leading support.

This situation could exacerbate the Eurozone's fiscal problems in the long term, with skeptical views on the Eurozone's survival expected to spread after next year.

Warnings are raised that European countries' debt problems, coupled with economic recession, could develop into a more severe crisis.

Due to this structural vulnerability, implementing financial repression (forced interest rate cuts) to solve debt problems is impossible. Leaving the Eurozone could become a more realistic option than cooperation through national sacrifice.

Crises tend to erupt when the OECD leading economic indicator declines, and pressures like loan recalls begin. The Eurozone's severe problems are also likely to intensify after the economic turning point in mid-next year.

However, from 1965 to 1985, during the high-inflation era, they showed a negative (-) relationship.

In the high-inflation era, when inflation bottomed out and rose, the economic cycle tended to turn, and the current inflation trend can be used to predict the economic cycle's inflection point.

This implies that the economic formulas of the low-inflation era do not apply in the current high-inflation era, suggesting investors need to interpret the market from a new perspective.

In the low-inflation era, inflation volatility was low, making the unemployment rate a key variable for stock price fluctuations. Still, in the high-inflation era, inflation re-emerges as the central variable determining stock price direction.

Just as employment indicators could predict market direction during the financial crisis or pandemic, in the low-inflation era, employment indicators are an important investment criterion.

Conversely, when employment improves, inflationary pressure intensifies, leading to a stock market decline. Therefore, in a high-inflation era, employment indicators should be interpreted from the opposite perspective.

This is a characteristic of the high-inflation era where inflation acts as the central variable, requiring a different approach than the low-inflation era's investment formula.

In a high-inflation era, poor employment figures are positive for the stock market as they reduce inflation rebound pressure. Still, in a low-inflation era, employment improvement signals economic growth and is positive.

The current market sees a high likelihood of a high-inflation era becoming entrenched, and for the stock market, the context of interpreting economic data according to the current era is more important than absolute numbers.

The market is currently holding up due to expectations of lower inflation, but if inflation data consistently exceeds expectations and begins to rebound, the likelihood of a stock market collapse increases.

This re-acceleration of inflation is the biggest threat to the market in a high-inflation era, and investors must be highly sensitive to changes in this indicator.

The IT bubble collapse occurred during the fifth interest rate hike, but the collapse truly began not with the rate hike itself, but when market inflation expectations wavered.

After three rate hikes in 1999, the market was relieved, but when CPI came out higher than expected in March-April the following year, speculation of a 50bp rate hike emerged, and the market began to collapse from April after peaking in late March.

The current market atmosphere after the first rate hike is similar, but past cases suggest that proven inflation data will be the key variable for bubble collapse.