To begin this week’s newsletter, we are assessing two important concerns at the forefront of many investors’ minds: bubbles and the US election outcome. Next, we pivot to learning about the threats to global security, including AI, election meddling, and nuclear catastrophe. Finally, we examine the risks of a food crisis, rising sea levels, and the surging demand for power.

Are Markets Heading Into Bubble Territory?

What’s Behind the US Stock-Market Disconnect?

Kenneth Rogoff, Project Syndicate

Bubble Angst Belied by Big-Tech Weaklings, Broader S&P 500 Gains

Alexandra Semenova and Matt Turner, Bloomberg

Beware the Market’s Priciest Stocks

Andrew Bary, Barron’s

Is the bull market about to turn into a bubble?

The Economist

American stocks hit a bottom in October 2022, but since then, stock markets are at all-time highs. With markets surging once more, the fear that this bull market will turn into a bubble (or already has) has re-emerged. Despite the worry that the conditions are similar to those proceeding the burst of the dot-com bubble (a new technology sending productivity and profits soaring, a.k.a. artificial intelligence), analysts from Goldman Sachs, Bloomberg, Bank of America, and others, are quelling fears by saying that there are signs that the US economy’s resilience and robust corporate earnings have not turned into bubble-market mania. While technology stocks, especially the Magnificent Seven (Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Meta Platforms and Tesla), have propelled markets in 2023 and left the rest of the market behind in their wake, there is evidence that these stocks have slowed down. Furthermore, the S&P 500 Equal Weight Index, which gives equal share to each participant rather than weighting by market capitalization, reached a record last week for the first time in two years, indicating that the rally is broadening out. Meanwhile, valuations of big tech companies seem to be contained (though approaching peak values – see Barron’s article for a deeper dive) as they remain at or below their five-year average for price-to-sales multiples. Additionally, investors seem to lack much of an appetite for IPOs which is unlike the euphoria we typically see around bubbles. While there doesn’t seem to be enough excitement from investors to justify a bubble just yet, rate cuts, and thus cheap debt, could get investors in the mood.

Another important element we are keeping a close eye on this year is the US presidential election. As of late, there seems to be a strange disconnect between the rising US stock market and the gloomy state of American politics. As Kenneth Rogoff proposes in his article written for Project Syndicate, perhaps investors believe the president has very little influence on the domestic economy in the short term, Congress is too split to do anything (especially concerning anti-trust or AI regulation) or AI conquers all. While markets may not react much in the short-term – and seem to be operating under the assumption that AI companies will thrive (likely unregulated) regardless of November’s outcome – the winner of this year’s presidential election will undoubtedly have long-term economic consequences. A second Trump administration could bring escalation in the US-China trade war, a potential withdrawal from NATO, and a planned 10% tariff on nearly all imported goods, in addition to other impulsive and unpredictable new policies, all of which could be expected to hamper the US domestic economy in the long-term. On the other hand, a Biden victory would likely result in more predictable consequences but would probably bring higher interest rates with subtle pressure on the Fed to do more to attack inflation. With the uncertainty in US politics and other challenges facing both the US and global economy, the current stock-market boom is not expected to last regardless of who wins the election. 

Global Security Threats are On the Rise

Four things we learned when US intelligence chiefs testified to Congress

Zack Whittaker & Lorenzo Franceschi-Bicchierai, TechCrunch

Meddling in elections, drugs and terrorism? Here’s the U.S. intel new list of threats

Josh Meyer, USA Today

Nuclear War: The Rising Risk, and How We Stop It

W.J. Hennigan, The New York Times

The latest intelligence assessment made by US intelligence agencies identifies a range of threats to national security, including cyberattacks stemming from countries like Russia and China, as well as the use of generative artificial intelligence (AI) to influence public opinion. Terrorist groups are exploiting regional instability, while drug cartels and human traffickers capitalize on the border crisis. Misinformation campaigns from states like Russia, China, and Iran threaten to disrupt upcoming elections, and Russia reportedly has plans to weaponize space, potentially threatening critical satellites that make modern life possible. The report highlighted the use of AI being particularly troubling when in the hands of foreign influence actors, who may now find it even easier to reach Western audiences. Additionally, the easy availability of commercial spyware and the vast amount of personal data collected by data brokers are seen as vulnerabilities that need to be addressed, even as US spy agencies buy data collected from American citizens.

Experts warn of another, far more cataclysmic threat: Nuclear catastrophe. Flashpoints like Ukraine and Taiwan raise the possibility of atomic war, a scenario that seems unthinkable but one that requires serious attention. The risk remains high due to a combination of factors: The modernization of nuclear arsenals by multiple countries that have interests in geopolitical flashpoints; the crumbling of arms control treaties between the US and Russia; and the lack of communication and transparency between nuclear powers. History shows that cooperation is possible even during tense moments, but the current situation is complex due to the myriad of actors and issues. Many experts believe that urgent international action is needed to prevent a devastating nuclear war. This includes renewed arms control talks, open communication channels, and level-headed decision-making by all parties involved.

Three Risks in the Era of Transition

Europe Is Wargaming a Food Crisis

Agnieszka de Sousa, Bloomberg

New Data Details the Risk of Sea-Level Rise for U.S. Coastal Cities

Mira Rojanasakul, The New York Times

Amid explosive demand, America is running out of power

Evan Halper, The Washington Post

In the era of transition we currently live in, new threats have compounded the old. Food security, for instance, has seen the European Union wargaming a potential food crisis for the first time, acknowledging its vulnerabilities despite being a major food producer. The pandemic, war in Ukraine, and extreme weather events have disrupted supply chains and caused food price hikes. While food insecurity is lower in Europe compared to other regions, concerns include reliance on imported feed for livestock and the impact of climate change on harvests. Also related to climate is the fact that coastlines across the US are sinking faster than previously thought, according to a new study using satellite imagery, potentially increasing flood risks for nearly 40% of Americans. This sinking adds to the threat of rising sea levels, especially in places where the land is sinking faster than the oceans are rising. Experts say there is a pressing need for more detailed flood risk maps that consider these variations in land elevation.

Another unfolding threat is the oncoming demand for power. The surging demand for electricity from data centers and clean energy production is straining the US power grid. The aging infrastructure is struggling to keep up, causing gridlock for new energy sources and forcing businesses to secure private power sources. The situation creates battles over who pays for upgrades, potentially delays the clean energy transition, and hinders climate goals. Both federal policies and booming factory construction are contributing to this power crunch. The demand for data centers is booming, pushing them into new locations that often lack sufficient power supply. This growth coincides with a surge in electricity needs from electric vehicles, clean energy production, and household appliances switching from fossil fuels. Upgrading the grid infrastructure faces political hurdles and lengthy permitting processes, creating a bottleneck that threatens both economic development and climate targets.