(Kitco Commentary) - History shows that simply recognizing a bubble, even when everyone seems to be aware of it, does not necessarily mean that a crash is imminent. The crash will come, sooner or later, but no one knows precisely when. Even the best technical indicators cannot predict the timing with 100% precision.
Take Shiller's P/E ratio, for instance. When it climbs above 40, it's often seen as a red flag signaling a potential market bubble. But hitting that level doesn’t automatically trigger a crash. For context, it surpassed 40 well before the dot-com bubble actually burst. Such signals, therefore, should be treated with caution.
Even a long-awaited correction usually needs a “push”. In the case of the dot-com crash, it came from the Fed's tightening of monetary policy to fight inflation. As interest rates rose, safer assets like bonds became more attractive, pulling capital away from overvalued tech stocks and bursting the bubble.
As for the AI bubble, the Fed is unlikely to be the cause of a downturn, as the latest FOMC minutes and the CME’s FedWatch Tool suggest further rate cuts at the next two meetings. Instead, it could be geopolitics — particularly trade wars — that ultimately turn euphoria into panic in the S&P 500.
And we saw it again last Friday, after Trump announced 100% tariffs on Chinese imports starting November 1, along with new restrictions on the export of critical software. This was in response to China's own restrictions on rare earth metal exports, announced the previous Thursday and set to take effect on November 8.
The market chaos followed: a sharp drop in the S&P 500, the Nasdaq, and digital assets, including Bitcoin and Ethereum prices. Overall, in a matter of hours, nearly $600 billion was wiped out from the cryptocurrency market capitalization. For some, this meant losing their entire fortune, and for a few, even their lives.
So, what happens next?
By Sunday, the Trump administration signaled it was open to negotiations, though it continued to criticize Beijing’s export controls. China softened its stance for its part, clarifying that the new measures wouldn’t amount to a total ban and that applications meeting requirements would still be approved.
This conciliatory tone was enough to spark some optimism: US futures opened higher on Monday, and bitcoin rose back above $115,000. Meanwhile, betting markets such as Polymarket are leaning toward a satisfactory agreement, but if they are wrong, another scenario similar to “Black Friday” cannot be ruled out.