Last week’s disappointing US labour market data do more than just reignite the debate about interest rate cuts. They open the door to a scenario that bears a striking resemblance to 1998, the year in which pre-emptive rate cuts by the Federal Reserve helped ignite the dotcom rally. In today’s ‘Uber-Goldilocks’ environment, the economic impact of artificial intelligence could even surpass the tech boom of that earlier era.
The late professor Charles P. Kindleberger, in his seminal work Manias, Panics and Crashes, identified four key conditions that together can create a financial bubble. All of them are present today, just as they were at the end of the 1990s.
A familiar pattern emerges
First, a paradigm shift, an external shock that disrupts existing economic relationships and opens new possibilities. In the late 1990s, this came in the form of internet commercialisation and telecom deregulation. Today, a similar transformation is underway, driven by the breakthrough of generative AI, reinforced by geopolitical shifts that encourage onshoring and technological sovereignty.
Second, a disruptive innovation that captures investors’ imagination with promises of long-term transformation. In the 1990s, that was the internet, an innovation expected to reshape the entire economy. Today, it is artificial intelligence. Much like then, investors believe we are on the brink of a fundamental shift in how we work, consume and live.
Third, speculative vehicles that enable mass participation. During the dotcom era, this meant companies like Amazon, AOL, Cisco and Yahoo. Today, the Magnificent Seven — Apple, Microsoft, Google, Amazon, Tesla, Meta and Nvidia — serve as the proxies for the AI revolution, just as their predecessors did for the internet age.
Fourth, ample liquidity and accommodative monetary policy. Until now, this ingredient has been missing, but that may be about to change. Kindleberger noted that bubbles rarely form without easy credit and low interest rates that encourage speculative behaviour.
The power of pre-emptive rate cuts
Between September and November 1998, the Federal Reserve cut interest rates three times, not because the US economy was in trouble, but to pre-empt fallout from the Asian financial crisis and the collapse of hedge fund Long-Term Capital Management. These “insurance cuts” turned out to be the catalyst for one of the most speculative bubbles in modern history.
Today’s situation shares similar traits. Fed chair Jerome Powell has said that interest rates are now very close to neutral. The weaker labour data, highlighted by a rise in unemployment to 4.2 percent and significant downward revisions to previous figures, make a precautionary rate cut in September increasingly likely. The Fed, after all, has a dual mandate to control inflation and maintain full employment. Employment is also a lagging indicator, which suggests that any rate cut must come well before job losses begin to mount.
From the roaring twenties to the AI age
Beyond the dotcom analogy, another historical parallel stands out: the Roaring Twenties. That era too was marked by explosive productivity growth, driven by electricity, automobiles, aviation and the assembly line, hallmarks of the second industrial revolution. Today, the fourth industrial revolution is fuelling similar euphoria, pushing equity markets to new highs.
The current productivity boom is striking. Gains in efficiency are allowing companies to absorb the impact of rising import tariffs without sacrificing profitability. Indeed, corporate earnings reports from the past quarter show that profit margins have continued to rise despite higher trade barriers.
Trump’s trade war as a catalyst
President Trump’s efforts to reform the global trade system are also fuelling innovation and cost-cutting, driven in large part by AI-powered productivity gains. His recent trade deals with the EU, Japan and South Korea, in which these partners agreed to 15 percent tariff hikes without retaliation, could result in significant export and investment flows to the United States. Combined with rising geopolitical uncertainty, these developments are pushing companies to reduce costs in any way possible, something that at this moment only artificial intelligence can deliver.
Han Dieperink is Chief Investment Officer at Auréus Wealth Management. He previously served as CIO at Rabobank and Schretlen & Co.