The Tokyo Stock Exchange (TSE) plunged on Monday, and investors there warned that the crash would likely reach Europe and the U.S. as well. The U.S. economy is also showing signs of cooling.

Redgate Wealth CIO Peeter Koppel told ERR that crises are like romantic relationships – things go wrong in similar patterns, yet in completely different ways each time.

"I wouldn't draw major parallels with any past crises," he said. "If anything, then the fact that the potential for something unpleasant is unfortunately there today." Whether we're entering a global crisis, he added, will only be clear in hindsight.

According to Koppel, the political turmoil in the U.S. and the potential for a bigger conflict in the Middle East underpinning the decline in Japanese markets could together create a perfect storm of conditions. This is a major problem right now, he noted, because the global situation is exceptionally unpleasant.

"In Japan, particularly in the stock markets, the fact that the yen was very cheap played a role, and the competitiveness of their companies continued to increase in connection with that," he explained. "These companies felt good about themselves, leading to interest in buying their stocks, and when the cheap yen essentially vanished overnight, then this competitive edge became problematic."

Economist Heido Vitsur recalled that in 1999, The Economist ran a cover depicting the start of a great depression and stock prices at the time, and it was said that a crisis was imminent. However, this didn't happen.

"So things don't work that way," Vitsur said. "Crises never repeat themselves the same way."

He added that recessions usually occur for the same reasons: either stock prices have gone up a bit too much or the geopolitical and economic situation has changed to the point where such high stock prices are no longer justified as the risks are too high.

"I think we're currently in a situation where the markets are blowing off a bit of steam – just a bit," the economist said. "Because if you take a look, the markets have recovered heartily in hopes that the economy will start to grow faster. Now it's clear that things aren't going to go too well, and now it's simply blowing off steam."

Leesi: Interest rate hike cycle typically ends in recession

In the broader context, the entire post-COVID period has been extremely good for stock markets, and there hasn't been a correction for a long time, said Avaron investment manager Rain Leesi, adding that corrections are actually a normal part of how stock markets work.

"We certainly can't talk about a full-blown crisis right now, as unemployment is still low in most countries, but we can't rule out that we're headed toward an economic recession," he noted. "It's still too soon to say whether and how deep it will end up being, but the likelihood thereof is certainly currently considerable. That's what the markets were reacting to."

According to Leesi, recent events started with U.S. markets, which have recently seen a rally in the technology sector specifically, and among artificial intelligence (AI) related companies that have been unable to prove they can monetize it.

"On the other hand, the fact that we're moreso in the final phase of the economic cycle," he continued. "Interest rates have risen very sharply over the past year and a half, and the interest rate hike cycle typically ends in recession."

He highlighted that the U.S. jobs report published on Friday clearly showed already the weakening of the labor market, and the surprise interest rate hike by the Bank of Japan over the weekend made investors more hesitant about a soft landing scenario.

"They see that the probability of an economic recession is nevertheless very considerable, and central banks tend to want to see inflation come down, which could lead to a deeper recession," the investment manager said.

He believes it's too soon to say yet whether the U.S. Federal Reserve was late with its interest rate-easing policy, and added that therein lies the difficulty in monetary policy – it's very challenging to bring inflation down without increasing unemployment.

"In order to curb price increases, consumer purchasing power must decrease, and this decreases most effectively when unemployment has gone up," Leesi acknowledged. "Looking at the current bigger picture, although unemployment has started to go up slightly in some places in the last six months, in terms of the longer time horizon, we're still talking about record-low unemployment levels in most countries."

From a central bank's perspective, he added, the question is whether they want to definitely bring inflation down or whether they want to avoid a recession and are prepared to allow inflation to remain high in the interest thereof.

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