The author of this article is Ruchir Sharma, Chairman of Rockefeller International.
I (Ruchir Sharma) previously referred to the massive share of the U.S. in global financial markets as the 'mother of all bubbles,' but my main rebuttal was that there are no signs that this bubble will shrink in the short term, a rebuttal even from a few who agree with my views.
Almost no one predicts an impending crash in the U.S. stock market. Nearly all Wall Street analysts forecast that by 2025, the U.S. stock market will continue to outperform other regions globally. However, all this enthusiasm often only confirms that the bubble is at a very serious stage. If the consensus of 'American exceptionalism' is so unstoppable, who else will join this trend and further inflate the bubble?
Confidence on Wall Street has spilled over into the mainstream media, which often only pays attention to market trends once they are established and nearing their end. Today, the rampant promotion of American exceptionalism has become material for television, radio, podcasts, newspaper columns, and magazine cover stories, which have often pointed in the wrong direction regarding future trends.
Bulls believe that due to the impressive earnings of American companies, the U.S. can maintain its dominance. However, without the extraordinary profits of large American tech companies and massive government spending, U.S. profit growth wouldn't look so special. Over time, extraordinary profits will be eroded by competition. Additionally, economic growth and profits have been artificially boosted by deficit spending.
Nevertheless, most economists believe that due to the strong balance sheets of American households and businesses, economic prosperity will continue. Those who worry about the incoming President Trump's tariffs or immigration plans tend to think that the harm to foreign economies will outweigh the harm to the U.S. economy.
America's problem lies in its increasing reliance on government debt. My calculations show that the U.S. now needs to add nearly $2 of government debt to generate $1 of GDP growth. If other countries spent this way, investors would have fled long ago, but now they believe that the U.S., as the world's leading economy and reserve currency issuer, can withstand anything.
More likely, by sometime next year, investors will no longer buy in, demanding higher interest rates or proof of fiscal discipline, which could be triggered by larger deficits or bigger government bond auctions. These demands would at least temporarily free the U.S. from its reliance on government spending, thus harming economic growth and corporate profits.
It should be clear that this is a bubble in U.S. performance relative to the rest of the world, not a market frenzy like in the 1990s. Therefore, if alternatives begin to appear more attractive, the bubble can deflate in a mild manner.
Perhaps Germany and France will make significant economic contributions, as Greece and Spain did when they faced pressure a decade ago.
But analysts confused by 'American exceptionalism' can only talk about how the U.S. has been the world's leading market for the past century. They forget that in the last 11 decades, there were 6 decades when the U.S. stock market lagged behind other regions, the most recent being the 2000s, when the U.S. stock market had a return of zero, while emerging markets tripled in value.
If the U.S. economy slows down, or if other major powers accelerate, or for unforeseen reasons, the U.S.'s outstanding performance relative to other countries may come to an end.
Bubbles often end unexpectedly. The longer the trend continues, the more confident investors become, and they will throw themselves into the frenzy more indiscriminately. In the later stages of a bubble, prices typically rise exponentially, and in the past six months, the U.S. stock market's increase has been the largest in at least 25 years for comparable periods.
All classic signs regarding extreme prices, valuations, and popularity indicate that the end is near. It is time to oppose the 'American exceptionalism.'
Article forwarded from: Jin Shi Data