WILL POP!..The mother of all bubbles' in the U.S. is sucking money away from the rest of the world,

Hype for American superiority is now the stuff of TV, radio, podcasts, newspaper columns and magazine cover stories, which have a record of pointing the wrong way on future trends. 

The bulls say America can remain dominant, owing to impressive earnings of the country’s corporations. 

• But US earnings growth would not look so exceptional if not for the supernormal profits of its big tech firms, and massive government spending. 

Over time, supernormal profits get competed away. Growth and profits are also getting an artificial lift from the heaviest deficit spending ever recorded at this stage of an economic cycle, by far.

Opinion Global Economy

How ‘the mother of all bubbles’ will pop

It’s time to bet against American exceptionalism. . .If any other country were spending this way, investors would be fleeing

Financial Times

The mother of all bubbles

‘The mother of all bubbles’ in the U.S. is sucking money away from the rest of the world, market expert says

Jason Ma

Updated Mon, December 9, 2024 at 9:50 AM MST

Quick Summary

Market expert Ruchir Sharma warns that the US has become a 'bubble of epic proportions', with investors putting more money into the US than ever before, accounting for 70% of the leading global stock index. 

• The US economy's share of global GDP is only 27%, indicating a disconnect between market performance and economic reality. 

Sharma notes that the US has outperformed the rest of the world by more than 4-to-1 since 2009, and that a booming US market is now sucking money out of other markets, potentially weakening currencies and slowing economies. This trend is expected to continue, with some experts predicting a 'huge sucking sound' of foreign capital flooding into the US.

U.S. dominance over global financial markets has reached extreme levels, pointing to a bubble of epic proportions, according to Ruchir Sharma, chair of Rockefeller International.

In a column in the Financial Times last week, the market expert said investors around the world are putting more money in a single country than ever before.

"Awe of 'American exceptionalism' in markets has now gone too far," warned Sharma, who authored the recent book What Went Wrong With Capitalism.

For example, U.S. companies now account for 70% of the leading global stock index, up from 30% in the 1980s, while the U.S. economy's share of global GDP is just 27%, he noted.

To be sure, U.S. growth has been more robust than elsewhere lately, and American companies are among the most profitable. But Sharma pointed to other metrics that indicate how out of whack markets have become, even after factoring out the AI boom that has sent a handful of U.S. tech stocks to stratospheric levels.

• Indexes that weight stocks by price instead of market cap and adjust for the leading tech giants show that the U.S. has outperformed the rest of the world by more than 4-to-1 since 2009, he explained.

And such outperformance isn't restricted to stocks either. In 2024 alone, $1 trillion in foreign capital has poured into U.S. debt markets, nearly double what the eurozone has attracted. And America controls more than 70% of the global market for private equity and credit.

"In the past, including the roaring 1920s and the dotcom era, a rising U.S. market would lift other markets," Sharma wrote. 

Today, a booming U.S. market is sucking money out of the others."

A mania in market sentiment can impact the real economy, he warned. 

• For instance, investors abandoning smaller markets can weaken currencies and force central banks to hike rates—slowing those economies and worsening their fundamentals.

"Talk of bubbles in tech or AI, or in investment strategies focused on growth and momentum, obscures the mother of all bubbles in U.S. markets," Sharma added. 

"Thoroughly dominating the mind space of global investors, America is over-owned, overvalued, and overhyped to a degree never seen before."

His admonition echoes what Allianz chief economic advisor Mohamed El-Erian said last

 month, when he told Bloomberg TV to expect a "huge sucking sound" of foreign capital flooding into the U.S.

The rest of the world may have more trouble coping with a period of faster growth and hotter inflation, adding to America’s relative edge, he predicted. . ."

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Financial Times

How 'the mother of all bubbles' will pop

ADDENDUM

Credit Bubble Bulletin
- Chronicling History's Greatest Financial Bubble

". . .This government “money” had unparalleled inflationary potential. Not only would governments and central banks initially enjoy insatiable demand for their IOUs, central banks also have the power to use their liquidity (balance sheets) to bolster the perception of moneyness for government debt, even in the face of massive over-issuance. Moreover, central bank liquidity backstops incentivize speculation, in particular leveraged speculation in government debt (i.e., “basis” and “carry trades”).

In hindsight, it should have been obvious that the Bernanke Fed's revolutionary reflationary tactics would seduce the entire world – and that Mario Draghi’s 2012 “whatever it takes” permutation would further unleash historic global monetary inflation. After all, history is unequivocal: Monetary inflation is such a slippery slope. Government (modern-day electronic) “printing presses” are the most destructive force for stability in finance, economics, and humanity.

We’re in the throes of end-of-super-cycle blowoff excess. Massive fiscal deficits, enormous Treasury “basis trades” and other speculative leverage, parabolic growth in “repo” and money market fund assets, AI and equities manias, along with social, political and geopolitical animus, are not coincidental.