How will the ‘mother of all bubbles’ appear?

Stay informed about free updates

Just register to go World Economy myFT Digest — delivered straight to your inbox.

The author is the chairman of Rockefeller International. His latest book is ‘What’s Wrong With Capitalism‘

After labeling America’s largest share of global financial markets as “mother all the bubbles” in my last column, the main feedback I got, even from a few people who share my view, is that there is no sign that this bubble is going to end anytime soon.

Almost no one sees pop pop nearby. Almost every analyst on Wall Street predicts that US stocks will continue to outperform the rest of the world by 2025. But all this enthusiasm tends to confirm that the bubble is too high. . If the consensus on “American choice” is so overwhelming, who is left to jump into the war zone and add to it?

The reality of Wall Street is embedded in the popular media, which often picks up on market trends only when they are well established and close to extinction. Hype for America’s superiority has become the stuff of TV, radio, podcasts, newspaper columns and magazine cover stories, with a track record of pointing the wrong way about future trends.

Bulls say America can stay strong, thanks to the impressive earnings of the nation’s corporations. But US earnings growth wouldn’t look so special if it weren’t for the extraordinary profits of its big tech firms, and massive government spending. Over time, abnormal profits compete with each other. Growth and profits are also getting an artificial boost from the heavy deficit spending that has been recorded at this stage of the economic cycle, so far.

However, many economists argue that, with the balance sheets of US households and companies in good shape, economic growth will take place. The few who worry about President Donald Trump’s tariffs or immigration plans tend to think they will hurt foreign economies more than the US.

But every hero has a fatal flaw. America is increasingly addicted to government debt. My calculations suggest that it now takes about $2 of new federal debt to generate $1 of US GDP growth — a 50 percent increase over the past five years. If any other country acted this way, investors would flee, but for now, they think that America can get away with anything, as the world’s leading economy and lender storage.

Perhaps next year, investors will reject and demand higher interest rates or a sign of financial control, resulting from a larger deficit or larger Treasury auction. Those demands will reduce US reliance on government spending, at least temporarily, and thereby weaken economic growth and corporate profits.

To be clear, this is a reflection of America’s performance in relation to the rest of the world, not 1990s-style madness in the American market. So, it can be spoiled for good if other brands start to look more attractive.

Maybe Germany and France will get their economic act together, like Greece and Spain have done so in the past decade when you are under pressure. Perhaps Beijing, under pressure from Trump’s tariffs and weak domestic demand, will eventually increase spending to stabilize the economy.

But, amazed by “Americanism”, critics can only talk about how the US has been the world’s leading market for a century. They forget that for six of the past 11 years, the country’s market has lagged behind the world, as recently as the 2000s when it provided zero and emerging markets. tripled in value. As the decade drew to a close, the outlook for emerging markets confirmed the certainty I now feel about the US: “Where else is the money going to go?”

The extraordinary performance related to other countries may end if growth slows in the US, or other major powers take over, or for other unforeseen reasons. That’s usually how bubbles end: suddenly. Two recent marriages in global markets were the commodity boom, which began to explode in 2011 as new supply increased, and the Chinese growth bubble, which collapsed in 2021 during government confusion in the property sector.

The longer the trend, the more confident investors become, and the more reckless they buy. In the latter stages of the bubble, prices tend to move in a similar fashion, and in the last six months US stock prices have advanced by the largest margin for the period any comparable to at least a quarter of a century. When you’re flying in such thin air, it doesn’t take much time to stop the engines. All the old signs of extreme prices, valuations and sentiments suggest that the end is near. It’s time to bet against “American choice”.