America’s Bubble Nears Breaking Point: Market Expert Sounds Alarm

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The "mother of all bubbles" is nearing its breaking point as the U.S. outperformance, driven by excessive debt, is unsustainable, warned Ruchir Sharma, chair of Rockefeller International. 

Sharma emphasized that the U.S. economy has become overly reliant on borrowing, and efforts to curb this dependence will likely weaken economic growth and corporate profits. In a Financial Times column, he expanded on his earlier warning, predicting that the bubble of U.S. dominance over other global markets is set to burst. 

While Wall Street optimists highlight strong earnings, Sharma argued that this success is overstated once adjusted for government spending and the dominance of a few major tech firms. Historically, "supernormal profits" tend to decline under competitive pressure, he noted. 

Sharma pointed out that U.S. growth and profits are being artificially boosted by unprecedented deficit spending for this stage of the economic cycle. Public debt—what the U.S. owes external lenders—has reached approximately 100% of GDP and is projected to surpass the post-World War II record without any catastrophic global event driving it. Servicing this debt now costs $1 trillion annually, a figure exceeding defense spending and further straining the deficit in a feedback loop.

Despite the federal government's ballooning debt, U.S. households and businesses maintain solid financial health, helping to sustain the economy. For instance, third-quarter GDP growth was recently revised up to 3.1% from 2.8%, fueled in part by robust consumer spending. 

However, Sharma cautioned, "Every hero has a fatal flaw, and America’s is its growing addiction to government debt." He estimated that $2 in new government debt is now needed to generate just $1 in GDP growth—a 50% increase over the past five years. While other nations facing such dynamics might experience capital flight, the U.S. continues to benefit from being the world’s leading economy and reserve currency holder.

This advantage, however, could wane if investors demand higher interest rates on new debt or insist on signs of fiscal responsibility, Sharma predicted. Such a shift would likely reduce reliance on government spending, negatively impacting growth and profits. Early indications of this are emerging, with major bond investors like Pimco reducing their exposure to long-term U.S. bonds due to concerns over surging debt.

Additionally, a rebound in other major economies like China or Europe could weaken the U.S.’s relative strength, Sharma noted. Unforeseen events could also play a destabilizing role. 

Sharma pointed to a telltale sign of a bubble in its final stages: parabolic price increases. Over the last six months, U.S. stock prices have outperformed global markets by the widest margin in at least 25 years. "When flying in such thin air, it doesn’t take much to stall the engines," he warned, citing extreme valuations and market sentiment as indicators that the bubble's end is near. Sharma concluded, "It’s time to bet against ‘American exceptionalism.’"

 

 

 

 

 

 

 

 

 

 

Paraphrasing text from "Fortune all rights reserved by the original author.