The mother of all bubbles

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The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong With Capitalism’ 

The idea of America as an exceptional nation, superior to its rivals and therefore destined to lead the world, seems passé to most observers. In political, diplomatic and military circles, the talk is of a dysfunctional superpower, isolationist abroad and polarised at home. But in the investing world, the term “American exceptionalism” is hotter than ever.   

United by faith in the strength of US financial markets and their capacity to keep outperforming all other economies, global investors are committing more capital to a single country than ever before in modern history. The US stock market now floats above the rest. Relative prices are the highest since data began over a century ago and relative valuations are at a peak since data began half a century ago.

As a result, the US accounts for nearly 70 per cent of the leading global stock index, up from 30 per cent in the 1980s. And the dollar, by some measures, trades at a higher value than at any time since the developed world abandoned fixed exchange rates 50 years ago.  

The overwhelming consensus is that the gap between the US and the world is justified by the earnings power of top US companies, their global reach and their leading role in tech innovation. These strengths are all real. But one definition of a bubble is a good idea that has gone too far. Awe of “American exceptionalism” in markets has now gone too far.

America’s share of global stock markets is far greater than its 27 per cent share of the global economy. The upcoming return of Donald Trump to the White House has reinforced the disconnect. Investors believe his plans to raise tariffs, lower taxes and cut regulations will further inflate US markets, which have outrun the rest of the world since the end of the global financial crisis. In November, with Trump’s victory, the US put in its strongest month of outperformance yet.   

It’s as if America is the only nation worth investing in. Travelling in Asia and Europe, I keep coming across investors who seem overawed by the global giant. In Mumbai, financial advisers are pressing their clients to diversify outside of India by buying the one market that’s even more expensive — America. In Singapore, the host of a lunch with wealth managers asked them: “Anyone here who does not own Nvidia?” Not a single hand went up.

This is not a bubble in US markets, it’s mania in global markets. At the height of the dotcom bubble in 2000, US stocks were more expensively valued than they are now. But the US market did not trade at nearly so vast a premium to the rest of the world. 

Nor is this just AI mania by a new name. On indices that weight stocks equally regardless of size and correct for the domination of Big Tech, the US has outperformed the rest of the world by more than four to one since 2009.

Some of the premium is rational. Compared to Europe and Japan, the US economy is growing faster. Compared to many other developing nations, however, it is slower. Yet it commands a premium not seen since the depths of the financial crisis that gripped emerging markets in 1998.

America’s drawing power in the global debt and private markets is also stronger than ever. So far in 2024, foreigners have poured capital into US debt at an annualised rate of $1tn, nearly double the flows into the Eurozone. The US now attracts more than 70 per cent of the flows into the $13tn global market for private investments, which include equity and credit.   

Though most observers think the world is increasingly multipolar, investors believe it is increasingly unipolar — and that makes the markets a zero-sum game. In the past, including the roaring 1920s and the dotcom era, a rising US market would lift other markets. Today, a booming US market is sucking money out of the others.

Investors still like to believe that fundamentals drive prices and sentiment. But there comes a time when sentiment starts to drive fundamentals. When money leaves smaller markets, the outflows weaken the currency, force the central bank to raise rates, slow the economy and make the nation’s fundamentals look worse.

Talk of bubbles in tech or AI, or in investment strategies focused on growth and momentum, obscures the mother of all bubbles in US markets. Thoroughly dominating the mind space of global investors, America is over-owned, overvalued and overhyped to a degree never seen before. As with all bubbles, it is hard to know when this one will deflate, or what will trigger its decline. But I will sketch out some of the possible scenarios in my next column.