What odds would you offer against the bursting of this “mother of all bubbles”?
The chairman of Rockefeller International Ruchir Sharma claims America’s inordinately large share of global financial markets is “the mother of all bubbles” ready to burst.
Rockefeller Group International Inc. is a private company based in New York City, primarily involved in real estate operations in the United States, and it is a subsidiary of Mitsubishi Group. The company began with the development of Rockefeller Centre.
Because the Australian and American economies are significantly linked, Macks Advisory believes Australians should pay attention when the chairman of this highly influential company says the US economy is too heavily reliant on unsustainable government spending, enabled by ever-increasing debt.
For this mirrors Australia’s situation, which is why we also believe note should be taken of Mr Sharma’s calculation that it is taking nearly $2 of new government debt to generate an additional $1 of US GDP growth -- a 50% increase in what it took just five years ago.
And we suggest Australia’s circumstances may in a sense be worse.
This because the federal government is fuelling so many initiatives off a much smaller tax base than America’s, and at the root of the nation’s fundamental problems is ministers who lack the political will and intestinal fortitude to undertake tax and regulatory reforms, not only specified previously in our newsletters, but also widely published on media platforms.
Bubble burst nay-sayers
Yet even as Rockefeller International’s chairman says investors would be deserting any other country behaving financially as America is behaving, bubble burst nay-sayers say the US economy is sound. These include economists who argue that because the balance sheets of so many households and companies are in good shape, good times will continue.
There’s also the persisting view of superiority and so-called “American exceptionalism” that’s the stuff of television, radio, podcasts, newspaper columns and magazine cover stories, hype boosted by almost every Wall Street analyst’s prediction that US stocks will continue outperforming the rest of the world throughout 2025.
American stock market bulls, seeming to base their confidence on impressive earnings of US corporations, also seem to overlook the reality that earnings growth would look far from exceptional were it not for the phenomenal profits of a few enormous tech firms and the most massive government spending at any stage of an economic cycle.
Some realistic considerations
History tells us that over time companies’ astonishing, abnormal profits will be whittled away by competition.
And America cannot sustain its increasing addiction to government debt – neither can Australia.
Spending by local, state, and federal governments in Australia accounted for a record 28% of gross domestic product (GDP) – economic activity – at the end of the 2023-24 financial year, up from 21% a decade ago.
In the past couple of years government spending has accounted for 55% of GDP growth, higher than during any other government on record – up from only about 20% under Fraser, Hawke-Keating, Howard, and Rudd-Gillard governments.
Ruchi Sharma says it’s realistic to expect that before the end of this year American investors will be demanding higher interest rates or a demonstration of governmental fiscal discipline to curb what rational voters will consider is an unacceptable deficit.
While such demands may wean Americans off dependence on government spending, they ‘ll have to become reconciled to consequent undermining of economic growth and corporate profits.
Some clarification
Mr Sharma says he wants to make it clear the bubble he fears will burst soon, is not a 1990s’ style mania in the US market, and it may “deflate more benignly” in other ways.
“Germany and France may get their economic acts together as did Greece and Spain a decade ago when under duress. Maybe Beijing under pressure from Trump tariffs and weak domestic demand, will finally boost consumption to stabilise the Chinese economy.”
But he claims US analysts “mesmerised by what they see as American exceptionalism, continue to promote the US as being the world’s premier market for a century” – completely overlooking the fact that for the past 11 decades its stock market lagged behind the rest of the world, most recently in the 2000s when it delivered zero returns while emerging markets tripled in value.
Another lesson from history is that bubbles can deflate unexpectedly, the two most recent examples being the global boom in commodities’ markets that began in 2011 because of a surge in new supply, and the China growth bubble that burst in 2021 because of a state crackdown of the country’s rampant property sector.
The bubble that is America’s recent super performance relative to other countries, could also burst if domestic growth slows as concurrently it picks up in other major markets – or for other unexpected reasons, which would be bad for Australia’s economy.
So, are we OK or not?
National Bank chief executive Andrew Irvine was recently quoted by The Weekend Australian claiming “the economy is in reasonable shape and businesses remain ambitious to invest and grow despite the nation being stuck in a per capita recession for seven successive quarters”.
Which prompts us to ask, can our country’s economy be reasonably said to be in reasonable shape in an on-going recession and when the Australian Financial Security Authority (AFSA) warns that personal insolvencies will surge by 25% in the next 18 months as householders exhaust savings to pay debts occasioned by cost-of-living expenses?
This government agency, responsible for administering the nation’s personal insolvency and property securities system, reports that “households and businesses are now under the highest levels of mortgage stress and cash flow since the GFC”.
So much for a banker’s opinion. NAB’s chief executive doesn’t seem too worried by this.
However, the latest edition of non-bank lender Scotpac’s biannual SME Growth Index Report shows a record “confidence gap” in six-month revenue growth forecasts between the most optimistic and most pessimistic businesses. More than a quarter of respondents to a survey of SMEs for the report say their business would only need to lose a single major client for it to become an insolvency risk.
Based on all the above information, we invite readers to calculate the odds of a so-called “mother of all bubbles” bursting in America with consequent likely major damage to Australia’s economy.
