‘Everybody thought US only place to invest in’: Ruchir Sharma says something was bound to snap

Global market expert and author Ruchir Sharma said that the American economy was a bubble and was bound to snap. He said for long the US stock market had over-performed and everyone believed it to remain so, something he says is a blunder.

Sharma said in an interview with India Today that markets and the economic profession are the most vulnerable when there’s ‘group think’. “The one thing you are conditioned to see when there’s far too much group think, when everybody around you is saying the same thing and that’s when I find markets and the economic profession to be the most vulnerable. That’s the sense I got late last year, which is that everybody in the world thought that the only place worth investing in is America. Therefore I tagged that as the mother of all bubbles,” he said in the interview with Rahul Kanwal.  

“But how can you have a situation where 80 per cent of all the capital flows into stock markets around the world is just going into one country. That was the trend this decade. Something was bound to snap. Of course, people are saying Trump is pricking this bubble but somebody put the air in that bubble in the first place. That’s what’s happening now. The expectations were far too elevated. The American stock market, the American economy had already outperformed for many many years. And people expected that to just continue. Extrapolation. So, in forecasting, one of the basic rules is that extrapolation is the single-biggest mistake people make,” said Sharma. 

Sharma said that the US stock market dominated the world after the 2008-09 global financial crisis. The US stock market had come to be nearly 70 per cent of the global stock market capitalisation, with 80 per cent of all incremental flows going into it. “When something is so overvalued, it is telling you that it is set up for disappointment. I think that’s what’s happening under Trump. The other thing I think a lot of people have underestimated is why is Trump doing whatever he is doing. Lot of people think this is madness but I think there is a method to the madness,” he said.

According to Sharma, Trump identified that many Americans were not happy with the way the economy was performing, inflation was high too. “The stock market was doing well but who owns the stock market, maybe the top 10-20 per cent, the bottom 80 per cent were not getting any benefits from this great tech boom, the stock market boom. It was a very stratified economy. Trump has been able to identify that the average American wants disruption,” he said.

“At the core of it we must admit that the American economy was a bubble. It was artificially juiced up by the government, and the average American was not happy with the way their economy was performing. Identifying that was the key thing and once you sort of identify that, you see that some disrupt was going to come to office and start doing stuff that is not acceptable to the status quo and the elites,” he said.

Speaking about India, Sharma said that the capital in the world was just going to America this decade, and inflows were “pretty poor into India”. “Foreign capital flows into India. Even FDI slowed down, but especially stock market flows had dried up over the last couple of years. I suspect what can happen in this new environment is that India could attract greater capital flows over the next couple of years,” he said.