To The Moon

Last year, U.S. share prices surged by 25%. Since the financial crash in 2009, share prices have skyrocketed by 300%. While many Americans continue to live paycheck to paycheck, Wall Street is thriving. By nearly every metric, U.S. share prices are now overvalued, with price-to-earnings ratios at record highs, surpassing levels seen before the dot-com bubble burst in 2001. The U.S. stock market's capitalization now exceeds 200% of GDP, four times its size in the early 1990s.

In the early 2000s, tech stocks reached unsustainable price-to-income multiples, driven by enthusiasm for the internet. When that bubble burst, the NASDAQ plunged 77%. Today, artificial intelligence has sparked a similar wave of optimism. Yet, history suggests that speculative bubbles often end poorly, as human tendencies toward overexuberance remain unchanged.

It's not just investors caught in this cycle. Central bankers in the early 2000s believed they had mastered economic stability, with low inflation and strong growth. However, financial innovations concealed bad debts, leading to the 2008 crash. The resulting financial and housing market collapse was mitigated only by massive government bailouts and central banks' creation of money. Sixteen years later, the memory of that crisis is fading. Both the Trump administration and subsequent governments have sought to relax post-crash regulations in hopes of spurring economic growth.

The U.S. stock market boom contrasts starkly with the stagnation of the U.K. market. In 2008, the U.K. market represented 8% of the global total; today, it accounts for just 3.7%. U.K. price-to-earnings ratios are among the lowest in advanced economies, reflecting widespread investor, business, and consumer pessimism. Meanwhile, the U.S. stock market now makes up 60% of the global total. Despite this, many Americans do not share the optimism: workers’ share of income relative to GDP has declined, while the wealthiest 0.1% have reached unprecedented levels of wealth.

The U.S. economy is marked by growing inequality. Inflation, rising rents, and high interest rates have stretched consumers thin. Consumer credit has soared, leading to a sharp increase in credit card defaults, the highest since the post-crash recession of 2010. Housing remains unaffordable, with house-price-to-income ratios near record highs. At 6.8%, 30-year mortgage rates have locked many buyers out of the market, leaving them to contend with an expensive private rental sector. While U.S. homeowners with 30-year fixed mortgages are somewhat shielded from rising rates, this has contributed to a stagnant housing market with elevated prices and limited mobility.

In theory, the property cycle follows an 18-year pattern. If this holds true, 2024 could mark the start of a decline reminiscent of 2006’s downturn. However, high prices, weak wage growth, and elevated interest rates suggest that the trajectory remains uncertain.

A new bubble may be forming. Bitcoin and cryptocurrencies have seen a resurgence, with Bitcoin rising 400% in value over the past year. While Bitcoin has been the most successful cryptocurrency, many others have left investors facing significant losses. Where this surge will lead remains uncertain, but it is yet another indicator of an unbalanced economy, though not definitive proof of an imminent crash.

The Trump administration’s policies may be adding fuel to the fire. Talks of repealing financial regulations, such as portions of the Dodd-Frank Act—which established agencies to oversee financial risks—pose a significant risk. Trump has long supported deregulation, with advisors like Steven Moore advocating for looser lending rules. A rollback in regulations could increase systemic risks in the financial system, reigniting the problem of moral hazard where banks benefit from risks but rely on government bailouts in case of failure.

Other uncertainties include Trump’s trade policies, such as proposed tariffs of up to 25% on Mexico, Canada, and China. These tariffs could disrupt global trade, already under strain, and lead to higher consumer prices and inflation. Additionally, large-scale repatriation of undocumented workers could increase costs in industries like agriculture and meatpacking, further driving up consumer prices.

Tax cuts, particularly those favoring high-income earners, are another area of concern. Such cuts, similar to those enacted in 2017, could increase the U.S. budget deficit while temporarily boosting economic activity. However, they also risk inflating asset bubbles in stocks and cryptocurrencies while fueling inflation. Rising inflation could lead to higher interest rates, which would severely impact an already overvalued housing market and consumers burdened by record levels of debt.

In contrast to the U.S., the U.K.’s economy shows sluggish growth, with businesses hesitant to invest and consumers saving at record levels. U.K. stock prices reflect economic pessimism, presenting potential opportunities for investors seeking undervalued markets. However, the U.K.’s reliance on its financial sector leaves it vulnerable to any downturns in global finance, particularly if U.S. markets falter.

Despite these concerns, some fundamentals of the U.S. economy remain strong. Business investment in manufacturing is robust, productivity growth outpaces much of the world, and inflation is near target levels without significant increases in unemployment. However, the U.S. economy is increasingly divided: stock and asset wealth benefit the top 1%, while many Americans struggle with high living costs, weak wage growth, and little relief in sight.

The federal government’s borrowing capacity remains high, but rising costs for healthcare and pensions, coupled with new tax cuts, are driving debt levels higher. Interest payments on debt reached $1 trillion last year, surpassing defense or education spending. While U.S. debt is unlikely to cause immediate problems, political divisions make the government vulnerable to shutdowns, which could disrupt the economy.

Although a crash may not be imminent, the exuberance in financial markets could soon meet harsher economic realities. History warns against assuming that "this time is different." Overconfidence in speculative markets has often led to painful corrections.

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