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US Exceptionalism


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Economist has just done a front cover proclaiming the US economy to be the envy of the world. And such headlines often turn out to be contrarian indicators. 

 

BNP Parabis have noted that the Q3 2024 Atlanta Fed's nowcast estimate is up 3.4% annualized while their own nowcast for eurozone is 0.3% growth quarter on quarter. So annualizing that US is expected to triple eurozone growth in the third quarter. And the USA has had a far more robust recovery both from the GFC but also COVID while Eurozone and Japanese growth has been anaemic. 

 

Lots of strategists have produced charts showing how the US stock market has just beaten the pants of the other major stock markets over the last decade. 

 

And there have also been a lot of charts showing the increasing dominance of the US stock market of all country and global world stock market indices. 

 

US CAPE at 35x is a lot higher than other major markets especially emerging markets indicating much higher future growth expectations as well as lower risk. 

 

And anecdotally on the Bogleheads forum where the focus is more on asset allocation then 100% US equity allocation is increasingly fervently argued for with the need for international diworsification pooh-poohed. Buffett and Bogle were obviously both fans of a 100% US equity allocation for know-nothing index investors. 

 

Obviously it is easy to come up with reasons for all of this:

 

-Big Tech and now Big AI are predominately American companies and they are global monopolies with incredible pricing power and seem to defy gravity in their ability to grow at fast growth rates and find new avenues of growth. 

-USD status as a reserve currency makes it easier for the US government to run huge deficits without the currency collapsing 

-US has benefited from an influx of cheap labour since the pandemic 

-US economy continues to be a favourable business environment with very lax competition law and business regulations which helps large firms to dominate markets while European markets are hampered by regulation and Japanese economy continues to keep having false dawns

-Chip subsidies and the huge investment in AI have probably helped in recent years add to multiplier effects and prop up the tech complex

-When growth is scarce it is rational to pay a high multiple for a stock market that has more than its fair share of blue chip growth companies 

-And probably quite a few more I haven't mentioned 

-Success begets success and therefore more and more inflows into the US stock market drive stock prices and valuations higher

-Everyone is convinced that AI is the future with the expectation that the major beneficiaries of this are going to be Big US tech companies. 

 

But then again taking a longer view with the benefits of hindsight the US economy and stock market over the last century or so has been the clear winner. However it hasn't always been a smooth ride and the US stock market has suffered lost decades and much of the outperformance over shorter periods has been from starting points with much lower valuations both in absolute and relative terms. So perhaps some caution is still warranted and foreign diversification is perhaps more important now than ever. 

 

Thoughts?

 

 

 

 

 

 

 

 

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I'll give you a different viewpoint:

 

We see the following in the US economy:

 

1. Debt accumulation

2. Financialization over production

3. GDP misrepresents growth->interest payments, rising housing prices, and other assets count as GDP but don't reflect economic productivity

4. GDP growth mostly benefited the top 10% while wages, compared to purchasing power, stagnated for a large majority

5. Loss of manufacturing->Deliberately moving away from manufacturing that now relies on intellectual property, monopolies, and cheap foreign labor, especially from China->Increased dependency on other countries->Reason for the global interference of the US military

 

 

At this point, the top 35% of the US SP 500 stock market does not represent the real economy of the US anymore but rather asset-light global monopolies that are highly dependent on other countries to provide their manufacturing while they increasingly transform into global utility businesses that are essential for doing basic business (AWS, etc., the backbone of the internet, Microsoft, Alphabet, Nvidia)

 

Except for China these are true monopolies and as long as no country does something against it they will grow further and extract further wealth of the global real economy. So in that regard its hard to not be bullish on them.

 

On the other hand, these businesses dont employ the majority of americans but rather highly educated global workforces with the goal to go even further asset light and also replace these workers. Really amazing to watch.

 

The asset hard economy of the US is hardly competitive globally and IMO will never be, thats the fate of a reserve currency too, hard to devalue your currency with that much demand and having all these large financial services businesses in your country. So the trend will only continue, less manufacturing, more asset-light tech and global control. Which is why democrat government interferes everywhere and why Trump doesnt want to because he stands for the real economy of the US and not Alphabet (biggest democract donor). So there you have the two different sides of the medallion. I dont think Trump is able to "make america great again", manufacturing just never can be where it was 40-50 years ago because of decisions that are irreversible.

 

My prediction: SP 500 will do okay further->US will further meddle globally in politics->US tech stocks will become even stronger->nobody will regulate them or do anything.

 

Question is what happens 20-30 years out because at some point the inner political turmoil in the US will become impossible to manage with this development.

 

 

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Like biology, diversity in governance style leads to more competition and more resilience in the overall system.  One style may work better for certain problem, but other style may work better for other problems.  It's better that there are multiple parties trying different systems and let the competition decide the winners.  We're starting to see some of the limits /defects of capitalism, as well as seeing the old limits of autocratic style of governance.  I've seen organizations at the company level work well when it can learn quickly and translate that into action.  The ones that don't learn, or can't translate that into action will eventually die off... some just takes a really really long time to do so (ex. North Korea).

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3 hours ago, nsx5200 said:

Like biology, diversity in governance style leads to more competition and more resilience in the overall system.  One style may work better for certain problem, but other style may work better for other problems.  It's better that there are multiple parties trying different systems and let the competition decide the winners.  We're starting to see some of the limits /defects of capitalism, as well as seeing the old limits of autocratic style of governance.  I've seen organizations at the company level work well when it can learn quickly and translate that into action.  The ones that don't learn, or can't translate that into action will eventually die off... some just takes a really really long time to do so (ex. North Korea).

 

This is largely correct, and the 50 state thing has been an underappreciated boon.  People overlook that when it comes to China too.  I'm too lazy to look it up, but last time I checked only 15% or so of gov spending from China was on the national level.  Xi is good at tamping down local politicians who get too corrupt or too powerful, but the central government in China is not like the Federal government in the US.  Despite the corruption, local governors have a lot more influence in Chinese growth and they have an interest in favoring projects that have a positive ROI, so their underlings compete for getting funding for these projects.  Despite the amount that is eaten away by bureaucracy and corruption, you rarely see as many  "bridges to nowhere"   https://en.wikipedia.org/wiki/Gravina_Island_Bridge as you would in the US. 

 

Jingoism aside, the US has benefitted from several things that have made up for the terrible government decisions.  The tech industry accounts for a huge part of global GDP, and those companies all got their start in the US.  Mostly in California.  

 

The recent boon in fracking has delivered cheaper energy, and because the US isn't well set up to export natural gas, it is a cheaper feedstock for many industries, since the price is decoupled from the global price, and encourages things like specialty chemicals and fertilizer production, which might not be feasible compared to other countries without that. 

 

Moreover, a legal system that respects property rights and treats foreigners (and minority investors) the same as locals (or majority share holders) is a big benefit that is hard to replicate.  Even in non-common law legal countries, the ones that have done the best (Japan, Korea, the Nordic States) are typically the ones that have such respectable legal systems and low levels of corruption.  Even in Latin America, the country that is doing the best (graded on a curve) is Chile, which has low levels of corruption. All government contracts must be posted online and anyone can see who got paid what.  Citizen journalists routinely expose fraud and bureaucrats are arrested when you find out that a contract was awarded to a company that is owned by another, which is owned by so-and-so who is the brother in law of a minister. And tourists from other countries like Columbia are routinely arrested because when they get pulled over by a cop, they do what they think is normal and bribe the cop. 

 

Here's someone who was arrested for trying to bribe a cop with US$50k.  Given that US cops make about 10x what they make in Chile, do you think many cops in Boston or Chicago would turn down $500k? 

 

The US also has an educated workforce, and employers in one state can hire from other states and a stable currency.  It's got a lot of advantages, but with enough mismanagement you can screw that up if you are not careful.  California has been driving out the wealthy and it's hard to make things so bad that people don't want to live on the beach. 

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  • 3 weeks later...

https://toronto.citynews.ca/2024/11/06/google-searches-for-move-to-canada-skyrocket-after-trump-win/

Other related queries that over the past 24 hours hit ‘breakout’ status, which Google defines as an increase in search volume by more than 5,000 per cent, include:

  • Cost to move to Canada from U.S.
  • Can I move to Canada if Trump wins
  • How to move to Ireland from U.S.
  • Easiest country to move to from U.S.A.
  • Jobs in Canada for Americans"
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3 hours ago, Haryana said:

https://toronto.citynews.ca/2024/11/06/google-searches-for-move-to-canada-skyrocket-after-trump-win/

Other related queries that over the past 24 hours hit ‘breakout’ status, which Google defines as an increase in search volume by more than 5,000 per cent, include:

  • Cost to move to Canada from U.S.
  • Can I move to Canada if Trump wins
  • How to move to Ireland from U.S.
  • Easiest country to move to from U.S.A.
  • Jobs in Canada for Americans"

 

Lesson number one for these people "moving to a better country" will be the realization that Canada's immigration policy is pretty much just as difficult as the US (minus a few years). 

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14 hours ago, Haryana said:

https://toronto.citynews.ca/2024/11/06/google-searches-for-move-to-canada-skyrocket-after-trump-win/

Other related queries that over the past 24 hours hit ‘breakout’ status, which Google defines as an increase in search volume by more than 5,000 per cent, include:

  • Cost to move to Canada from U.S.
  • Can I move to Canada if Trump wins
  • How to move to Ireland from U.S.
  • Easiest country to move to from U.S.A.
  • Jobs in Canada for Americans"

If you Google this, you are not going to move.

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