American Exceptionalism - What's next?

[Crip1]

This may be more applicable to US-based members. Also, this runs contrary to my normal modus operandi as a bottoms-up investor.

By most measurements the US economy has performed as well as any of the major economies during the post-Covid period and the US Dollar is as strong as it’s been in the past 20 years (save for a brief period in 2022). Furthermore, pretty much every morning as I listen to Bloomberg to start the day the term “American exceptionalism” is tossed out, often multiple times. This has caught the attention of my contrarian spider-sense. This suggests that have got to be closer to “maximum optimism” now than in recent times, and max optimism often portends reversal. 

If that is the case, then it seems to me that buying non-US domiciled equities, especially in markets who would be “catching up” to the US economically, would give a double-dose of returns from growing earnings and currency appreciation relative to the USD. 

So, looking for other’s thoughts, pro or con. 

-Crip
 

[Blake Hampton]

My best guess is China due to their strong manufacturing base, but I also don't think they understand property rights over there.

The U.S. honestly seems like the best place to be still. I would argue that our situation isn't great but I still think it's better than the current positions of the EU, Africa, South America, etc. Even reconsidering China, they're currently going through a debilitating property crisis and they carry a ton of debt, some of which isn't even on the books.

 

I think the whole world is in for a tougher time in which the U.S. will continue to lead.

[james22]

I'd make a US Small Value investment before anything International/Emerging Markets if making a mean reversion trade.

 

Just as relatively undervalued and with the Trump catalyst in play.

[Lazarus]

I'm investing in a Swiss ETF as my international play. They have high levels of innovation and are as stable as can be, yet they have lagged for an extended period of time. But I think that AI and Trump de-regulation means the American exceptionalism will continue a bit longer at least.

[cubsfan]

1 hour ago, james22 said:

I'd make a US Small Value investment before anything International/Emerging Markets if making a mean reversion trade.

 

Just as relatively undervalued and with the Trump catalyst in play.

 

Brilliant. Been concerned about the US market - but your right about the small caps. 

[SharperDingaan]

Forever the heretic  .....

 

The US innovates, it does it very well, but it has slept on its laurels for a very long time. The big difference is that now the dragon has woken up, it's breaking the furniture, and years of dammed up innovation are now flowing downstream. It's just super disruptive as old world orders are swept away, new ones established, and there is widespread change. Not a bad thing, and if you are a youth ... this is your future; grab it with both hands, and SQUEEZE!

 

Canada should be a big beneficiary; but only if we continue to play rough hockey, we give as much as we get, and we move with the times. It's not the 1980's anymore it's 2025, and that hot guy/gal back then is now claiming pension, as the times have moved on! Expect lots of volatility, lots of broken teeth/arms, and CAD to fall like a brick .... but a decade from now? CAD approaching parity. Expect restructured inter-provincial trade barriers, and material trade/energy corridors flowing east/west/north not that dissimilar to the EU. New grid and pipe running south, joint NATO development of coastal/arctic waters, tighter and more integrated borders. M&A and infrastructure opportunities, not that different to when highways were being built back in the day; it's not just the US waking up.

 

Back in the day, draft-dodgers were able to flee to Canada; today, that now tighter border is going to be well spent money turning a lot of 'illegals' back. Mystery as to what happens with those who if turned back to the US, would be deported back to 'where they came from', and probable death (ie: Indian Sikh, or Chinese opposition). Not sure that Canada is in the murdering business.

 

Lots of opportunities .... too little time!

 

SD

  

[Crip1]

4 hours ago, cubsfan said:

 

Brilliant. Been concerned about the US market - but your right about the small caps. 

Quick tangent, I'm a White Sox fan. Also a fan of the Bears, Bulls and Blackhawks. Thankfully my investing results have been better than my sports teams.

-Crip

 

 

 

Edited January 21 by Crip1

[Viking]

6 hours ago, Crip1 said:

This may be more applicable to US-based members. Also, this runs contrary to my normal modus operandi as a bottoms-up investor.

By most measurements the US economy has performed as well as any of the major economies during the post-Covid period and the US Dollar is as strong as it’s been in the past 20 years (save for a brief period in 2022). Furthermore, pretty much every morning as I listen to Bloomberg to start the day the term “American exceptionalism” is tossed out, often multiple times. This has caught the attention of my contrarian spider-sense. This suggests that have got to be closer to “maximum optimism” now than in recent times, and max optimism often portends reversal. 

If that is the case, then it seems to me that buying non-US domiciled equities, especially in markets who would be “catching up” to the US economically, would give a double-dose of returns from growing earnings and currency appreciation relative to the USD. 

So, looking for other’s thoughts, pro or con. 

-Crip
 

@Crip1 I think your instincts / questions are sound. My read is the US is just getting started. Trump has lots of low hanging fruit - and he is prepared and motivated. My guess is US economic/profit growth will continue to be much stronger than the rest of the world in 2025 and probably in 2026. So here area couple of thoughts:

1.) I think you might be early. Which sometimes can mean you also end up being wrong. 
2.) What is the catalyst that makes your idea work? I don’t see one today. In fact, I see new headwinds forming. 

I actually recently kind of did the opposite of what you are thinking… I sold my holdings in XIC.TO (100% Canadian stocks) and shifted it largely to XEQT.TO (45% S&P500, 24% Canada, 31% rest of world). I also hold VO and VOO.

 

If Canada elects a Conservative government? In my mind, that would be a catalyst - a reason to be more interested in buying Canadian stocks. But we are probably 7 to 9 months away - with a lot of unknowns.
 

My strategy today is to have some cash to be able to take advantage of any volatility that materializes in companies/sectors I like. Bottom line, I am not trying to over think it.

Edited January 21 by Viking

[mattee2264]

A big factor in the US outperformance in the post-COVID period has been the USA's ability to run multi-trillion dollar fiscal deficits. I am not convinced that is an entirely sustainable driver of exceptionalism. Although it is likely to continue for the foreseeable future. Open borders under Biden may have also helped offset the inflationary impact of such spending. 

 

The big pitch seems to be that AI will trigger a new industrial revolution and America will be at the forefront and cementing the Big Tech oligopoly is therefore a necessary evil not least if it helps us stay one step ahead of China's AI efforts. And so long as there is huge investment spend on AI every year that is going to keep the US economy booming the same way it did in the late 90s. 

 

Although there has been some scepticism about the much anticipated productivity benefits from AI e.g. the paper by Acemoglu the famous economist and Goldman Sachs also did a paper on that and so did Sequioa Capital. Although that doesn't really matter during the build-out/boom phase. 

 

 

[Spekulatius]

45 minutes ago, mattee2264 said:

A big factor in the US outperformance in the post-COVID period has been the USA's ability to run multi-trillion dollar fiscal deficits. I am not convinced that is an entirely sustainable driver of exceptionalism. Although it is likely to continue for the foreseeable future. Open borders under Biden may have also helped offset the inflationary impact of such spending. 

 

The big pitch seems to be that AI will trigger a new industrial revolution and America will be at the forefront and cementing the Big Tech oligopoly is therefore a necessary evil not least if it helps us stay one step ahead of China's AI efforts. And so long as there is huge investment spend on AI every year that is going to keep the US economy booming the same way it did in the late 90s. 

 

Although there has been some scepticism about the much anticipated productivity benefits from AI e.g. the paper by Acemoglu the famous economist and Goldman Sachs also did a paper on that and so did Sequioa Capital. Although that doesn't really matter during the build-out/boom phase. 

 

 

I very much agree. Any other country that tries to run similar high MMT like deficits gets punished by capital markets severely (Brazil, France, UK) and has to revert to austerity. The US can do this because of the twin factors of reserve currency status and the largest most liquid capital markets (which are tied to each other so you could say it’s really one factor).

 

 

Another thing worth watching is this one:

 

[mattee2264]

There was a London Standard article on precisely that. The argument was that ceremony reveals where the power lies and the tech oligarchs were front and centre at the inauguration ceremony and are very much kingmakers. There were some signs the Biden administration were going to take some antitrust measures. But I imagine that Trump figures that national security is much more important than monopoly abuse and will do little to curtail Big Tech's dominance so long as they continue to spend hundreds of billions on AI. 

[vinod1]

4 hours ago, mattee2264 said:

A big factor in the US outperformance in the post-COVID period has been the USA's ability to run multi-trillion dollar fiscal deficits. I am not convinced that is an entirely sustainable driver of exceptionalism. Although it is likely to continue for the foreseeable future. Open borders under Biden may have also helped offset the inflationary impact of such spending. 

 

The big pitch seems to be that AI will trigger a new industrial revolution and America will be at the forefront and cementing the Big Tech oligopoly is therefore a necessary evil not least if it helps us stay one step ahead of China's AI efforts. And so long as there is huge investment spend on AI every year that is going to keep the US economy booming the same way it did in the late 90s. 

 

Although there has been some scepticism about the much anticipated productivity benefits from AI e.g. the paper by Acemoglu the famous economist and Goldman Sachs also did a paper on that and so did Sequioa Capital. Although that doesn't really matter during the build-out/boom phase. 

 

 

 

So, if USA did not run multi-trillion dollar fiscal deficits,

 

- No Chat GPT, no huge capital spending on AI, no run up in NVIDIA and semiconductor stocks

- No big increase in profits for the Mag 7, cloud spending would collapse...

- No big increase in profits for all the large moat companies (Visa, Mastercard, Costco, etc)

 

Cool story but absolutely nothing to do with reality.

 

The multi-trillion dollar fiscal deficits contributed to inflation, helped improve the balance sheets of lower income families, increased GDP growth rate a little bit, but not much impact on the stock market. Look at where profits grew. They are all in companies with strong moats and they would have performed well even without the deficits. Banks might probably be the one sector that was helped quite a bit due to deficits, but their impact is much smaller compared to the other companies.

 

Vinod

 

[Spekulatius]

@vinod1 I disagree.

 

Take Visa and Mastercard for example. Why do Visa and Mastercard exist and why are they US companies? The biggest reason is that the US has substantial control over the financial (by means of the US $ , but also the payment systems, interbank transfer etc). So while they may not benefit much from all that extra spending, they owe the very existence to the might of the US dollar and the control of  the international financial system.

 

The US share of the total global GDP is ~26% but the US equity market cap is almost 60% if the global equity market cap. why do you think this is case? All due to better managements? I’t part of the equation but can’t explain all of it. anyways, the net result is that market valuations are much higher, which leads to lower cost of capital which allows to higher investments and faster growth. It’s a nice flywheel and we better hope it keeps spinning.

 

By the way, an Oligarchy  is not good for economic growth long term. In a crisis, they often fall to pieces.

Edited Saturday at 12:07 AM by Spekulatius

[mattee2264]

I was talking about the US economic outperformance not the US stock market outperformance (which I agree can mostly be explained by cloud/AI). 

 

When manufacturing is in recession and consumers are feeling the pinch then its been massively helpful to the US economy that the government is able to run multi-trillion fiscal deficits and helped the US avoid a post-COVID hangover and more than offset the contractionary effect of Fed monetary tightening.

 

Trump clearly wants to run the US economy hot with the expectation that the AI revolution will increase productivity and increase the sustainable US growth rate. 

[vinod1]

19 hours ago, Spekulatius said:

@vinod1 I disagree.

 

Take Visa and Mastercard for example. Why do Visa and Mastercard exist and why are they US companies? The biggest reason is that the US has substantial control over the financial (by means of the US $ , but also the payment systems, interbank transfer etc). So while they may not benefit much from all that extra spending, they owe the very existence to the might of the US dollar and the control of  the international financial system.

 

The US share of the total global GDP is ~26% but the US equity market cap is almost 60% if the global equity market cap. why do you think this is case? All due to better managements? I’t part of the equation but can’t explain all of it. anyways, the net result is that market valuations are much higher, which leads to lower cost of capital which allows to higher investments and faster growth. It’s a nice flywheel and we better hope it keeps spinning.

 

By the way, an Oligarchy  is not good for economic growth long term. In a crisis, they often fall to pieces.

 

MA and Visa: I really dont know the whole history especially what happened in other countries, but I think it is because they are the ones who started the network first (the banks who got together and started them) and all the network effects took over. All the things you mention are secondary to this. 

 

As to US share of equity market cap, a lot of things come together for this:

 

1) The US is very capital-friendly; any time there is competition between capital vs consumers, employees, and societal effects, the US tends to favor capital. Very few countries are like this. This results in higher profits relative to GDP in US compared to other countries.

 

2) There is also all kinds of positive factors that promote innovation - social, educational (look at leading universities), financial (startup funding, private equity, investment management, banking, etc), cultural (there is no one looking down on you if your company goes bankrupt) and you see the impact in places like Silicon Valley, New York, and Boston. This leads to most of the innovative companies being started in US which tend to be faster growing and more profitable. And these profits are from the world over and not just in US.

 

3) Less social financial support compared to other countries. So more people are going to invest in stock market to finance their retirement. This leads to all sorts of support for assets.

 

When you have these combination, it is not surprising that US would dominate the equity market cap.

 

Take China for example. If Apple is China based, do you think the Govt would like them to keep making $100 billion per year in profits? As far as they are concerned if they make $20 billion in profit and spend the rest $80 billion on something that helps the overall country or people, that is better. You see this again and again in their policies and approach. It might not even be wrong and probably a good approach for their economy, I don't know. But it is not good for shareholders. This is one thing people who invest in China repeatedly overlook and just focus on how cheap and great Alibaba and Tencent are.

 

US stocks can still offer higher returns than international stocks AND become a smaller percentage of the world stock market cap. This happened in the past and likely would in future.  China, for example, has increased its overall stock market cap without generating better returns than the world stock market. That is because they issue new shares to fund companies or grow existing companies. 

 

Vinod