Market Musings 080225: Challenging The Conventional Wisdom Around American Exceptionalism

8th Feb by Edmund Shing

9 comments 1199 reads

Market Musings 080225:
Challenging the conventional wisdom around American exceptionalism

Is the US really so exceptional and can this exceptionalism really continue for the long term? Certain things are quite clear and cannot be disputed.

First of all, in terms of US economic growth, we have seen outperformance versus the rest of the world with superior productivity growth in particular so we can't argue with the fact that the US economy has grown strongly over the last few years.

US GDP growth has been strong

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Secondly, at least in dollar terms, it is still the largest economy in the world with unchallenged reserve currency status for the US dollar. There's no doubt that the US dollar is the date facto global currency accepted pretty much everywhere.

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Thirdly, when we look at the stock market, it's quite clear that the US stock market, led by the S&P 500 index, has outperformed for 10 plus years on the back of particularly strength in the technology sector on the back of strong earnings growth from this sector. So over the past decade, US equities have delivered an impressive 14.8% annualized return per year, outpacing global ex-US equities, which delivered only 7% and euro area equities delivering 7.8% per year. So clearly, massive, consistent outperformance from US equities over the long term.

S&P 500 has massively outperformed World ex US in $

And that's been compounded by a strong US dollar, which has been more or less the case since 2011. If we look at the DXY US dollar index, in 2011 the level was 73, today the level is 108. So over this period, substantial appreciation of the US dollar against a basket of other currencies, including the euro, the Japanese yen and the British pound.

DXY US Dollar index has trended higher since 2011

The consensus view today is, given all of these facts, why buy any stock market outside the US?

Well, I have some challenges to this consensus view, this consensus narrow, and they are the following.

First of all, I believe that US economic growth is set to slow, as many consumers are showing…

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Pat W

9th Feb

Thought provoking, as always. Thanks

topvest

Thanks Edmund - Interesting and thought provoking. Some thoughts from me....

The US does create some truly wonderful businesses, that is without question, but all of this is priced in and there is little or no margin of safety in my view.

In terms of the USA economy, much of the US GDP growth is generated by unsustainable government deficit spending only permitted due to reserve currency status? The US is actually in a dire financial position with US$36.5trillion of government debt. Trump has inherited an impossible "house of cards" position in my view which is why Elon Musk is doing what he is .

The US stock market is clearly in a bubble, as evidenced by the 74% MSCI World Index weighting. It's worse than that for concentration risk actually as c25% of the MSCI World Index is now represented by the Magnificent 7. Where does this end before it reverses? Maybe 80-90%, but it just cannot continue much longer as the US stock market is clearly not sensibly worth 90% of the world's stock market when their economy is less than 30%.

Warren Buffett has realised this, as he did in the dot-com bubble: The US market was valued at 206% of GDP versus 138% for dot-com bubble. If you include privately owned companies, then > 300% of GDP versus 200% at dot-com bubble. Only 81% in 1929!!

Epitychia

10th Feb

"Every kingdom divided against itself is brought to desolation, and every city or house divided against itself will not stand." Matthew 12.22

We talk about political risk in many countries, but not the USA. But today it is more divided than most. Where will it be in 10 years time? I dread to think.

The Phoenix

Hi Topvest you echo my thoughts , it varies but potentially $12 trillion of the US debt needs rolling over this year which could be a bump in the road.

If you don't follow him have a listen to Michael Howell on Youtube search "Michael Howell global liquidity" he is brilliant on macro debt cycles.

Agreed the problem is for a lot of the old slave states it seems in their mind the civil war never ended hopefully they will muddle through and reunite

Cancun

Suspect that the political / instability risk would have been even higher under a Democrat win .... sad to say, but we saw the disruption the last time that Trump lost... My hope is that the next Republican leader is a tad more ' sensitive '.

I do wonder Cancun if Trump is setting his children up to be the next Republican big dogs so he can create an ongoing dynasty like some of the old communist states had, mainly those the US used to be at war with.

Another very interesting thing on the MSCI UK World index is that the UK weighting at 3.5% is greater than the China weighting. Yes, the UK > China!

We all know that China is the biggest threat to US dominance. Their weighting is below 3% or 25 times lower than the US in the MSCI. Something to really make you think about US valuations and how high they are!

Trident

12th Feb

They are an unappealing bunch. Beware a repeat of the Kennedy 'curse'.

Market Musings 080225: Challenging the conventional wisdom around American exceptionalism