The markets capture the two in one: the US$ (TWI) is at multi-decade highs and 20% above fair value (REER); and the return on investment in US equities has outpaced returns from non-US equities by a factor of 3.5 times in a decade.
Not all of this is based on economic reality. In the last decade, US equities have increased their share of global markets by 25 percentage points, but US equities’ profit share has only risen by 14 percentage points. Hope plugs the gap with earnings-multiple expansion.
Now here’s the thing! US Exceptionalism started a decade ago (perhaps longer). So, the question is: will the Trump 2 administration enhance it or kill it?
This piece finds that US Exceptionalism has two critical legs: massive foreign capital inflows and foreign ownership of US equities. They are linked at the hip; if one falls, both do. And if that happens, US Exceptionalism will end.
Current and proposed fiscal and trade policies, as well as structural flaws in the Exceptionalist economic model, will end US Exceptionalism.
Animal spirits unleashed by deregulation have too much heavy lifting to do in order to offset the damage caused by tariffs, fiscal policy and a US Fed pivot.
It will not be a smooth “correction”. It would start from bubble valuations in assets and the dollar and would have feedback loops to the “real” economy. We are talking about a bear market and a recession.
I am reducing long positions in the USD and buying Yen and reducing US equity positions in favour of European, Japanese and Indian stocks. I am buying TIPS.