← Many Happy Returns
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- [00:00]
A
This episode is sponsored by Raisin uk, the award winning online savings marketplace. Compare open and manage competitive savings accounts from over 40 FSCs, protected banks and building societies with a single login. Use the Raisin link in today's show notes for a 100 pound welcome bonus. New customers only terms apply. Warren Buffett says never bet against America, but plenty of people spent the last 18 months doing exactly that, betting the dollar would be dethroned and the sell America trade would finally pay off.
- [00:38]
B
They're still waiting on Uncle Sam's 250th birthday. We ask whether the United States is still exceptional or just expensive. And in today's Dumb Question of the week, is the US the best performing stock market? All right, let's get into it. So this is the fifth time I'm attempting to record this intro because it's America's 250th birthday and there's a word we wanted to say and I just can't pronounce it. So romin over to you. What is the word?
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A
Semi quincentennial. There we are.
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B
So 250 years since the Declaration of Independence, and it's not controversial to say America's done pretty well, both as a country, an economy and a market. The idea of American exceptionalism seems to be alive and well, and I think we'll split this episode into two parts. Firstly, what has made America exceptional? And then secondly, will it continue?
- [01:37]
A
And I should say, as a strategist, this is an absolute gift. Whenever you get one of these anniversaries, you can write a themed note and it's one other piece of content that you can churn out. Not to say that's true of a podcaster as well, of course.
- [01:50]
B
No, the podcaster is sort of the second derivative. So we've read the investment banking notes and are now going to nitpick them handily. Deutsche bank published 10 reasons for US exceptionalism, so maybe we go through them and give our take. So number one on their list of why the US has been such a unique country is due to its political and institutional stability.
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A
Now, until recently, I'd have said that was still true, but clearly with this presidency, that has not been the case. We've seen been a lot of erosion of what we would consider to be norms. Now, that's not all bad. I think some change is definitely a good thing. But I'm worried about certain things. Quality of data from economic institutions, rule of law, things like foreign policy, whether you can start a war on a whim. All of These slightly concern me and also make me think, is the US the same country that it was just 10 years ago?
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B
I always think it's a slightly weird claim to say the US has had unique political and institutional stability given that it had an awful civil war in the middle of the 19th century.
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A
And it was interesting living in the US which I did for a while. It was really a different country depending on which state you lived in. It really was multiple states which are loosely together in a federation. And that in turn leads to instability. I think people always say, oh yes, well, you'd never have the United States splitting up. You could never have a kind of texit or a caliph exit for the United States. But really those are almost two different countries. They've got the GDP of a country and they've got very different political views.
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B
And there was a brief period where they did split into two countries.
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A
Indeed.
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B
So I'm not sold on this being the difference maker. There are plenty of countries which are as stable as the United States, I would say.
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A
And I did live through a revolution as a kid. When I was a little boy we lived in Iran. And it was absolutely shocking to see what I considered to be quite a safe country suddenly change overnight. Of course there were things going on in the background which I wasn't aware of. I was just a little kid, but I saw that stability change into utter chaos and bloodshed and a terrible collapse of society. And I think the critical mass here is a number of disgruntled people who've got nothing to lose. And if that's the case, then things can change very quickly. And what seemed like a really stable system at one point in time, because of this disgruntlement under the surface can transform into something which is very unstable.
- [04:40]
B
So don't take it for granted is what you're saying. But the second point on Deutsche Bank's list is that the US has benefited from extraordinary geographic advantages. It's got a huge amount of arable land, well positioned rivers, large coastlines and access to both the major oceans. And it also hasn't had to worry too much about foreign invasion.
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A
And there is a quote, it's not actually verifiable, from Bismarck, who said that America's bordered by weak neighbors to the north and south and by fish to the east and west, which obviously puts it apart from Europe. Europe, where you've got lots of other countries who desperately want more resources and who once in a generation think, wait a minute, I could have some of that.
- [05:27]
B
I mean, we think that about America it's just tough to get there, isn't it? We're not going to be able to invade very well. And a related point really is that America has abundant energy resources, especially when you compare it to countries in Europe or Japan.
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A
Yeah. So essentially a continent with incredibly diverse geology, also a huge land area. If you look at the us, it is phenomenally large compared to the uk,
- [05:55]
B
which is another point on the list, which is the US simply has scale. It's got a domestic market of over 300 million people with high average incomes
- [06:04]
A
and a common language and common markets. If you look at Europe, if you compare the stock market in Europe to the us, and recently we've been trying to plumb data into pensioncraft, into our trackers, and it's so difficult for Europe because you've got 10 different exchanges, different currencies, whereas the US is just one system, one currency, one set of trading hours. Yeah. Just so much easier. And that huge market to sell into. So if you do become a company in the United States, you've got a huge number of people who essentially can buy your stuff if you do it in Europe, now that we've got the Eurozone, it's not so bad. But you've got a very disparate market, multiple languages, multiple currencies. It used to be, and that was very difficult. But going back to energy, I think you shouldn't underestimate the importance of oil to the United States, because that'll not only enable the country to have huge amounts of energy resources, but also to develop multiple industries on the back of it, like automobiles, like manufacturing. And recently we've had a renaissance of that because of tight oil, because of shale oil. And that's really allowed the United States to change the way it approaches foreign policy as well, because it's not the case any longer that a Middle east war is massively disadvantageous to the United States. High energy prices are a problem, but nothing like they were in the 1970s.
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B
And the key point is that American energy costs for fossil fuels and of course electricity are some of the cheapest in the developed world.
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A
And of course, they've got this huge resource in terms of solar energy. If you live in the Southern states, in the United States, in Texas, for example, weirdly, I believe Texas is really forging ahead when it comes to things like solar energy. I say it's weird because they also do fossil fuels. They have huge fossil fuel reserves in Texas.
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B
Yeah, they built loads of massive solar fields. But they're ashamed about it because it is woke and it is liberal. We don't want to harness the power
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A
of the sun, but it's pretty clear that the power of the dollar overweighs the power of ideology.
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B
I mean, we're joking, but that is kind of one reason America's been so successful.
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A
Right.
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B
It has embraced capitalism, sometimes to an extreme level, which is good for capital markets at least.
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A
Yeah. What's really clear in the United States is that it seems to be run for the purpose of maximizing wealth, both as a country and in terms of the companies within the country and social rights. Things like providing a safety net for its citizens is not as important as it is in other countries such as the ones in Europe. Now that's been a benefit in a way because it's allowed them to massively expand their capital markets, grow companies very quickly, to be very flexible in terms of their labour market. So when we had Covid, there could be mass firings, which we were less likely to do in Europe. But it comes with a social cost.
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B
So American support for its people might be conditional, but one thing it does really well is back its companies. So if you look at venture capital and how much of GDP is spent on backing these early stage companies and scaling them up in the decade from 2013 to 2023 in the US it was around 0.7% of GDP per year, which compares to just 0.2% in the EU. So much, much more money is going into building big successful companies and in
- [09:49]
A
cash terms, that's $1.4 trillion more on venture capital than in the EU. So if you are someone who's young, bright, has a brilliant idea and is willing to work all hours of the day, well, you can put that capital to good use and you have this ecosystem behind you of capital and support to help you scale your company and your idea. And that's just been an unbelievably successful model for the United States over the last decade or even longer.
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B
And a lot of smart people. So according to the times, at least seven of the top 10 universities are based in the US and up until recently at least, the government has been willing to back scientific research with a lot of money.
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A
Yeah, I remember at Imperial when I was at ic, I was doing physics, they had a kind of company spin off type arm. And that happened after I left because I was still kind of associated with Imperial, but there was no equivalent of the Bay Area or Palo Alto or any of that around Imperial. It never really happened. Maybe it still will, but it's just too fragmented and there's not Enough capital or enough people willing to risk their money as they are in the United States.
- [11:07]
B
I mean, what you see happening is a lot of people who are super ambitious, they'll move to the us, won't they? They'll go to the west coast and meet the venture capitalists and set up their firms. And I think looking back over the last century, you shouldn't underestimate what immigration has done for the United States. I'm not trying to make a political point, just a factual point, that a lot of their big companies have either been created by or grown by first or second generation immigrants to the us. And I think especially in the run up and aftermath of World War II, there was a huge influx of top scientists from around the world into the us. And maybe the point that is often underappreciated is the impact of World War II. If you're looking at the relative performance of the US versus the rest of the world, to me that's the biggest factor. The US was not destroyed, whereas so much of Europe was. And if you look at the first half of the 20th century, the US economy grew almost six times compared to the UK's, just two times and less than that in France. And then for the second half of the 20th century, well, Europe was rebuilding largely.
- [12:13]
A
And of course some of the US wealth came from selling arms to Europe so that we could kill each other. And in the UK we had loans that were out outstanding to the US because we couldn't afford those arms and we couldn't afford the materiel which they were providing. So war has been particularly good for the United States. Wars that weren't based in the United States, of course. And it's interesting if you look at these back tests of which countries have the worst sustainable withdrawal rate, every single country that fought and lost a war, so Japan, Germany, for example, they have these unbelievably low sustainable withdrawal rates because it always hinges on the worst possible year. And of course, after a war, when you're trying to rebuild a society and rebuild your country physically, that's incredibly expensive and you get these atrocious returns in your capital market. So in that sense, the US is like the uk. We're surrounded by a sea that's protected us in many cases, but now that we've got air warfare, not so much. And the fact that they are quite isolated geographically, they've got oceans, whereas we've just got a sea where you can actually see France from the uk, They've been very lucky to have that kind of geographic location.
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B
Yeah, they're isolated, but also more than willing to get involved with the rest of the world and eventually got the rest of the world to kind of play by US rules.
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A
And people forget that the United States was largely behind the World Trade Organisation to ensure that there is free and fair trade between countries. And yet now they claim that that's put them at a disadvantage, which is a strange turnaround given that they were so important to creating it in the first place.
- [14:00]
B
I mean, they built the world order, we played by their rules, now they want to change the rules again. Let's just scoot through the last couple of points on Deutsche Bank's list. So perhaps an underrated reason why the US has been so successful is that they have pro business architecture. There's a greater tolerance for business failure there. And indeed a lot of the systems around bankruptcy and liquidation and reorganization are designed in a way to make failure kind of acceptable and allow the phoenix to rise from the flames, if you like.
- [14:35]
A
And again, living in California really helped me to see the difference culturally between the US and Europe. If you succeed, if you're wealthy, if you built a business, people really praise you and they genuinely mean it and kind of say nasty things about you behind your back, necessarily. But in Europe, we have this sense that if someone gets too high, we want to chop them down. And if they're successful, it's because they're dodgy or they've done something bad. So I think that's culturally a huge difference. The culture of success in the United States versus Europe.
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B
You'll notice that if pensioncraft keeps growing, eventually people are going, we've got to take Romyn down a peg or two.
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A
Yeah, that's unlikely to happen. But I think if you look at people, individual stories, Walt Disney's a good one. His first company, Laugh O Gram Films of Kansas City, went bankrupt in 1923.
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B
It deserved to with that name, didn't it?
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A
So he went broke, he moved to California, he built Disney, and of course we know what happened next. Henry Ford, his first two car ventures, failed before he built Ford Motor Company. And now we see that in Silicon Valley, where you get people who create startups fail and then just move on to the next one. So I think that kind of culture, that tolerance of failure, that people can pivot, they can rebuild, and that they can learn from their mistakes and the capital's still there to help them build, well, I think that's been very successful in the United States. And that culture, I think, is behind a lot of their success.
- [16:13]
B
I agree with that and the last point on Deutsche Bank's list is around adaptability and the fact that America has generally opted for pragmatism rather than ideology over time. There's been swings of policy between openness and isolationism, between protectionism and free trade over the years and none of it has managed to really hobble America because really there are these self correcting mechanisms and everyone seems to want to get rich.
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A
But I think what's really fascinating about America is how they've got incredible resources, they've got geographical benefits which we've touched on. Other countries have the same thing. Russia has huge reserves, a huge country, there are many countries in Africa which have similar resources and yet not the same success, at least not yet. But if you look at what America's done, what they've built on top of those resources, in terms of capital markets and successful companies, it is staggering.
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B
There was a fascinating note published recently from J.P. morgan and this is where that annoying word semiquincentennial, hey, I just said it, Robin, I said it. That's where it came from. And there's a table there showing just how successful the US has been, especially since the financial crisis. So if we look at investments starting in 2012, the US stock market has annualized 13.2% per year, whereas the rest of the world on average has delivered 5.2% per year. So the US has outperformed by 8 percentage points per year since 2012, at least according to JP Morgan.
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A
But this is the fascinating point, which is how the US has managed to do that. How have they managed to outperform so much? I think part of the story is that they reinvest back into the company. Whereas in Europe, in the uk, for example, if we have a successful company, we expect it to pay out dividends to shareholders. So the money comes out of the company if it's successful, and we kind of bleed it dry. Whereas in the US it's expected that they'll reinvest in research and development and that ongoing cycle of growing the company's capital and its revenue, which is also the reason why they've grown hugely in terms of their proportion of capital markets. That's why they're now 65% of capital markets compared to the UK's 4%. Whereas if we go back to 1900, we were actually ahead of them in terms of percentage market cap globally.
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B
If you look at profit growth since the year 2000 and focus on two indices, MSCI USA and MSCI World X USA, earnings per share have grown around twice as fast. In the US versus the rest of the world.
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A
It's funny, I heard this interview with this guy from Goldman, one of their strategists, one of their equity guys, and he was saying, of course this exceptionalism will continue and it's precisely because of this reinvestment. It's precisely because they can grow their profits more rapidly than countries in Europe and elsewhere in the world.
- [19:24]
B
And in large part it's come from the tech industry. That was the bet they placed in Silicon Valley and it has paid off massively.
- [19:32]
A
That's true. I mean, that's what's led to this recent growth. But in the past it's been for every industry where they've basically done what everyone else in the world has done, but just better and more profitably. Whether that was oil, whether it was automobiles, whether it was steel, they've just done an incredible job at generating profits from the resources that they have. When it comes to your cash savings, making sure your hard earned money is working for you is important. But chasing competitive interest rates can mean dealing with a mountain of paperwork. Meet Raisin uk, the award winning online savings marketplace. Instead of the hassle of opening multiple bank accounts across different apps and providers to get a better interest rate, Raisin UK lets you compare, open and manage competitive savings accounts from over 40 FSCs, protected banks and building societies all through a single login. What's more, new customers can claim a £100 welcome bonus. Simply register for an account using the code July 100 and open and fund a fixed rate bond of one year or longer with a minimum £25,000 single deposit by 31 July 2026. Don't let your savings sit idly in a low interest high street account. Visit the link in the description and use the code July 100 new customers only terms apply.
- [21:05]
B
Right, so we spent quite a lot of time looking at why America has done so well. But will it continue to be exceptional? As we said in the intro, a lot of people have been willing to bet against it, but so far that doesn't seem to have paid off. But the arguments they make are often coherent, so maybe let's go through them. The first thing doubters of America say is that they've had this immense privilege from controlling the US dollar, which is the reserve currency of the world and its position is now coming under threat. Is that true?
- [21:42]
A
I think Ray Dalio's talked a lot about this and he's looked at it historically to see which countries have been dominant in terms of their currency for trading and for funding. And I think it's true that many countries have been very dominant in the past and then simply faded away. Sterling is the most recent example of that where it was used as a trade currency and then just gradually diminished as the dollar came to the fore. So will this happen to the United States? I think it's certainly possible. And we all know the obvious examples of what could take over the renminbi is the one that people usually quote. But ultimately some country is going to come along and topple the US in terms of its dominance in terms of currency.
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B
But I think the people saying that that process is already well underway are probably overstating it. So the JP Morgan note I mentioned looks at various currency metrics and whichever one you look at doesn't seem to show a huge change in the fact that the US dollar is the reserve currency. Whether you look at cross border loans, currency transactions, central bank FX reserves, export payments, the Swift Payment network, all these things show relative stability with the US dollar being the dominant player.
- [22:58]
A
And it's not always a benefit to the United States to be dominant in terms of fx. A lot of economists have written about how it can be a hindrance having dollar dominance. So perhaps that's something that's not what the US wants anyway.
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B
In terms of the share of central bank effects reserves around the world, it does seem to be true that the dollar has fallen slightly down around 3% since 2020. And a lot of people point to gold and say, well, that's the reason central banks are buying loads of gold and they are buying some gold and it has increased quite significantly as a percentage of central bank's reserves. But and there's a big caveat here, the vast majority of that increase has come because gold prices have risen, not because they've added loads of gold to
- [23:43]
A
their reserves, not so much during 2026. It has to be said it has fallen quite a bit. But you're right, it has been a huge run up. What I think is true is that some countries are much more worried about weaponization of the dollar than others. So particularly the countries which are allied with China, but even countries which are friendly to the United States have repatriated their gold reserves. They don't want them to be held in a vault in the United States just in case they fall out with the. But if we look back at sterling's decline, there were certain things which speeded it up. For example, the world wars and of course Bretton Woods. But it wasn't an overnight case where people said, oh, I'M not going to trade in sterling. I'm going to trade in dollars. And I think the dollar will be the same thing. Maybe we'll move to a more multipolar world where a single country doesn't dominate. You just trade with certain people and you want to have reserve currency in their local currency.
- [24:44]
B
Currency reserve status seems to shift slowly. And it's not just the fact that whichever economy is the biggest suddenly has the dominant reserve currency. So I think US GDP was something like four or five times the UK's by the time the dollar displaced sterling finally as the major reserve currency. And people now say, well, maybe it's going to be China. Maybe the renminbi will become the reserve currency. That just seems extremely unlikely to me.
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A
The big problem with renminbi is its convertibility. If there are constraints on how much money you can move in and out of the Chinese currency, then that's always going to constrain its role in global finance.
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B
Now, the other big talking point over the last year or two for people who question America's preeminence is this Sell America trademark. And this was kind of characterized in March 2025 by a simultaneous weakening in the strength of the dollar at the same time that treasury yields rose. That's always a red flag. And the US stock market was falling for good measure. And there hasn't been many instances in history of that happening to the US. The last one was in 1982, and there were a couple in the 70s as well. But it proved temporary. The world became a net buyer of America again very quickly this time.
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A
And I think one of the things that the US is really good at is generating stories and telling its story to the rest of the world. We now watch American movies, we look at American film stars, and we have to listen to US politicians.
- [26:23]
B
But I'll be damned if I'm watching American sports.
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A
Not a baseball fan, then, Michael?
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B
No, I actually am. That's the sad thing. But the rest of the world just want to watch football.
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A
But they tell this story about AI and they can sell the story and we believe it and we use their product. So I think that's one of the ways in which they've been very dominant as well. You can't quantify it, but I think it's important.
- [26:50]
B
What about some things we can quantify? Foreign holdings of U.S. treasuries. If there was going to be a canary in the coal mine for people dumping US assets, presumably it would show up in the treasury market. Right? It's the biggest, most liquid market in the world. Quoting you there, Robin, it's really important. And foreign holdings of U.S. treasuries have been falling. So the share of total outstanding US debt owned by foreign holders has fallen from around 50% in 2012 to more like 30% now. However, this is overwhelmingly because the US is issuing a lot of debt. So foreign buyers are still buying Treasuries and increasing their holdings in absolute terms. But as a share of the debt, it's falling.
- [27:41]
A
And again, if we look at doomsters like Ray Dalio, he's very concerned about the sustainability of US debt. He thinks that there are too many social programs and too much spending relative to what the US Gets in tax receipts, and that's unsustainable. And if you look at forecasts from politically neutral US institutions like the Congressional Budget Office, they also say that US Debt is unsustainable given the current fiscal deficit. But again, this isn't something which is going to cause a huge problem overnight. Usually it takes a long time, if ever, for these things to cause a problem. Japan has quite happily coasted to 250% and beyond of debt to GDP, and it certainly hasn't paid a huge price for it yet.
- [28:29]
B
Perhaps a reckoning will come at some point, just no one knows when. There doesn't seem to be a massive internal pressure on US politicians to try and reduce deficits. So it would probably have to come from a kind of bond market squeeze if it continues down this path.
- [28:47]
A
And I think the reason why is that people trust the United States. It's a stable country. It's got political stability. It's got rule of law. It doesn't have revolutions, not anymore. So if you park your wealth in US dollars, it's still a safe bet. At least that's the way it feels right now. But certainly at the edges, I think people are getting more nervous.
- [29:10]
B
And if we move on from the bond market to the equity market, as we said earlier, clearly the US has outperformed. Although last year we did see other markets fight back. It was the best year in a long time for emerging markets. And if you did a league table of 2025 returns, the US is not so far up.
- [29:32]
A
But the main reason which I see as being problematic for the United States is that if it carries on growing its revenue better than every other country, if it carries on producing the most innovative companies, will it become the only stock market in the world? To first order, at the moment, it's about 2/3 of the global market for equity. But will it just carry on growing until really we've just got the US and then a kind of rounding error, which is the rest of the world. I think that's unlikely. If there is any kind of rule in finance, then it's mean reversion. And what we will see is that some other country will come up with an incredible business model and incredible innovation which will undercut what happens in the United States. And that means that its star will start to fade relative to the rest of the world. Of course, that's not to say there'll be a catastrophe in the us it's just that other countries will come to the fore.
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B
But Romin, think how much easier your pensioncraft data ingestion would be if everything was listed in New York. Wouldn't you rather that world
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A
from a data perspective? Yeah, it would be great to. But from a cultural perspective, I think less so. I always like the fact that there are different ways to operate both culturally and economically.
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B
I feel like throwing some numbers at you here, fundamental numbers, because the rest of the world has quite a gap to close when it comes to how good the companies in their indices are. So let's look at return on equity by sector. How well are the companies using this money that shareholders give them? Well, let's look at tech first because that dominates the world. In the United States, the return on equity for the tech sector is 32.6 according to JP Morgan and Bloomberg. In Europe it's 16.5. So they use capital about half as well as the US in Japan it's even lower, 12.7 and in China 8.9. So that's the tech industry. And you might think, yeah, we know the US is amazing at technology. That's not a fair comparison. Let's look at some other sectors. How about industrials? The US return on equity 25.1. Europe 16.7. Japan 10.6. A similar kind of pattern, albeit not quite as extreme. This plays out again and again over all the different sectors. The only ones where Europe is really comparable to the US are healthcare, where they're both around 17, materials, utilities and real estate. But most of those are quite small as shares of the index.
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A
Now I think breaking down return on equity is helpful here because we can see why the US has outperformed if we look at that return on equity number and decompose it into other things. Now you can break it up into three chunks. These are net margin, so what proportion of the revenue makes it through to profit? We've got asset turnover and we've got an equity multiplier. And that equity multiplier measures financial leverage. So looking at that decomposition, why have US companies outperformed? Well, the margins play a big part in the story. So how much of the money that you generate makes it through to profit is very high. For US companies, particularly those tech companies where a margin of 60% isn't unusual,
- [33:04]
B
they kind of became comfortable with monopolies and that's paid off for shareholders.
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A
And despite other countries trying to push back on those monopolies, those have largely failed. So if you think about every dollar of capital which a company has, how efficiently does that get deployed to generate profitability? The US has just been very good at doing that. Just speaking to people who've worked with US Companies, they always say, oh, it's so different culturally to a company in Europe. They're so worried about profits and the bottom line. Well, yes, that's the point. They run it in order to generate the maximum return for their shareholders. I think what worries me is that a lot of the success story in the US is now built on credit. So perhaps that will be more of a problem in the future as we move from companies which were incredibly high margin to companies which had become almost like industrial companies in the sense that these data centers are very costly to run and you actually have to have physical stuff, infrastructure in order to generate that profit. And it's come off the back of leverage. So they've issued these corporate bonds in order to fund the hyperscaling. So that could be a problem in the future.
- [34:21]
B
Yeah. You don't want to pay software multiples for Victorian railway companies, do you? That's right.
- [34:30]
A
It's always like the age of steam. I think you're right. People shoveling coal into furnaces to generate the energy which went into the industrial revolution.
- [34:38]
B
But the question here is, will US exceptionalism continue? The things that everyone knows about the US market right now is that it does look expensive. Regardless of what you measure the stock prices against, whether it's trailing profits or future profits or turnover, any of those things, it looks expensive and not too far off the peaks of the dot com bubble on some metrics. And the other thing we know is that it's very highly concentrated. So the top 10 companies in the S&P 500 make up around 40% of the index versus just 17%. Ten years ago you said you were a fan of mean reversion, Romin.
- [35:24]
A
Yes, I am. And I think that's a problem. I think that is going to be a problem. And other countries have been cheap for a long time. And eventually there's going to be a reckoning, I'm sure of that.
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B
Are you sure though? Are you really sure? This is what people have said for a long time and it's kind of been a very expensive, good idea to diversify away from the U.S. oh yeah.
- [35:47]
A
I mean, it's been a widowmaker trade in that sense. And I haven't done it. I haven't moved my capital away from the U.S. i've just stuck with the global index and just rode it up, which has been great. I don't want US exceptionalism to end, but will people pay more for US profits relative to the rest of the world forever? No, I don't think so. I think eventually these trends always end with some kind of problem that no one could foresee. Whether that comes externally, another country which innovates and undercuts, or whether it's political stability in the country itself. Eventually something happens.
- [36:25]
B
The concentration point is quite interesting in the sense that the Mag 7 is now underperforming. But also the the US is still one of the least concentrated markets in the world. We said that 40% of the index is in the top 10 stocks, but most countries have far more in major developed markets. It might only be Japan that's less concentrated, I think.
- [36:51]
A
No, that's right. And this was a point they made in the dimsonmarsh Staunton Report. I think it was this year's. But it is unusual for the us, which is such a deep capital market, to have that kind of concentration. And I suspect it will mean revert eventually.
- [37:07]
B
But that needn't spell doom for the US market as a whole. We'll see a correction at some point, we always do. But we're talking more about the long term returns over the next 20, 30 years.
- [37:19]
A
Yeah. What the US is really good with coming up with is new narratives, new stories. They're storytellers and they've got the companies to back it up. So they'll come up with something new. It may be something that we don't even consider now. I think one of my concerns is that a lot of the source of that innovation is research which comes out of U.S. universities. And I think the cutbacks that we're seeing in particular parts of the U.S. economy and particular parts of research will be harmful to its creativity. So we see the administration in the US openly hostile to some of its most successful universities, universities like Harvard, Columbia. We've also seen cuts in things like biotechnology, MRNA vaccines, where the US was pretty much a leader, have been hampered by the fact that the US has cut back on research on that, so Europe, for example, has carried on, and probably that'll be a big benefit when it comes to things like transformative cancer treatment and diseases caused by congenital DNA defects. A lot of the innovation we see in that space is precisely by modifying DNA. And that's precisely what the US Administration seems not to like.
- [38:37]
B
Do you want Trump to modify your DNA? Honest answer.
- [38:43]
A
I think I'd look great orange, but maybe that wouldn't be a good look.
- [38:47]
B
I don't know. You need to get on these peptides. That's what everyone's talking about now, isn't it? But more seriously, I think you're right that that's a big concern. The sort of centralized research and development funding at the federal level is being squashed right now. But it's also the fact that the population at large seems to have turned against science. Just look at measles cases. They've risen hugely over the last 20 years. I think the other thing I would worry about is the rule of law and whether it's becoming unpredictable.
- [39:21]
A
Yeah, when you look at cases of financial fraud and then clemency being given to those people who've been convicted, that just makes you think, that's not quite what I want. In a country where I want to park my reserves or where I want the rule of law to uphold my patents, for example, is that going to still be safe?
- [39:40]
B
What do you think then? To wrap all this up at the beginning, we asked, is the US still exceptional or just expensive?
- [39:48]
A
Well, I think it is exceptional. I still love the United States. I have done for a long time, ever since living there. And I love the American people, the culture and the food, I'll be fair. But am I getting slightly concerned that they're too much of global markets and that we're paying too much for their stocks and believing their narrative a little bit too much? Yeah, that is a big concern to me, given my exposure right now. And I'm worried that there's going to be a very rapid correction. Hopefully it'll be a slow one. There'll be a gradual change. Someone else will come to the fore, or the US Will just have a slow correction. But unfortunately, that's not what usually happens. Usually there's a shock, a crisis, and things revert very rapidly.
- [40:35]
B
I guess my view is so much of it at the moment is obviously dependent on the AI trademark, and it's US versus China. And yes, there might be some bubbly aspects in AI clearly, but I would rather a stock market that is trying to win the AI race than one that's just not participating. And Europe, for example, is just not participating. If it becomes a winner take all world where intelligence is commodified and it's whoever has the big data centers and the best models, America's going to win. Or possibly China.
- [41:11]
A
Now this sell America trade has been a big topic of discussion within our community in Pensioncraft. Should you, shouldn't you? What are the consequences? To join the conversation, go to pensioncraft.com membership
- [41:27]
B
okay, today's Dumb Question of the Week is the US the best performing stock market ever?
- [41:34]
A
Now, as someone who uses statistics a lot, I know what the pushback's going to be. Whatever we say, people will say. But that's not the right time period to use. Or have you seen this data set which completely contradicts what you just said?
- [41:47]
B
People will push back whatever we say on anything. So we've just got to nail our colors to the mast and say yes, generally speaking, on most graphs, the US is the top performing stock market. No? Come on, let's talk. Dimpson, Marsh, Staunton, Old Faithful.
- [42:02]
A
Yeah, but even they'd say that the data they've created isn't unequivocally true. They had to make certain assumptions about currencies, about what was investable in the past. So maybe not directly comparable between countries.
- [42:17]
B
And weirdly, the leadership seems to have flipped over the last couple of years. When you flick back through the Global Investment Returns Yearbook now published by UBS, formerly Credit Suisse. I looked at the 2022 yearbook and it seems that there were two countries listed with better stock returns since 1900 than the US and that was South Africa and Australia. Commodities markets, basically. Whereas now looking at the 2024 edition, it seems that the US has taken the crown again, recording 6.6% annualized returns since 1900. And this is when they look at all the country's real returns in US dollars. So those are your assumptions.
- [43:04]
A
And of course the currency makes a difference there. The shock for me was South Africa. I'm surprised that's so large, but I guess it's coming off a tiny base in 1900. I don't imagine the South African stock market was huge in those days.
- [43:18]
B
I don't imagine so either. There are lots of assumptions which matter when you're looking at real or nominal. Yeah, but whose inflation are you using? And if you look in local currency versus USD again, that's going to make a big difference. And if you risk, adjust the data or not. And account for volatility.
- [43:36]
A
I think what's surprising to me is the dispersion, what a huge variation there is over such a huge timescale, which is 124 years. A lot of it, I think stems from base effects, what was tiny then and what's not tiny now, which is why countries like Australia have really done very well. It's just second behind the us. Third is Denmark. And then at the bottom of the table, there are some interesting ones too. Austria has been absolutely abysmal zero over that period of time. Italy's managed an appalling just over 2% over that period of time. Belgium, not much more. France, we always like to have a dig at France and that's been an awful performer as well, as has Germany.
- [44:22]
B
Uk. Middle of the pack. But when we're investing, what matters to us is presumably not the last century, it's what's coming in the next century.
- [44:32]
A
And a lot of those countries which struggled struggled because of political instability. Either they were the victims of war or lost a war. And that makes these forecasts very difficult indeed. So if you are planning to go into cryosleep for the next century, just be diversified is my tip.
- [44:50]
B
And pay your electricity bill.
- [44:58]
A
Oh, that is very good.
- [45:00]
B
Thank you for joining us for Many Happy Returns. Keep sending us your questions, no matter how dumb, at MHR entry pensioncraft.com and
- [45:08]
A
do remember to check out pensioncraft.com for all the information about our membership courses and investment coaching options.
- [45:15]
B
Many Happy Returns is a Pensioncraft production co hosted and executive produced by Romin Nikiza and Michael Pugh. This podcast is for informational and entertainment purposes and is not financial advice. We do not provide recommendations or endorse any decision to buy, sell or hold any security. We cannot be held responsible for any actions listeners may take and investors are encouraged to seek independent financial advice.