Odd Lots Podcast Summary: "Is This the End of the US Exceptionalism Trade?"

Episode Details

• Title: Is This the End of the US Exceptionalism Trade?
• Host: Joe Weisenthal & Tracy Alloway
• Guest: Ozan Tarman, Vice Chair of Global Macro at Deutsche Bank
• Release Date: April 17, 2025

Introduction: Assessing US Market Dominance

In this episode of Bloomberg's Odd Lots, hosts Joe Weisenthal and Tracy Alloway delve into the pressing question facing investors: Is the long-standing US Exceptionalism Trade nearing its end? For over fifteen years, US equities, particularly within the tech sector, have been the cornerstone of global investment strategies, offering limited diversification benefits. The hosts set the stage by highlighting the dominance of US assets in global portfolios and questioning whether this trend is sustainable.

Joe Weisenthal opens the discussion by emphasizing the unique position the US market has held:
"Is this one trade that's worked out so well? Is it coming to an end?" (01:17)

The Crux of US Exceptionalism in Markets

Tracy Alloway points out the unequivocal nature of US Exceptionalism within financial markets, contrasting it with the more debated concept in politics and society. She underscores how US equities have not only outperformed but have also become a significant proportion of the global market.

Tracy Alloway:
"Not only have US equities outperformed recently, but they've really come to dominate the market as a whole." (02:15)

The hosts discuss how global benchmarks remain heavily weighted towards US assets, making it challenging for global managers to diversify away from US stocks without sacrificing performance.

Crowded Trades and the Potential Shift

Joe references the Bank of America Fund Manager survey, noting a shift from the previously crowded "Magnificent Seven" tech stocks to gold as the most crowded trade. This pivot signifies increasing skepticism about tech valuations and raises questions about future investment strategies.

Joe Weisenthal:
"After two straight years of long mag Seven being identified by fund managers as the perceived most crowded trade... this most recent month was gold." (02:58)

Tracy Alloway elaborates on the difficulty of outperforming when the primary investment strategy (overweighting tech) becomes a necessity to meet benchmarks, labeling it the "true pain trade."

Guest Insights: Ozan Tarman on Market Dynamics

Inviting Ozan Tarman, Vice Chair of Global Macro at Deutsche Bank, the hosts seek expert perspectives on the sustainability of US market dominance. Ozan provides a comprehensive analysis of the factors undermining US Exceptionalism, including unexpected policy shifts and China's technological advancements.

Ozan Tarman:
"The US was the one, the big one, printing the most, especially after Omicron. And on top, yes, the magnificent seven... All these consensus trades and views are thrown into the water." (06:16)

He highlights the reversal of expected fiscal behaviors in Germany and China, challenging the previously held beliefs that these economies couldn't match US fiscal ambitions.

Europe and China: Shifting Economic Landscapes

The discussion pivots to the recent surge in European stocks and China's resilience in the tech sector. Ozan attributes Europe's unexpected infrastructure spending and China's competitive stance in technology, particularly AI, as pivotal changes disrupting the US-centric investment landscape.

Ozan Tarman:
"Germany step is a huge step... These all are completely turned on their head." (06:16)

He notes Europe's potential to reinvent itself in technology, albeit requiring time, and China's strides in sectors like electric vehicles (EVs) and solar energy, which pose significant competition to US tech dominance.

Monetary Policy and Market Reactions

The conversation delves into the implications of US monetary policy, Federal Reserve actions, and their impact on the dollar and treasury yields. Ozan discusses the challenges the Fed faces in maintaining credibility amidst political pressures, especially with President Trump's interventions.

Ozan Tarman:
"If president didn't blink and 10 year and 30 year continue to sell off with the dollar selling off... Then Fed would have come definitely... But Powell really doesn't want to cut because of all the inflation growth dynamics." (08:39)

Tracy and Joe reflect on how these policy decisions create uncertainty and affect global investor confidence, drawing parallels to past economic crises and their market impacts.

Technological Competition: AI and Beyond

Tracy raises concerns about the US's lead in AI and technology, noting the lack of comparable competitors outside the US until China's advancements. Ozan responds by acknowledging Europe's current shortcomings in cutting-edge tech but remains optimistic about its ability to innovate and catch up.

Tracy Alloway:
"There has been this long-running disappointment that Europe is just not where other places like the US and China are when it comes to cutting-edge technology." (18:26)

Ozan Tarman:
"Europe can reinvent itself. That's going to take a little bit of time... Europe does AI, but does the chips..." (20:15)

Bitcoin and Digital Assets: A Shifting Perception

Towards the episode's end, Joe introduces a question about Bitcoin's evolving role in investment portfolios. Historically viewed as a speculative asset, Bitcoin has shown signs of stabilizing and potentially being recognized as a digital gold equivalent. Ozan acknowledges this shift but also points out the impact of broader market dynamics and policy changes on Bitcoin's institutional adoption.

Joe Weisenthal:
"Bitcoin has not actually been as tech stock-like as it used to. People have called it digital gold, but the chart doesn't reflect that clearly." (33:57)

Conclusion: Navigating a Changing Investment Landscape

As the episode wraps up, the hosts and Ozan summarize the intricate balance between US market dominance and emerging global competitors. They emphasize the importance of monitoring key political and economic players—Trump, Powell, and Xi—and their decisions that could significantly influence future market trends.

Ozan Tarman:
"I think we have the backing of the Fed... So first of all, I believe blinks will continue from the White House but even if they don't, I think we have the backing of the Fed." (32:37)

Tracy Alloway adds a cautionary note on the potential for increased term premiums in treasuries and the need for investors to remain vigilant amidst evolving market conditions.

Tracy Alloway:
"I do like one thing that seems certain to me really is the higher term premium in the treasury market and the idea of a steep NER." (37:48)

Key Takeaways

• End of an Era: The long-standing US Exceptionalism Trade may be facing significant challenges due to unexpected fiscal policies in Europe and technological advancements in China.

• Market Crowding: Overreliance on US tech stocks has led to crowded trades, prompting investors to consider diversifying into other asset classes like gold.

• Policy Influence: US monetary and fiscal policies, particularly interactions between the Fed and the Trump administration, play a crucial role in shaping investor confidence and market stability.

• Global Competition: Europe's potential to innovate and China's competitive edge in technology sectors are altering the global investment landscape, offering new opportunities and risks.

• Digital Assets: Bitcoin's role is evolving, potentially moving towards being recognized as a digital gold, though its stability and institutional adoption hinge on broader market and policy factors.

Notable Quotes:

• Joe Weisenthal (01:17):
  "Is this one trade that's worked out so well? Is it coming to an end?"

• Tracy Alloway (02:15):
  "Not only have US equities outperformed recently, but they've really come to dominate the market as a whole."

• Ozan Tarman (06:16):
  "All these consensus trades and views are thrown into the water."

• Ozan Tarman (08:39):
  "Powell really doesn't want to cut because of all the inflation growth dynamics."

• Tracy Alloway (18:26):
  "There has been this long-running disappointment that Europe is just not where other places like the US and China are when it comes to cutting-edge technology."

• Joe Weisenthal (33:57):
  "Bitcoin has not actually been as tech stock-like as it used to. People have called it digital gold, but the chart doesn't reflect that clearly."

This episode of Odd Lots provides a deep dive into the shifting dynamics of global markets, questioning the sustainability of US market dominance and exploring the rise of European and Chinese economic powerhouses. With expert insights from Ozan Tarman, listeners gain a comprehensive understanding of the multifaceted factors influencing today's investment landscape.