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- [00:01]
A
Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley.
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And I'm Lisa Shallet, Chief Investment Officer for Morgan Stanley Wealth Management.
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A
Today, the first of two episodes tackling a fascinating and complex question. Is American market dominance ending? And what would that mean for investors? It's Wednesday, July 30th at 4pm in.
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B
London and it's 11am here in New York.
- [00:27]
A
Lisa, it's so great to talk to you again and especially what we're going to talk about over these two episodes. You know, a theme that's been coming up regularly on this podcast is this idea of American exceptionalism. This multi year, almost multi decade outperformance of the U.S. economy, of the U.S. currency, of the U.S. stock market. And so it's great to have you on the show given that you've recently published on this topic and a special report very topically titled American Navigating the Great Rebalancing. So what are the key pillars behind this idea and why do you think it's so important?
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B
Yeah, so I think that when you think about the thesis of American exceptionalism and the duration of time that the thesis has endured, I think a lot of investors have come to the conclusion that many of the underpinnings of America's performance are just absolutely inherent and right. They'll point to America as a economy of innovation, a market with regulation and capital markets, breadth and depth and liquidity, market guided by, you know, laws and regulation, and a market where, you know, heretofore we've had relatively decent population growth, all things that tend to lead to growth. But our analysis of the past 15 years, while acknowledging all of those foundational pillars, say, wait a minute, let's separate the wheat from the chaff. Because this past 15 years has been extraordinary and different. And it's been extraordinary and different on at least three dimensions. One, the degree to which we've had monetary accommodation and, and an extraordinary responsiveness of the Fed to any crisis. Secondly, extraordinary fiscal policy and fiscal stimulus and third, the peak of globalization, a trend that in our humble opinion, American companies were among the biggest beneficiaries of exploiting, despite all of the political rhetoric that considers the costs of that globalization.
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A
So Lisa, let me go back then to the title of your report, which is the Great Rebalancing or Navigating the Great Rebalancing. So what is that rebalancing? What do you think kind of might be in store going forward?
- [03:05]
B
The profound outperformance, as you noted, Andrew, of both the US Dollar and American stock markets have left the world at an extraordinarily overweight position to the dollar and to American assets. And that's against a backdrop where we're a fraction of the population, we're 25% of global GDP, and even with all of our great companies, we're still only 33% of the profit pool. So we were at a place where not only was everyone overweight, but the relative valuation premia of in equity assets versus equities outside or rest of world was literally a 50% premium. And that really had us asking the question, is that really sustainable, those kind of valuation premiums? At a point when all of these pillars, fiscal stimulus, monetary stimulus, globalization, are at these profound inflection points.
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A
You mentioned monetary and fiscal policy a bit as being key to supercharging US Markets. Where do you think these factors are going to move in the future and how do you think that affects this rebalancing idea?
- [04:24]
B
Look, I mean, I think we went through a period of time where on a relative basis, relative growth, relative rate spreads, right, the dispersion between what you could earn in US Assets and what you could earn in other places and the hedging ratio in those currency markets made owning US Assets just incredibly attractive on a relative basis. As the US now kind of hits this point of inflection when the rest of the world is starting to say, okay, in an America first and in an America only policy world, what am I going to do? And I think the responses are that for many other countries, they are going to invest aggressively in defense, in infrastructure, in technology, to respond to de globalization, if you will. And I think for many of those economies, it's going to help equalize not only growth rates between the US and the rest of the world, but it's going to help equalize rate differentials, particularly on the longer end of the curves where everyone is going to be spending money.
- [05:40]
A
That's actually a great segue into this idea of globalization, which again was a major tailwind for US Corporations and a pillar of this American outperformance over a number of years. It does seem like that landscape has really changed over the last couple of decades. And yet going forward, it looks like it's going to change again. So with rising deglobalization, with higher tariffs, what do you think that's going to mean to US Corporate margins and global supply chains?
- [06:09]
B
Maybe I'm a product of my training in economics, but I have always been a believer in comparative advantage and what globalization allowed true free trade and Globalization of supply chains allowed was for countries to exploit what they were best at, whether it was the lowest cost labor, the lowest cost natural resources, the lowest cost inputs. And America was aggressive at pursuing those things, at outsourcing what they could to grow profit margins. And you know, that had lots of implications. And we weren't holding manufacturing assets or logistical assets or transportation assets necessarily on our balance sheets. And that dimension of this asset light and optimized supply chains is something in a world of tariffs, in a world of de globalization, in a world of, of create manufacturing jobs onshore, where that gets reversed a bit and there's going to be a financial cost to that.
- [07:16]
A
It's probably fair to say that the way that a lot of people experience American exceptionalism is in their retirement account. In your view, is this outperformance sustainable? Or do you think, as you mentioned, changing fiscal dynamics, changing trade dynamics, that we're also going to see a leadership rotation here?
- [07:37]
B
Our thesis has been this isn't the end of American exceptionalism point blank, black and white. What we've said, however, is that we think that the order of magnitude of that outperformance is what's going to close when you start burdening your growth rate with headwinds. Right? And so again, not to say that American assets can't continue to be major contributors in portfolios and may even, you know, outperform by a bit. But I don't think that they're going to be outperforming by the magnitude kind of the 450, 550 basis points per year compound for 15 years that we've seen.
- [08:19]
A
The American exceptionalism that we've seen really since 2009, it's also been accompanied by really unprecedented market imbalances. But another dimension of these imbalances is social and economic inequality, which is creating structural and policy and political challenges. Do these imbalances matter for markets? And do you think these imbalances affect economic stability and overall market performance?
- [08:47]
B
People need to understand what has happened over this period. You know, when we applied this degree of monetary and fiscal stimulus, what we essentially did was massively deleverage the private sector of America. Right. And as a result, when you do that, you enable and create the backdrop for the portions of your economy who are less interest rate sensitive to continue to, you know, kind of invest free money. And so what we have seen is that this gap between the haves and the have nots, those who are most interest rates sensitive and those who are least interest rate sensitive, that chasm is really blown out. But also I would suggest an economic policy conundrum. We can all have points of view about the central bank and we can all have points of view about the current chair. But the reality is, if you look at these dispersions in the United States, you have to ask yourself the question, is there one central bank policy that's right for the US economy? I could make the argument that the US GDP is growing at 5.5% nominal right now and the policy rate's 4.3%. Is that tight? I don't know. The economists will tell me it's really tight, Lisa, because neutral is 3. But I don't know. I don't see the constraints. If I drill down and can I see constraints among small businesses? Yeah, I think they're suffering. Do I see constraints in some of the portfolio companies? Private equity? Are they suffering? Yeah. Do they need lower rates? Yeah. Do the lower 2/3 of American consumers need lower rates to access the housing market? Yeah. But is it hurting the aggregate US Economy? I don't know. Hard to convince me.
- [10:48]
A
Well, Lisa, that seems like a great place to actually end it for now. And thanks as always for taking the time to talk.
- [10:55]
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My pleasure, Andrew.
- [10:56]
A
That brings us to the end of part one of this two part look at American exceptionalism and the impact on equity and fixed income markets. Tomorrow we'll dig into the fixed income side of that debate. Thank you as always for your time. If you find thoughts of the market useful, let us know by leaving a review wherever you listen and also tell a friend or colleague about us today.
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B
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