Capital Flows and Asset Markets
Capital Flows and Asset Markets
IS THE USA THAT SPECIAL?
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IS THE USA THAT SPECIAL?

If you are an investor - then you need to answer that question

Generally speaking, Americans will always tell you how special America is, even if you don’t ask them. From an investing perspective, US is very special at the moment, with USA making up over 50% of world market capitalisation now. Comparisons of the S&P 500 to other markets confirms American dominance.

If you asked Americans why they are so awesome this would be a (non-exhaustive) list of reasons:

  • Work harder - especially compared to Europeans (French in particular)

  • Work smarter - especially compared to Chinese/Japanese

  • Pro-business government

  • Better (higher) education system

  • Rule of law

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All of the above points are debatable, but if we assume they are true, why were they not true in 2006, when the US fell to less than 30% of global market capitalisation? Was US government particularly bad then? Was the education system not working then, but was working now? I am generally impervious to people’s claims of how awesome they or their nation are. I heard it in Japan in 1991, I heard in again in the US in 2000, I heard in China in 2010, and Brazil in 2014. Generally speaking, claims of awesomeness are generally made to justify very high valuations and generally overvalued exchange rates.

Looking at BIS real effective exchange rates for the US - we can see from 1970 onwards, a weak exchange rate coincided with a low in equities, and high exchange rate a top. Since 1970, a strong exchange rate was never maintained - except in this cycle, where the US dollar has been strong since 2016, and continues to strengthen. What this tells me is that there is something very different in this cycle compared to other cycles - but what?

Lets try a different approach to thinking about US dollar and economic strength.

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