American Exceptionalism

This post succinctly summarizes why the US stock market ha done so well compared to the rest of the world:

If the world is circling the drain, America is furthest from the drain, on the most outer ripple. Wherever the market falls more than a couple percent, the huge funds step in and keep buying the dips, as developed economies are awash with liquidity and US stock market and treasuries are still the best game in town in a world of uncertainty. The S&P 500 has gained 5% since Brexit:

Public and private pension funds and insurance companies are among the biggest holders of stocks and treasury bonds. That’s a huge part of the economy that is helping keep interest rates low and stock prices high.

Those who heeded the doom an gloom headlines about Brexit and sold their stocks at the bottom (the worst possible time), would have missed out on this huge rally.

A winning investment strategy since 2009 has been to short all markets excluding US, while going long the S&P 500 or the Nasdaq 100:

As shown above, foreign markets have markedly lagged the S&P 500 since 2011. The S&p 500 (blue) is up 85% since 2012 (and this does not include the generous 2% annual dividends). China (pink) is flat. Brazil (green) is down 48%. Turkey (purple) is down 19%.

This agrees with a thesis of this blog, which is that America is still exceptional (or at least compared to the rest of the world).

As I explain in Slow Economic Growth Not a Big Deal, America is leading the world in terms of intellectual output and inflation-adjusted GDP growth. There is a lot of evidence that not only is America not in decline, it’s running laps around the rest of the world.

America still best place to invest. Emerging markets, Europe, and Japan have too many problems, either too much volatility, slow growth, high inflation, corruption, or too much regulation, which hurts capitalism. Emerging markets are dependent on capital inflows in order to keep growing, resulting in lots of debt at very high yields. America also has a lot of debt. but the key distinction is that it can name its own price, resulting in very low yields on its debt. Foreign countries also suffer from cognitive outflow: all their best and bright (understandably) moving to America, which has much more opportunity for the best and the brightest from all over the world. Rich foreigners and their smart kids are coming to America, buying up real estate in the most expensive of locations, attending America’s most prestigious schools, and then working at some of the most lucrative, fastest-growing companies like Snapchat, Facebook, Palantir, Airbnb, Pinterest, and Google, and making millions in the process (from the real estate, stock options, and high wages). Only in America is that possible, not in Denmark, Japan, or Brazil.

America occupies 63 spots of the top 200 institutions of higher education in the world, followed by UK with only 34:

America also has 6 of the top 10 academic institutions:

Unfortunately, for better or worse, a lot of Americans also being left out, sitting on the sidelines as others make tons of money. Although wealth inequality has always existed, perhaps to add insult to injury, it seems like policy makers care more about appeasing both extremes (either the really poor immigrants or the cognitive and financial elite) than average Americans, who are pushed to periphery in terms of policy. This could explain the appeal of Trump, as part of a growing backlash against policy makers who seem too deferential to either extremes of the wealth spectrum and ignoring ‘average people’ in the middle.

Mason, in his post 10 THINGS MOST AMERICANS DON’T KNOW ABOUT AMERICA sums this up pretty well:

If you’re extremely talented or intelligent, the US is probably the best place in the world to live. The system is stacked heavily to allow people of talent and advantage to rise to the top quickly.

The problem with the US is that everyone thinks they are of talent and advantage. As John Steinbeck famously said, the problem with poor Americans is that “they don’t believe they’re poor, but rather temporarily embarrassed millionaires.” It’s this culture of self-delusion that allows America to continue to innovate and churn out new industry more than anyone else in the world. But this shared delusion also unfortunately keeps perpetuating large social inequalities and the quality of life for the average citizen lower than most other developed countries. It’s the price we pay to maintain our growth and economic dominance.

America may bee the land of opportunity for the best and brightest, but for far too many such exceptionalism is out of reach. One of the best, easiest ways for average Americans to take advantage of America’s economic dominance is to buy and hold the S&P 500.