INVESTMENT ADVISER | ISSUE 09 2024 27
THE ECONOMY MATTERS MORE TO GLOBAL MARKETS .
The US originally gained its economic power because it became established as the world ’ s premier seller , but it has long since become a net buyer , in terms of exports minus imports . That means , in pure trade terms , money flows out of the US . Another complicating factor is that the US is not even the world ’ s largest economy in purchasing power parity ( PPP ) terms ( China overtook the US in PPP terms nearly a decade ago ). That matters in terms of the value of country ’ s economic activity . In other words , the US economy is pretty expensive .
One of the reason ’ s it is so expensive , however , is that US economic activity matters more – certainly in market terms – than economic activity from elsewhere . The biggest companies in the world are American , for many reasons . As the dollar is the world ’ s reserve currency , so much of global trade is priced in dollars , meaning capital naturally flows to the US . This gets called the US ’ s “ exorbitant privilege ” in political analysis , and it helps explain why the US can keep consistently running trade and borrowing deficits without the usual penalties .
Current US market dominance is heavily tied to its tech sector . Some have argued that US corporate structures are more suited to technological innovations being quickly monetised and marketed ( rather than just discovered , which many countries achieve at least as well ). Companies can also quickly scale because there is a fairly homogenous ( relative to other large nations or blocs ) market of wealthy consumers .
The biggest American companies are global but , strangely enough , tend to derive a disproportionate amount of their revenue from US markets . Amazon , for example , gets more than two thirds of its revenue from the US . What happens in the US is therefore massively important to those companies – and those companies are disproportionately important to the global economy .
CAN IT CARRY ON ?
There is a limit to how US-centric global markets can become . At a certain point , investors will realise that other regions are undervalued – particularly if those regions are getting an ever larger share of global GDP , like China or India . But the massive US concentration over the last decade and a half has been prompted by the fact that US tech companies have shown the greatest and most consistent profit growth , and US authorities have left them alone – in contrast to regions like China . If that profit leadership can continue – through AIinnovation , for example – there is no reason why the party should end anytime soon .
That scenario requires a continual capital flow into the US , however . And , as we have argued before , the conditions that underly those flows are being challenged . Donald Trump wants political and economic isolation for the US , for example , while Joe Biden ’ s administration wants to break up the tech monopolies that pull in so much money from around the world . There may be good reasons for these policies , but they would likely constrain international investors ’ American enthusiasm .
There is also the long-term deterioration of US fiscal policy , which we have argued before could be more of a risk to bond markets than investors seem to appreciate . The larger US government debt becomes , the more capital needed to fund it . And , if international capital is not flowing as freely to the US , it will have to come from US domestic savers – which takes money away from stock markets and corporate investment .
In capital market terms , America is as great as it has ever been . That is why we talk so much about it , and that will not change anytime soon . But nothing is forever , and perpetual US dominance is not inevitable .
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