Financial elite go long American exceptionalism
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By John Foley
LOS ANGELES, May 8 (Reuters Breakingviews) -It’s easy to spot ways that the United States is unique, but American exceptionalism is becoming a more broadly touted investment strategy. In fact, among the wealthy 1% roaming the halls of the Los Angeles Beverly Hilton for Michael Milken’s annual bacchanal of capitalism, it was the clear consensus tip.
The strength of the U.S. economy and its financial markets this year has come as a pleasant surprise to many careful observers and dominated discussions at the Milken Institute global conference hosted by the junk-bond-mastermind-turned-philanthropist. Higher interest rates and inflation are less of a concern because of the strong growth and low unemployment. The threats that furrowed brows a year ago, such as bank failures, have eased. Concerns about commercial real estate loans are “last year’s story,” said Bruce Flatt, the CEO of Brookfield Asset Management BAM.TO, which oversees more than $900 billion.
Uncle Sam's performance is also an outlier in global terms. Saudi Arabian securities regulator Mohammed El-Kuwaiz suggested on Monday that investors should start thinking about developed economies, excluding the United States, as a new category when thinking about how to allocate capital, a sign that the country has pulled away from other rich nations. The idea is borne out by recent forecasts from the International Monetary Fund, which project 2024 U.S. growth at 2.7%, almost triple that of Europe and Japan, and quintuple what Britain is expected to generate.
This comparative dominance helps explain the strong dollar and high stock valuations that have made the piles of money that many Milken conference attendees oversee ever bigger. The S&P 500 Index .SPX trades at 20 times forward estimated earnings, according to LSEG, compared with a 20-year average of 16 times. Today’s multiple is flattered by the enormous valuations of the so-called “Magnificent Seven” technology stocks, including chipmaker Nvidia NVDA.O and electric-car maker Tesla TSLA.O, whose boss Elon Musk treated delegates to a meandering chat about alien life and free speech. But the “equal weight” version of the index that removes the outsized effect of large companies has still risen 15% in a year. It is near a record high.
Why has the United States done so well? The most common explanations are a culture of innovation and deep capital markets. There are other American distinctions too, however. For example, the strong state of the country’s personal consumption, which makes up two-thirds of GDP, owes more than a little to the prevalence of 30-year fixed rate mortgages, an option unavailable in most other countries. These long-term home loans have shielded households from the sharp rise in borrowing costs. Meanwhile, shoppers benefitted from generous pandemic payments from a government able to run up bigger deficits and still find willing buyers for its bonds. It’s an exorbitant privilege that other currency issuers lack.
If the economy’s resilience is a surprise, so is the optimism that it has longer to run. All things considered, it’s a reasonable prospect. Even with the dollar close to a two-decade high relative to a basket of its peers, the likelihood of interest rates falling in Europe while staying high in the United States could strengthen the currency even more. The surge in investments related to artificial intelligence, including data centers and power grids, accompanied by a transition to low-carbon energy, are also set to persist.
Even generously priced stocks have further to go, given the $6.5 trillion of cash the U.S. central bank tallies in money-market funds, roughly twice the 30-year average. Citigroup C.N CEO Jane Fraser suggested a possible “win-win,” in which stocks rise if economic growth continues, but also if the Federal Reserve cuts rates, as it might if growth slows. Carlyle CG.O boss Harvey Schwartz, who joined Fraser on a panel discussing worldwide trends in capital markets, said his clients are already “overallocated” to the United States, but are nevertheless planning to deploy even more in the country.
For all this, the Beverly Hills crowd acknowledged the serious risks to the American investment dream. The government is on course to spend an estimated $1.6 trillion more than it will take in this year, and everyone from Citadel founder Ken Griffin to IMF chief Kristalina Georgieva warned that such deficits are unsustainable. There’s also the growing question of how to care for a rapidly aging population with more than 11,000 Americans everyday celebrating their 65th birthday. Stubborn income and wealth gaps present worrisome challenges, too. With so much money to be made today, however, finding extra time to fix such problems will have to wait until Milken’s conference next year.
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CONTEXT NEWS
The Milken Institute’s global conference is being held in Los Angeles from May 5 to May 8, featuring hundreds of speakers on finance, healthcare and geopolitics.
The event, hosted by financier-turned-philanthropist Michael Milken, included conversations with Tesla boss Elon Musk, Citadel founder Ken Griffin, soccer star David Beckham and International Monetary Fund head Kristalina Georgieva.
Editing by Jeffrey Goldfarb and Sharon Lam
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