I read this and thought there were very many good points.
https://fortune.com/2024/06/23/american-exceptionalism-us-economic-outlook-stock-market-forecast-dollar-dominance-europe-china/

This is the 'special sauce' behind American exceptionalismand why the U.S. stock market could continue dominating the world economy.

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Cautionary Notes:
- Some experts question whether this is genuine exceptionalism or just temporary advantages
- Concerns about sustainability of fiscal spending
- Persistent income inequality

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1. It's genuine. One of Zeihan's more important observations is that American millennials exist whereas most of the world just doesn't have that generation in any meaningful numbers. We aren't facing the demographic driven retraction in quite the same way as the Europeans and Chinese, to name a few. All developed nations are struggling with low birth rates but most of the world is well ahead of the U.S. in this regard. I read the other day that China's birth rate is now around .5. That's catastrophic for a nation whose primary value add to the global economy is a bottomless pit of cheap labor. Those days are long gone for everyone, we're just late to the party.
2. This is the #1 threat to really the entire global system. All nations are spending at unsustainable rates. We know that's the plan to pay for the boomers retirement but do we really think it'll get better as that generation dies off? This is a significant problem. Spoiler alert, it won't be solved.
3. Income inequality has existed since the dawn of civilization. For nearly all of time there's been no middle class so just the fact that we exist in meaningful numbers tells us income EQUALITY is relatively good right now. It's been said that all of human history is defined by abject poverty with few exceptions. Those exceptions occur when rare men elevate humanity out of poverty and make everyone relatively wealthy. Then we forget history and kill those men resulting in a return to abject poverty. People talking about income inequality tell me we're in the "forget history" phase.

I agree that my "gut instinct" is that the market is overbought as well and a stock market correction is probably due. However, I'm still heavily invested in the market, and the reasoning is the 401k market. Salaries are up substantially in the past 5-10 years with a growing population which means more money is being shoveled into the market through 401k contributions by millions of Americans than ever before. That is pretty inelastic investment in terms of demand, so its my belief that this will continue to prop up the stock market higher, as the divide between the stock market health and economy health continues to separate.

Spaceship said:

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I agree that my "gut instinct" is that the market is overbought as well and a stock market correction is probably due. However, I'm still heavily invested in the market, and the reasoning is the 401k market. Salaries are up substantially in the past 5-10 years with a growing population which means more money is being shoveled into the market through 401k contributions by millions of Americans than ever before. That is pretty inelastic investment in terms of demand, so its my belief that this will continue to prop up the stock market higher, as the divide between the stock market health and economy health continues to separate.

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What happens when the boomers retire and start drawing down their 401K rather than putting more money into those accounts?

The percentage of the population in the workforce is shrinking, and the high-earners (boomers) are retiring quickly. AI will result in fewer jobs, and robots/systems don't need to invest in a retirement plan.

I have no clue what the answer is but it seems like the global economy, which has been built on growth, is going to radically change, and soon. Americans need to start having more babies if we want to keep this carousel going.

That's a fair point. I do wonder how younger millenials and Gen Z will contribute moving forward.

University admissions will reach it's peak this year, so future generations will have fewer and fewer college-educated individuals entering the workforce (13% decrease by 2040). That, coupled with AI advancements and H-1B/offshoring, make me nervous in the medium to long term.

I work in tech, so I might be slightly jaded on this.

Spaceship said:

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The youngest boomers are 61 now, so many of them are already retired and drawing on those assets. Millennials as a whole, are a larger generation and entering their prime earning years now. Gen X and Millennials contribute in 401k's at a relatively high rate (historically) and Gen Z is ahead of the Bookers at the same age.

I think the impact of Boomers aging is overstated - the generations behind them are massive too.

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Boomers by far have the most assets. They've invested into a favorable market, and also lived their careers at a time where affordability was less of a concern in terms of housing and education. And now they are starting to draw down. Question is - will their drawdowns be overcome by younger generation contributions?

Younger generations are stretched thin. Burdened by massive debt either in education or housing, they do not have nearly as much to invest. Younger generations also seem to fall victim to tendencies of FOMO and gambling. If they are just living paycheck to paycheck, what's the point? Let's gamble on speculative assets rather than my 401k.

I don't see this ending well, honestly. Those with the most assets will be drawing down, while the smaller younger generation is not investing like boomers were in the past (either forced savings through pensions or voluntary in their 401k).

If we ever get to a liquidity crisis again, and everyone is crowding mostly into S&P 500 assets, there's only one exit and it will get crushed. Not predicting that will happen, but it is a possibility.

Heineken-Ashi said:

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AggiEE said:

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The US market is priced for perfection with a CAPE of 40. The last time valuations were roughly this high, the market had a negative real return for 13 years

All of this information is already priced in, it's not enough for the US companies to be exceptional; they must be more exceptional than the market has priced in for this to continue.

History says, don't count on it

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Well said from a fundamentals viewpoint.

But to keep it simple, markets never have traded purely on fundamentals. More on mass herding and social mood patterns.

Think of it this way.. if a stock perfectly priced based on the most aggressive future growth potential hits the level it "should" be at in that scenario.. what next? Does it go flat? No. The stock will often trade up and beyond reasonable measures of objective value, and then down well below what would be considered a discounted value. That isn't an entire market efficiently pricing in the future. It's sentiment running its course. And earnings and fundamentals always always trail sentiment. If you are waiting on the fundamentals to make a decision, you will always be the last to know of the good times and last to know when good times are over.

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Totally agree - there's tons of recency bias, momentum, and speculation that can drive this market very high. We saw what happened with Japan in the 80s and 90s. There were all sorts of narratives that justified their market being priced as high as it was.

It would not surprise me to see this market continue roaring upward, especially if there's any tangible surprises with AI technology that keep people drunk on the idea that price doesn't matter. This is true for any speculative bubble.

But I also know that, as a long term investor, the fundamentals always start to matter. You don't need the US valuations to contract for returns to be poor either. By simply being static and high, the earnings yield ultimately results in lesser returns. So to expect another decade like the one you've had, you really need to count on valuations to continue to rise to astronomical levels because it's very unlikely the fundamentals will do that for you.

All that to say, my belief is that if you're highly diversified you don't have to worry too much about this. The timing is impossible. I would just caution investors that believe we should pile into 100% US right now simply because of narratives and recency bias. Things can change quickly.

Good article for comparing global equities

https://mebfaber.com/2025/01/23/the-1-stock-in-the-world/

That's the current playbook. Announce unbelievable advancements while guiding higher and higher while using stock buybacks to support the price instead of investing in the company or returning cash to investors. All while record amounts of insider shares are selling.

Like I've said many times.. you will hear over and over again the claim that you can't time a top and there is no warning that it's happening. It's true if trying to be exact. But the clues are everywhere. Just a matter of what catalyst is going to set it off. If you haven't done the preparations before it happens, human psychology will take over when it does. You will be unable to think rationally when you need to and you will ride the elevator down. You don't have to sell everything. But you do need to have a plan in place, only be risking what you are willing to lose, and understanding that the shift will come swiftly, likely when you least expect it.

Heineken-Ashi said:

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That's the current playbook. Announce unbelievable advancements while guiding higher and higher while using stock buybacks to support the price instead of investing in the company or returning cash to investors. All while record amounts of insider shares are selling.

Like I've said many times.. you will hear over and over again the claim that you can't time a top and there is no warning that it's happening. It's true if trying to be exact. But the clues are everywhere. Just a matter of what catalyst is going to set it off. If you haven't done the preparations before it happens, human psychology will take over when it does. You will be unable to think rationally when you need to and you will ride the elevator down. You don't have to sell everything. But you do need to have a plan in place, only be risking what you are willing to lose, and understanding that the shift will come swiftly, likely when you least expect it.

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Agree, and risk management is where you can look at current prices and take some off the table to your taste. We used to live in an environment of 0% yields, but now you can get a 10Y treasury at close to 5%, or TIPS that yield a positive 2.2% for 10Y.

The equity risk premium relative to bonds/TIPS is at the lowest level its been since the Dot Com bust. TINA (there are no alternatives) no longer applies. It has now turned into TARA (there are reasonable alternatives).

1/40 CAPE = 2.5% real return for US stocks at current valuations (CAPE isn't perfect, just using a crude measure for expectations). Does this seem like a good risk relative to alternatives for the risk over the next 10 years?

AggiEE said:

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The US market is priced for perfection with a CAPE of 40. The last time valuations were roughly this high, the market had a negative real return for 13 years

All of this information is already priced in, it's not enough for the US companies to be exceptional; they must be more exceptional than the market has priced in for this to continue.

History says, don't count on it

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