The unwind of the Fed SuperCycle
Sketching a bear case for the US economy.
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.
TLDR Summary
The outperformance of the US economy and the US stock market over the last three years is not just due to demographic factors and the proliferation of its technology and energy industries. It’s also due to what I call the Fed SuperCycle which powered deficit spending, investor risk appetite and a capital influx from abroad. This Fed SuperCycle is in the process of rolling over. Trump’s disruptive trade and fiscal policy might accelerate it, but it’s inevitable anyway. Once rates fall, they will neither stimulate economic growth nor support the values of risk assets.
American exceptionalism
The US have been one of the fastest growing developed nations for a while. This surely has something to do with the proliferation of the US technology industry. The economic gravity of the Silicon Valley is unmatched. Almost unimaginable that any new and exciting innovation would not be developed and commercialized there first.
It likely also has something to do with the energy production boom in the US that started about 15 years ago. Cheap oil and gas made their industries more competitive. It also improved the trade balance which supported the US Dollar and strengthened US consumers.
And finally, it likely has something to do with demographic tailwinds and the attractiveness of the US for immigrants which provides a constant stream of motivated and qualified newcomers that boosts economic growth.
These three factors are quite well understood and they are structural in nature, i.e. there is not much reason to believe they will stop American exceptionalism anytime soon.
But there is a fourth which is cyclical in nature and which is in my opinion extremely poorly understood: It’s the Fed.