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Why US equities will weather the storm (and come back better than ever)
When Geir Lode, head of global equities at international asset manager Federated Hermes, stopped in at a diner in Wisconsin there was a sign in the door offering instant interviews. It had been there for about a year, the owner told him; in that time he’d only received two applicants. It’s a sign of how strong the labour market still is, and how far central banks will have to go to crush it (and inflation).
“What I find interesting is there are different types of inflation; in the US it’s driven more by demand, because they have everything they need for their economy,” Lode says. “Then you go to Europe, in an energy crisis, where it’s more supply-led.”
Most countries will have a recession; some will have it worse than others. European countries are not going to prosper for the foreseeable future, held back by the crisis on their borders and a bureaucratic culture that stifles innovation (Lode jokes that a European book of regulations for transporting cabbage can be as thick as the US constitution, with all its amendments).
The US recession is unlikely to be as bad, Lode says. Still, the gloomiest forecasts predict a lost decade for the US stock market, which is being hammered on all sides by inflation, rate rises, geopolitical risk and the generalised anxiety that follows the bursting of any asset price bubble. Japan’s stock market provides perhaps the best example of a lost decade, but the US experienced lost decades on a price basis from 1999 to 2009, 1969 and 1978, and 1929 to 1939.
But those forecasts don’t really take into account how different the circumstances are, Lode says. The most recent lost decades in both countries had an element of real estate speculation, with systemically important institutions gleefully offering leverage to households they knew couldn’t pay it back. In Japan’s economic Golden Age, the price of the land on which the Imperial Palace was built was somehow equal to that of half the landmass of California. High valuations for a handful of growthy tech companies pale in comparison, as does the amount of leverage households have taken on to invest in them, when they did.
So the crippling economic damage seen in Japan in the late 80s or the US in 2008 is unlikely to be repeated, Lode thinks, and US equities will still flourish. The US economy is more dynamic and more willing, on a cultural level, to support entrepreneurs, even as rate rises make money more expensive.
“In Japan, you had bad demographics. They were getting fewer and fewer people, and no immigration,” Lode says. “The US is very dynamic, with younger people – and all this oil, all this grain, all these commodities. It has everything, and I think it will do well. The culture is more capitalistic; people think it’s good to make money… They don’t sit down and say it’s impossible. They want to do it. People still believe in that.”
“And I think consumer cyclical types in the US will recover pretty quickly. I think the economy will be stronger than people think for that type of stuff. You have a recession, but when you come out of a recession and people feel good again they’ll go to Disneyland. They’ll go on cruises. A temporary downturn is good for everything and will bring inflation back to normal levels. But Americans are much quicker to adjust than others.”
The big threat to this optimistic view is the geopolitical situation, which threatens to escalate beyond control as Xi Jinping eyes Taiwan and Vladimir Putin grows increasingly desperate in Ukraine.
“An accident could easily happen if people don’t act responsibly,” Lode says. “It’s hard to put a per centage on that. But Churchill said that the farther back you look the farther forward you can see. The more history you know, the more easily you can predict the future.”
“If you think about the wars we’ve had, the same sort of escalations have happened there, and you see this slow escalation around some of the geopolitical tensions we have now. If some of the more totalitarian leaders end up in a difficult situation, that could be very dangerous.”
