Is the Rest of the World Selling America?
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today is episode 521. It's titled, Is the Rest of the World Selling America? For decades, the U.S. has been a favored investment destination, drawing capital from every corner of the globe. But today, the narrative of the U.S.

appears to be shifting. Robert Shiller, in his 2019 book, Narrative Economics, wrote, a key proposition of this book is that economic fluctuations are substantially driven by contagion of oversimplified and easily transmittable variants of economic narratives. In other words, economies and financial markets are driven by

by stories. David Tuckett, who's trained in economics, medical sociology, and psychoanalysis wrote, when investors buy, sell, or hold all classes of financial assets, what they're doing is constructing narratives about their future relationships with an imagined idea, what they think will happen. We all do this. We do it subconsciously. And stories can change. What I want to do now is go through three episodes

economic regimes over the past 30 years. This time span covers my investment career. And we'll look at the stories that drove what was going on and how that was reflected in financial outcomes. The first period is July 1995 to July 2001, six-year period. I began my investment career in

July 1995, I joined FEG Advisors as an analyst slash consultant. And I remember that the U.S. stock market rose 37% in 1995. And over that six-year period, this was during the dot-com bubble, where there was internet mania. Stock markets were soaring in the U.S. U.S. was attracting gobs of foreign capital to invest in...

In many of these startups and in the U.S. market overall, growth stock investing trounced value investing in that capital flowing into the U.S. led to the appreciation of the U.S. dollar. It appreciated about 6% per year over that six year period.

It was great fiscally for the U.S. U.S. ran budget surpluses from 1998 to 2001. It was bringing in more tax revenue than it was spending because there was a great deal of tax revenue coming from capital gains as companies were being bought. Investors were realizing capital gains. It was an amazing time. It was a great time to start advertising.

As an investment advisor, because there was this huge tailwind over that period, interest rates were generally in that 5% to 6% range. And if we look at the returns, the U.S. stock market significantly outperformed the rest of the world. It returned over 14% annualized over that six-year period. The world ex-U.S. in U.S. dollars barely returned 4% annualized.

Now, in local currency, it returned over 9% annualized. But again, the U.S. dollar was strengthening. So if you're a U.S. investor investing overseas, that strengthening dollar meant your U.S. dollar-based non-U.S. returns were lower. And that was the regime. I came across testimony by Federal Reserve Chair Alan Greenspan saying,

in front of the U.S. Senate Budget Committee, January 2001. Get this. This is what he was worried about. Things had gone so well for the U.S. and Greenspan pointed out that productivity from the mid-90s to 2000 had been meaningfully higher than

than it had been over the previous decades. And it had led real incomes of workers to grow about two and a half times faster than it had previously. Output per hour was increasing. And he said some of that was due to implementation of technology.

He mentioned the budget surplus and that the productivity increase would lead to faster economic growth. And the Office of Management and Budgets, the OMB, and the Congressional Budget Office were essentially predicting that the U.S. national debt would be paid off by 2011 because of continued budget surpluses. And Greenspan warned one of the big concerns is if the U.S. pays off its

its national debt and continued to run budget surpluses, taking more taxes than it was spending, then the government would have all this money that it could use to buy up private assets in the U.S. That was the concern Greenspan expressed in front of the Senate. And that was based on two

two and a half percent productivity growth for labor over the next decade from 2001 to 2011, which in fact was the productivity growth per year over that decade. It didn't play out like the prediction, as we know, because the U.S. did not pay off its national debt. But look at the narrative, the attractiveness of the U.S. because of the startups, the internet,

It was a great place to invest. Investors were rewarded. The dollar was strengthening. U.S. was running a budget surplus. And that's regime number one. Then a second regime started in 2001. It was the rise of globalization in China. China was admitted to the world first.

trade organization. Greenspan kept interest rates low through much of that period, and that fueled or helped fuel a private sector debt bubble. It was easy to borrow and to buy a house and a second house, at times a third house. Imports were cheap because Chinese imports were flowing into the country. China was getting much more productive in producing things. Their labor costs

were extremely low. And during that period, the U.S. dollar weakened from 2002 through 2012, about 4% per year. Europe and U.S. bond yields were about the same. A lot of companies were offshoring manufacturing to China. Global supply chains were being built out. It was the era of globalization, an era of attractive mortgage rates, at least lower than they had been in the 90s. And it was easy to borrow. And it created...

Now, at the same time, the debt was not getting paid off because of tax cuts that were implemented in

In 2001, the wars in Afghanistan and Iraq, expansion of Medicare, pay for drug coverage, and then ultimately had the 2008 financial crisis, which led to huge budget deficits. And so the national debt balance grew over that time. But as investors, we were rewarded for being globally diversified. In the overall global stock market, excluding the US, but including emerging markets, we're

returned 7.5% annualized in U.S. dollar terms from January 31, 2002 to January 31, 2012. So 10-year period. China returned 17.4% annualized over that time. Emerging markets, 14.7% annualized. And the U.S. stock market lagged, 3% annualized return over

over that 10-year period. If you were investing during that time, if you were overweight emerging markets and underweight the US, you were rewarded significantly. And I remember that because I was managing assets at the time and we were indeed overweight emerging markets. We outperformed our benchmark five years in a row meaningfully. And I remember telling my partners that money management can't be this easy. Turns out it wasn't, but it was the environment.

A different regime, a globalization regime, the rise of emerging markets in China regime, a debt bubble regime that collapsed leading to the great financial crisis, which is one reason overall returns for the U.S. were low at 3% because not only was the U.S. overcoming the dot

calm bubble that collapsed, but then you had the great financial crisis. And so we had some of the lowest returns for U.S. stocks in decades. But outside of the U.S., you did just fine. That was a different regime, different narrative, globalization, diversification. Then it shifted again. Before we continue, let me pause and share some words from this week's sponsors.

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From 2011 through 2024, U.S. again dominating. The U.S. dollar strengthening 2.3% per year. Big cap technology stocks, the rise of AI, corporate balance sheets expanding as corporations borrowed money because of low interest rates to rebuy stock.

It was an era of continued large trade deficits as a percent of the economy and budget deficits. Productivity growth was actually slow. So it had labor productivity, 2.5% per year from 2001 to 2011. But then, and since then, it's only been about 1.5% per year, which means wages aren't growing. Income inequality has increased. And that was exacerbated by the global pandemic as the poorest...

were harmed the most because many of them were in service sector jobs, in travel, but higher incomes, upper middle class professionals, they just started working from home and continued on. How did that play out financially? The U.S. meaningfully outperformed over that period. U.S. stock market returned 14.1% annualized. Growth

Led by technology, outperformed value. The U.S. growth index, 17.5% annualized from December 2011 through December 2024. Global stocks, excluding the U.S., but including emerging markets, returned 5.8% annualized. That's in U.S. dollars. I mentioned the U.S. dollar was strengthening over that time, about just over 2% per year. So that hurt you if you were diversified over time.

overseas as a U.S. investor, non-U.S. stock returns were 8.5% to 9% per year in local currency. So in line with historical averages, they did fine in local currency, but because U.S. dollar was strengthening, that lowered the return by 2% to 3% per year.

U.S. also benefited from stocks getting more expensive over time. As more capital flowed into the U.S., investing in mega cap stocks, technology stocks, their valuations increased. That added another three to four percentage points of

of return, which is why U.S. stocks returned over 14% annualized. But that was a great time to be overweight U.S. stocks. And if you were internationally diversified, that was tough, period. Now the question is, in 2025, is the narrative changing? Is, as the Trump administration initiates a trade war, are...

businesses, consumers stepping back from globalization. What are we seeing? Year-to-date, U.S. stocks have fallen over 12%. Non-U.S., including emerging markets, in U.S. dollars has gained 5%. The U.S. dollar has weakened 9% this year. And so if you're invested overseas as a U.S. investor, that has boosted returns. In local currencies, non-U.S. stocks, including emerging markets, are actually down 1.6%.

So still, U.S. has lagged non-U.S. by over 10 percentage points in local currency. But if returns are translated to the U.S. dollar, U.S. has lagged

Non-U.S. stocks by over 17% year to date. That's a sea change of what's been going on compared to the previous decade. We're seeing credit spreads widen. What investors demand in incremental yield for corporate bonds, both investment grade and non-investment grade, they're asking more because they're worried about potential defaults due to an economic slowdown.

We're seeing long-term Treasury bond yields increase. They've increased 0.4 percentage points in April alone. 30-year Treasury bonds increased their highest amount in one week since 1987 in April after Trump announced the tariffs.

Treasury Secretary Scott Besson has suggested the sell-off in stocks and other risk assets is because hedge funds and other large investors are unwinding trades. When volatility spikes, they reduce exposure to risk. And so I've had to sell assets, including some of their safest assets, like U.S. Treasury bonds. There's some truth to that. But, and it's still in the early stages, so we don't really know if the narrative has changed because it's only been a few months. We described recession

Regime changes that occurred over six to 10 year periods. And here we are three months into the year, but the changes have been notable. And there's reasons for it, given what the Trump administration has announced. Stephen Kamen, he's a former senior Fed economist.

He's now with the American Enterprise Institute, said the behaviors of investors changed. Ordinarily, they would have bought the dollar in this crisis time, and instead they sold the dollar. U.S. is typically a safe haven. When chaos breaks out, the dollar will often strengthen and U.S. treasury bond yields will fall. The opposite occurred, partly because the chaos is being initiated by the U.S. Ludovic Subran, chief economist and

and chief investment officer at Allianz, the German insurance company, said that tariffs are the tip of the iceberg. If the dollar depreciates by 30%, what is the return on your investment in the U.S.? Everybody's doing the math. This would be non-U.S. investors looking at a 9% performance drag year to date just because of the currencies.

Larry Fink, CEO of BlackRock, suggested that we had a period of over-allocation to the U.S. And we described that economic narrative from 2011 through 2024. All the capital that was attracted to the U.S. had pushed up the value of the dollar, led to bigger trade deficits and budget deficits. If there was an over-allocation, he's saying, can it reverse? It's a good question to be raising, he suggests. Are non-U.S. investors less bullish on the U.S.? And

exiting? Is that pushing down the value of U.S. stocks, their price levels? Is it leading to increases in U.S. Treasury yield? One thing we are seeing is less travel to the U.S. Total number of global visitors have fallen 3% so far in 2025, visits to the U.S., and over 11% in March alone. I spoke with one friend who lives here in the U.S. Her family is from Europe.

They're going to visit this summer. And I asked whether her family ever came here. And she said, no, especially now. They won't come given what's going on. We look at travel from Europe to the U.S. fell 17% in March. Those are big numbers, perhaps indication that the narrative has changed. Tim Harford, writing for the Financial Times, pointed out there's no historical precedent to what's happening. The level of tariffs that

that the U.S. wants to implement, much of them on hold for 90 days. But he pointed out the bear market that began in 1929 lasted three years, and the Dow Jones Industrial Average lost 89% of its value, and we had the Great Depression. He asked, if that's the closest forerunner we have, is there a case that the markets have been far too calm?

We don't know, because if we look at leading economic indicators, it's just too soon to tell. We're in the early stages of what potentially is a major narrative shift with a change.

Trade war, huge levels of uncertainty. What should markets be reacting to when it switches so much? Tariffs implemented, taken off, put on hold. No business is going to totally reconfigure the supply chain when policy changes that quickly.

The U.S. only makes up about 15 to 17 percent of consumption globally and about 15 to 17 percent of trade. There is a lot of world outside of the U.S. And if the U.S. is trying to reduce its dependence on the world, reduce capital flowing to the U.S., reduce the amount of imports coming in, that puts

puts more pressure on the rest of the world to grow and to adapt. And perhaps we're seeing that in some of the early financial indicators in terms of how U.S. interest rates are increasing, spreads are widening, the term premium, the additional compensation investors demand to hold U.S. treasuries due to uncertainty is increasing. We're certainly focused on

on leading economic indicators. We'll address that in our investment strategy reports that we release each month. For now, we don't want to overreact. Global diversification has helped in 2025. The narrative is changing, but it's too soon to see if it sticks and if it's permanent. Depends on how severe the tariffs are when they roll out, who pays for it. Depends on how consumers and businesses react to

to the uncertainty. Being globally diversified has helped as investors, finally, after a very long 12-year period. But keep in mind, 2001 to 2011, that global diversification helped as U.S. dollar weakened and non-U.S. stocks outperformed non-U.S. assets. Then it reversed. U.S. did well. Are we heading to a decade of U.S. underperformance? Wait

We don't know yet, but the narrative's changing. We'll see how it continues to evolve in the weeks and months ahead. This is episode 521. Thanks for listening. Everything I've shared with you in this episode has been for general education. I've not considered your specific risk situation. We've not provided investment advice. This is simply general education on money, investing in the economy. Have a great week.