What Investors Need to Know about 2022 Part III – the USA

America the (maybe not quite so) beautiful

Since Stevie Wonder released his classic, gospel version of the great American hymn in 1991, something has happened to the once soaringly self-confident Land of the Free. The US has become a more fractious, ill-tempered and divided nation than in its heyday; even as it has continued to enrich itself thanks to its pre-eminence in digital technology and its global domination of social media. There is talk of “tribalism” in the country whose banknotes bear the mantra ‘In God We Trust’.

On 6 January last year, Congress was stormed by a mob who trashed the citadel of American democracy and injured 138 police officers, one of whom later died. Most people believe that this was a coordinated attempt to prevent the US legislature from endorsing the outcome of the presidential election of 3 November 2020 (though who precisely was engaged in that conspiracy is still not entirely clear).

Joe Biden clearly won the presidential contest by 81.27 million votes against Donald Trump’s 74.22 million. Trump gained nearly 12 million more votes than he had in 2016, so one understands his having felt aggrieved. Some people have described the Epiphany Day riot as an “attempted coup”. Vice president Kamala Harris, with her characteristic lack of reticence, even compared it with two other days of infamy − Pearl Harbour (7 December 1941, when 2403 Americans were killed) and 9/11 (2657 dead).

The US is now divided between those who think that the Epiphany Day vandals were “terrorists” and those who think they were “patriots”. Those who still support Trump and who want him to run again in 2024, of which there are many in the Republican party, favour the latter appellation. And yet there seems to be no prospective rival to ‘the Donald’. Those eminent Republicans who called out the vandals such as Republican senate minority leader Mitch McConnell and Mike Pence, the former vice president, have been vilified.

Ambrose Evans-Pritchard, a distinguished British commentator, affectionately known as AEP, was the US correspondent for the Sunday Telegraph during the Clinton era. Writing in the Telegraph last Saturday, he advanced a fascinating analysis of what has gone wrong in the US. He argues convincingly that the current state of its media, with the left accusing the right of conspiracy theories and the right dismissing virtually all mainstream-media output as “fake news” started, not with internet-based social media, but under the Clinton presidency.

AEP covered the scandals that engulfed Bill Clinton and his entourage in the 1990s. He says the current levels of mutual distrust arose because the mainstream media – including the New York Times and the Washington Post (the latter now owned by Jeff Bezos) − refused to publish the murk surrounding the Clintons and their Arkansas “mafia”. Arkansas is often compared to Sicily, and allegedly, questionable tactics went unquestioned. He holds that there were huge irregularities surrounding the investigation of the death of Vincent Foster in 1993. Amongst other things, most of the FBI depositions were tampered with. But now, in a BBC Radio 4 series, The Coming Storm, it is being claimed that AEP − a highly respected commentator − spun a conspiracy theory out of Foster’s unexplained death.

An argument between journalists is not interesting. What is interesting is AEP’s analysis of what has really gone wrong in the US. He claims that it was the serial failure by the mainstream media, led by the White House press corps, to investigate misconduct in Clinton’s America, that began public mistrust of the media. Since then, that mistrust has been worsened by economic trends:

“Untamed globalisation has shrunk the bedrock of middle-class America, relegating the lower half to relative or absolute pauperisation. Blue collar workers have fallen out of Galbraith’s Affluent Society, compelled to compete with Chinese factory workers in a world of labour arbitrage…Digital technology has done much the same to their white-collar siblings.”

Those who own assets have done OK – mostly thanks to quantitative easing (the practice whereby central banks pump invented money into the economy to sustain and boost asset prices). The tech giants now rule the world – even more so since the advent of the coronavirus pandemic two years ago. Apple recently achieved, briefly, a market capitalisation of three trillion dollars – an inconceivable sum of money, roughly equivalent to the annual GDP of the UK, India or France. This would have seemed like science fiction just a few years ago.

Inside the situation room

Last week Russian troops arrived in Kazakhstan as part of a “peacekeeping” operation orchestrated by the Collective Security Treaty Organisation of former Soviet states. As Secretary of State Antony Blinken observed, one should be careful about inviting Russians into one’s house as they might decide they don’t want to leave. The events in Kazakhstan may prove to be a distraction for President Putin from his game in Ukraine (whatever that is) – though this week military experts have conjectured that he may have delayed a full-scale invasion because the weather in the Donbas region has been unseasonably mild and Russian tanks, which love ice, do not like mud.

It is unclear how Biden, who will turn 80 this year, would respond in the event of a Russian incursion into Ukrainian territory. Would the man who abandoned Kabul to the Taliban (showing a lack of knowledge of history) really go to war over Kharkhiv or Poltava? My guess is that the Russians would try to cut the country in half with a new border roughly along the length of the river Dnieper.

And does Democrat America have the stomach for a war to defend Taiwan? It is certain that those surrounding presidents Putin and Xi are asking these questions. It is also reported that President Ebrahim Raisi and the ayatollahs of Iran are just weeks away from producing weapons-grade uranium. What will Biden do about it? And what if Israel were to strike first?

In his inauguration speech, Biden declared that “Diplomacy is back!” And yet he has not even sought to appoint permanent ambassadors in the leading European capitals or in London. The US-Russia talks in Geneva are going badly (neither the British nor the Europeans were invited). Now the Russians are talking about deploying troops in Cuba and Venezuela – so much for diplomacy.

When Biden first entered the White House in January last year there were some who hailed him as the new Franklin Delano Roosevelt (the 32^nd US president). Few make that comparison now. At least he was not Trump. But Biden’s promise to reunite the country seems to have been forgotten.

Violent crime is still rising, and many Americans live in fear of criminal activity. There were 797 homicides in Chicago in 2021, and 400 in Los Angeles. Atlanta has experienced an increase in homicides of more than 40 percent. So much for the ‘Defund the Police’ movement, which succeeded in cutting the New York Police Department budget by $1bn last year. And thousands of experienced police officers are leaving the profession in despair.

Inflation is rampant – it reached seven percent this week. Almost a million (870,000) Americans have died from Covid-19 to dateⁱ – and that is just one cause of what is a decreasing life expectancy in the US. Yet 28 percent of American adults have not been vaccinated at all. Illegal migrants are crossing America’s southern border in record numbers. The culture war rages on − the Pentagon recently tweeted in celebration of ‘International Pronouns Day’.

Biden’s “disapproval rating” (based on the views of those who think he’s doing a good job minus those who don’t) is currently running at about 55 percent. Things do not look good for the Democrats in the mid-term election that will take place in November this year. The Democrats even lost the gubernatorial election in Virginia two months ago, partly because voters were infuriated by the imposition of “critical race theory” in schools. When the president spoke on the anniversary of the 6 January “attempted coup” he was the opposite of conciliatory. He said that it was all his predecessor’s fault.

Biden’s multi-trillion ‘Build Back Better’ spending programme has also hit the buffers. Last month Senator Joe Manchin, a fellow Democrat, used his casting vote against it. Mainstream Democrats want to build new roads and reconstruct America’s crummy airport terminals; but ‘progressives’ want to use the trillions to advance “racial equity” and LBTQ+ rights.

As in the UK, and indeed the EU as I discussed last week, the US now faces a cost of living crisis that will affect the poorest hardest. US inflation is at the highest level since 1982 and thus the highest ever for most people in work. The Federal Reserve has recently admitted that inflation might not be as “transient” as it had supposed. It is likely to raise interest rates three times this year (Goldman Sachs thinks four times), with an uncertain impact on financial markets.

Thirteen months into his presidency, Biden already looks exhausted. He refuses to take questions. For some, Plan B was to get Harris to step up if Biden decided to retire; but her poll ratings are now even worse than his. The next election might turn into Biden (aged 82) versus Trump (aged 78) round 2. But this week the American Spectator conjectures that Hillary Clinton is about to ‘reclaim her throne’. So, it could be Clinton (aged 77) versus Trump round 2. Is this the American dream or American nightmare?

Ray Dalio, founder and co-chief investment officer of Connecticut-based Bridgewater Associates, one of the biggest US hedge funds, puts the risk of civil war in the US during the next decade at 30 percent, given the current degree of political polarisation. He foresees that the Chinese “empire” will overtake the US as the dominant global power relatively soon, as explained in his book, Principles for dealing with the Changing World Order, published in November last year. As I have written before: never underestimate the cancerous impact of political risk on markets.

If China were indeed to overtake America, then the mighty US dollar would no longer be the global must-have currency, and the US would have to face up to a national debt which the IMF estimates will soon surpass $30trn. That would prove unsustainable.

Market outlook

At the time of writing, with a market valuation of just under $2.9trn, Apple accounts for about seven percent of the entire NASDAQ, a market that comprises of around 3,300 stocksⁱⁱ. As the ‘Big Five’ tech stocks have soared, so fund managers have been obliged to allocate to them in accordance with their weight in the index. So, it is reasonable to say that the fate of the major US stock-market indices in 2022 depends on the performance of a handful of tech stocks, each of which has a de facto monopoly in its specific niche. The fate of these tech stocks rests on the future regulation of these industries; but until now the markets have not foreseen that any break-up of these behemoths is likely.

The prospect of future regulation of the tech titans may become entangled with the outcome of the culture wars. As we know, Trump was exiled from Twitter after the events of 6 January 2021; and Republican congresswoman Marjorie Taylor Greene has been similarly banned for certain posts she made concerning Covid vaccines. If the Republicans perform well in the November mid-terms, and if Trump emerges as the natural Republican nominee for 2024, then things might not look so bright for the tech sector. Trump might want to take a leaf out of Xi’s playbook and castrate big tech and its attendant “sissy boy celebrity culture”, to use the Chinese president’s phrase (those androgynous Korean boy bands have been banned in Beijing).

The idea that US tech funds always make money has taken a knock in the first year of the Biden presidency. The Ark Innovation ETF is about 40 percent down over 12 months, having soared by over 150 percent in 2020. Deutsche Bank’s global market survey of more than 750 equity analysts, published on 10 December, foresaw that the S&P500 will rise by just 4.2 percent in 2022. About nine percent of analysts surveyed predicted a market correction of 10 percent or more. Retail investors, according to ARC Research, are more bullish than institutional investors.

According to Dalio, the equity markets are set fair for a decent 2022 before falling away in 2023. As interest rates rise, so bonds will become more attractive relative to equities. And as institutional investors reallocate towards bonds, the danger of a tipping point increases.

Despite the pandemic, global equity markets have far outpaced the 40-year average for returns these last three years. In the past week, the NASDAQ has lost ground though it is still more than 300 percent up over five years. But if you ignore the tech titans, more than 40 percent of NASDAQ stocks are off their 2021 highs by 50 percent or more. Victims include home-fitness company Peloton and Robinhood, the share-trading app that (briefly) became famous as day traders piled into the market during the first lockdown.

Just like the US as a whole, the NASDAQ is a universe of extremes which share little in common. Just one set of poor results for Apple – perhaps induced by the intensifying shortage of microprocessors – could have a radical effect. And I’ll explain in a future article why Facebook’s new “metaverse” strategy is much riskier than it might appear. Consider that if Wall Street slumps, it will take all the other major global equity markets with it.

Trump might also attempt to emasculate cryptocurrency, just as the Chinese have done. Bitcoin has fallen by about one third since last November. But by 2024 it will be regarded as a lame asset class anyway. Banks could storm back – and don’t write off the oil majors (sorry, “diversified energy companies”) quite yet.

The world will endure varying degrees of inflation – possibly severe – for at least the next two years. Thereafter, there will be a period of readjustment in which risk-return profiles across all asset classes will be recalibrated. Zombie businesses and over-indebted companies will finally go to the wall.

Out with the old – and in with the new. But it’s going to be a bumpy ride.

PS

The electricity-distribution company, Ovo Energy, sent customers an email offering advice about how to save energy. They have since had to apologise since some of their suggestions included cuddling a pet and doing star jumps before breakfast.

They should not apologise. Cuddling a small dog is an excellent way to dispel the chill on waking up in a cold house on a winter’s morning, while waiting for the tea to brew. In fact, I think it could be demonstrated that dogs are more energy-efficient than hot-water bottles: the latter require a kettle to be boiled (causing CO2 emissions) and dissipate their heat rapidly. Dogs remain warm indefinitely. Again, some vigorous indoor exercise can raise the metabolic rate and spike the appetite for a decent winter breakfast (preferably involving porridge, of course).

Thermal underwear should be compulsory for everyone living in these islands in the winter months. And let it be exempt from VAT. As keen hikers always say − there is no such thing as inclement weather, only inappropriate clothing. I am sorry to say that contemporary Britons have lost the art, mastered by my parents’ generation and their forebears, of enduring the cold gracefully. And despite the endless rhetoric about the climate crisis, the younger generations are far too prone to switch the central heating on.

Companies cited in this article which merit further study:

• Apple (NASDAQ:AAPL)

i^ Source: https://www.worldometers.info/coronavirus/

ii^ About 2,500 of these comprise the NASDAQ Composite Index.