With US ‘exceptionalism’ seen to be in decline, portfolio risk now needs to be viewed differently, through the lens of the life cycle of empires, says Anthony Rayner, Fund Manager, Premier Miton Macro Thematic Multi Asset Team
The life cycle of empires is one of the many perspectives we use to try to understand the current environment. Indeed, it is proving increasingly helpful as the decline of the US empire becomes ever more apparent.
If it’s not obvious, it’s worth stating that empires always decline, though sometimes there is a period of self-denial. Typically, empires decline gradually and there are a number of common signals that are consistent with the latter stage of the cycle. For example, increasing signs of inequality, social divisions, overspending, corrupt leadership and over-extending themselves militarily.
These are all apparent in the US, and interestingly, many of them are evident across other Western democracies. However, the US is facing its first major economic competitor during their empire, in the form of China (Russia was a miliary competitor but not an economic one).
In addition, over more recent times, the US has become more self-serving, desperate and obvious about their desire to preserve their dominant position, for example by using their economic and political power to improve US terms of trade. So, even if it’s not regularly mentioned, I think it’s broadly accepted that the US empire is in decline, just as the British empire was before that. It’s relatively easy to predict the broad rise and decline of empires but not so much the precise timing.
So, what does this mean in practice? As the world moves from unipolar to multi-polar, we should expect increased conflict and, indeed, that is what we’ve seen over recent times, with injuries and deaths from global conflict unfortunately at a 50 year high.
More generally, Western governments are struggling to convince electorates of their worth: rarely do governments get a second chance to govern these days and the share of the vote from traditional parties is falling, as the populist vote grows. This is also very evident in the US, with the MAGA base an important driving force for policy.
So, the pressure is on for governments to spend their way to popularity, as well as spend on defence in a world of increased conflict. However, for many, including the UK and the US, debt piles are already large. The Global Financial Crisis and Covid lockdowns proved expensive, with minimal resultant productivity improvement, and so growth prospects are somewhat constrained. For example, the German economy hasn’t grown for five years.
The US faces many of these problems but still has economic, political and military might, and is using these to firm up its position. When the rules of a complex organic system, such as the world economy, are changed it’s hard to predict what will result but we can draw some conclusions.
Expect shifting global allegiances, a move away from traditional parties and increased conflict. In a similar vein, for economies, expect deglobalisation to continue as well as high debt levels and scarce growth. Moreover, expect inflation to remain higher for longer, as a result of deglobalisation and higher government spending.
So, what does this mean for global multi asset portfolios? Thinking about broad portfolio structure, the higher for longer inflationary environment is instructive. It suggests having a bias to real assets, such as equities and commodities, especially gold. Turning to bonds, it makes sense to us to limit interest rate risk by keeping duration pretty short. It’s also worth noting that in inflationary environments, government bonds are not good diversifiers of equity risk, though short-dated bonds might dilute equity volatility somewhat, but commodities can be good diversifiers.
A more fundamental question is what does this mean for perceived safe haven assets, such as US Treasuries and the US dollar? One of the main reasons they have been thought of as safe havens is that they have represented what has been the dominant economy for a number of decades. As the power of this empire comes into question, so will the credibility of these assets. This is another reason why gold is attractive, as an alternative safe haven asset.
To sum up, even if the decline of the US empire is clear, it’s not so easy to predict the implications and their timings. Nevertheless, we do feel that inflation will remain elevated and that this is likely to be a key driver of portfolio construction shape, as will the decline in credibility of US safe haven assets over time.
Main image: aaron-burden-9C8r4QUwZRQ-unsplash
