Something Has Broken In The U.S. — ft. Katie Martin

Key Takeaways

A national economic strike targeting the AI sector is proposed to influence policy through consumer power.
Investors are increasingly diversifying away from US assets due to political uncertainty and dollar concerns.
The AI sector faces scrutiny over inflated valuations, with executives and workers reporting divergent productivity gains.
Japan's historically stable bond market is experiencing turbulence from persistent inflation.
Diversification is a key strategy for investors navigating US policy uncertainty and potential Federal Reserve shifts.
International markets are outperforming the S&P 500, signaling a potential shift in long-term expected returns.

Scott Galloway proposes a national economic strike, specifically targeting the AI sector to protest ICE.
The protest aims to leverage consumer power, as consumers control 70% of the US economy.
A coordinated subscription cancellation for services like ChatGPT is suggested for 'Unsubscribe February'.
This action aims to create a significant market reaction and impact company valuations.

Katie Martin notes the market reaction to a recent 'taco' (Trump Administration Currency Order) related to Greenland was more modest than previous instances.
Investors increasingly expect Trump to withdraw from such policies, a pattern observed in past situations like trade tariffs.
The "Taco Trade" creates a dilemma, requiring investors to simultaneously ignore and react to political noise, risking losses from policy unpredictability.

European and Asian asset managers perceive a breakdown in the dollar and demand higher risk premiums on US assets.
Foreign investors are reducing dollar exposure and diversifying into other markets due to US political uncertainty and risks to treasury payments.
International markets, including Spain, showed stronger performance last year, partly due to European pension funds increasing international exposure.
For foreign investors, currency devaluation has significantly eroded returns from US investments.

The Japanese bond market, historically stable with low volatility, is now challenged by persistent inflation after decades of deflation.
Rising inflation increases borrowing costs and negatively impacts bond prices, with concerns about the central bank's slow response.
A gradual adjustment is more likely than a crisis, leading to Japanese government bonds offering better compensation to domestic and foreign investors.

Scott Galloway and Ed Elson label AI a potential 'trainwreck' due to inflated valuations, suggesting a need for a 50% cut or significant layoffs.
Surveys indicate a divergence: C-suite executives report over 8 hours weekly time savings from AI, while 40% of general workers report no time savings.
A previous MIT study suggested 95% of companies found AI adoption a waste of time, contrasting with younger generations' reliance on tools like ChatGPT.
While NVIDIA is fundamentally sound, a significant layer of speculative froth exists in the AI space that needs to be addressed.

Investors are adopting a more rigorous approach, demanding tangible proof of AI's effectiveness beyond speculative claims and "AGI" buzzwords.
The current market focus for AI is on demonstrating actual returns, with companies like Anthropic succeeding through enterprise business.
OpenAI is rolling out advertisements to monetize its platform, indicating a shift towards demonstrable revenue.
This represents a transition from speculative AI projections to a focus on concrete results.

European fund managers are diversifying away from the US, a trend expected to continue due to US political uncertainty and new European investment opportunities.
Germany's infrastructure and defense spending, alongside a healthier European financial sector, signal positive growth for Europe.
The US administration is sensitive to European investors reducing holdings of US Treasuries, highlighting reliance on these buyers.
Pension funds may gradually reinvest maturing US treasuries into European assets like German or UK bonds, rather than a complete sell-off.

Market risks include potential increases in Japanese yields, loss of faith in US treasuries, and overvalued AI stocks.
Katie Martin notes US markets may perform well due to growth, tech, fiscal expansion, and falling rates, but risks policy uncertainty.
Investors are advised to consider currency, hedging, and domicile, as they seek more compensation and certainty due to US policy uncertainty.
The Federal Reserve's future direction is identified as a key, under-addressed concern, with political forces potentially seeking its reconfiguration.

Ed Elson reflects on the 'rotation trade' or 'Sell America' thesis, noting the outperformance of foreign markets even on a currency-adjusted basis.
While the S&P 500 may end the year with low single-digit returns, European markets show potential to significantly outperform the U.S.
In recent performance, the S&P 500 was the worst-performing developed market at 17% up, compared to European stocks (19%), Japan (26%), and South Korea (over 70%).
Currency devaluation further impacted US returns for foreign investors, underscoring a potential shift in long-term expected returns.