The End of US Exceptionalism?

09 June 2025
49 min listen
GBDO Podcast May 2025 - Beyond Consensus: Thoughts from the Dismal Roundtable - The End of US Exceptionalism?
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      Richard A. Brink, CFA| Market Strategist—Client Group
      Eric Winograd| Director—Developed Market Economic Research and Chief US Economist
      Alla Harmsworth| Co-Head—Institutional Solutions; Head—Alphalytics
      Inigo Fraser Jenkins| Co-Head—Institutional Solutions

      Transcript:

      Rick Brink: Hello, everyone, and welcome to this very first installment in our new AB series, Beyond Consensus: Thoughts from the Dismal Roundtable. My name is Rick Brink, Market Strategist within AB's Client Group. The sole purpose of this series, as we put it together, was to gather experts from around AllianceBernstein to talk about the macro and market issues that our investors are asking us about. We want to do it meaningfully, but at the same time we want to add a little bit of touch of pluck and a bit of humor. So, if we get it right, you're going to have a dash of both. So speaking of the experts, by the way, Eric Winograd, Chief US Economist; Inigo Fraser Jenkins, Co-Head of Institutional Solutions, visiting us from London; actually from London, Alla Harmsworth, who is the Co-Head of Institutional Solutions as well, Inigo's partner in crime.

      Now, sometimes the topic is going to be chosen by us. Sometimes the markets are going to choose them. Right now, it is absolutely the latter. Now, we talked about calling this “All Tariffs, All Day” in a nod to the ’80s movie The Karate Kid. It was almost “Tariffs On, Tariffs Off,” but the reality is underneath the surface, bubbling up in all of our conversations throughout the world, there's one question that came up over and over again everywhere: Is this the end of US exceptionalism? So Eric, I'm going to go right to you. Let's start with exceptionalism from the cyclical perspective, because there's a lot of talk about the strategic or structural, but there's a cyclical element as well, so let's go to the macro on that side.

      Eric Winograd: Yeah. It's really important, I think, to differentiate between the cyclical and the structural. I think those of us who have been in markets for a long time are really used to thinking about exceptionalism from a cyclical perspective. Which economy is growing more rapidly? Is inflation diverging in one economy from another? Is one central bank doing better, doing worse, doing different than another? And that's where we sort of have made our bones, for the most part, in financial markets over the past couple of decades. But in part because of the tariffs you reference and in part for other factors that we'll go into as we move along, the idea of structural exceptionalism is in question now, in a way that it really hasn't been, certainly in the last 20 years and probably even a little bit longer than that.

      But look, let's sort of clear the cyclical story first, because coming into this year we, like most forecasters, did expect US exceptionalism to predominate. From a cyclical perspective, I think that has been and is still correct. The US economy is still outperforming other major economies, and we can see that reflected in the data. We can see that reflected in the fact that the Fed hasn't cut interest rates even while other major central banks around the world have. The growth outlook for the US, to be sure, is not as bright as it was last year, largely due to the tariffs, but we are still not forecasting a recession there, whereas in other countries around the world, that seems a very reasonable possibility, so cyclically, the US still looks pretty good by comparison. But again, where the rubber meets the road, and the discussions that we've all been having haven't been around the basics of growth and inflation in the near term. It is really around these structural issues.

      Rick Brink: Yeah, and we've talked about—I've always described it as cake and icing. If there was no election, what would we be saying about the economic backdrop? And we talked about solid labor, but moderating, inflation coming down, shelters, the last bastion.

      Eric Winograd: It would've been a lot more boring, right? I mean, we would have been talking about a continuation of where we were before and normalization. Boring is good for financial markets most of the time, but the outlook would not have been as dynamic and as sort of fraught with risk as what we're seeing. That's what happens when you get big policy changes.

      Rick Brink: In a lot of ways, I've talked about this as two sides of the coin. When the election happened, the markets focused on the head side of the coin. The head side of the coin was the idea of deregulation and tax cuts and everything else, and treasury yields and markets reacted accordingly, consumer sentiment reacted accordingly. And then after the inauguration, we get the tail side of the coin and the reality around immigration, DOGE, job cuts and, of course, tariffs. Then, there's that kinder, gentler time around April 1, right? It used to be known as April Fool's Day. Now it's going to be called Liberation Eve, I suppose. But it's after that that all of this breaks loose. So the idea is, how do we overlay the potential impact? And one thing we sort of talked about is hard versus soft data. Do you want to chat about that a little?

      Eric Winograd: Yeah, so when we look at the economic data flow, there's a lot of different types of data that we get, and each has their pros and their cons. When we talk about hard data, we generally mean counting things. How many cars roll off an assembly line? How much did industrial production go up or down? How much money did the American consumer spend on goods in a given month? In a lot of ways that's the gold standard of data, because it has the great benefit of being true. You can count things. The downside is it takes time, right? We don't get the hard data in real time, because it covers a month, because it takes time to tabulate, because the tabulation is done by government employees. In an environment where government employment is being called into question, you wonder about the reliability of it, to a degree, but in a general sense, the hard data takes more time to come than the soft data. Soft data, what we mean by that is where we're not really counting things, we're asking people questions. We're saying, "How do you feel? Is your business doing better? Is it doing worse? What do you expect for the next several months?" Now, the great benefit is that we can get that in real time. So it tends to capture turning points more quickly than the hard data, which are necessarily backward looking. You can't rely on counting how many cars were sold last month to predict how many will be sold next month. In theory, you can ask people, "What are your plans for the next month?"

      So the upside is we get it in real time. The downside is that it's less reliable. Plans change. People tell you one thing and do another. The best example is the dichotomy we're seeing in the US economy right now, where measures of consumer confidence have plummeted, but measures of consumer spending have still been stable. So people are telling you that they don't feel good, but they are behaving in a way that's consistent with how they have done. Now, we expect that over time the soft data will lead the hard data, that how people feel, that these sentiment indicators—particularly when they are as unanimous as they are right now, and especially when they come on the heels of an approximate trigger, in this case the Liberation Day tariffs—we expect that the soft data will lead the hard data, that in the coming months we will see a deceleration in the economic outlook. But for the time being, there is this gap between the soft and the hard data, and the market has been very resilient and seems to, at the moment, be focusing on the hard data rather than the soft. There's a danger in that, that the market seems to be hearing what it wants to hear, as was the case around the election, right? You said heads versus tails. The market assumed we would get deregulation and tax cuts but disregarded the possibility that we would be getting spending cuts and trade restrictions. We may end up getting both. It's a question of prioritization, but again, the market seems to have had the ability for the first six months of the Trump administration to hear what it wants to hear. It seems, to us, that right now it is focusing on the hard data, which have been more resilient than the soft.

      Rick Brink: And one last question here, which is a lot of the reports coming out are almost throwaway right now, as we're in this way station before they hit CPI, is one that comes to mind in the US. Trying to put it all together, because you still have to put out the charts every month.

      Eric Winograd: Right.

      Rick Brink: So, what are you sort of taking where it is to try to get to where we're at? Because a lot of the world is sort of somewhere around a coin flip on US recession.

      Eric Winograd: Yeah, look. The hard data always lag, as I said, because of collection issues, because it takes time. They're going to lag even more right now, because in order to get a read on how the economy is performing post-tariffs, first you have to get the tariffs. They have to be imposed. Then, that has to hit the way the businesses operate. Then it has to feed through into what consumers are doing. So not just a one-month lag here, we're talking a multi-month lag before we really see the impact of the tariffs that have been imposed on the broader macroeconomy. We think it won't really be until the summer that you get a true read of how much the growth outlook has declined, how much growth is going to slow, how much prices are going to go up. You referenced, Rick, the CPI report. We haven't seen that yet in the inflation data, because the tariffs haven't really hit prices yet.

      If you listen to earnings announcements and commentary from the business sector, they're telling you that they will raise prices in the coming months, as they work through the inventory that they accumulated pre-pandemic, so we think it's going to take several months before we get a real sense of what the macro impact of trade and tariff policy is on the economy. For now, we're confident, or I shouldn't say confident. We're comfortable forecasting that the US economy will not slip into a recession. We rate the probability sort of subjectively as around one in three that the US has a recession in the next 12 months. If the full magnitude of the Liberation Day tariffs were to go back into effect, I think it would be more like a two in three probability that we would have a recession. So, the ability to forecast in a volatile policy environment is necessarily lower than it would be in a stable, more boring one. But for now, we think that the US economy will sort of skirt a recession.

      Rick Brink: It's funny. I remember, back in the day, on CNBC, when they'd have the stock tickers going up and down when a CEO was speaking. We should have our probability of recession as policies are applied and rescinded, because it's changing the numbers. I don't want to stay completely on the US, Inigo. Can we talk a little bit about the cyclical current case, current growth situation in Europe and add that in as well?

      Inigo Fraser Jenkins: Yes, so I guess the growth question is obviously rippled across the world, to some extent, with people figuring out the impact on tariffs. But I think that when we actually talk about the relative impact on markets between the different regions, actually, I guess one of the approximate drivers of markets, I think, might be to do with sentiment and flow. Because I guess, as we've talked about earlier, coming into this year, there was an almost kind of unanimous view that the US was exceptional in a cyclical, near-term perspective. Certainly, we had that view as well, but it was somewhat alarming to realize that everyone else had the same view. And you see it in the hard flow data too.

      So, you saw this extraordinary inflow into US risk assets, particularly equity markets, over the last two years, but I guess last year in particular. At the same time, not just a lower rate of flow into other regions, but active outflows from regions like Europe. Now, there were lots of good reasons for that, but that degree of disconnect was really quite striking. So then as you translate that to a world where, yes, there's a case that the odds of US recession is less than half, as Eric says, but certainly the growth outlook is less good than people thought it was. I guess there's a risk that some of that sort of excess flow that took place into the US risk assets over the last six months, one year, sort of undoes—and you've seen a little bit of that. You've seen markets that were deeply hated, from an investor point of view, like Germany, for example—you’ve seen inflow into its equity funds, over the course of a couple of months, that undoes a year of outflows. Now, there were good reasons why those outflows were taking place, as I said, but you haven't really seen a full unwinding of that sort of excess flow into the US. So, I guess when we think tactically, particularly on the equity market, it's somewhat surprising that there hasn't been more of this sort of-the risk of a more normalization of kind of growth rates priced in. In fact, if anything, yes, there's some small episodes of foreign investor selling, but the total flow hasn't really seen a significant outflow yet. So that's something that could weigh potentially on a relative, near-term outlook of the US versus other regions.

      Rick Brink: Got it. Alla, I'm going to throw you a question, because you're the master of allocations. I have a T-shirt coming for you. It just it takes a while—delivery, tariff costs, shipping, all of that stuff. So, same idea. We're at a way station here. People have to build portfolios. So what's the advice, as it relates to equities, given what Inigo and you were talking about, and the fact that folks still have to put a dollar/pound/sterling/euro into the markets every day?

      Alla Harmsworth: Absolutely. Thank you for asking me the really important question. I agree with Inigo that the flow could be a crucial, tactical driver, and that we may see some more of that repositioning away from the US in the near term, and we’ll want to be positioned for that. So, extraordinarily, this year has seen the biggest inflow into European ETFs, I believe, since 2015. So there has been something quite extraordinary going on there, but it's only a start of the reversal, and it really hasn't even begun to unwind this huge, massive gigantic flows into the US that we've been seeing prior to that. What do we want to do? Well, we want to position for the uncertainty and volatility. It sounds boring and obvious, but I think, tactically, that's what we need to do, and it's crucial again to distinguish the time horizons, the tactical and strategic. The latter we’ll come to a bit later. Tactically, we want to bring our risk in. We want to have a more diversified regional allocation. We want to broaden out our access to other parts of the market, just to have a somewhat more stable portfolio that can be fortified against all the uncertainty that we're seeing and against further possible shocks. Who knows what's going to happen tomorrow? So, we have somewhat moderated our regional bets. We've decreased our tactical US overweight and decreased our tactical Europe underweight. Again, very much motivated by that flow, which we think may have further to go. We want to broaden out our exposure to different sectors of the market, and we want basically sort of a balance balanced robust allocation. In Europe, we see opportunities in value and growth. We actually quite like European financials, even though—despite the likely rate cuts, we think […] are a solid. They […] been oversold. In the growth space, we might want exposure to some industrials, which could benefit from the AI build-out, etc. So a balanced allocation in Europe. In the US, we do want some defensiveness, and we actually want some defensiveness across the globe as well. We like factors like quality and low vol., because they act as good hedges on valuation grounds or might prefer low-volatility stocks, because parts of quality are expensive, but that very much depends on the nuance and definition. We want, again, access to the broader market, not just the Mag Seven, because that gives us more defensiveness, again, at the sector level, healthcare, utilities, staples—all attractive and can help us weather this volatility.

      Mag Seven, obviously, is a separate, huge topic, and other people can chip in on what they think. I think that some of those stocks are really great stocks, and some of them may have been even oversold in the short term, so now might be a good entry point, for those who don't have it. Although that exposure very, very much needs to be moderated. We really need to be aware of the concentration risk. And on the AI, just so that we are still exposed and can take advantage of the longer-term opportunities, maybe having access to AI adopters, rather than just those seven stocks, is a better way to play the theme while staying diversified. So, I guess the key message is, near term, we want to manage risk. We want to be robust to the volatility, which is still going to happen, and that's sort of the message.

      Rick Brink: I'm going to take a stab at the bond side, because I can't help myself. Eric tells me that all the time. So, look, one of the interesting things about the two sides of the coin is that the—let's take 10-year Treasury, it sort of rotated around 4.30% for a while. It was around 4.30% around the election. Makes its way up, comes back down. Then it pushes back up through all of this stuff. Then, when some of the tariffs were rescinded, it comes back down around 4.30%. Now it starts to make its way up a little bit of steepening of the curve, because now we're getting the other side of the coin—policy starting to show up on the scene. Right? Now we're talking about the tax cuts, the cost of the tax cuts, and everything else. And so, I get asked a lot about investing in bonds and the flows into bonds and everything else. A couple of things. One, the existential question is just, "Will we keep paying our bills on time?” If we're going to have a strategic default at some point, all bets are off from everything I'm about to say. However, if we presume that bills continue to get paid, if you're talking to a dyed-in-the-wool former bond guy, and you show me a steep curve with high real yields, I am very interested in the real yields, whether I get it nominally or through the TIPS market, and I'm very interested in the roll-down math because of the steepness of the curve, so that's the first thing.

      And so, if I see a 30 floating up near 5%, and I think about what the real yields were pre-COVID, to me, for a lot of the world's investors, that's something you should really be looking at. But let's say that you have some sort of hesitation around loading into the Treasury boat, my old global bond hat tells me that I'm going to dust off my global hedged yield curves, right? So I can take any yield curve in the world, I can hedge it back to a base currency, and the things that we know versus local-currency curves is going to lower the volatility, but it's also going to create a difference in yields based on the shift and based on interest-rate differential. Sorry to get too wonky, but—based on interest-rate differentials, that curve is going to shift up or down.

      So, net-net, investors can go shopping right now­—Inigo mentioned the interest in German equities. There's been bids into German Bunds as well for the same reason. Because on a hedged-to-dollar basis, that's been attractive. But there are other parts of the world as well. So, for those folks that are looking to get a hold of reasonable yields and reasonable shapes of curves, and at the same time maybe try not to have all their eggs in the Treasury basket, on a hedged basis, that's there and present for everybody. Then, specifically, for the US listeners that are maybe on the municipal side of the market, one of the biggest things has been talked about, and some of the challenges in munis early in the year had to do with, one, it was what was happening to treasuries  ripples into the muni market.

      Another big part of it had to do with issuance in the calendar. But the last one that was hanging around was because of the “big, beautiful bill” that was going to come out, what was going to happen to municipal tax exemption, right? And so, one of the early things, everybody was combing through the first draft to get a look. And as it stands right now, munis aren't being touched. And so if you look at that bid that started to come into munis, that's going to be because of that. You take that out of play, and again, we've got an area that's been beaten down, but with an ability to pay and on an after-tax basis is pretty attractive. OK, that's my spiel on the bond side, but now let's get to the bigger deal. The bigger fish to fry is the strategic side. So, Eric, back to you again. Is this the end of US exceptionalism, strategically speaking?

      Eric Winograd: I think that, coming at it from the perspective of bonds or coming off of bonds to talk about it is exactly the right way to go, because you talk about real yields, you talk about nominal yields being very attractive. The pushback that we get when we talk to clients is often, "OK, but there may be a structural shift underway, in the way that financial markets work." And the nature of that shift, people define it differently, but big picture, what it looks like is there's concern that the dollar may be losing its status as the reserve currency of the world. And if that is the case, then the structural bid into US bond markets in general and to Treasury markets in particular may be called into question, and what looks like a high yield today by recent historical standards may turn out not to be that high of a yield.

      To be clear, we've looked at this from a variety of different perspectives and we don't think that that is what is happening yet. We're not seeing outflows from reserve managers. We have not seen a true structural change, but it is being talked about in a way that it hasn't been in a long time. Inigo and Alla and I have talked a lot about this, both with one another and with a variety of different clients, so we each describe it slightly differently. The way I think about it is that the US has been the reserve currency of the world for a lot of reasons. Some of those reasons still hold. It is still the world's most liquid currency. It is traded 24 hours a day. It can be used in almost any economy in the world at any time to purchase goods or services. It is supported by very deep, very liquid capital markets, including specifically the Treasury market. It has been a stable source of value. That doesn't mean the exchange rate never moves, only that it never moves all that much in the grand scheme of things. And all of those variables still hold. That said, some of the variables that have made the dollar the reserve currency may not hold anymore. It has benefited from a policy environment that is process-oriented, and as a result of being process-oriented, has been predictable. US policy in a variety of different economic arenas has not swung back and forth unpredictably in the past. It is, to a certain degree now, to the point that we've made earlier. Markets came in expecting one thing. They got another thing. Nobody that I know of expected the magnitude of the tariffs that were announced on Liberation Day, and there weren't any particular process-oriented ways that you could have predicted that. The lack of process orientation leads to unpredictability that makes reserve managers nervous. So, too, does the fact that it's not clear how rules-based the US policy environment is at this point. The old rules of the road, in terms of multinational agreements, both economic and geopolitical, may not hold any longer. Even things like bank regulatory policy. Walking away from these international agreements, if you are investing your country's reserve dollars in another country's assets, you want to know that you will be able to get those assets back when you want them. In a less rules-oriented environment, it's reasonable to think that some may be questioning that. So that's really the back and forth here. You have good reasons for the dollar to hold its place, but you also have reasons why it may be called into question. Inigo can talk about this too, but the scale of reserve flows that is possible, and again, we aren't seeing them yet, means that even if a small reallocation of reserves were to happen, it could have meaningful impact on financial markets.

      Inigo Fraser Jenkins: Yeah. I think, but that's a question of US exceptionalism, I guess, from a strategic point of view has quite different stories to tell when it comes to the equity market versus dollar/bond market. And so, if you just stay on the dollar and bond side for the moment, I guess there are a few reasons why there is this attempt by the world to de-dollarize, some of which are new and some have been in place for some time. So, I guess the one that's been in place for some time, most obviously, is this question of fiscal sustainability. Certainly, when I've gone around the world and met clients, really, for sort of three or four years, this question of how sustainable is US debt has come up again and again, and people ask the question of how high can debt, as a percentage of GDP, go?

      It's one of these unanswerable questions. Because I can say, "Well, yes, it can be kicked down the road." I guess Japan has been through this level a long, long time ago. But that is a concern that's obviously been around. And it raises questions of what is the ultimate path out. I guess we can come back to it, but I guess my view is that there's a greater risk that inflation/depreciation is the path out. Having said that, whether that concern has been around for a long time, it's a concern that comes from most of the G7 as well. So, if you look at the level of debt to GDP for all of G7, then all of them have a common problem on that front. So, yes, the fiscal trajectory in the US may be worse, but the levels are actually bad across by the most advanced economies. If there's a wish to de-dollarize for that reason, actually, it raises some question marks over other currencies too.

      Eric Winograd: That's sort of—what's the acronym we've used? “TINA”: there is no alternative, right? And so, if you want to de-dollarize, it isn't clear what you're supposed to move those reserve assets into.

      Inigo Fraser Jenkins: But yes, that's the key constraint, I guess. So, although people would like to de-dollarize, there is going to be lack of other alternatives. So when the previous shift of reserve currency took place between sterling and the dollar in the interwar period—that took 20 years or so, but it was very clear what the alternative was. It was the dollar. Whereas now there is no alternative. I think it's highly unlikely that the Chinese make their currency convertible, because the capital outflows […] are just too large, and hence this interest in buying gold. Which I guess brings me back to I guess one of the other reasons has been in place for some time and why people wanted to de-dollarize is really, ever since the Russian invasion of Ukraine, and I guess the world observing what happened to access to the dollar being weaponized, that has created this desire to find non-dollar alternatives. Hence, the gold buying that we've seen. That's obviously in place. And I think one of the things that's come up in the last few months, yes, the headline has been around tariffs, but the deeper question that has been asked is really trust: Is there still trust in the US to the same extent that there was before? And that's been severely rattled. So that implies there is this demand to try and buy other kinds of assets. Then, I guess the third thing that is also new in this is this sort of floating of ideas about some Mar-a-Lago Accord and other type of approaches that would have quite a severe effect potentially on foreign holds of bonds. Now, I don't know if that's likely or not, and perhaps, given the administration walking away from some of the suggestions, it's somewhat less likely, but the question is being asked. So I guess there are these reasons, both fiscal and more geopolitical trust-related, why there's an attempt to de-dollarize, but as Eric says, the key problem is there isn't an alternative.

      Eric Winograd: There's a limit to how much gold you can own. It's not clear. Reserve managers don't appear to be interested, particularly, in crypto at this stage of its evolution. You can tell stories about how, in the future, these things would make sense—crypto, for example. But in the here and now, it seems improbable that you would see a significant reallocation into that, and so then you're left with Euros, but that's not all that enticing. As you say, the RMB, the Chinese currency, it's not hard to see how 40, 50, 60 years from now it might play that role, but it isn't freely traded. Its exchange rate is heavily managed. It is not rules-based either, and so the share of the Chinese currency in global reserves is well below 5% at this point.

      Inigo Fraser Jenkins: And so, I guess this is the consequence for investors obviously being somewhat different for US-based versus non-US-based. So for non-US-based investors, I think it's quite a clear conclusion, which is the dollar has become somewhat more risky in the sense of shocks. The dollar also shocks, too, by the risk outlook. And perhaps it's easier to imagine a narrative of a weaker dollar from here rather than the stronger, perhaps. For non-dollar-based investors, increasing their hedging is something that we've had lots of questions on and seen actual evidence taking place. I guess in the US, it's I guess more manifested in this kind of question of the steepness of the curve and to what extent these risks are priced.

      Rick Brink: And last point that I want to make on this is, you alluded to this earlier though, using a light switch analogy, it's not sort of on or off when it comes to reserve currencies. You can just move the needle a few percentage points, and, you mentioned that before, that does have meaningful impacts.

      Eric Winograd: And as Inigo says, I think it's easier to envision, from here, a situation in which the dollar weakens somewhat, because of an incremental change in reserve management, emphasis on incremental, even if it just means a reduction in purchases of new dollar assets. That could have an impact on the exchange rate, but as we sit here today, I think it's difficult to envision a true collapse in the dollar as it loses reserve currency status. Again, for international investors, the conversation for now seems to be more one around hedging than around reallocation. It may become more around reallocation. And for US investors, the risk that they are focused on is primarily fiscal, at this stage. It's the idea of unsustainable budget deficits, and the so-called big, beautiful bill doesn't appear, to our analysis, to do anything to reduce those budget deficits. There are spending cuts in it, but they're being used to fund tax cuts, which leaves you sort of treading water from a top-down perspective. So US investors have concerns around that. The FX implications are much lower for US investors, who tend not to be as engaged in the rest of the world as foreign investors are with the US financial markets.

      Inigo Fraser Jenkins: Can I shift the conversation a little bit to exceptionalism, I guess, from the point view of equities? Because here I think we can be much more robust in outlining a pretty clear view. And I'd like to propose a view which I think has become somewhat unpopular in the last few months, that we can defend US exceptionalism, both despite what's happened in the last couple of months. And certainly, when I go into conversations with investors around the world, there has been, as I mentioned earlier in the more tactical conversations, this desire to try and find other places to invest in. That may be the right answer, from a very short-term tactical perspective, but strategically, I really think there is a strong case to remain overweight the US from an equity standpoint. This comes down to deep structural forces that are not really changed by recent changes in policy.

      So, I guess number one amongst those, I guess would be demographics, which is one of these, I guess, slightly boring topics, because it's so slow-moving that people tend not to think about it, but the huge advantage is that it's eminently predictable, unlike many things that we talk about. And here the US has a very clear advantage, which is that the working-age population in the US—sure, it's growing at a much slower rate than it has done for the last 40 years, but it's growing. Unlike in Europe where it's shrinking, in Japan where it's shrinking, in China where it's really shrinking at an accelerating rate. And even accounting for possible paths of immigration policy from here, I mean, even under quite severe scenarios, the US working-age population still has a spread in terms of growth rate over the rest of the world. Other things equal, I guess the growth rate of the economy is equal to how many productive workers there are and the level of productivity that they have. Now, the whole question of productivity growth is a whole AI-based question. It's really, really hard to forecast, but let's assume that's constant for the moment, and sort of hold that idea. That increased trajectory in the number of workers relative to other regions, implies a better growth rate in the US. So that's part one for US exceptionalism. Part two is that US corporates have long enjoyed an ability to be more profitable and more productive than corporates in the rest of the world. Now, there are a number of different elements to this and not all of it is understood. Some of it seems to be through organizational structures and choices about the use of intangible assets, which have enabled US firms to be more productive. Some of it's from the regulatory and tax environment. That means that the effective tax rate in US firms has been very benign, compared to regions around the rest of the world. Some has been this high level of profit share of GDP, which in turn is partly a function of the level of a fiscal largesse that’s possible.

      But all those things, at least at the moment, seem in place. And so we observe both a high level of profitability of US firms and a greater stickiness of profitability, which is a key thing that justifies a higher multiple, I think, of US stocks. I can, then, point to other things such as the security of the energy supply in the US. And yes, there's a narrative that Europe could become energy self-sufficient through wind and solar power. Yes, maybe. But it requires enormous investment of capex, and that is some way off, and that's a clear advantage that the US has. So, with those in place—I mean, yes, there are worries about eroding the US soft power that's taking place, and there are questions over, I guess, funding costs of US corporates possibly shifting if there's a change in people's desire […] dollars. But it does imply a growth rate for GDP in the US, but I guess even more so a growth rate in corporate earnings in the US that is better than the rest of the world.

      Now, I guess the pushback you could still have on that is people say, "Yes, but the US is expensive compared to the rest of the world." I guess that's a debate that sort of runs and runs. Partly, it's expensive because it has a tech sector and some regions like Europe have very small tech sectors. But even if you adjust for that, the US is somewhat more expensive, yes, that's true. But it turns out that, at least as far as we can tell, relative valuation hasn't had a blind bit of difference in terms of determining regional performance in recent decades. What really matters is earnings growth. So, I guess long tangent on this, but the bottom line is, if one is going to forecast an out-performance of Europe or an out-performance of EAFE relative to the US, you have to be also forecasting superior EPS growth for EAFE within the US. As a strategist, I'd find that a really hard forecast to go and make, so the bottom line is remain overweight US equities.

      Rick Brink: It reminds me of a very old adage I heard early on: "Money finds the earnings." And, Alla, I want to dive down, so, staying with this—so back to allocation then, we talked about the tactical side earlier on equity allocation. If you could piggyback onto what Inigo was talking about, let's dive into what a strategic allocation looks like, equity-wise.

      Alla Harmsworth: Yeah, and funnily enough, the strategic allocation, given everything that's been going on, hasn't changed, as far as we're concerned. We'd already been positioning for this huge structural forces taking place—deglobalization, demographics, AI, high public debt levels. So, I guess what the Trump administration has done is just accelerated some of these trends, and kind of increased our conviction and the fact that inflation will be higher structurally, and we'll see more volatility, and growth will potentially be lower. There's also some other sort of less pleasant consequences or as unpleasant, which is the return outlook for most asset class betas, at least for broad asset classes, is going to be more muted than before. Diversification is going to be harder to come by as before. Again, because of all these forces, which sort of are crystallized in the high-inflation, low-growth outlook. And again, that was in place before, but recent changes such as the tariffs obviously accelerate that, just bring it to light that bit quicker.

      So, what do we do? As Inigo mentioned, we still believe in the US long term, so we want to belong strategically in US equities. It is a core return-seeking asset in the high-inflation world. It's an asset that can generate real return for most moderate sort of anchored levels of inflation. On the flip side, we want to be managing the duration risk in our portfolio, so we’re long equities […] in the US. We are somewhat underweight duration, within fixed income, across developed markets. We prefer sort of intermediate duration because of all this uncertainty about the bonds, because we expect higher volatility of the long treasuries across the globe, because of higher debt levels and higher inflation, etc. Again, because bonds are not going to be such a […] just anymore. So within fixed income, we would want somewhat shorter duration. We also prefer inflation-linked debt to nominal duration, so we hold US TIPS, and that is also our way to position explicitly for inflation, which again is our current theme. Regionally, as I mentioned, overweight US. Somewhat neutral, slightly overweight in the Eurozone. We do like Japan. Corporate reform, hopefully the return of inflation, looks interesting. We like the UK. We want to use a much broader range of assets, I suppose, to achieve real diversification than perhaps investors have been used to doing. So, to position for inflation, we want to have real assets. We've mentioned gold. We think there's a strategic place for gold in portfolios. We mentioned TIPS. We also want to have some wheat, some commodities. Gold, in particular, is great, not just because it's a stagflation hedge, if you feel like, but it's just a great defensive asset, which has this wonderful characteristic that it gets more correlated with equities as equity recovers from a big drawdown, but a very negative correlated when the drawdowns aren’t large. So real assets. We want to broadly think of alpha. Alpha is crucial in this environment. As we've mentioned, returns on passive asset class are going to be challenged. Within, there's actually plenty of opportunity for active, but thought about in a more broad sense than before. Investors need to be willing to travel to sort of less traveled areas, if you like. There's ample opportunity still in EM and small-cap in long early space. We think that absolute return, market neutral hedge fund strategies are attractive, because again, they can give you that uncorrelated return stream, which doesn't have the exposure to the betas, where outlook is more challenging. One thing I'll mention is, also, we think that we need to mix public assets and private assets much more so than we've done before. I think the benchmark should become something like 50/20/30, rather than 60/40, having private assets in there. Again, in the low-return world, it's a crucial return enhancer. It can provide diversification. It gives you access to this massive pool of private companies and private capital, which again, can give exposure in turn to these massive structural trends, such as AI, energy transition, etc. Within that, we have a preference for private credit. We do have concerns about private equity. I'm sure Inigo will have to add on that. But I guess the bottom line that I'd like to leave our listeners with is we're in a low-return world. We need more diversification. We need alpha. We need a very wide range of assets to be considered, more so than before, be it asset class betas, factor strategies, alpha strategies, including long-short and private assets. And yes, within equities, equities are a core allocation, and we still believe in US exceptionalism. That part might be a little bit more muted than two years ago, but it's still there for us.

      Rick Brink: Thank you. In a few of our comments, Alla's comments, something you were talking about earlier, I know I hit on the bonds, but when we talk about low vol. in these areas, we're also basically talking about where do we get our countercyclicality from? And classically, the list of countercyclical assets is somewhat short. You've got high-grade debt. You've got a few currencies, potentially. And inside of some equity betas or betas, you've got countercyclicality living, which is something I love chatting about. But you've done a lot of work on this idea of defensive defining, so that's a big one. So let's talk about that.

      Inigo Fraser Jenkins: Yeah, so I guess that I suppose the backdrop is one where we should expect higher volatility, right? It is partly because of the background uncertainty from fundamentals, but also just valuation levels. Most asset classes are expensive compared to history. That does not necessarily imply that asset classes have to fall, but it does strongly imply that volatility remains high, because when you go into a period where valuation is high, it then requires relatively small shock to cause an effect, but it can be negative. So, I think there's this sort of extra need to think about defense in portfolios.

      Yes, we have this positive structural view on equities, but it's more out of desperation of trying to scrape the barrel to find any sources of real return, rather than being bullish. So yes, defensiveness has a role to play. I guess you can think about that from a cross-asset perspective. As Alla mentioned, there's the TIPS and gold. Within the equity market, there is also defensiveness as well. I mean, I guess when we think about it, there's this sort of spectrum of exposures in the equity market, from simple broad market beta to factor exposure, to outright active exposure. The dividing lines between them are a bit blurry, and they move over time, as financial innovation takes place.

      But thinking of strategies like low vol., I guess we can show that environments where the market is not delivering really strong returns, environments where volatility is somewhat higher, then that can outperform a broader market, but also bring some diversification benefit in portfolios. However, the other lens that has to be applied is valuation, I think. For these intra-asset class exposures, it can be shown that both the business cycle and starting valuation seem to matter. So one of the problems with, say, outright simple exposure to more quality in recent periods is that it started to be actually quite expensive and has sold off as a result. Whereas low volatility, for a range of reasons, hasn't been unduly expensive, and so it seems to be an attractive way to buy defensiveness as part of a series of defensive trades that can also be kind of cross-asset ones too.

      Rick Brink: So what does the cocktail look like then? So, we've got a lot of options here, so build my defensive portfolio for me.

      Inigo Fraser Jenkins: I guess as ever, it's very hard to give a blanket answer, because we find clients who come to us who are very happy to have huge amounts of illiquidity in their portfolios and clients who can't cope with it. So, I guess within that constraint, that defensive portfolio will involve, yes, low vol. in equities. It'll involve gold and TIPS as, I guess, more kind of classic hedges of equity risk, even when inflation is somewhat higher. I think it also is the segue into illiquid assets as well. Now, we need to be super careful when we talk about the diversification and risk-mitigating characteristics of illiquid assets. So just to be completely crystal clear about it: the lack of marking to market and stale prices does not bring about any form of diversification, and I'm terrified on the occasions I meet people who seem to believe that, because that sounds like a governance risk in waiting. No. The possible defensive properties, from an overall portfolio design perspective, come from the ability to buy return streams that, by virtue of their underlying legal structure or by virtue of the sector of the economy which they're exposed to, are return streams you can't buy in public markets. Now, that is potentially useful a form of diversification in this kind of environment, and so that would become part of the mix as well.

      Rick Brink: I would love—

      Alla Harmsworth: […] said income-generating strategies are less […]. I'd say high-dividend index equities, I think, are also interesting because of income, and valuations are very attractive, and even in fixed income. And you don't think about high yield as a defensive asset, but it can help you manage your duration risk and actually give you a good income and take on more credit risk, which actually, from analysis we've done, does not increase your drawdown of the portfolio as a whole when you sell off. So I think that sort of income dimension across asset classes is also an attractive tool in the defensiveness portfolio. That's worth mentioning.

      Rick Brink: OK, thanks. Thanks very much, Alla. Now we've covered quite a bit, but I want to look forward now. So, in the coming months, I get asked a ton, "What will you be watching? What are you going to be looking at?" And we've got a whole table full of things around the world that we can be looking to. So Eric, I'll start with you. What are you going to be looking for?

      Eric Winograd: I'll give you two things. From a cyclical perspective, I'm going to be looking to see if the hard data converged to where the soft data were, right? Are we going to see the soft data lead and send the correct signal that the economy is slowing, or are the soft data just going to bounce back as sentiment improves for whatever reason, and the economy continues to power along? So cyclically, that's what I'm looking at. Structurally in the US right now, it's all about the budget. It's all about the fiscal position. Inigo talked about concerns about debt, sustainability, and the level of the deficit. We are in what I would think of as the very early stages of the budgeting process in the US. I think we have several more months of back and forth between the two houses of Congress, between Congress and the White House, between all of the above and the American people, as they try to sort out a fiscal trajectory that both meets their political objectives but also, maybe, keeps financial markets in sort of a stable stance, and so watching those budget negotiations is going to be really the name of the game for the next few months.

      Rick Brink: Lovely. It just sounds riveting and fun.

      Eric Winograd: For a certain type of person, fiscal policy can be very interesting.

      Rick Brink: Are you that type of person?

      Eric Winograd: No.

      Rick Brink: No.

      Inigo Fraser Jenkins: Glad to hear it.

      Rick Brink: Inigo?

      Inigo Fraser Jenkins: I guess a host of things that we can point to, but I guess in the last few months, these more existential questions around global investors' attitude towards US debt, and its role in portfolios, and the role of the dollar. I mean, at the moment, a lot of that is talk rather than flow. I mean, yes, there are examples of pockets of investors. For example, in Japan, there's been some selling of US bonds. But it's small flows in the scheme of things. So I guess it's interesting to see, does that talk actually translate into actually crystallizing some fears and seeing some outflow, or do we discover, as we said earlier, that people figure out that there actually are no alternatives and they have to kind of stick with it? So, I guess it'll be an interesting time to see how the policy debate translates into any changes in asset allocation.

      Rick Brink: Thank you. Alla?

      Alla Harmsworth: Just as riveting, I might be watching the term premium. I'll be watching for signs of more risk being priced in into US bonds. Within equities, I'm looking forward to seeing whether the enormous uncertainty, as measured by trade impulses of the indices, starts moving down, starts to dissipate, because that might be the time when tactically we might want to start taking on more risk and maybe getting more exposure to those attractive, long-term themes, and more constructive exposure in the US, such as, again AI-related stuff and US value. So this is what’s on my list.

      Rick Brink: I'm going to be watching probably two things. In the near term, if we do start moving to the head side of the coin, and we start looking into deregulation, I'm going to be curious what sort of a bid […] like value again. Because once you start digging inside of banking regulations, onshoring, “Drill, baby, drill”—if you look inside all of those, they all end up being ensconced within value indices, and whether or not that starts to make its way around. Then, I have this sort of intermediate horizon, out the next couple of years, because the word that I keep thinking about is precipice, right? You can get to the precipice, and you can come back from it or you can fall over the side of it. Supply chains can be reoriented if given long enough. Things can change. Currencies can move if it takes long enough to get us there. So in the first administration, there was a lot of this discussion. I know it seems forever ago, but there were trade deals being signed between Europe and China back then, and the way that I tell the story is, if you look back, the only thing that really kind of got in the way was the unlimited partnership, the Winter Olympics, and Russia's invasion of Ukraine. And so, the question is, in the second iteration, can we dance up next to the precipice, where ultimately it ends up being nothing to see here, put 145% tariffs on, take them all the way back after a weekend, NVIDIA rips and rolls. Is it no harm, no foul, or do we continue to get enough policy volatility that eventually it leads to some kind of structural decisions, not just in markets, but the way we produce things and ship things and do things?

      Eric Winograd: Well, that's the other part of it, right? The interaction between markets and policy is really interesting. It appears that the walk-back on tariffs that you talked about was sparked in large part by moves in financial markets and in the bond market in particular. Like any administration, this one has to be aware of what financial markets do, particularly on the bond side, particularly given the large and growing stockpile of debt, and the need to issue more as the budget continues to be in deficit. Higher interest rates are something that make dealing with the budget deficit and the debt situation even more difficult. So if bond markets move, if the bond market vigilantes reawake, that's something that could be very, very disruptive and could cause our next version of this roundtable to look very different than this one.

      Rick Brink: The number of Carville reposts from the Clinton administration during that was heartwarming, actually. It's one of my favorite quotes of all time. We hope you found this really informative, really interesting. On a go-forward basis, this is what we want to get to. We want to get to, when we're out in the world having conversations, the things that are most pressing to the people that we talk to, we want to syndicate it and bring it out and have this conversation. For those of you listening, thank you very much for going on the maiden voyage with us. If there are topics that you want to hear about, related to what's happening in markets, let us know.

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      About the Authors


      Richard A. Brink is a Senior Vice President and Market Strategist in the Client Group. Previously, he served as a managing director in the Alternatives and Multi-Asset Group. Prior to that role, Brink was a senior portfolio manager in Fixed Income, and before that an investment director for fixed-income investments within the Global Retail Investments Group. Before joining AB in 2004, he was senior product manager at the Dreyfus Corporation, covering both retail and institutional fixed-income offerings. Brink was previously a senior trainer, dealing primarily with the design and delivery of product training to financial advisors and mutual fund sales representatives. He holds a BS in applied mathematics and economics from Stony Brook University, and is a CFA charterholder. Location: New York

      Eric Winograd is a Senior Vice President and Director of Developed Market Economic Research. He joined the firm in 2017. From 2010 to 2016, Winograd was the senior economist at MKP Capital Management, a US-based diversified alternatives manager. From 2008 to 2010, he was the senior macro strategist at HSBC North America. Earlier in his career, Winograd worked at the Federal Reserve Bank of New York and the World Bank. He holds a BA (cum laude) in Asian studies from Dartmouth College and an MA in international studies from the Paul H. Nitze School of Advanced International Studies. Location: New York

      Alla Harmsworth is Co-Head of Institutional Solutions and Head of Alphalytics at AB. She was previously head of European Quantitative Strategy at Bernstein Research. Prior to joining Bernstein in 2015, Harmsworth worked for two years on Nomura's Institutional Investor-ranked European Equity Strategy and Quantitative Strategy team. Her previous experience includes seven years at Fidelity as a quantitative analyst and portfolio manager, along with stints at Nikko Asset Management and ABN AMRO. Harmsworth holds a BA (Hons) and an MA in philosophy, politics and economics from University College Oxford and an MSc in economics from the London School of Economics and Political Science. Location: London

      Inigo Fraser Jenkins is Co-Head of Institutional Solutions at AB. He was previously head of Global Quantitative Strategy at Bernstein Research. Prior to joining Bernstein in 2015, Fraser Jenkins headed Nomura's Global Quantitative Strategy and European Equity Strategy teams after holding the position of European quantitative strategist at Lehman Brothers. He began his career at the Bank of England. Fraser Jenkins holds a BSc in physics from Imperial College London, an MSc in history and philosophy of science from the London School of Economics and Political Science, and an MSc in finance from Imperial College London. Location: London