For finance titans, the US economy rules
The financial titans attending this year’s Milken Institute conference in Beverly Hills don’t seem like the types who answer consumer confidence surveys or financial wellness polls: They’re way too bullish on the US economy.
A recurring theme at this year’s annual gathering of financiers, CEOs, and economic influencers is America’s resilience in the aftermath of the COVID pandemic. “There is reason to be happy about the US performance,” Kristalina Georgieva, managing director of the International Monetary Fund (IMF), told a ballroom full of people at the conference on May 6. “The US has a remarkably strong labor market. It has ample supply of labor. It has the tremendous advantage of being an energy exporter. It has the privilege of the dollar.”
Money gurus with investments all around the world report that the United States continues to attract far more smart money than anyplace else. Georgieva noted that before COVID, about 18% of global financial flows went to the United States. Now it’s nearly double, at 33%.
Some foreign investors may be overdoing it. But they don't seem to care. Harvey Schwartz, CEO of Carlyle, said, "The vast majority of investors, when I ask about the US, they say 'I’m over-allocated to the US. But I'm going to allocate more to the US.' It's not an exotic answer to the US phenomenon. There's incredibly strong earnings growth, interest rates are high, the economic activity underpinning all this is quite profound."
A big part of America's appeal is the rapid recovery from the COVID recession, which lasted all of two months. “The United States recovered very, very rapidly relative to most other countries,” Ron O’Hanley, CEO of State Street Bank, said at the conference. “Part of what you’re seeing is an ongoing bet on the endurance of the US economy.”
Some of America’s advantages are longstanding. “We’ve got to remember, this is over 50% of the world’s financial strength and firepower,” Citi CEO Jane Fraser told the Milken audience. “The United States sits here with the depth and breadth of the capital market that is unique.”
But some things are new. The Milken conference is like an annual gauge of what’s going right and wrong in the global economy — and the United States is sometimes the bogeyman. In 2009, for instance, the main story of the global economy was a financial crash in the United States driven by fraud, greed, and ruinous policy choices that spread through much of the world. The fallout of the Great Recession lasted for years.
For a number of years, booming China was the darling of global investors and the hottest topic at Milken, while US investment seemed stodgy and dull. Every Western business or money management firm wanted to cash in on China's epic growth rates found in no other large economy.
Now, the Chinese growth miracle has petered out amid a massive real estate crisis and a militaristic pivot by hard-line President Xi Jinping. India could be the next China, but many reforms remain necessary. Europe limped out of the COVID downturn way behind the United States, with many eurozone countries flirting with recession. In the United States, by contrast, Congress enacted record amounts of fiscal and monetary stimulus that triggered a robust recovery that still has legs.
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Ordinary Americans might wonder what kind of cosmic dope these Milken dilettantes must be smoking. Americans are notably gloomy about their nation. Only 23% of Americans are satisfied with the direction of the country. Consumer confidence is close to recessionary levels. President Biden’s approval rating is a mere 40%, startlingly low given a growing economy with an extremely low employment rate.
Even at the Milken conference, there’s a dose of skepticism about America’s high-flying trajectory. Harvard economist Raj Chetty gave a presentation on May 6 showing that the portion of Americans ending up better off than their parents is close to historic lows. And there’s plenty of chatter about America’s titanic debt load and an inflation battle that’s improving but not yet won.
Can both perspectives be valid? Can the United States be the world’s premier economy at the same time it’s letting down millions of its own citizens? Sure it can.
One of the United States' strongest assets is a remarkably efficient and (usually) stable financial system, anchored by the world’s most powerful financial institution, the Federal Reserve. That gives investments in American assets a built-in edge. As Mike Gitlin, CEO of Capital Group, pointed out at Milken, a simple investment in the S&P 500 basket of stocks has returned 15% per year for the last 15 years, about double the return on global stocks.
Other parts of the US economy don’t work as well. The “China shock” that began a quarter-century ago shipped millions of good-paying manufacturing jobs overseas and hollowed out whole US cities, mainly in the Midwest. Top earners have gained a growing share of wealth during recent decades, with less wealth accruing to lower earners. The recent bout of inflation has caused daily hardship for some workers struggling to pay rent and food bills.
The sunny view at the top of America’s income chain, however, means US businesses are hiring more and workers are earning more than if the economy were stagnant. Biden has signed legislation meant to boost manufacturing employment and other downtrodden parts of the economy. Americans will get to vote this year on whether they think Biden is effectively addressing the right problems or they want somebody else to give it a shot.
The Milken one-percenters don’t represent all of America. But they recognize the advantages America has, and they embody what we could gain if more people benefited from them.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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