US: a cycle ride onto the very edge of a cliff?

A really dangerous place to ride your bike is next to the cliff edge. Self-sabotage you might say. Nico Hines in The Times: “Few modern nations can have done so much to sabotage themselves for so little reason. The latest fiasco paralysing the US economy is nothing more than political artifice.”

This “paralyses” is important for investors. Whilst I would rather be writing about New Year’s Resolutions, and other seasonal issues of cheer or fear for 2013; the US economy, the biggest in the world, and logically featuring in many of the worlds private and corporate portfolios, is in a mess. The combat between President and Congress has twists and turns that will excite many.

To many more with vested interests in the US economy the political farce is boring. The result could be a mass exodus of investment in things American. There is no upside for external views of US politics, and the problem with that is the direct impact this has on confidence and the economy. As Hines continues:”botched negotiations over raising the debt ceiling last year led to the US losing its triple-A credit rating. The rating agencies have already warned that another failed attempt at the most basic of all governing principles would risk further downgrades”. Hines, didn’t need to go as far back as the TARP agreement (the political theatre following the Lehman’s bankruptcy) , to conclude with the Bank of America’s view that a lack of domestic confidence is the main brake on a US recovery, concluding: “what confidence will remain if their government failed once again?”.

All the above assumes a basic understanding of the US ‘Fiscal Cliff’. The set of burdens that will be added into the US economy by law, if no political agreement is established, by 1st January. At the time of writing (29/12), this is the place not to drive your cycle. At the time of reading (31/12), however, the cliff-edge might have disappeared; it might have a less precipitous drop. None of this changes the point that: the cycle and the cliff should not have been driven so close in the first place!

The cycle? The Kondratieff Cycle.

Politicians driving the US economic cycle might consider the fate of Nikolai Kondratieff. He joined the thinking that led to the phrase “the Kondratieff Cycle”. These cycles lasted around 50 years, a time frame that didn’t work for the Soviet’s (who liked things to turn in 5 year cycles), so they packed him off to a gulag and was executed in 1938. Joseph Schumpeter is accredited with suggesting that these long cycles should be named after Kondratieff. He is also accredited with the economic phrase “creative destruction”, which also has some parallel with our central US story.

Anyway, the US became a superpower in 1950, post WW2.Source: me. OK, they had lots of trade before WW1,and a big navy, but remained isolationist until WW2 and Pearl Harbour. Then, sometime in my lifetime, they became very important economically and (up until the cliff-edge) were mainstay selections in every “prudent man’s” investment portfolio.

The period 1950 to 2008 (when we should have seen all this coming), puts us in line with the 40-to-60 year period of a Kondratieff Cycle. There-you-go: cycles and cliff edges.

Now add-in: the movement of investment from West to East, the underlying strength of emerging markets; the increase in thematic issues on investment (energy and urbanisation for example), the growth of more genuine boutique diversification stories (i.e. student accommodation), and you now have more reason to see America as an investment concept of less relevance. US Politicians hasten the pace of irrelevance. As Warren Buffet noted: “the investor of today does not profit from yesterdays growth”.