Can Long-Term Economic Bull Runs in the US Be Sustained?

From 1857 until 1945, the durations of expansionary and contractionary phases of the US economic cycle were short. However, the trend shifted after 1945. Since then, the duration of the expansionary phase has been increasing while contractions have been decreasing, with the exception of the Global Financial Crisis (GFC) in 2008. Nonetheless, I believe that in the future, we may not witness above 90-month bull run. Below is a high-level analysis of the reasons for the post-World War II secular bull runs and why such prolonged periods of growth are not expected in the future.

1945 to 1970: Post-World War II Era

? Bretton Woods Agreement: Established a stable international monetary system.

? Technological Advancements: Led to increased productivity and economic expansion.

? Tax Cuts During the 1960s: Stimulated economic activity and prolonged growth.

? Baby Boomers: Increased demand for goods and services.

? Marshall Plan: Aid to rebuild European economies, fostering trade and interdependence.

? Decline of UK Economy: War debt, colonial withdrawal, and pound devaluation diminished UK's economic appeal.

1970 Onwards: Post-Bretton Woods Era

Abolishment of Bretton Woods: Adoption of floating exchange rates allowed flexibility in monetary and fiscal policy.

Petrodollar System: Surplus revenues from oil-exporting countries were invested in U.S. and European markets, fostering growth and providing liquidity.

Limited Growth Avenues: Economic growth primarily concentrated in the U.S. and select European countries, with capital flow from non-oil-exporting surplus nations, like Japan, mainly directed towards these regions.

Technological Advancements: Significant economic expansion driven by innovations in internet, medicine, aerospace, and computing since the early 1990s.

Financial Innovation: Development of complex derivative, ABS, MBS, and options products attracted substantial investment into U.S. financial markets.

EU Budgetary Constraints: Strict budget rules limited innovation and supportive economic policies within the European Union.

Japan's Economic Stagnation: Prolonged recessionary spiral experienced by Japan since the late 1980s.

End of the Cold War: Shifted geopolitical and economic dynamics, influencing global capital flows and economic trends.

Current & Future Economic Trends Affecting Capital Flow to US Markets

Middle Eastern Investments:

• Facing low oil prices and demand pressures, Middle Eastern countries are increasingly investing domestically to diversify their economies.
• There's a shift in investment policy towards an EU-style economic block involving Middle East and North African countries.

Fiscal Constraints in the U.S.: The U.S. faces limited fiscal space compared to previous periods, potentially impacting its ability to take the lead in building infrastructure and buffer for innovative technology.

Attractive Alternatives for International Capital: China and India have emerged as key destinations for global investment, diverting capital flows away from the U.S. and Europe.

Decline in China’s Surplus Capital to the U.S.: Various factors have led to reduced Chinese investments in U.S. financial markets in recent years.

Concerns over International Investments: Actions such as the freezing of Russian assets have raised concerns about the security and effectiveness of international investments.

Domestic Investment in AI and Technology: Countries are focusing on developing their own AI infrastructure, potentially impacting tech-related investments in the U.S. and EU in the long term.

Alternative Energy and EV Adoption: Significant growth in Asia and Africa, particularly led by China, in alternative energy and electric vehicle adoption.

Emerging & Developing Market Growth Potential: Emerging and developing countries, with their young population and low labor costs, offer better risk reward potential for investors.

Access to Raw Materials: Initiatives like the Belt and Road are increasing China's influence in low-income yet mineral-rich countries, potentially reshaping global supply chains.

AI Promises & Reality: The impact of AI on productivity remains uncertain, with theoretical use cases but no clear roadmap. Excessive expectations on AI for future growth may not materialize in the near term, affecting investment decisions.