Suite Madame Blue

As today is the 4th of July, a day where Americans celebrate their independence, our focus this week is on the state of affairs down south. The United States represents more than 50% of our equity pool and 62% of global markets; needless to say, what happens in America doesn’t necessarily stay in America.

Economy

Beyond being the largest economy in the world, America has been the best performing developed economy for some time. The start to the year, however, has delivered mixed signals: GDP dropped 0.5% in the first quarter of the year, housing starts are down double digits year-over-year, consumer confidence, while up from its April low, remains weak. Unemployment dropped to 4.1% last month, the statistical improvement was due to a drop in labour force participation. On the bright side, inflation appears contained: 2.6% over the past six months and 2.4% over the last year.

What’s more surprising about the inflation reading is how little inflation has been impacted by tariffs-at least so far. The Fed is walking a tightrope: it wants to be prepared in case inflation picks up again in the second half of the year, but also needs to remain ready to support growth if momentum continues to fade. A strong jobs report this week helped lower the odds of a July rate cut to nearly 0%, which has already drawn the ire of the President.

BBB

America is in a bit of a bind because of its uncontrolled spending. Neither political party has taken the issue seriously for years. While some of the deficit spending was entirely justified (think financial crisis stimulus and COVID support) most of the cumulative deficit has come from America’s wars at the start of the century and the subsidization of lower and higher income earners via wealth transfers and tax cuts. Thanks to the global role of the US dollar, America has been able to run large deficits for decades. But eventually, it will hit a wall, servicing the debt will become a problem, and markets will care.

Where that wall lies is harder to pinpoint. But the passage of the Big Beautiful Bill (BBB) is pushing us closer. America’s political dysfunction has turned these large bills into the norm. This one is no exception. To start, we have an extension of the individual tax cuts from the Tax Cuts and Jobs Acts of 2017. It is important to explain that this alone will not worsen the current financial picture, although it likely will not improve it. Also, while it will not hurt economic growth, it also will not add to it as there is no additional benefit to be gained from maintaining the status quo. There are small additions like no tax on tips and overtime pay as well as a bigger standard deduction for those receiving social security but these are set to expire in 2029.

What is most concerning is that an estimated 12 million people would lose health insurance through a variety of cuts. The Congressional Budget Office estimated that, from an earlier version of the bill, the poorest 30% would be worse off than before while the richest 10% would see their incomes increase by 2.3%. Let’s set aside the human cost for a moment and focus on the economics; low-income earners spend everything they earn while the top 10% of earners saves 12% of their income while the top 1% save close to 40%. For an economy that is 70% consumption based, one cannot help but question if moving dollars from one side of the ledge to other would yield better economic results.

The CBO also estimates that this bill will add $4.5 trillion to American debt over the coming decade. Treasury Secretary Scott Bessent challenges that estimate by saying it dramatically underscores the growth that this bill will unlock. The BBB, however, is largely a continuation of existing policy so extending it will not generate any significant, additional growth. While tariffs will raise some additional income, the estimated $200 billion per year that they will bring is a fraction of the $1.8 trillion budget deficit and that estimate does not account for the negative impact of tariffs on economic growth.

Game Over?

While there is a lot that concerns us about the current state of America, it would be a mistake to write them off. Its lead in AI will continue to power growth through investment and productivity gains, the country continues to be a magnet for capital and labour (even if some will be deterred to move to America due to the sudden shift in policy) and the country possesses a culture of consuming, investing and inventing that few can match. We may have reduced our weight in America, but we are a long way from divesting entirely and we expect the country to be our largest geographical exposure for the foreseeable future.

Earlier in the year, while digesting the new direction that the country was taking, we took the opportunity to consult with some of our institutional contacts about what was going on in America and if they saw a difference in their world. We spoke to a director of $200 billion Swiss fund who said America was just too big and important to ignore. We listened to an investment strategist, this one from a trillion dollar asset manger in America, shared similar confidence in America’s investment attractiveness even if we did experience a volatile environment earlier in the year. While many initially thought America was going off the rails, it now looks more like a speed bump.

As risk assessors, we cannot ignore the rising risks of fiscal indiscipline and political dysfunction. As investors, however, we need to balance this risk assessment by embracing the hard facts and following the money. It is noteworthy that the American dollar has poorly performed this year, the worst start to the year since President Nixon moved America off the gold standard. This reflects the world repositioning its allocations in the face of new information, which we believe adds some weight to the idea that confidence in the US has dipped a little. This too we expect to stabilize in the coming months, so long as there are no new surprises from the White House.

Healthy Distraction

I golfed nine holes this morning at 6am with my brother and a good friend of his. I’m not an early morning person, but for some reason, if I golf early before checking my email, reading the news or getting on the phone…it seems to work.

It had me thinking; how much of our performance is shaped by our state of mind? I came across a study showing that peppermint tea increased cognitive function for a control group. This sent me down a rabbit hole and I (unscientifically) concluded that it’s not the tea- it is the act of doing something pleasant before something cognitively strenuous that helps.

So, my wisdom of the week: the way you feel impacts the way you act. Before you tackle your next demanding task, set aside two minutes (or ten if it’s Pink Floyd) to listen to a song you like or snack on something you really enjoy before you take on that challenge.

If anyone gives it a try and sees a difference, let us know.

Have a great weekend!

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