Blain’s Morning Porridge 10th December 2024: Why the USA might remain extraordinary and the power of Tech!
“The man who says something can’t be done is generally interrupted by the person doing it.”
Valuations in the USA look insane. Surely stock prices must be a bubble? Maybe. Maybe not – the USA has created a self-driving technology machine, a conveyor belt of tech innovation that’s set to continue delivering value and corporate profits. To understand it – ditch traditional thinking about economies.
I am beginning to worry myself. I have woken up optimistic 2 days in a row.. Something must be wrong with me…
The reason for my insanely happy frame of mind is I’ve persuaded myself the world is not going to collapse, go to hell in a handbasket, and even if there is a massive risk-off correction in stocks – as just about everyone seems to fear in a random selection of year-end outlook pieces – fundamentally, the global economy looks better than we feared. Sure there are problems, but, heck, there always are… The question is; where is value?
What’s triggered me is the insane value of US stocks relative to the rest of the world. Surely it is unsustainable? How can US companies be worth some 70% of all corporates listed on global stock markets when the US is just 26% of Global GDP? Looks a bubble. But maybe not.
I’m trying to figure out if I’ve fundamentally misunderstood how the World works and is changing. When I started in markets it was the beginning of the everything Japan rally – the success of Japanese method and corporates, how the land value of the Imperial Palace in Tokyo was greater than the whole of California, and the irresistible upwards trajectory of the Nikkei. Wrong.
Then it was questioning whether Europe was on the cusp of something – the apparent success of Germany while Italy and France sort of overtook the UK, heralding European economic renaissance. Wrong. Didn’t happen. Now its China – which already looks Wrong. China will likely be overtaken by Indian growth in a few years – but while I love the people, for anyone to predict India becomes the global economic driver and powerhouse… well, it seems kind of unlikely.
I tend to look at all markets and assets in terms of how dangerously bubble-esque they look. Are they overvalued or cheap? Giving my son advice on this stock portfolio I told him some of Tech picks were just too richly priced – thankfully he stuck with them. He is not trapped in my confirmation biases about US stocks relative to the global economy.
My subconscious baseline has been to ask the question who or what is going to replace the USA – and therefore the dollar, and thus the insane value of corporate America. All empires rise and fall, and usually for predictable reasons; conquest, overexpansion, monetary debasement, debt traps, sheer exhaustion, or simply the rest of the world catching up. The USA can’t be any different.. surely?
Maybe it is.
There is plenty of evidence to suggest there are cycles in the affairs of men – 70-year Kondratieff or K-Waves – seeming to top and tail periods of technological and empire change. Others think there are shorter and longer time frames. It struck me that I’ve been exposed to economic thought about the end of the “American Century” for nearly 40 years. Hasn’t happened. Far from slowing, the USA races further ahead of us every single day, beating Europe in terms of growth, prosperity, earnings and wealth. Consistently. Upwards, ever upwards.
In terms of 2 K-Waves, the US overtook the UK economy sometime in the 1880s – a time frame which could have fitted with Japan replacing the US as the key economy in the 1990s/2000s (which proved a pipedream). American hegemony only really began in the 1940s, after the USA became the Arsenal of Democracy and replaced the exhausted Brits. That fits quite well as the second K-Wave after the growth of American productive capacity from the 1880s, and its economic and productive dominance by the 1920s – a period when the US remained isolationist. America only became truly involved as the prime global power after WW2.
Today there is a broad assumption the US will be replaced by the next global power as that second K-wave ends about now. All the signals were there. The rise of China, the decline in US power. But, as China wanes, there is no obvious replacement.
I’m now wondering if the power that replaces the USA will be the USA itself. Let me try to explain…
Everyone is very aware of how the Mega 7 US tech firms have driven the value of the global economy – and the share of stock market upside they represent. Their value within the US and global stock markets is extraordinary and unprecedented. The earnings they kick off are unparalleled – about 3 times the rest of the market. Their stock market values have thus far proved anything but a bubble. That’s because all these firms – yes, even Nvidia – have longevity, which they have earned by constantly evolving. (Maybe not Telsa – but that does not mean it is not also extraordinary.)
Microsoft was the most valuable company on the planet way back in 1998. 20 years is a long-time in Stocks – especially in a sector that undergoes as rapid change and evolution as tech. In 2005 a few years after the reversals of the dot.com crash, the top 50 companies in the US included Microsoft, IBM, Cisco and Intel. By 2015 the list was topped by Apple, Alphabet/Google, Microsoft, Meta/Facebook, Oracle and Amazon. Oracle drops out and Nvidia appears in 2020. Today the Mega 7 stocks hold the top places.
What’s surprising is how long these Tech companies have dominated – only the retailers and oil stocks have shown the same kind of longevity, and they exist in very much more stable state demand driven sectors. Tech has to create its own demand by constantly evolving.
That’s the clue. Evolution.
For the last few years it’s been the rise of AI that has fed the ongoing expectations for the growth of tech – creating multiple new product streams and investor demand. It also reveals the multiple directions computing power could drive the economy – from self-driving cars, the meta-verse, video-conferencing, solving problems we never even dream about.
This morning Google has announced a new chip that brings true quantum computing closer. They say it’s the equivalent of the first nuclear pile going critical back in 1942 as part of the Manhattan Project to build the atomic bomb. It’s going to require billions of dollars to commercialise what the Willow chip promises – but that money will be spent, it will happen, and qubits will become real. It will give computers calculating power beyond our wildest imaginations.. (Which is what the infamous IBM cost accountant who concluded global demand for computers might be a few dozen each year, did not have the imagination to grasp.)
Quantum computing will be huge and change the world. And it will likely happen in America, because it has the critical mass to make it happen. Its not just attracting the best and brightest global minds, but the thing about Americans: they still have the imagination to try to do stuff. While Europe is drowning a gloop of bureaucracy, they remain intellectually curious. They are still evolving – and the result is their economy grows in fashion we’ve never seen before.
The rest of the world, from Europe to Asia Autocracies tends to approach problems from a bureaucratic perspective: Why should we solve this?
Americans ask how do we solve it?
Which might explain why Elon Musk could only thrive in America. Or why the USA has spawned such a hierarchy of technocrats who can now afford to keep the USA ahead in tech by acquiring foreign tech at early stages. I am no fan of Elon Musk, but I do acknowledge he’s special. His Department of Government Efficiency may (or may not) be real, but it hints at a real discussion within the economy about what the division between what the Government should be doing re the provision of public goods, and how the economy should be freed to let entrepreneurs (who have the money) to run riot to create wealth, value and growth…
Gosh.. am I really writing this? The last card-carrying communist in the City of London? I better get to work and remind myself how difficult the world really is…
Out of time and back to the day job…
Bill Blain
Author of the Morning Porridge, and CEO Windshift Capital
7 Comments
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To say that the US is the world’s best stock market is, I am afraid Bill, worthy of one of your NSS awards. It has been and will be the case until EVERYONE has got a proper weighting. Mine is 90%, what is yours? In fact, ultimately, why does the world need more than one stock market anyway?
The point my dear Julian is that I am a Doubting Thomas… It took a revelation to understand why. I can’t just accept numbers – i need to know why it is the US is worth so much more..
And its about national character, govt and the way the economy is motivated.
If I may add, it’s about abundant affordable energy. The US understood that energy independence is worth more than the sum of its components, and that physics wins every game against platitudes. Fighting intermittency is expensive.
We Europeans, we have a problem with mistakes, we have a problem with admitting them, we have a problem with dealing with them, we never move on. We stick with them for far too long and then say it’s too late to do sth about it. Bankruptcies take ages to resolve, whereas Chapter 11 filings allow people to move on quicker. That’s why European companies never take any risks, for fear of a bankruptcy and losing precious years of growth and development in the process. We never forgive any mistakes. People are still talking about stuff that some Austrian guy did over 80 years ago and that penalty that Southgate missed in 1996. It’s our culture. Americans already forgot what happened during the first Trump term. Let’s give the guy a 2nd chance
I think you’ve hit the nail on the head there Yves.. yes.. we are two wrapped up in what we are. The Yanks are what they might be.
I was thinking that as I wrote the article this morning…
An Englishman transported from 1900 to the current day to a normal english town (Not London) would immediately recognise he was at home – he would wonder if we’d lost a war as the place looks so run down, but it would be England.
A German transported to downtown Germany would recognise it as intrinsically German..
A Frenchman would be able to complain about the same stuff today as he complained about 120 years ago.
A Chinaman would be amazed at the buildings and infrastructure that has sprung up, but would immediately recognise the culture has not changed..
But an American – the NY skyline would be familiar, but the neighbourhoods and people would be utterly different – yet utterly the same, utterly focused on being Americans which today is very different form what it once was.
The USA as the world’s largest emerging market? A propos your point on evolution.
A constantly evolving economy…
Never underestimate the ability of America to reinvent itself . Why? Because it’s not hamstrung by its history or lack thereof compared to countries such Japan and the UK. Japan – incredibly forward looking and innovative yet at the same time incredibly backward which often prevents itself from moving forward. For example, in 2008 I still had to have an official ink stamp with my Japanese name imprinted on it to take money out of my account .