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Comment of the Day

June 11 2013

Commentary by David Fuller

Email of the day

On the US continuing to outperform
"Hope you had a great holiday. Been quite volatile in bond mkts. What is your take on the view that the US is due to outperform EM over the next five years? I have heard this several times the past week."

David Fuller's view We had a great time, thanks.

This is an interesting question and the US is currently outperforming most emerging markets. That certainly gives some validity to the question, although a lot can obviously happen over the next five years.

I do not wish to make a political point but my view is that US outperformance prospects over five years would be more certain if Mitt Romney had won the presidency. However, he did not and I understand why lots of Americans do not like Republicans in this era. Too many of them have an off-putting streak of provincialism and social intolerance, unlike the Eisenhower or even Nixon era Republicans.

I maintain that the US economy will not do as well under President Obama's leadership, although some redistribution of wealth is justified, in terms of fairness and social cohesion. I do not think that Obama has Romney's interest in or grasp of economic issues. Instead, he is more concerned with helping poor people by subsidising them.

Additionally, there is too much regulation in the US economy, in my opinion, and I was interested to see Jack Welch making the same point on CNBC this morning. Irresponsible and dishonest executives should be held accountable by either political Party but this does not mean that everyone else has to be held back by bureaucratic 'red tape'. I also think that US corporate tax rates are too high, causing many of America's Autonomies to keep considerable cash reserves off shore.

Nevertheless, the main reason for the USA's current outperformance is its huge advantage in energy costs relative to Europe and Asia, thanks to fracking technology. This is a triumph for US innovative private sector capitalism. It was initially opposed by the White House which favoured green energy for understandable atmospheric reasons, but regardless of the costs, inefficiencies and health hazards that we have seen with windmills.

The USA is building on its energy advantage and beginning to reverse its long industrial decline. American companies are beginning to increase their US divisions, and overseas firms are making inward investments in the USA. Consequently, the USA is now attracting more skilled workers. This is a virtuous cycle and the US is enhancing its lead in the crucial field of technology.

As a consequence of these developments, the USA is likely to remain highly competitive for at least a number of years. Nevertheless, other countries can also lower their energy costs by adopting the latest technologies. Good governance is the long-term key to outperformance, and where we see it in emerging markets, they too are likely to outperform.

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