US Struggles – Whumpf – 20,654%

Fri 07 Mar 2025

By Brian Dennehy

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QuoteWhen in India I met three American couples on holiday, all expressing the view that “we didn’t understand what voting for Trump would mean”. This has become a louder refrain in the last week within the US, let alone globally. But we are all stuck with him, so, as investors, must not let Trump distract us unduly.

Warren Buffett provides a decent starting place as we all try and be more measured and less emotive:

“We try to think about two things: things that are important and things that are knowable”

Right now these three things are important and knowable:

  1. We know that in the long run, if we start by investing where there is good value, we will achieve superior returns. 
  2. In the short run, we know we have to protect our investments against catastrophic falls. 
  3. History tells us that the US markets at current levels are subject to catastrophic falls (which for the sake of argument we can define as 50% falls, occurring over multiple years).

This is where the difference between risk and uncertainty raises its ugly head. Risks can be clear, evidenced by historical precedent, mathematical probabilities, or both. They are knowable. 

It is the timing of those falls which is a random event, this is uncertainty. The stop-loss manages that uncertainty – it is not a perfect tool to manage uncertainty, but it is considerably better than having none at all.

Looking at where there is good value, readers know we have been identifying these for a number of years e.g. Japan, UK smaller, China etc. But there was uncertainty on two issues. Firstly when will these seeds of future outperformance begin to germinate, let alone blossom. Secondly, how would they respond to those US-centric falls. 

Well, we can now see positive trends emerging in those areas. I have highlighted these in recent weeks, and there is more in this commentary from our sister company Dennehy Wealth. No longer can we only highlight where there is value. That value is now moving, in Europe, Japan, and China to name three.

In the case of Japan, it has been moving up since the 2009 low, but remained largely ignored by global investors until the last two years. Recently the Nikkei 225 has struggled to break 40000. Cue more huge purchases of Japanese equities by Warren Buffett, who reckons his company will be hanging in there for decades to come.

Turning that risk of catastrophic falls in the US, these obviously have not yet occurred, but the rumbling that you get before an avalanche, the whumpf sound, is very distinct. In particular, the impact that Trump is having on the US economy and US financial markets is most certainly not what he intended…

Ironically, the massed ranks of less well-off Americans, those which voted most enthusiastically for Trump, have been rapidly losing confidence.

For example, an array of recent economic releases are revealing sudden and alarming weakness. One of the most jaw-dropping was a Wells Fargo survey which found that 76% of Americans plan to reduce their spending in 2025 – that is very un-American!

There is much more. There has been an upsurge in Americans applying for UK and Irish citizenship. Applications for the UK were up 40% in the last quarter of 2024, and up 46% across 2024 for Ireland.

US hedge funds aren’t sitting on their hands while all of this is unfolding right in front of them. According to Goldman Sachs there has been a surge in bets on there being chaotic falls in a Trump-depressed US stock market, a huge turnaround in sentiment since November, when all seemed rosy, US Exceptionalism was forever, and, apparently, no one should invest their money anywhere other than the US. No sniggering at the back of the class!

Even the huge Vanguard fund management group, enthusiastic purveyors of S&P index trackers to unprepared investors around the world, has hinted at problems ahead, but are their ETF buyers listening? This from MarketWatch:

 

"Vanguard's model implies absolute catastrophe for those who invest in large U.S. growth stocks — the kind currently dominating the market. The firm sees them losing somewhere between 20% and 40% of their value in real or constant dollars over the next 10 years."


Our analysis, and that of quite a few others, puts the number somewhat bigger than a 40% loss, but let’s not split hairs. The US stock market is, on some measures, more over-valued than in 1929 and 2000, and we don’t need to tell you what happened next (we’ve done that many times before!).

Senior executives in US businesses have been voting with their feet, selling up their own shares even as latecomers to the US stock market party still insist on piling in. These insiders are selling more of their own company shares than at any other time since 1988. They are at the sharp end, they know what is happening right now, and have a decent sense of what is just ahead.

No two investors will react exactly the same to all of this. Some who hear the whumpf sound will increase their cash levels, even though the stop-loss has not been hit on non-US invested funds, and remembering that we do not know the extent to which such US falls, when they are at their most extreme, will impact other markets. 

This investor is arguably jumping the gun, and acting on the possibility of a random event. On the other hand, there is a very important behavioural issue here. Raising your cash level may simply mean you can sleep better at night – the need for peace of mind and a good night’s sleep is important. Balance here is not easy.

There are two Dynamic Portfolios up for review this month. The much-loved but very volatile 6 Month Bonkers was up 7% over the period, though underperformed the World Index (up 10%), having given back bigger gains earlier in the 6 months. Since inception in 1995 this Dynamic Portfolio is up 20,654%, which is 17x the index. 

Less insane, and more likely to have a central part in your portfolio is the Dynamic Asia and EM Portfolio. It was a very poor 6 months, down 12%, and driven by falls in India. Nonetheless it is still up 19x the index since inception, a gain of over 7,600%.

Wherever you are, I hope the sun shines for you this weekend. The Spring is now sprung.

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