| The big negative is Europe. And I am thinking about Germany more than anything. I listen to a daily Dutch-language podcast called NRC Vandaag that picks big issues to highlight daily. On Tuesday, they had one titled "Panic at Volkswagen: Is the German Economy in Danger?" And while the title makes you think this was about the German car industry, it was really an expose on the de-industrialization of Europe's onetime economic engine on multiple fronts. With German business confidence waning, the country is likely in a recession. This is a big reason that European inflation has now fallen below 2%. And it's also why we should expect more rate cuts from the ECB. But that stimulus won't be nearly enough to overcome Germany's manufacturing woes or the receding tide of fiscal policy. With a deficit of just 1.8% of GDP through the first half of 2024, Germany is running federal stimulus only one-third as large as the US. Even if the country increased its deficit to the European Union's 3% red line, it would probably be enough to escape recession. Bottom line: Germany may be more fiscally conservative than many EU countries. But as the largest economy in Europe, its moribund economy ripples across the globe as a drag on global growth. And other less fiscally austere countries like France and Italy have their own problems. So Europe isn't significantly adding to the tide of global stimulus. With the US, and now China, giving the world a boost, it probably doesn't matter. But it does mean European-based equity investments will lag behind for the foreseeable future. I see this as confirmation of the patterns that emerged after the Global Financial Crisis a decade and a half ago. The US cleaned up its banks quicker while Europe had a sovereign debt crisis. Meanwhile, the US tech giants helped markets there outperform. While Europe did whatever it took to overcome the pandemic, it has dialed back fiscal support. And so, US economic outperformance from its tech-heavy skew and deficit-fueled growth has led to yet more outperformance by US shares. Given how the tide of global stimulus is set up, this tilt toward US-centric investing won't change for at least a few months, if not much longer. We did see Moody's warn the US a week ago that if deficits keep piling up, the ratings company will be forced to downgrade the country's credit rating. "Over the long term, if fiscal policy does not respond to widening deficits, that would put increasing pressure on the triple A rating."
Does it really matter though? I would argue it doesn't. Interest rates for sovereign currency issuers like the US see their long-term interest rates determined mostly by expectations for future shorter-term rates. Look at Japan as an example. The Japanese government has the highest debt load in the G-7. And yet, because the country's central bank has kept overnight lending rates so low, long-term rates have been low too. In a worst-case scenario, US deficit spending could cause the economy to overheat, forcing the Fed to raise interest rates. And that would be the way the deficits hurt the economy, not a debt downgrade. I think the fiasco with the UK's 2022 mini-budget proposal is a textbook case of how things could unravel in such a worst-case scenario. That's unlikely because of the US's reserve currency status. But let's see what the next US administration proposes in 2025. Meanwhile, it's steady as she goes. It really does look like the Fed has achieved a soft landing. And with inflation coming down, we can expect it to cut rates even more going forward, a recipe for a continued boom. | 
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