Mackenzie strategist laments: Is there still regulatory mechanism in the United States? Investors have nowhere to escape!

Morgan Stanley's global strategist Victor Kerr wrote that unlike President Trump's first term, the current government has a broader support base, forming a huge alliance composed of various different demands. This nearly unrestricted and unconstrained executive power provides convenience for radical reforms. In this atmosphere of change, regulatory mechanisms either fail, are assimilated, or weaken resistance, making election cycles and markets the only remaining regulatory forces. Market turmoil prompts investors to reassess the fundamental principles of their investment strategy, from the role of the US dollar to the ability to forecast economic cycles, to measuring neutral interest rates and risk premiums, etc. As the differences between the United States and the rest of the world gradually narrow, investors are starting to reconfigure their portfolios, channeling funds to other regions, especially the Eurozone and China. Note: These communications articles are prepared by Morgan Stanley's sales department and traders, and do not represent the official research findings of Morgan Stanley's research department. I. Does the US still have regulatory mechanisms in place? During President Trump's first term, investors had a relatively easy time. The policy focus at that time was on tax cuts and deregulation, and the capital markets played a restraining role, curbing some extreme tendencies. People also believed that "there are adults in the room controlling the situation," believing that bureaucratic institutions are capable of resisting or "delaying implementation" of ideas believed to be counterproductive. However, the situation in President Trump's second term is different, adding a great deal of uncertainty to investment prospects. Unlike President Trump's first term, the current government has a broader support base. Although the population in areas that voted for Trump is still a minority in the country, accounting for about 38% of GDP, there has been an improvement compared to 2020, when areas supporting Trump accounted for only about 40% of the country's population and 30% of GDP. Trump received support from most voter groups, including the younger generation, minorities, blue-collar workers, and the tech industry. This has formed a huge alliance composed of various different demands, which have one thing in common: they believe the current system is dysfunctional and are receptive to radical change. The alliance is mainly composed of three groups. First, the tech elites, who have a global vision but hope the government will grant them more freedom to create a tech paradise with rapidly decreasing marginal costs. They support open immigration policies, even experimenting with universal basic income (UBI), while also working to eliminate resource wastage. Second, the nationalist populists, who are trying to recreate an idealized scenario from the past when one person's wage could support the whole family, the US was a manufacturing powerhouse, and the middle class was prosperous. This is a socially conservative and narrow group aiming to restrict immigration, achieve US self-sufficiency, and avoid foreign entanglements. Many of them also support unions. The third group hopes to rebuild the global economic system, including better matching savings and investment flows, thorough restructuring of US debt, and suppressing government intervention, which is more in line with traditional conservative principles. Not surprisingly, many of these demands conflict with each other. Is the government in favor of or opposed to unions? The answer is both. Does the government want a strong or weak US dollar? Again, the answer is both. Is the government supportive of immigration or advocating for closed borders? The answer is still ambiguous. Today, these differences are temporarily suppressed due to the common enemy concept. To establish a new order (whether narrowly nationalistic or technologically dominant), all sides believe it is necessary to dismantle the existing order (thus the call for "purge"). And the single power accepted by all sides, namely near-unrestricted and unconstrained executive power, provides convenience for radical reforms. In this atmosphere of change, regulatory mechanisms either fail (such as bureaucratic institutions, legislative bodies), are assimilated (such as "there are no adults in the room controlling the situation" and limited resistance from businesses), or weaken resistance (such as judicial institutions). This makes election cycles and markets the only remaining regulatory forces. As the stock market dips and the US dollar weakens, Americans' wealth may have shrunk by about 10%. In addition, consumer expectations for employment, income, assets, and inflation are deteriorating. Given the interdependence between the real economy and financial markets, even though people's tolerance for suffering is higher than in Trump's first term, there will inevitably be a tipping point. America's advantage has not disappeared, but is gradually weakening, and currently no other country can replace the United States. Without the US as a "magnetic north," the world will fall into chaos. S&P 500 Index vs. MSCI Global Index - The beginning of a new trend? (S&P 500 Index compared to MSCI Global Index's relative performance) World Business Federation - Confidence in stock price increases significantly decreases University of Michigan's Consumer Inflation Expectations - Marked increase US independent Business Federation's Capital Expenditure Expectations - Decline II. Investors have nowhere to escape, nowhere to hide Market turmoil prompts investors to reassess the fundamental principles of their investment strategy, from the role of the US dollar to the ability to forecast economic cycles, measuring neutral interest rates and risk premiums, etc. This is consistent with our view, that current risks have spilled out of the financial system, spreading into unpredictable and irrational policy changes in the political sphere, geopolitics, climate, healthcare, etc. The "Day of Liberation" event more clearly reveals this reality than any other recent event. Investors no longer have clear core bases when building investment strategies as the US is dismantling the pillars that support its dominance and the attractiveness of US dollar assets. Where should stock investors go? As the differences between the United States and the rest of the world narrow, investors are starting to reconfigure their portfolios, channeling funds to other regions, especially the Eurozone and China. Considering the lower risk premium of the S&P 500 Index (around 3-4% after adjusting for inflation, compared to 7-8% for the Eurozone and China), this adjustment is reasonable and likely to continue, with the magnitude of the adjustment depending on the direction of US policies and market performance. Note: The information provided in this content represents the author's personal views and does not constitute investment advice.Policy. In extreme situations, the valuation may even tend to balance.However, even as investors adjust their investment layouts, they are also aware of the structural problems facing the Eurozone. For the Eurozone, it is unable to increase labor while increasing capital, and the type of capital being increased is incorrect (missing out on the information age). Total factor productivity (TFP) has failed to improve. The region is also a concentration of all geopolitical and social risks, and its enterprises face great difficulties in improving Return on Equity (ROE) or cash flow. Indeed, increasing public expenditure should promote economic growth and reduce trade dependence, but this transformation process will be full of challenges. On the other hand, the United States has increased productivity while increasing labor and capital input. The US has the highest quality portfolio of tangible and intangible assets in the world, and benefits from a large domestic market with low external market dependency. Despite its self-inflicted wounds, the US economy, its private sector, and its public sector remain strong, with financing and stimulus capabilities second only to China, and quite sufficient. However, trade, immigration, and public policy (unless policies are reversed) could push up inflation and weaken economic growth. Depending on the extent of economic slowdown and the independence of the Federal Reserve, this could lead to uncertainty in the US between suppressing inflation and injecting liquidity into the financial system and providing support. Some investors are redirecting funds to smaller emerging markets in the hope that a weak US dollar will provide these markets with greater policy space. However, most emerging markets rely on trade conditions, strong cyclicality, commodity and capital free flow, and moderate market fluctuations, none of which are likely to be realized in the short term. Investors have no escape, no hiding place, and most short-term trades may fail even before execution. The rationale for shifting towards defensive or cyclical assets is also incomplete, as the prospects for both types of assets are uncertain. In the short term, there are reasons to further reallocate assets to the Eurozone, China, and India. However, once there are signs of policy shift, the structural advantages of the US will drive its asset prices significantly higher. The US may no longer be as prominent as before, but neither will other countries and regions. Fed: Raise or cut rates? 3% or 4.5% interest rates? No one knows Real GDP growth composition (adjusted by purchasing power parity) (%) Output per employee (purchasing power parity, with the US as 100%)