Investors should differentiate between US equities and the US dollar. The case for equity outperformance is strong due to AI leadership and demographics. However, the dollar faces risks from fiscal unsustainability and geopolitical shifts, making it a less certain bet.
Contrary to hype, AI's productivity gains may only serve to offset negative growth pressures from declining demographics and climate change. The central case is that AI keeps the economy running at the same pace, not faster, requiring a 1% annual productivity boost just to break even.
The reliable diversification from government bonds seen since 2000 is not the norm. For 200 years prior, stock-bond correlation was mostly positive. Investors relying on bonds as a primary equity hedge are using an outdated playbook that is likely to fail in the new macro regime.
Unlike past automation waves that hit heavily unionized industries, AI is targeting sectors with low unionization rates, such as finance. This lack of organized labor resistance means firms can implement job-replacing automation faster, implying a higher near-term risk of significant job dislocation.
Gold's function in a portfolio has fundamentally changed. Due to geopolitical tensions and high sovereign debt, it should no longer be viewed as a mere commodity but as a non-fiat monetary asset and a true dollar alternative, altering its valuation framework.
Analyzing U.S. market history creates a false sense of security due to survivorship bias. After the U.S. and U.K., the next six largest markets in 1899—including Germany, France, and Japan—all went to zero at some point. This highlights the extreme risk in long-term, single-country bets.
The long-held assumption that high US corporate profit margins will revert to historical norms is likely wrong. Given the lack of political will to reverse pro-corporate policies and AI's potential to boost margins, strategists should now expect margins to remain elevated or even rise.
The concept of a "risk-free asset" is a simplification for mathematical convenience, not a reality. The safety of government bonds is entirely contingent on the prevailing political and economic climate. In today's high-debt world, assuming they are risk-free is a critical mistake.