Published on March 14, 2022
The US will be the new UK of this century
by:
Abhishek Katta
My friends, colleagues who know me, are aware, I have discussed this possibility for the last 5 years or so.
I love capital markets and I enjoy analysing the co-relation of Capital markets and Geo-politics.
Today, In this article I am going to share my views on why I think “ The US will be the new UK” of this century. It may sound simple but if you start to think about it and then its impact on us, overall, you will find this interesting and possibly you will prepare yourself for the consequences it may have on :
My thought process is based on:
Let’s being with the US Debt cycle. – US Govt has been running on high debt levels for a long time and the pandemic has accelerated that debt to an extreme level.
As of date, the federal debt to GDP stands at 125%.
And the total debt (States +Fed) = 139%
For starters – This is a comparison of a county’s GDP (produce) vs how much it owes to its lenders. Simply put – a broad comparison of your income vs how much you have to pay.
It can be said that almost all countries run on debt so there is nothing new in it. The US as a country has never, ever defaulted on its debt and as such rates it as the heaven for creditors; fair enough but this is not the problem, but it starts from here:
If you look at the composition of Federal Debt vs state debt, you will notice majority is Federal and it makes sense too, however, the political situation in the US is something that can trigger a bigger problem for the US. I am not saying it will happen today, but certainly their possibilities of something spurring up over the next few years where states may rebel against the federal government. Even though there is nothing new in it, but reasons will be different this time. Debt and re-payment will be one of them. Until now, the US was influencing geopolitics all the way, but with China emerging as the leader of the “other side” its influence cannot be ruled out in the domestic politics of the US. The same logic applies to Russia and its influence. Technically and ultimately, the USA is a “federation of states” bounded by contractual agreements, and I need not mention – Agreements are bound to be broken one day
Total debt of US to external parties(countries) is (the largest creditors of US are Japan and China
The relationship with creditors is key for any successful economic operation and while it’s good with Japan, the relationship with China is already bad and there are no hopes of a revival in the next few years.
Keeping it simple – China can play anytime by redeeming(or any other means) the US Treasures that it holds. It will put the US economy under great pressure.
In the polarized world that we see now, more and more – In a coordinated effort, China can use its influence and make the game bigger and more problematic of the US.
In simple terms – If China and its allies ask for its money back from the US, what will happen?
The current economic situation doesn’t permit the US to pay from its pocket. So the only way would be “another loan” from the world.
Imagine this situation in a highly volatile Geo-political world.
Another possibility could be before China starts the action on Taiwan – Will they not want to secure their loan? Unlike Russia, which is bound to lose their US$ 600b ( for the moment ), China will (knowing them) certainly play smart here.
Last but not the least, China led the group and the others who are in the Neutral group, if take sides with China, then it’s the end game for Dollar.
| Groups | Debt in Billions(US$) |
| US Lead | $3,880.70 |
| Neutral | $1,754.10 |
| China Lead | $1,614.30 |
| Not known | $490.30 |
| Grand Total | $7,739.40 |
In a situation, US participates in a WAR, it would only be with the group led by China, supported by Russia, you can imagine the situation that it would lead to – World will be divided into two camps- led by China and the other would be led by the US. Current impacts of Russia’s SMO and covid crisis were just a Trailor to what the world and the economy would face.
The Tech sector and Tech blue-chips will be the biggest losers in this game. The sanctions, blockages, etc. will have the worst impact on their prices.
Last US elections were a testimony of the situation of US politics – Any war/conflict like scenario will make the situation very difficult for the US.
Capitol Hill riots and the Black Lives Matter movement also sheds the light on the socio-economic condition of the country and as such, US direct participation in a WAR will be a troubling scenario for the economy, stocks and Dollar value.
In simple terms – global economics will be shattered.
There are enough reports that state that US stocks are overvalued. Fundamental indicators like P/E ratios, Projected earnings, Debt-to-EBITDA ratio and many more have been on fire and ringing alarms.
Interestingly, you would have noticed:
Yet, there is a lot of enthusiasm left in retailers and speculators where “buy the dip” phycology is in the play. Financial media & YouTube channels are full of such articles and discussions where they are guiding and people are liking ‘buy the dip’
“This will end in a mess”
Just on Facebook (FB) – I have been following it for quite some time and have been predicting the price levels and the anticipated falls. You can review the initial projects that I made back on 13 Nov.2020
and detailed analysis here on Dec 29 2020 :
Overall market sentiment – Recent COT data ( Feb 2022 ) suggests that large speculators are not giving up and are all for buying the dip. They have been net long and created a record high over the last 15 years.
From a Technical and Structure point of view, things are looking very interesting and yes, interesting is not always positive. Here is my understanding of where we are in markets today and possible moves that can be expected.
The chart below is an attempt to illustrate where the major US indices (S&P, NDX and DJIA) are standing in an overall bullish cycle. After every bullish cycle, the markets will enter an area of consolidation or correction. This time, looking at where we are the markets are either:
The historical valuations, the retailers’ maniac participation and a conversation around the “93-year cycle” compelled me to zoom out and look at the broader market cycle and the picture isn’t better there too. Cycles in conjunction with Fibonacci levels are showing a horror story for bulls.
Let’s review them here as follows:
The bullish cycle that started from the depression of (1928-1932) is also approaching its end. The only question that remains is if we have reached the top or we are about to be there. While it is tricky to call it out, my bias remains that we will have one more upside before we start the larger fall, however market sentiment is the only driver and if shifts in other direction, which can certainly be calculated using price action over the next few weeks, we will get a clear picture.
A: Price moving above 4583.15 in SPX and a sustained close above it on a 4H basis would be the indication that SPX will make new highs before we start the larger degree down.
The bullish cycle started in 1837 (S&P) had covered a lot in it. Typically called as Super Cycle bull saga – it is witness to the Great Depression (1928-1932), Nixon Shock ( 1971 ), Inflation and US Gold standard removal, Dotcom bubble 2001 and Subprime crisis of 2007-2009.
This bullish cycle is reaching an intermediate top but not the ultimate top yet. Looking at the chart below, you will notice:
As such one should buy/invest when the markets are closer to lows, however, these lows will/should be much lower than what is generally expected. We will continue to monitor structure and predict price levels that could be safe entry points.
The time cycle calculation based on a shorter time frame suggests that we will see some sort of lows in 2022 – 2023.
In a conversation, I was told about a study done by Late BV RAMAN on US’s NYSE and he was of the view that there are various astrological patterns that he has decoded that he was able to associate with major Bull and Bear markets of the US. Out of those, the most interesting pattern was of this 93-year cycle. His calculation suggested that the US sees a major economic crisis every 93 years due to specific combinations.
First major economic crisis was in year 1837+93=1930 + 93 = 2023
Even though the available data points to me are not expansive but when this similar period is calculated by Mathematical equations using Fibonacci variables, in conjunction with market cycles and the output is the same and as such “ this becomes very, very interesting.”
This Index comprises of top 500 US companies with broad sectors covered
Possible support areas are highlighted in green channels when market sell-off intensifies as we expect.
2. Nasdaq 100 – Long Term outlook
This index comprises of top 100 tech companies listed in US markets. It specifically covers only the Technology or related companies.
The overall bullish structures seem to be intact from a mid to long term perspective. A sharp correction is expected but then it should eventually take prices higher.
The series of chars above suggests that China’s composite index peaked in the year 2007 and since then it has been consolidating while the tech stocks are close to the bottom of their bear markets.
For the same period, US stock markets have started their bull run from 2009 and coming to a possible conclusion. Once the China stocks complete their consolidation, we can expect a sharp rise in the prices whereas the US stocks could be consolidating or would be in a bear market.
Russian markets have been in consolidating after this hitting its peak in 2009. The consolidation period seems to be nearing its end. While the probability of markets completing their bear market is high, there are 2 possibilities for the next move:
Buy the fear, Sell the greed
Warren Buffet
Emerging markets were also consolidating since their peak in 2007 and completed their bear market cycle in March of 2020. Since then, they started their new bull run and now completing their intermediate correction with Russian-Ukraine crisis and will eventually continue their bull run.
Gold prices are seen as an indicator of fear in the world. The recent price spike during Russia-Ukraine crisis and it’s reaction at the all-time highs is an indicator of the coming times in the :
With continual evolution in geopolitics, a lot has changed and a lot more is yet to come.
Geo-politics is forcing the world to divide into 3 distinct groups – US-Led, China led and Neutral. These groups are led by countries that have different ideologies and interests.
With the US-led group, NATO is trying everything possible to keep its supremacy as a military superpower backed by economic might, and the US, in addition, wants to continue to keep its supremacy over the world as “World Leader”. This world order is challenged by China and its allies. With China’s strong economy and untested military might, it believes that it has and will continue to evolve as the next Superpower. The consequences of such conflicts can be seen nourishing in the latest Russia – Ukraine crisis.
US companies have been leading the world with their products, services and technologies. Amazon, Google, Facebook, Boeing, Tesla, Apple, Intel, NVIDIA, Coke, Disney, Salesforce, McDonald’s, Netflix, Uber, Visa, Mastercard, etc. have dominated their respective markets for decades. At the same time, China had played smart and didn’t allow such American companies in the key sectors, instead created their own companies which would provide similar or better services than their American counterparts – eg. Alibaba, DiDi, Baidu, JD, Mei Tuan, and many others.
With the increasing divide and its consequences, you will notice that the US and the Western countries have imposed several sanctions on Russia. It now joins the list of previously sanctioned countries like Venezuela, Cuba, Iran, North Kore, Sudan, Syria, Belarus and many others. Many US and European companies moved one step ahead and pulled themselves out of the Russian market to isolate Russia. While it may have little impact on their balance sheets, it will have a larger impact on their market dominance.
Noticeably, China and its companies will get a chance to fill this vacuum created by Western countries. This will bring Chinese and other allied countries and their businesses on a global stage. Russian people will still get what they need but from Chinese or domestic companies.
Fintech companies from countries like China and India will certainly be big beneficiaries of this.
US sanctions will stop transactions in US Dollar but will have little impact on transactions happening in currencies like the Renminbi (CNY). This will provide a Golden chance to China in realising its long-standing dream of breaking the hegemony of the US dollar and bringing CNY to the global platform as an alternative to the US dollar for international transactions. If this happens, it will be a big blow to America’s economic supremacy. Their sanctions so far have been an effective deterrent because of US Dollar is a reserve currency and standard for International transactions. Availability of alternatives will be a big blow for them.
It plays such a critical role internationally in socio-economic international politics. The narratives on social media can divide or unite people and there have been numerous examples of this in the past. Isolating Russians with US social media will be a bigger problem for the US and the West than for Russians.
How will the US provide a counter-narrative to Russian people without its social media? Setting aside the financial losses to such companies is just like losing the biggest leverage to your enemy. Today it’s Russia and China, next will be many other countries who will reply on alternative platforms which will reduce the reliance on US companies further.
The world is moving to EVs and supremacy in Chipsets will be the biggest asset for any country for the coming few decades. Russian crisis and sanctions will also provide another opportunity to the Chinese companies in the EV segment and more importantly the chipset space. China is at the cusp of being self-reliant on chipsets (Thanks to US sanctions on Chinese companies in this space since 2018). As soon as it’s ready, it will provide another great opportunity for Chinese companies.
With the ban on Russian Oil imports, the world’s largest importers like China & India will not be able to import Russian oil in US Dollars. Russian on another hand to survive will/should offer oil on discounts and in such cases why the transactions would not happen in CNY, INR or Ruble? Iranian oil with India and China has a precedent for this. And yes, it is also important to note that OPEC leaders (Saudi & UAE) are not on great terms with the current US establishment.
Fed’s biggest challenge today is to manage inflation which is running at 40 years high. To add to the despair, Oil prices are shooting up like a rocket and will soon add fuel to the overall situation. In all sanity, Fed. will be forced to increase the interest rates at an unprecedented level. Such a situation will not only be extremely negative for the US economy but will also have a ripple effect in other areas like wages, housing, debt repayments and others.
By the way – the US Housing price index is showing signs of exhaustion, and if this is correct, we should see a dramatic drop in home prices in the US. This will certainly have an impact on other major economies which are closely tied to the US.
The way the human body becomes resistant to the frequent use of antibiotics, the world will become resistant to US sanctions. The fate will follow accordingly
After evaluating all the factors discussed here, I firmly believe that :
