Investors are facing the biggest global economic shift in a generation as the post-second world war order is being dismantled.
This is not happening by accident but by design, according to Brian Dennehy, managing director at Dennehy Wealth. “All of the elements that have been in place for decades are now collapsing. It’s the biggest shift in a generation," he said. "[Current] US policy is to deliberately collapse the post-war infrastructure.”
The implications for investors are seismic – from debt and demographics to geopolitics and technology, the foundations of market stability are cracking. Dennehy’s message to investors is blunt: the US is no longer the safe haven it once was.
Many of the structural quirks of the US market that were once overlooked in the name of American exceptionalism may no longer be tolerated.
“The US has some exceptional features, but it’s not that exceptional,” he said. “Be wary if you have assets of one kind or another in the US, because that will be an issue at some point.”
Equity valuations
One of the most glaring concerns is valuation, particularly for the stock market. Equities in China, Japan and the UK remain significantly cheaper than the US. For example, the US market’s price-to-book ratio is still more than three times higher than Japan and China, and two and a half times that of the UK.
“This just doesn’t reflect where the better returns will be. That’s the opportunity. The risk lies in staying overweight the US,” said Dennehy. “In the years ahead, the best investment returns will be moving east. And this isn’t reflected at all in valuations.”
The shift is already visible. Capital is flowing out of the US, just as retail investors are piling in, said Dennehy.
The period we're in now is a transition, as money is moving from the hands of the institutions to “weaker hands”, he added.
“What we can expect is hesitation and volatility. After that, we’ll get the bear market, with the sharpest falls yet,” he said. “Then, eventually, a reset and recovery will come, with some of the best opportunities of your life.”
US bonds are also a concern
In fixed income too, a crisis has been brewing for decades and is now hitting the breaking point. US treasuries are facing a trust crisis as countries that once funded America’s deficits by buying treasuries – China, notably, but Europe too – are stepping back.
“People say the US will never default, but the world isn’t so sure anymore,” he said. For example, president Donald Trump could halt payments to Chinese treasury holders, which would be an effective default on the debt, if political tensions with Asian powerhouse escalate to catastrophic levels.
“The risk isn’t just financial – it’s about control and potential confiscation,” Dennehy said. “As Trump and the authorities in the US see all this money leaving, what they [could] do is introduce capital controls to restrict that money leaving the country. If history is a guide, that's almost a certainty.”
This is just one of the reasons why long-dated treasury yields have been rising. If they break much above 5% and stay there, “there will be real problems for markets”.
Demographics are changing – and not for the better
Another hard-to-escape issue is demographics. The post-war boom in births created a social contract based on a growing, tax-paying workforce. But now, as people age, the maths no longer works. This is true not just for the US but for all developed countries.
“Demographics is destiny,” said Dennehy, who argued that “this may be the most predictable crisis of the past 100 years”.
US bulls often point to artificial intelligence and other technologies as drivers of long-term productivity gains as a way to counterbalance this, but these are more likely to fuel disruption than deliver growth in the near term, according to the director.
“There’ll be job losses and new industries emerging, but we don’t know if those gains will match the losses,” he said. “Historically, new tech only delivers at scale during wars. Wars accelerate tech.”
Don’t count on central banks
The world is shifting in fundamental ways. Isolationism, capital flight and capital controls aren’t hypothetical anymore – and this time, quantitative easing won’t save investors from the downside.
Since 2009, central banks have suppressed normal market signals. “We never had a proper reset after 2008,” Dennehy said. “Instead, we got a central-bank experiment, which fuelled a historic stock market bubble.”
Now, that bubble is bursting, and the question is how bad the damage will be. Unlike in the UK, US mortgages are based off the price of long-dated bonds. Higher yields mean a generally higher cost of borrowing, which in turn means higher inflation and slower growth – a stagflationary scenario that often precedes a recession.
There’s no going back from this situation, according to Dennehy. “Demographics can’t be reversed. Trust, once lost, takes years to rebuild,” he said. “Complacency was tragic for investors from 1929 and will be tragic for many investors when eventually the market begins to break down from its peak and begins to move towards those much lower levels.
“Even a mild recession in the US stock market, which is extremely vulnerable in valuation terms, and the world is going to be in trouble.”