THE COMING CRASH

 The writer is an FT contributing editor, a visiting fellow at the Hoover Institution and author of a forthcoming book on globalisation

One of the extraordinary aspects of SpaceX’s IPO has been the scramble to buy shares outside of America. In Australia, brokers’ call centres opened emergency hours. Over 100,000 people in stagnant Britain applied for an alternative journey on Elon Musk’s financial rocket. There was an investor stampede in Japan. In South Korea unmet demand has become a national scandal. Chinese buyers were barred by US authorities but still found back channels. Even as the Gulf states worry about waning US defence guarantees, their sovereign funds placed multibillion-dollar orders. 

The frenzy reflects Musk-mania and a bigger trend. Foreigners’ holdings of US shares have hit $22tn, over triple the level in 2015. In many places, the best way of creating wealth has been owning a stake in US capitalism. Gatecrashing America’s party has been staggeringly lucrative. But it means the world is now far more exposed to a market crash there. And, in some countries, it raises uncomfortable questions about why, even as they seek more autonomy from an unreliable America, much risk-taking is outsourced to it.

SpaceX is not flying alone. Alphabet announced a record $85bn equity raising on June 3. Anthropic, Meta and OpenAI could be next, pushing the proceeds for US public equity raising above $600bn this year. The AI boom is central to this, but America’s attractions run deep. It has the best pool of entrepreneurs and US businesses account for just over half of the world’s value creation, or profits in excess of the cost of capital.

America also has what Scott Bessent, its Treasury secretary, called this week, the world’s “deepest, most dynamic markets”. Since 2009, its banks, asset managers and traders have grown more dominant globally, and funnel savings into its markets. Citadel Securities, which executes a third of share trading in the US market, says activity is “astronomical”. Larry Fink, the boss of BlackRock, the largest asset manager, had called US capital markets a “juggernaut”.

The world’s financial relationship with the US has been transformed. Its status as the ultimate safe haven has decayed. As US debts have swollen, the special premium Treasury bonds command relative to other ultra-safe assets has shrunk. China and Europe are building payment networks to bypass the dollar. Instead, America is the venue for taking risks. The world, excluding the US and China, has 38 per cent of its public equity portfolio in US shares, up from 25 per cent a decade ago. Of global risk-taking equity raised this year, via stock markets or venture capital, perhaps 65 per cent will be in the US.

For non-Americans the first response should be gratitude: their profits from US shares since 2015 have been a staggering $13tn. Yet the bonanza comes with two concerns. First, if there is a US stock market slump, the rest of the world’s losses would be bigger than in the past. A market rout as bad as 2008 would trigger a hit equivalent to 10 per cent of non-US GDP. While investors expect ups and downs, these are huge sums and, combined with the diminished role of Treasury bonds, portend a new kind of crash. 

The second worry is deeper. In the original logic of globalisation, location barely mattered. A neutral financial system allocated money to the best firms. Their products were sold to the world. If you could own Google shares and use Google Search, it made little difference where you lived or where the company was based. Now, this neutrality has weakened. Not all American products are equally available to all countries. Some US allies fear relying on SpaceX’s satellites for defence. On June 12 the US blocked Anthropic’s Fable 5 and Mythos 5 AI models from being used by foreign nationals. 

The rational response for other countries is to expand or incubate local alternatives. On June 24 Sanae Takaichi, Japan’s prime minister, announced a $2.3tn national investment target for AI, semiconductors and more. Mark Carney, in Canada, aims to kick-start a $700bn surge in energy, defence and data. 

Left unspoken is how this will be financed by a global financial system led by US companies committed to American goals. The global asset management industry raises 55 per cent of its cash outside of the US but allocates 70 per cent of it there. Based on current trends Europeans could end up putting more fresh equity into American AI and satellite capabilities than European ones this year.

One answer is to use US capital markets to finance risk-taking abroad. SK Hynix, South Korea’s memory-chip champion, has launched a $29bn equity raising in America, with the proceeds to be spent at home.

The other is to change the pattern of the financial system and bend the arc of capital back home. Friedrich Merz, Germany’s chancellor (ex-BlackRock), has just backed a new national pension system. Carney (ex-Goldman Sachs) says Canada’s pension funds are a “strategic asset” in the new world order. Takaichi could push the $1.8tn government pension fund to invest less abroad. Done adroitly, it should mean the world’s dependence on American risk-taking falls. Done badly and it could yet turn the trade war into a financial one.

I give money to every beggar and homeless person I see. The reality is they will enjoy the booze and drugs my money can buy more than I will at my age.

Not that I gave a penny to a bloke on London’s Golden Jubilee Bridge last week. His sign could be read a hundred metres away. “Hungry — need food.” I could also see that he was a danger to the structural integrity of the pylons.

A big lad — and badly advised in his choice of words, I feared. Good luck to him, though. I feel less sympathy, however, with those who complain about “the cost of living crisis” when they clearly spend like mad.

It’s the same with investing. And, frankly, I’m one of the worst culprits. You shouldn’t feel sorry for my meagre pension pot after three decades of employment, as I have a bad habit of living beyond my means.

My lifestyle wasn’t excessive when I was a managing director of a global bank. But why did I buy a yacht post-divorce (and, worse, keep it when I lost my job)? What explains the holidays to Australia? The top-shelf tequila? The second wing-foiling board?

If you think expenses don’t affect our long-run balance sheets, think again. There is nothing you can do — apart from avoiding tax — that shifts your savings profile as much. Stock picking or asset allocation are irrelevant by comparison.

Take that £30,000 boat of mine. In 2020 I had to earn £50,000 pre-tax in order to buy it. That could have topped up my pension instead, growing at least 6 per cent per year since. A £71,000 white elephant, in other words.

There are the costs in perpetuity too, such as eight grand annually in marina fees. These you have to capitalise and tax, as you do when valuing merger synergies, for example. Assuming a 15 times multiple (a 1/15 or 6.7 per cent return) and a personal tax rate of 40 per cent, Jammy Dodger was equivalent to £72,000 in savings.

Seen this way, summer holidays are the number one enemy of retirement. A ten grand all-inclusive with the family to Greece? More like £90,000 wiped off the family books. Even a thousand pounds spent in Butlin’s each August is worth £15,000 to a saver paying no tax at all.

Recommended

Travel & leisure industry

Holiday bookings surge in markets hit by Iran crisis

But this column has never been about saddling you with problems and guilt. So let me explain how you can use the above to your advantage.

British parents could warn their kids that a fortnight’s worth of ice cream on the beach — at ten euros a day for them and that random new friend they can’t shake — is a €2,100 claim on the future value of their Junior Isa. Your call, darlings.

Or how about the £500 a year your partner blows on streaming services to watch their favourite shows? Tell them it’s the same as giving up ownership of a £4,500 fund invested in US equities — which also has a long-run return equivalent to a multiple of about 15 times. Cancel them and we’ll split the difference.

And this approach can be used on any recurring expenses you’d like to cut back on — personal trainers, Soho House memberships, the lot.

Trouble is, most humans aren’t in the habit of comparing immediate costs with capitalised values. Whoever thinks of the annual lunch with the girls — a hundred bucks a head — as a claim on $450 of lifetime wealth?

It’s not hard, though. Even including tax in your decision-making process is a useful start. I worked with a guy once who would always put down the phone after securing, say, a $10 discount off his water bill and say, “I just made twenty bucks!”

By which he meant he would have had to earn twice that amount before tax to save the equivalent sum. And then from there it’s easy to calculate the assets he added to his family’s pot. It’s just $10 times 15 (assuming a 6.7 per cent perpetuity return).

So next time you’re pondering a subscription to an app or wine club, just take the annual cost and multiply it by the inverse of whatever investment return you’re used to and again by one minus your personal tax rate.

If you have your savings in a bank, for example, maybe you earn 4 per cent annually. And perhaps your tax rate is 30 per cent. Those sunglasses you buy at the airport each July for £200, therefore, will lower your wealth by 200 times 25 (1/0.04) times 0.7.

Three and a half grand! A pair of sunnies! You’ve got half a dozen others sitting in a drawer beside your bed. Resist! And for those who are more risk-loving, with most of your money in stocks, say, you’re still forgoing £2,100 of investment capital.

I should acknowledge here that some readers will find this confusing. It seems backwards that capitalised values for a given expenditure are smaller for those earning a higher return on their money.

But it’s mathematically correct, because in the case of the Ray-Bans, we’re asking: “How much capital would I need to produce £200 a year?” If your money earns less, you need more of it. We are deriving present values, not future values.

The latter is all about “what would this expense become if I invested it?” That’s very different from telling your wife: “You’re consuming the equivalent of a small endowment.”

Indeed, that’s how universities, foundations and the like manage their capital. Not as something to be spent, but as an asset that generates a perpetual stream of income. We should all be thinking this way. If it weren’t so boring.

The author is a former portfolio manager. Email: stuart.kirk@ft.com

Stuart Kirk’s holdings

	Assets (£)	Weighting	Total returns YTD
Vanguard FTSE 100 ETF (GBP)	206,327	29.1%	-
iShares MSCI EM Asia ETF (USD)	162,867	23.0%	-
Vanguard FTSE Japan ETF (USD)	73,150	10.3%	-
Vanguard S&P 500 ETF (USD)	73,653	10.4%	-
BlackRock Latin American Ords	62,340	8.8%	-
4.5% Treasury Gilt 2034	130,111	18.4%	-
Total	708,448	-	10.9%
S&P 500 (GBP)	-	-	10.6%
Morningstar GBP Allocation 60-80% Equity	-	-	6.9%