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The Declinists at Work March 1979 Used with permission of Bloomberg L.P. Copyright© 2016. All rights reserved. July 2016 Source: Financial Times. Martin Wolf/James Ferguson, 2016. “Global elites must heed the warning of populist rage.” Financial Times / FT.com, 20 July. Used under licence from the Financial Times. All Rights Reserved. Conference Board. Even median household income, as measured by the US Census Bureau, rose in 2015 at the fastest rate on record. In the corporate sector, total profits of domestic corporations as a percentage of GDP, as measured by the national income and product accounts (NIPA), are close to all-time highs. At 11.5% of GDP, profits not only are well above the historical average of 9.6%, but have been higher than current levels only 17% of the time since 1950, as shown in Exhibit 2. Despite these “glass half-full” facts, the announcements of US decline that pervaded the airwaves in the depths of the global financial crisis have persisted. We continue to be inundated with analysis of “America’s relative decline,”* “America’s slow-growth tailspin” and “sclerotic growth,” “an economic in-tray full of problems”*® and, of course, “secular stagnation.”’ Two books published in 2016 that have received extensive coverage epitomize the sentiment: Robert Gordon’s The Rise and Fall of American Growth® and Marc Levinson’s An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy? Some of the images are equally telling. We were struck by a recent image of the Statue of Liberty on its side that resembles a Business Week cover of March 1979 with a tear trickling down Lady Liberty’s face. Since WWII, the waning of US preeminence has been a topic of recurrent hand- wringing. Whether prompted by the flexing of Soviet muscle, most spectacularly with the launch of Sputnik in the 1950s; the civil rights upheavals and growing fallout from the Vietnam War in the 1960s, the Arab oil embargo and the Watergate scandal of the 1970s, the rise of Japan in the 1980s or the rise of China in the 2000s, the declinists have foretold the ebbing of American preeminence. Typical of the genre is a 2009 book provocatively titled When China Rules the World" by British columnist Martin Jacques. Yet, as we wrote in our 2011 Outlook: Stay the Course, neither the global financial crisis nor the rise of China will hinder what we described as “America’s structural resilience, fortitude and ingenuity” and remove the US from its preeminent perch. What explains our difference of opinion, which has consistently underpinned our investment recommendation for a greater allocation to US assets and for remaining invested at such high valuations? Why do we believe that the US is on a more solid footing both absolutely and relative to all other major countries in the world? Is it a matter of perspective, analytical rigor, bias, review of longer economic history, or reliance on a big cadre of external experts in specialized fields? Outlook | Investment Strategy Group 7 HOUSE_OVERSIGHT_014540