This thread really has me thinking. We need red lines, that, if violated, would indicate that the US stock markets or US economy no longer resemble the economy our backtests are based on. These would have to be major structural changes that would make the US more like the foreign economies we just habitually don't use for backtesting.
For example, a rethink of our mantras might be reasonable if policies were enacted that
(a) could cause a great depression scenario, or
(b) could cause hyperinflation, or
(c) could cause political violence and instability that would affect business operations or demand, or
(d) start a major war that the US would lose, or
(e) significantly reduce the US's standing in the
Democracy Index or the
Corruption Index.
Obviously, the U.S. has historically excelled in all these areas. We had policies that prevented recessions from turning into depressions or inflation from turning into hyperinflation. We had democratic systems, independent media, and civic society that prevented political instability and kept disagreements and reform within the boundaries of political activism. We had the invincible NATO alliance and the financial depth to fight wars for decades if we thought necessary. Finally, we were in the top 20 list of democracies and bottom 20 in terms of corruption.
But that was history. If we cite these reasons for why the US's historical performance enabled a 4% SWR, while the SWR in many other countries was much higher, then it only makes sense that the removal of these reasons might justify either a much lower SWR estimate or a "rebalancing" toward countries that exhibit higher stability and growth potential. It's not that the U.S. is inherently a great place to invest because of its name or whatever, it's that the U.S. was doing the right things to make it a great place to invest for most of the last 150 years.
In other words, we'd edit our "B&H in the USA" mantra to "B&H in stable democracies with low corruption" and if the U.S. failed that test we'd end up looking abroad. If we found few opportunities, or the opportunities were more concentrated, then maybe a more bond-centric, USD-avoidant portfolio would be a better bet.
So, back to red lines. For me, the following might trigger a significant move away from U.S. equity and currency risk.
RED LINES:*The US treasury takes on debt to buy cryptocurrency, in an obvious pump and dump scheme
*The Congressional Budget Office is abolished, neutralized, or packed with cronies.
*Ten independent journalists are jailed for criticizing the regime.
*The Constitution is changed to enable Trump to run for a third term, or for Musk to run for president.
*Social Security is significantly cut, defined as a 10% reduction in payments OR an end to inflation indexing.
*Medicaid or Medicare are significantly cut, defined as a 20% reduction in spending.
*Government data sources such as the BEA, BLS, or Federal Reserve Banks either stop reporting key data series OR are politically influenced so that the data are not considered credible by a significant number (20%) of economists who previously considered them credible.
*The US government attempts to unilaterally cancel treasury debts to a non-governmental bondholder.
*The projected US federal deficit surpasses 15% of GDP in the absence of a recession, or 25% during a recession.
*The US enters a military conflict with China.
*Compulsory primary and secondary education is ended OR most public schools are privatized/closed.
*The government attempts to switch back to an
asset-based currency system, such as a gold-standard or crypto-standard.
*Three or more state universities are shuttered due to funding being cut off.
*The Federal Reserve cuts rates in an inflationary environment due to political pressure, or disengages from rate-setting.
*The executive branch ignores a clear ruling from the Supreme Court.
*The SEC or FDIC are abolished, gutted, or limited.
