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Britain’s Decline Holds Lessons for the American Reset

Britain’s Decline Holds Lessons for the American Reset

For about 400 years, Great Britain was a vast empire.

Some said the sun never set on its lands. At its peak, the House of Windsor ruled over a quarter of the world. That was at the beginning of the 20th century.

Within 50 years, little was left of what was once the largest empire in history. And for decades, policymakers managed the Empire’s decline.

The end of the British Empire may now guide long-term investors based in the U.S.

Many analysts expect the upcoming Biden administration to be former President Barack Obama’s “third term.” Based on personnel appointments, that’s possible.

This means that one of the administration’s goals may be to conduct a managed decline of American influence. This was a topic of active debate during the Obama years.

Investors can’t ignore that possibility and the likelihood of an economic reset in the U.S.

What a Reset Looks Like

A chart of the FTSE All-Share Index, which represents U.K. market capitalization, is shown below.

It starts in 1962, when the index began. It ends with 1981, two years after Margaret Thatcher became British prime minister.

FTSE All-Share Index From 1962 to 1981

FTSE Index 1962-1981

(Source: Bloomberg.)

This chart shows what a reset looks like.

For years, stocks went nowhere. Then a volatile trading range followed.

Finally, Thatcher completed the reset with a number of steps that transformed the British economy in the early 1980s. That kicked off a long bull market.

As you can see, markets can reset without steep declines. Years of small gains can actually substitute for a bear market.

Resets also challenge index investors. Long-term investors buying in 1962 had nothing to show for their efforts as late as 1975.

This Time May Not Be Different

Many will argue that this time is different. After all, inflation is stable.

Inflation was relatively stable in the 1960s. However, stable inflation doesn’t mean low inflation.

The consumer price index was near 5% for most of the 1960s. Then inflation soared. It peaked at 27% in 1975 as stocks bottomed.

Stagnation in the U.K. market coincided with nationalization in many industries. Even though that process couldn’t happen here, regulations could still have a similar, chilling effect in the U.S.

A new administration carries risks to the American economy.

The likelihood of an economic reset is high. And the managed decline of the British Empire could be a helpful model for investors to study.

Regards,

Michael Carr, CMT, CFTe

Editor, One Trade

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