One week / one topic: Out of many, one

What happened?

Last week I was in the US, marking my 15th visit in total and the 5th trip during an election year.

Going in, first-hand reports and widespread international press coverage painted an unsettling picture:

• The country is deeply divided – to an extent unseen in living memory – as social media exacerbate rampant culture wars;

• Deep inequality led to the eclipse of ‘traditional’ values, and money is the only thing that (almost) everyone wants more of;

• Public debt is growing at unsustainable rates, echoing the last days of many fallen civilizations.

To boot, the conviction of former President Trump is guaranteed – if possible – to further radicalize views.

And yet, from the ground, it was obvious that many tenets of American exceptionalism remain in place:

• Belief in the American dream continues to defy any evidence of the contrary, as it keeps attracting dynamic and hard-working immigrants;

• Americans continue to take risk, fuel growth and strive for self-determination to an extent largely unseen elsewhere;

• Despite reasonable concerns about the direction of travel, US hard power remains unmatched.

The post-WWII status of US Treasuries as the ultimate safe haven looks unlikely to be challenged, especially as Macron is sounding the alarm about Europe’s decline and China – while certainly still willing and able to compete – is busy combating deflation.

But how material are the risks posed by the upcoming 2024 election, given the unarguably toxic current political climate?

Are US government bonds still the best bet to protect portfolios from unforeseeable risks?

Our observations

• Fundamentals: Government debt accumulation increases net private financial wealth. With its very high wealth capacity and the Dollar essentially still unchallenged as the global reserve currency, the US can afford higher debt-to-GDP ratios than other countries – like it or not.

• Price action: Fortunately, major market events that require portfolio insurance don’t happen every day. While US Treasuries ‘did their job’ during the COVID crisis, they haven’t really been tested since… but lack of evidence is of course not evidence of the contrary, i.e.: we still think they’d deliver in a major crisis.

• Investor beliefs: Up to a point, markets can choose to believe what they want to believe. Presidential debates will likely feature promises of further spending which might test investors’ appetite for (more) US Treasuries. Buckle up…

So what?

No matter how apparently unfixable current divisions may appear, the US will have to be reborn once again as a synthesis of its many souls by the time the new presidential term starts in January.

E pluribus unum – out of many, one. Will it be able to?

Political outcomes are unknowable – as is their impact on markets – yet a rollercoaster ride between now and November looks very likely, as investors keep trying to extrapolate the latest developments into investment insight.

Warren Buffett’s “never bet against America” may sound trite to foreign ears, and yet it has been good advice for a very long time.

At current yields, we see US Treasuries as moderately priced portfolio insurance – ‘value’ remains very hard to gauge – with the implicit view that, in a crisis, American exceptionalism will prove true once again.