One week / one topic: Lost in translation

What happened?

Like Schrödinger’s cat, ‘US exceptionalism’ is currently both dead and alive at the same time.

While, in practical terms, we just won’t know which way it is until after the fact – when an obvious (!) narrative will be conventionally retrofitted, of course – for now it mostly depends on whom you ask, and on what biases they bring to the table.

From the perspective of US investors – despite Trump’s approval ratings being severely dented from his liberal use of tariff threats – what we have seen year-to-date might just be a bump in the road.

Of course the US is still on its way to fulfilling its manifest destiny on the back of superior technology, hard power and risk-taking capabilities… Case closed.

Ask Europeans though, and – after the usual expressions of disbelief, disdain and disapproval aimed at the US president – you will hear a very different story…

This is (finally) Europe’s time to shine by deploying its fiscal firepower, leveraging its status as the world’s largest trading bloc and (selectively…) progressing on its path to further integration.

Asia (population 4.8bn) naturally features a wider set of views on the topic, ranging from comeuppance vibes (China) to concern mixed with suspicion (Japan) and all the way to attempts to placate (India).

Increasingly, though, investors are left with a strong suspicion that – in the end – this all revolves around US debt…

After all – and especially in light of Trump’s ‘big and beautiful’ tax bill advancing through Congress – who’s left with full confidence that this administration has the ability (or even the desire…) to rein in unbridled growth in the federal deficit?

Our observations

• Fundamentals: Since 2022, the assumption of negative correlation between stocks and bonds can no longer be trusted due to the return of proper inflation concerns. Even more so then, high real yields on inflation-linked bonds look attractive against this backdrop.

• Price action: Non-US equities still have a long way to go in relative terms before they can properly catch up… (see below) As for US Treasuries, let’s see if ‘line in the sand’ levels ultimately hold?

• Investor beliefs: Are investors being gaslit into believing that – no matter what – US treasuries will ultimately save the day when you most need it? Time to ask the question out loud…

So what?

Humans – and therefore investors – are desperate for reassurance, especially in times of stress.

Add to that a sprinkle of 2000-2019 flavor recency bias – where nominal Treasuries delivered portfolio protection in a low-inflation / growth-sensitive environment, and bad news for the economy was good news for bonds – and it’s no surprise that it takes time to seriously challenge the article of faith that ‘US government bonds will always ultimately deliver the portfolio-level insurance that you seek”.

The US Treasury knows this, of course, and (part of) its job is to extract maximum value from this set of beliefs.

Nonetheless, large buyers of US debt have been changing their behavior for a while now…

To top it off, gold is still in a bull market and many foreign investors remain scarred by the recent experience of the ‘trifecta from hell’, reversal-of-US-exceptionalism trade: US Treasuries, US stocks and the Dollar all going down at the same time.

While the inflationary impact of tariffs might well be a one-off, we remain wary of governments’ carefree approach to more and more spending and debt.

Putting it all together, those linkers look pretty attractive…

Mood music: TOTO – Hold The Line