Financial Times Analysis: Time to Start Moving Money Out of Supposedly "Safe Haven" US Investments to "Riskier" Bets in the Growing World

Investors have been willing to overpay for US treasuries and stocks on the theory that our economy, while not growing, was at least stable and predictable.

World investors may no longer be willing to pay a premium for a benefit that might no longer exist.

Note this article does not in fact address treasuries at all -- it's about stocks in US corporations. I would imagine that some of the same thinking applies to treasuries, but I don't know that, and the article doesn't say that.

It does suggest moving money out of US stocks and out of stocks dependent on US consumption for their growth.

The market had hoped for a “Grand Bargain”. Instead, it got a small, ultimately insufficient fiscal deal. The best to be said of the agreement hammered out on New Year’s eve is that it beat the alternative. While investors still cheered, nobody should mistake this for an economic, fiscal, or financial positive. Ideally Washington would have crafted a deal coupling long-term tax and entitlement reform with short-term stimulus. Instead, we got the opposite. The US now faces significant fiscal drag on an already sluggish recovery.

The drag might have been justified had the agreement actually addressed the long-term fiscal outlook. But it failed to tackle the US tax code’s dysfunction or the sustainability of major entitlement programmes. In abdicating any effort to stabilise the national debt, Washington now risks an eventual loss of international confidence in the US....

Rather than abandoning risky assets altogether, investors should tap market segments most geared to faster global growth and less exposed to US consumption....

To benefit from global growth even more directly, investors can reduce their overall US allocation....

Given the shift in relative fundamentals, investors should consider reallocating some portion of their holdings out of the US and into emerging markets, smaller developed markets and European exporters.

I had a half-baked idea. It's almost certainly been noted before. I don't know why I pretended ambiguity on that point-- it has been noted before, a bunch of times, including by commenters here. But I've been thinking about it, so I'm writing about it.

George W. Bush wasn't ever really as popular as he seemed post-9/11-- something that became apparent when his approval ratings cratered in 2007. His post-9/11 support was, as they say, a mile wide and an inch deep.

I believe that George W. Bush was the beneficiary of a rally-round-the-flag effect, as the liberal American media frequently speculated. In a time of trauma and crisis, he seemed to be, ahem, a safe haven for people's hopes.

But his actual support, being very fragile, cracked and then broke apart when he seemed to not be making any progress on the very issue due to which people had rallied to him, that is, the War on Terror (expanded into the War in Iraq, of course).

And then he became quite an unpopular politician.

The media almost never says that Obama is the beneficiary of a rally-round-the-flag sentiment, but that's only because their own support is so deep (and so deep, in fact, as to approach actual romantic love). They were Johnny On the Spot in pointing out the public might not like a President they themselves didn't like as much as it might seem; but when the sitting president is the apple of their eye, they're blind to the fact that maybe the public's support is a highly contingent and fickle thing. (Indeed, even when Obama's approval dropped to 45%, the press persisted for a year and a half calling him a "popular president.")

Now, Bush's own contingent, fickle, best-port-in-a-menacing-storm was enough to allow him to squeak by in an reelection contest which pitted him against a personally cold, graspingly ambitious Northeastern Brahmin. But after the War in Iraq continued to go poorly (up until the moment it was won), support for Bush, and Republicans generally, fell dramatically, and Democrats swept into control of Congress in 2006.

I think Obama stands in a similar situation. His approval rating continues to fluctuate between 45 and 49 percent, as people continue giving him the benefit of the doubt on his own Main Challenge, the economy.

But as with Bush, this benefit-of-the-doubt is not perpetual.

As with Bush in the beginning of 2005, Obama has about eighteen months left to show some serious progress before people make a similar decision as they made with Bush -- we trusted this guy, we reelected him, and he's still not delivering on the central issue we elected him on five and a half years in.

Of course, Obama could actually get some good economic news.

But it doesn't seem like we'll have anything like a truly growing economy. It seems we will continue to merely grow-and-fall along a much-lowered baseline.

And of course his various expensive and controversial "surges" don't seem to be winning the day. In fact they seem to be hurting things, unlike Bush's.

There Is No "U" in Hubris

Wait a tic, checking again, there is.

Soothsayer Objects... He writes that the public doesn't care about such things.

we learned three things in 2012:

1. Obama does not need gas to be under $3.50/gal

2. Obama does not need unemployment rate to be lower 7.7%

3. Obama does not need a healthy housing sector, only one that perpetually shows "signs of recovery"

I don't think that's true. I think the public didn't demand these things occur by the end of his first term. That is different from them never demanding these things, ever.

Consider that the Iraq War was going poorly in 2004 -- and the public knew that -- but did not, at that point, give Bush his walking papers. By 2006, however, they kicked the Republicans out of Congressional power.

I think the dynamic worked like this:

Liberals overplayed their hands complaining that Everything Is Bush's Fault. The public realized that this was nonsense -- that terrorism had been a growing and unaddressed issue for a decade or three -- and that the liberal pretense that Everything Is Bush's Fault was unfair and just some political shuck-and-jive.

Liberals seemed to them overwrought, and primarily whining about their reduced political influence, rather than making accurate complaints and assessments of fault. And animated by ideological/political antipathy and outright hatred for Bush, which the public by and large did not share. (Nor did they love him -- I think the broad, less-political public views the passions of partisans as somewhat unhinghed and silly.)

I think the same sort of thing may have happened to conservatives in 2008-2012 -- that the public thought we were just whining about their decision (they voted for these imbeciles, after all) and were also offering up some shuck-and-jive political agitations for purposes of PR manipulation.

Nevertheless, the relentless drumbeat that Everything is Bush's Fault did in fact strike a chord with the public (how can drums strike chords?, you ask; Shut Up, I explain) by 2006 and continued through 2008... and to the present day.

At some point, the public was willing to believe Everything Is Bush's fault. That time just wasn't in 2004. It came later.

Will we see a similar dynamic? I believe that if things do not markedly improve we will in fact see that dynamic again.

I don't think the broad public is terribly political. I think they are practical, results-driven. It's hard to move them on policy because they just don't have much interest in policy, ideology, or theory.

But they will take note of results, and change their minds according to that metric.

posted by Ace at 04:27 PM

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