Investors must end their infatuation with the US

“WHEN America sneezes, the world catches a cold.” This saying, which has been around forever, epitomises the dominance of the US financial system in the global economy. And it reflects the love affair investors globally have had with the US and how dependent they have become on its stocks and bonds.

- MARTIN HESSE

You would have thought that the global financial crisis (GFC) of 2008, which wiped billions of dollars off investors’ balance sheets worldwide, would have reset the global financial system, shifting it away from US dominance. But it didn’t.

The US government and Federal Reserve stepped in to avert a repeat of the Great Depression of the 1930s by bailing out bankrupt financial institutions, reducing interest rates to near-zero, and printing money, euphemistically called “quantitative easing”. Stock markets bounced back, and the status and strength of the US dollar never seriously came into doubt. Then came Covid.

The world economy froze, and radical monetary measures were again invoked to resuscitate it. But this time, there was a problem: inflation, partly due to trade blockages directly caused by the pandemic, rose alarmingly.

These events compounded US debt levels.

From the GFC onwards, US government debt skyrocketed, forcing it to allocate more and more of its budget to interest payments.

Countering America’s economic woes, and perhaps masking their gravity, was the extraordinary rise of the tech giants, originally labelled the FAANG stocks and now, with a few changes, known as the Magnificent Seven. Investors piled into these stocks, driving up their prices to unrealistic “bubble” levels, to the extent that they account for about 20% of the MSCI All Country World Index, which comprises about 2,500 companies around the world.

To top it all, making America’s economy and increasingly detached financial system more unstable than ever, have been the misguided efforts of the Trump administration to bring back manufacturing to the US.

The imposition of high import tariffs and a policy of isolationism have alienated its closest political allies and trading partners and threatened the hallowed status of the US dollar.