Six-Chart Sunday – Bet Against America?

6 Infographics + 1 Video (Pres. Ronald Reagan’s D-Day remembrance)

One of the most critical questions at the intersection of policy, geopolitics & markets right now is whether it’s time to bet against America’s economy. Some fear trade protectionism, immigration restrictionism and fiscal indiscipline will prove stagflationary. Billionaire investor Ray Dalio suggests the U.S. is on the verge of suffering an "economic heart attack" caused by unsustainable national debt. But others disagree, arguing the U.S. remains the most innovative, dynamic and best-positioned-to-benefit-from-AI economy in the world, with recent market gyrations more reversions-to-the-mean (after years of extraordinary over-valuation of U.S. equities & currency) than portents of doom. I have no idea who’s right! But history suggests those who bet against America’s economy do so at their own peril.

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1. Markets are demonstrating new, unexpected, troubling patterns. According to the Financial Times, “The close relationship between U.S. government bond yields and the dollar has broken down as investors cool on American assets in response to President Donald Trump’s volatile policy-making.”

2. Investors are pricing American debt as riskier. U.S. government credit default swap spreads — which reflect the cost of protecting a loan against default — are trading at levels similar to Greece and Italy, according to new analysis by Torsten Sløk, chief economist at Apollo.

3. U.S. deficits will persist and grow for the foreseeable future. One reason investors are demanding higher interest rates from (and charging more to insure) U.S. government bonds is America’s persistent budget deficit. Analysts forecast >$2 trillion annual budget deficits into the next decade under current law, with the Center for a Responsible Budget projecting the possibility of >$3 trillion deficits if expiring tax cuts are permanently-extended.

4. Some argue dollar weakness merely reflects over-valuation. The U.S. dollar has been very strong for a very long time thanks to underlying economic strength and many foreign governments’ efforts to promote exports to the U.S. by maintaining artificially-weak currencies (which benefit U.S. consumers but hurt exporters). IIF’s Robin Brooks shows that the dollar “is still massively strong versus the G10 and EM” currencies, so a reversion to the mean is both overdue and consistent with the Trump Administration’s efforts to increase exports. But “the risk of a weaker U.S. dollar and the cost of protecting against that risk, are making American assets less attractive around the world.” (WSJ)

5. Still, recent U.S. economic performance has been extraordinary. MUFG analyst Tom Joyce writes: “The U.S. economy, now over $30 trillion in size, has increased by nearly 50% from its nadir at COVID’s peak in Q2 2020, making it among the strongest of 35 US recoveries since 1850.”

6. Bet against America at your own peril. Past performance is no guarantee of future returns. But as Spectra Markets’ Brent Donnelly reminds, “every year there is a good reason to be skeptical of the permanently-growing U.S. economy,” and yet so far it’s proven resilient and exceptional.

VIDEO

Every June 6 it’s worth watching President Ronald Reagan’s masterful speech on the 40th anniversary of the D-Day landing, h/t the great Peggy Noonan. "These are the boys of Pointe du Hoc. These are the men who took the cliffs. These are the champions who helped free a continent. These are the heroes who helped end a war.”