The Picture of Safe Haven Flows Looks Different Today
The number of trouble spots is increasing, as is their importance.
- Although there may be an opportunity to do so in the course of the year, the war in Ukraine is far from over.
- Even if Donald Trump loudly proclaims it will, Israel’s war against Iran is unlikely to end very quickly.
- Public debt continues to rise sharply, with an increasing proportion being spent on the unproductive defence sector.
- The USA is grappling with persistently high interest rates and mounting interest servicing costs.
- Europe is only relatively less indebted than the US, and can therefore better afford to expand fiscal deficits. Infrastructure projects can actually stimulate investment.
The USA is facing the risk of conflict and is heavily in debt, under increasing pressure to find international investors willing to take on its national debt. The more aggressively the US acts to push through its trade interests, the more difficult it will be to encourage investors to take on US debt.
Is a Capital Markets Union Likely to Be Established in the EU?
The EU lacks its own tax revenues and a unified capital market. I expect to see progress on both of these issues in the second half of this decade, which will have significant implications for the EU’s financing capacity, as well as that of its member states and local companies. A common capital market could facilitate competition for investment capital within the EU, as the EU as a whole could create a bond market and, to a lesser extent, an equity market similar in depth to that of the US today. This would benefit the euro (and its interest rates), while harming the US and the UK. The UK would face increased pressure to align more closely with the EU towards the end of the decade.
If the EU were to follow this path, it would be inevitable for Poland, the Czech Republic and Sweden, among others, to join in order to avoid falling behind.
The Capital Market Tends Towards Efficiency
However, participants in the capital markets also tend to follow unsustainable trends until they collapse. This is now highly likely to happen with the USD because US government finances are in trouble. Over the last 15 years, the USD has been strong and US equity markets have been in a uniquely strong position, while Europe, especially the UK, has lagged far behind. This has resulted in relatively weak stock market and currency developments against the USD.
Participants in the Capital Markets are Both Cowardly and Greedy
The focus is always on achieving the best possible preservation of entrusted capital. It turns out that greed exploits a trend to the fullest extent. I don’t mean this in a disgraceful, cowardly sense; it is the duty of an asset manager to look ahead and be cautious. As I have summarised above, recognised risks do not allow us to invest in overvalued US assets today without facing accusations that we could easily have recognised this.
Once a direction has been taken, it remains that way until the new direction becomes exaggerated again, which takes years and leads to significant changes.
