The Blink
Yesterday our Daily reported on the wild swings in the longer dated Treasuries with the 30-year bond price falling by some 6% from the Tuesday high to the Wednesday low. Our belief is that it was this, rather than the crash in equity markets, that made Trump blink.
Jefferies’ Chris Wood recently highlighted America’s extreme dependence on foreign capital. The net international investment (NII) deficit has increased from circa 20% of GDP in 2008 to a record 90% of GDP at the end of 2024. Simply put, this speed and direction of travel is unsustainable.
On 15 August 1971 President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value ($35 per oz). Gold had been the benchmark of ‘zero risk’ for centuries. Today gold trades at $3,100, a ninetyfold increase over the past 54 years. Post 1971, the new benchmark of what was deemed ‘zero risk’ became the US dollar and US Government backed securities, i.e. Treasuries. Triple A. Foreign investors currently own more than $8.5tr of US Treasuries. The two biggest holders are Japan (circa $1tr) and China (some $760bn).
The growing realisation of the unsustainable direction of NII may well have been behind the Trump tariff agenda. We are not sure, but the very blunt nature of Trump’s agenda has roiled equity markets worldwide. The ninety day cessation (except for China) will probably allow global equities to recover but, further out, one has to question what ‘zero risk’ really is.
An investment approach that relies on excel spreadsheets adds to risk rather than detracts from risk. Think LTCM – just one of many ‘black swans’ in recent decades.
Publicly traded equities, in theory, are a much better measure of zero risk over any reasonable time frame (a decade or more). Becoming an owner of numerous successful businesses has generally worked well. The UK pension industry would be in a much better place today had the traditional ‘rules’ in the 1970s (i.e. significant exposure to equities) not been replaced by excel spreadsheets.
So far this century equities (MSCI AC World Index) have generated a compound annual rate of return of 5.49% in US dollar terms. That is almost 2% per annum higher than the Bloomberg US Treasury total return index (3.63%).
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