Bob Homan: The day debts become too much for the US

Bob Homan: The day debts become too much for the US

November 5, 2024

Fixed Income United States
Bob Homan (Cor Salverius Fotografie) 980x600

This column was originally written in Dutch. This is an English translation.

By Bob Homan, written in a personal capacity

US public finances are rapidly souring. How do you position yourself as an investor without missing out on sweet stock returns?

It has long been seen as a risk: the persistent US budget deficit. Even at a time when the economy is doing quite well, it is improbably hefty. So hefty, in fact, that despite growth and quite a bit of inflation, the public debt is rising sharply not only in nominal terms but also as a percentage of national income.

And no improvement is expected. It is generally assumed that, whoever comes to power in the US, the government will continue to spend more than it brings in. Among Republicans, probably a bit more than among Democrats.

Many market researchers always saw the phenomenon as a problem for the distant future. And he who lives then cares, right? But now it is being mentioned more and more explicitly as a risk for 2025, with, incidentally, hardly any consequences for the market or even proper alternative positioning.

The most logical thought would be US long-term interest rates and the dollar rising. We see the former happening in recent weeks, while the dollar is moving in the opposite direction. What to do with your allocation? Moving away from US equities is notoriously difficult. They have been outperforming the rest of the market for years and, from a bottom-up approach, they are heartily dominant in many developments (think AI).

So what to do? OK, don't invest in US government bonds then. But many European investors were not doing that anyway. Hedging the dollar may seem logical, but at the same time it involves a lot of risk. And again, the dollar does not seem to suffer that much from government deficits.

Just stay put? Indeed, that would be my suggestion, despite the debt becoming too much for the US one day. And then when a sharp market correction follows, everyone says: you could have seen that coming! Yes, but missing out on all those returns until that day doesn't strike me as providential either.

 

 

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