Markets believe in American exceptionalism
It may seem strange to talk about American exceptionalism, given that only about a week ago it seemed as if the US government was so divided that lawmakers would fail to increase the country’s ability to borrow, which would lead to a default that would cause an economic and financial disaster anyway. level of the world. However, they managed to increase it in the end, albeit in the last moments. This episode reminded us once again that there is often a big difference between perception and reality. The perception is that a dysfunctional government was leading the country toward economic ruin.
The reality is that the United States has things the world would envy, at least when seen through the eyes of investors. Indeed, the currency, bond and stock markets all send a similar message that America is where one should be.
It starts with dollars. It is said that the currency of a country does not differ much from the share price of a company, as it represents the best indicator of investor sentiment. And the Bloomberg index, which measures the value of the dollar against other major currencies, maintained the value of the green currency during the first five months of 2023, and the latter is closer to its highest levels for this year than its lowest.
It’s true that some of this has to do with the higher interest rates that investors can earn in the United States compared to the rest of the developed world, but Citigroup’s currency strategists have discovered that something else is going on. In a report published Friday, they wrote that the desire to obtain dollars is partly related to the growing demand for shares in US technology companies, which are seen as the main beneficiaries of a rising boom in artificial intelligence.
Against this background, the Nasdaq 100 index of technology stocks is up 33% this year. What are the implications for the overall economy? Ben Emmons, a strategist at New Edge, estimates that artificial intelligence will quickly grow into a $1.3 trillion market and “become a huge source of employment … boosting sales and ad spending in the technology sector.” Indeed, even if these estimates turn out to be exaggerated, artificial intelligence is not the only factor benefiting the United States today. Because very few people understand what the passage of the “Inflation Reduction Act” in 2022 means for the US economy.
Despite its derisive name, the law unleashed massive capital investment. Construction spending by US manufacturers more than doubled over the past year, reaching an annual rate of nearly $190 billion in April. .
The manufacturing sector now accounts for about 13% of all non-state construction, the highest share recorded in a data series dating back to the early 1990s. For example, Intel is investing about $20 billion to build a chip manufacturing plant in Ohio, and Ford Motor last year started building a factory in Tennessee to make electric trucks. Then don’t be fooled by all the “stop using the dollar” chatter. The belief is that the United States is “weaponizing the dollar” through heavy financial sanctions against Russia, including preventing the Russian Central Bank from accessing its foreign exchange reserves. Therefore, countries whose ideological leanings conflict with those of the United States may wish to convert their reserves into the currency of a friendly country.
Indeed, when the foreign ministers of Brazil, Russia, India, China and South Africa met in Cape Town last week, Bloomberg reported that they asked the bloc’s bank for advice and suggestions on how a possible new common currency would work, including how it could shield other member countries from the impact of sanctions like those imposed on Russia.
Indeed, it is this rule of law that attracts capital from all over the world to the United States, in good times and in bad times. In the week before lawmakers approved raising the debt ceiling, the US Treasury Department offered $120 billion worth of two-, five- and seven-year bonds. Remarkably, despite all the pessimistic comments about the US heading for a certain debt default, each such transaction has brought in well above average demand from a group of buyers who are generally seen as proxies for foreign investors.
The so-called indirect bidders got 68.2% of the $42 billion of the two-year bonds offered, which is the largest amount for this maturity since 2009. As for the $43 billion five-year bonds, they got 72.7%, which is the second largest percentage on record. While 72.3% was recorded for the seven-year bonds offered, amounting to $35 billion. The bottom line is that the perception is that American democracy is broken, but the reality is that democracy is messy and difficult. Indeed, it always has been.
The recent debt-ceiling battle in the age of social media has proven this abundantly, with all its twists and turns scrutinized, critiqued and praised in real time. Or, as Winston Churchill said, “Democracy is the worst form of government, barring all the others that have been tried.” Market players seem to understand this, choosing to focus on the reality of American exceptionalism, rather than on the perception of a declining America.
Robert Burgess*
* American writer
Published by special arrangement with The Washington Post Licensing and Syndication Service.
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