No. of Recommendations: 24
I am absolutely not going to worry about a "sudden stop" to foreigners buying US assets. Zero.
I think the pithy summary of Goldman's chief economist makes a pretty compelling observation:
The US current account deficit is about $1.1 trillion/year. There is no realistic chance of the current account deficit shrinking materially any time soon. That gap is plugged almost entirely by non-US entities putting $1.1 trillion/year of fresh net investment capital into US stocks and bonds each year. (a few other things happen too, but stocks and bonds are the only big item).
If they do less of that net investment, and the deficit stays anywhere around the same size, the US dollar *WILL* fall relative to other currencies. They don't have to be net sellers, they don't have to stop buying, they would only have to buy incremental US investment assets at a somewhat slower rate.
So...
I agree with you that there is no need to worry about a sudden stop to non-US investors putting money into US assets. But it doesn't have to be a full "stop" to cause quite a big upheaval in the settling prices of the US dollar and of those investment assets. There is a price for everything, and so the capital can always be pulled in, but it might have to be pulled in at very much lower prices.
US investments have become so compelling to the world's savers almost entirely because of the long period of good returns. But the outstanding returns are in large part from rising valuation multiples, which has built a feedback loop attracting ever more capital and causing ever higher prices. Since investment memories are not longer than investment careers, more and more myopic investors mistake rapidly rising prices for rapidly rising value. That dynamic definitely can't go on forever, so it will definitely stop. I conservatively assume that if US equity valuations can rise on trend for 40+ years, one shouldn't assume that they could never fall on trend for 40+ years.
Jim
