Greenland clash risks undermining America’s place in world economic order
The U.S. has long been a beacon of safety when uncertainty reigns. That is changing.
Escalating tensions over Greenland are supercharging a dynamic that was already under way: a shift in the world economic order that had put the U.S. at the center of the global economy.
For investors the world over, America has long been a beacon of safety when uncertainty reigns, a nation whose deep and liquid financial markets are the premier destination for capital and home of a currency that is the lingua franca of international transactions. That is changing.
Trump’s combative economic and foreign policies are compelling countries to invest elsewhere, spend more on defense, make new trade alliances, and rethink the U.S. as the primary economic force around which to build their economies, security and futures.
Tuesday’s market action provided a taste of what could come.
Stocks fell around the world, but the U.S. experienced some of the sharpest declines, with the Dow Jones Industrial Average retreating 871 points, or 1.8%, the S&P 500 dropping 2.1% and the tech-heavy Nasdaq sliding 2.4%. Bonds sold off globally, sending the yield on the benchmark 10-year Treasury to just below 4.3%. The dollar extended recent declines.
The sharp declines in Treasurys and weakness in the dollar were especially notable: In times of trouble, investors have habitually flocked to the safe haven of the U.S. Tuesday, they were heading in the other direction.
“The U.S. is plainly for a lot of international investors becoming a less friendly place to do business with, and that is likely to have an impact on investment decisions going forward," said Shaun Osborne, chief currency strategist at Scotiabank.
The power of the American economy makes it tough to dent, nevermind topple. The “sell America" trade last year fizzled, and stock indexes reached new record highs just last week. Yet risks are real.
Adam Posen, president of the Peterson Institute for International Economics, said the circumstances now are different from last year. He points not just to the escalating Greenland tensions, but the U.S. military intervention in Venezuela, the Justice Department’s probe of Federal Reserve Chair Jerome Powell and the administration’s threat of new tariffs against countries in Europe despite its previous deals.
“I think there is a much better chance that we’re going to look back and say this was the turning point," he said.
Posen believes that the administration’s actions could knock away what has been a pillar of stability for the world. The U.S. helped grease the wheels of global commerce, expanding trade and providing security. In return, America got cheap financing, robust foreign investment and the primacy of the U.S. dollar.
The long-term repercussions could be grave. If investors around the world seek safe harbors elsewhere, the U.S. could face a future of diminished foreign investment, higher inflationary pressure and a reduced capacity to finance its debt. And that could in turn weigh on U.S. living standards.
Moreover, if the U.S. no longer functions as the world’s economic center, the multipolar world that takes its place—where China, Russia and the U.S. control their own economic and security spheres—could be more dangerous and unequal.
Although the erosion of America’s safe-haven status might be gradual, the caution flags, including past tariff actions and the country’s high level of debt, have been there for investors to worry about for a while, said Robert Barbera, a Johns Hopkins University economist. Markets can move quickly, he points out, and it doesn’t help that stocks appear extremely expensive relative to the past.
“This market can fall a lot before anybody can stand up and say, ‘God, do they look cheap," Barbera said.
A valuation metric devised by economist Robert Shiller, which compares the price of the S&P 500 to the past 10 years of inflation-adjusted earnings, has reached its highest levels since the dot-com bubble. Other than that period, valuations have never been so rich in the 145 year history of Shiller’s data.
Corporate debt valuations are also high: The spread, or difference, between yields on high-yield corporate bonds and comparable Treasurys, is near its narrowest point since 2007, according to the Ice BofA High-yield Index.
The worry is that, with valuations so high, any fracturing of investors’ optimism on U.S. assets could provoke a selloff. And that could have far-reaching consequences for the American economy.
The rally in stocks over the past year has helped propel consumer spending, particularly among higher-income households. Investment has poured into Artificial-Intelligence projects, bolstered by debt-financing and the sky-high valuations of AI related-stocks. That AI investment, in turn, has boosted gross domestic product.
“Stocks are priced for near perfection," said Bob Doll, chief investment officer at Crossmark Global Investments. That generally hasn’t been a problem with corporate earnings continuing to outperform expectations and the Fed cutting interest rates, but “the high-risk part of it is that you can’t have anything go wrong," he said.
News Tuesday that a Danish pension fund that serves academics and teachers is planning to sell its U.S. Treasurys shows the kind of risks that markets face, said Brent Donnelly, president of Spectra Markets.
Although that pension isn’t big enough to move markets on its own, “it paints a picture of what could happen" if other, larger pensions in Sweden and the Netherlands arrived at a similar decision, he said.
Given the “the deep liquid capital markets that are on offer in the U.S., and the returns that are generated, you have to have a very strong motivation to turn your back" on U.S. markets, said Scotiabank’s Osborne. But, he added, as the old world order and relationships “continued to be chipped away at, there is probably more motivation for investors to perhaps put less money to work in the U.S."
Write to Justin Lahart at Justin.Lahart@wsj.com and Sam Goldfarb at sam.goldfarb@wsj.com
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