Everyone has seen some version-action movie or cartoon-of the canoe headed toward the waterfall. Sometimes the protagonist is aware of impending doom; sometimes it catches them by surprise. Lots of times, at least in the movies, there is a Hollywood ending whereby the hero is miraculously saved from going over the falls, or even more miraculously, goes over the falls and survives.
The global debt situation is like that now for the four large countries remaining with AAA credit ratings. Those four countries are the U.S., U.K., France, and Germany, and according to the Wall Street Journal
The credit-rating company repeated that there was no immediate risk of a downgrade of the big triple-A-rated countries, although the slight risk they could fail to get their finances under control, and thus be downgraded, has increased. Moody’s concluded that “on balance, we believe that the ratings of all large triple-A governments remain well positioned—although their ‘distance-to-downgrade’ has in all cases substantially diminished.”
As far as I can tell, “distance-to-downgrade’ is a polite way of informing these countries that if they listen carefully, they will be able to hear a waterfall in the background.
One of the interesting things about currencies is that all of the movement is relative to other currencies. You may be in bad fiscal shape, but you might still have a strong currency if your neighbor’s condition is even worse.
The dollar was having a tough time of it against the Euro until it came out that several members of the EU had very large and in some cases, undisclosed, debt problems. Now the Euro is floundering. The recent strength in the dollar has allowed dollar-denominated assets, like U.S. stocks, to improve in performance versus international stocks. In a purely domestic portfolio, you would probably never notice this, but its effect is very apparent in a global macro-type account.
It’s not clear how things will shake out. Will our policy makers rescue us before we go over the falls, or at least protect our currency better than the other governments? Or will we all go over the falls together? One thing that does seem certain is that the global enonomy is more linked than ever before, and that investors will have to account for this in their investment portfolios.
