On the east coast of the United States, we are accustomed to calling it birch. In the mountainous west, they call it aspen. In Finland, this ubiquitous tree is called koivu. In Sweden, they call it björk.
These trees stand like gleaming white spires among the diverse and colorful foliage that graces Scandinavia this time of year. Interspersed among magnificent evergreens and those with leaves in yellow and red hues, these trees shine brilliantly in their landscape.
During my meetings in Helsinki and Stockholm, I encountered many bankers and investors from various financial and economic sectors. In the course of these meetings several themes continued to surface.
1. Will the United States be able to pay its debt? This question arose several times and in serious form, and I attempted to probe it in private conversations. It is unclear if this is due to the Standard & Poor’s rating downgrade of America. What is clear is the negative effect of the constant barrage of information coming across our American-produced media as they discuss American deficits and the intractability of American budgets. This is significantly reducing European confidence in the US.
Of course, my answer to this question was a very quick and clear yes. There is no question that the United States has the capacity to pay its indebtedness. I explained the rationale behind that several times.
2. Will the US maintain a path leading to a loss of its preeminent status as a world reserve currency and as a global power? If it does, who and what will replace it? The metaphor in Scandinavia has always been the Cold War period after World War II, in which the dominant powers were either Russia or the US, and they were antagonists. Particularly in Finland, the sensitivity to Russia’s aspirations is pronounced, for good reason. One need only examine their history.
I answered that the US would eventually lose its status as a world reserve currency, but that will take some time. The growing dominant power in the world is the second largest global economy, and that is China. I pointed out how US policy is gradually changing because of the recognition that China is extremely competitive to the US in global affairs. For example, witness the sale of enhanced F-16 fighters to Taiwan, instead of a new generation of aircraft. While the US says Taiwan is adequately protected with the enhanced versions, insiders in the defense industry clearly state that this was designed to appease China and, hopefully, diminish the risk of any active military belligerency between the mainland and Taiwan.
In follow-up to the questions concerning the global power of the US, additional comments focused on the roles of the US in the world, namely in Afghanistan and Iraq, and how much longer the US could sustain policies that seem to weaken it. Coupled with the question about the projection of global power, there was substantial inquiry into the capacity of American citizens to muster a sense of common purpose when needed for either military contingencies, other emergencies, or to solidify internal domestic economic policies.
It is odd to be an American in front of Northern European audiences, where they are highly skeptical of the US. They witness our behaviors on television and in the media, and they look at our political system and its current intractable belligerency, and question the long-term direction of the United States.
3. An interesting discussion dealt with the workout of the political/debt/deficit problems in the US versus those in Europe. Europeans are very suspicious of the United States. They do not trust our political leaders, and they do not have confidence in our outcomes. That is an interesting contrast when you observe the 27-nation European Union and 17-nation Eurozone attempting to formulate a non-crisis mechanism for dealing with sovereign debt. In Northern Europe, locals who have been through their own versions of financial crisis remain certain that such things can be worked out and managed if the governments coalesce with common purpose. They look then at the US and say, “What is missing here? Is not the risk of failure imparting a sense of common purpose in Washington?”
Europeans have a path by which they can determine the outcomes of a banking crisis. They have been down this road before; they have infused and adjusted the capital circumstances of their various banks. They have taken losses and write-offs. They have dealt with the aftermath of a financial crisis and a protracted period of high unemployment and low productivity.
One takeaway that has been reinforced from this trip to Scandinavia is that Europe is now better prepared to deal with the sovereign debt issue, defaults, restructuring, and the elements that it faces in the peripheral countries. Europe is better prepared than the United States. Their sense of resolution to avoid a Lehman/ AIG-type meltdown is strong.
That is not to say that the problems facing Europe are easy; they certainly are not. It is clear that Greece needs to restructure its debt and that it faces insolvency. It is less certain that Spain and Italy need to restructure their debt, since neither country is insolvent. They face liquidity issues regarding the pricing of the debt. Those issues can be addressed with European institutions. They require budgetary control and disciplines on spending and changes in policy. That mechanism is at work, and we shall see whether or not it is successful.
My takeaway is that mass national defaults among members of the Eurozone will not occur. Italy, Spain, Ireland, Portugal, and Belgium have the capacity to pay off their debt obligations. The determining factor lays in the strength of political will to adjust policies so that they may do so. My perspective and answer to that question is likely to be yes, they can do it. All member nations of the eurozone and the European Union are focused on what the destructive force of excess sovereign debt is doing to Greece. They are very aware that they could be next if they do not adjust their policies, and are motivated by national purpose to do so.
In summary, we do not believe the European Union will dismember. We also do not believe the euro as a currency will meet its demise. We think the European banking system will get sufficient capital infusions to continue its functionality, and we do not expect the European sovereign debt crisis to result in another Lehman/AIG meltdown. In Northern Europe, they will not permit it. In the larger European countries, like Germany and France, there is too much at stake to allow it to happen. In peripheral Southern Europe, they are aware that the penalties are more severe if the system fails, and they are doing everything they can to avoid it.
I will depart from the delightful Scandinavian autumn forest with its beautiful white trees, dwelling on the cyclical nature of the seasons. Nature itself provides a platform to consider the repetitive seasons that also come and go in the financial arena. Human behavior moves from crisis to crisis, from resolution to resolution, from rebuilding to rebuilding, and from growth period to growth period. The developed world faces its share of crises, and is doing its best to reach resolutions, each country or region in its own particular way.
We will weather this storm, just as we always have. The stage is set in financial markets for the recovery and robust rebuilding. Recovery is coming, and prices of financial assets in real estate, equities, and in nonspeculative items like operating businesses, are inexpensive. Speculators betting on a perpetual rise in the price of a precious metal or in the arena of derivatives, in which profits are made by the demise and default of entities, institutions, or governments – those speculators have flourished but now face difficulty. Their easy times are behind them; markets are preparing for the next leg up.
We hold to our projection that the Standard & Poor’s 500 Index as a benchmark for the US stock market is incredibly reasonable. We are able to purchase US equities at dividend yields that exceed the riskless benchmark 10-year Treasury note. We are able to obtain for the next ten years the growth of those equity prices and of the profit shares that flow through to those equity earnings. We hold to our projection that the S&P 500 Index will trade above 2000 before the end of this decade. We seek other opportunities like that around the world, and particularly will favor those markets and economies that are more pro-growth and whose policies are conducive. That is the projection of our global multi-asset class approach. In all cases, we continue to use exchange-traded funds as our mechanism and apply economic principles to our research in order to determine sectors, industries, and various other weightings among the ETFs.
We will say adjö from Scandinavia.