Key Takeaways:
- The "Sell America" trade has returned, with concerns about the US’s net international investment position (NIIP) and the potential for foreign investors to reduce their holdings of US assets.
- The world is "net long the USA" to the tune of $27.6 trillion, with foreign investors owning $68.9 trillion of US assets and Americans owning $41.3 trillion of foreign assets.
- The US needs to plug its massive current account deficit, requiring net capital inflows of $1 trillion or more a year from overseas.
- A mass exodus of foreign investors from US assets is unlikely, but a slowdown in inflows could depress the value of US assets and erode the "American exceptionalism" narrative.
- The US’s geopolitical whirlwind, including its trade policies and relations with Europe, may make it harder to convince foreign investors to stick with US assets.
Introduction to the "Sell America" Trade
The concept of the "Sell America" trade has resurfaced, with concerns about the US’s net international investment position (NIIP) and the potential for foreign investors to reduce their holdings of US assets. This is not a new phenomenon, as similar concerns were raised last year during the US-China trade war. However, the current situation is different, with the US’s NIIP at a record high of $27.6 trillion, making it the largest on record, both nominally and as a share of GDP. The world is "net long the USA" to the tune of $27.6 trillion, with foreign investors owning $68.9 trillion of US assets and Americans owning $41.3 trillion of foreign assets.
The US’s Net International Investment Position
The US’s NIIP is a measure of the difference between the value of US assets owned by foreigners and the value of foreign assets owned by Americans. The current NIIP of $27.6 trillion is a significant amount, and it has raised concerns about the potential for foreign investors to reduce their holdings of US assets. This could have a significant impact on US markets, particularly the equity market, which is already considered to be overvalued by some analysts. The US’s NIIP is not just a matter of foreign investors owning US assets, but also of Americans owning foreign assets, and the balance between the two is critical to understanding the US’s position in the global economy.
Mutually Assured Financial Destruction
The concept of "mutually assured financial destruction" has been raised in the context of the US’s NIIP, with concerns that a sudden reduction in foreign holdings of US assets could trigger a financial crisis. This concept was previously associated with fears that China might dump its Treasuries to push up US yields and hurt Washington. However, the experience of China reducing its exposure to Treasuries in recent years without triggering a spike in yields suggests that the impact of a reduction in foreign holdings of US assets may not be as severe as feared. European countries, such as Britain, Belgium, and Ireland, have filled the void left by China, and their demand for US assets has helped to maintain stability in the market.
The Role of Europe
Europe plays a critical role in the US’s NIIP, with European nations owning $8 trillion of US stocks and bonds, almost twice as much as the rest of the world combined. While Europe may no longer consider the US a reliable partner, forging new trade links, supply-chain networks, and strategic partnerships takes time. A quick decoupling from the US would be both hard to achieve and highly risky, given the size and liquidity of US markets. The US is home to many of the world’s most valuable and innovative companies, and shunning American equities would mean betting against these companies.
The US Current Account Deficit
The US needs to plug its massive current account deficit, which requires net capital inflows of $1 trillion or more a year from overseas. While the deficit has narrowed sharply over the last two quarters, and Trump’s protectionist trade policies could ensure it continues to shrink, the US still needs to attract significant foreign investment to finance its deficit. The net $1.27 trillion of US securities bought by foreigners in the first 11 months of last year was substantial, but it is unclear whether this level of inflows can be sustained. The US’s ability to attract foreign investment will depend on its ability to maintain a stable and attractive investment environment, which is being challenged by its current geopolitical whirlwind.
Conclusion
The "Sell America" trade has returned, with concerns about the US’s NIIP and the potential for foreign investors to reduce their holdings of US assets. While a mass exodus of foreign investors from US assets is unlikely, a slowdown in inflows could depress the value of US assets and erode the "American exceptionalism" narrative. The US’s geopolitical whirlwind, including its trade policies and relations with Europe, may make it harder to convince foreign investors to stick with US assets. The US needs to address its current account deficit and maintain a stable and attractive investment environment to attract the foreign investment it needs to finance its deficit. Ultimately, the US’s NIIP is a critical component of its economic stability, and it will be important to monitor developments in this area closely.
