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In the New Normal of lower returns and higher volatility, investors are looking to beat inflation by a point or two without taking on too much risk. Some blue-chip companies now look less risky than the countries in which they are headquartered. After all, what would you rather be invested in over the long haul--globally diversified stocks of cash-rich companies that are hedged across many nations and pay a predictable 3% dividend, or the relatively low-interest-paying sovereign debt of a country with a totally dysfunctional political system? (I'm looking at you, Washington! And you too, Europe!) As I've been saying for some time, it's now a legitimate investment question. The debt-ceiling face-off has only brought the trend into starker relief. In recent days we've seen the rate on one-month T-bills exceed that on interbank loans--which means that the markets believed that companies' ability to pay each other back was a safer bet than the trust and faith of the U.S. government.
Both the economy and politics will become more volatile.
Over the past few years, the U.S. has sadly been following a story line more typical of emerging-market nations. Politicians play chicken with the country's credit, borrowing rates eventually go up, growth goes down, and politics becomes more polarized and extreme as a result. It's a vicious cycle, and it's happening as we speak. Given Washington's willingness to take America to the brink over and over, it's difficult to imagine how any deal can break that cycle. This is the real New Normal, and we will all pay the price.