Capital War Risk Demands Cooler Heads

It was probably my second summer during college when someone — I think it was my Dad — gave me the book "The Art of the Deal." At the time, the book was considered one of the current must-read business books for young guys looking to get into the professional world. Trump's style of extreme self-promotion, coupled with negotiation methods I perceived as winner take all, didn't fit with my personality. I still remember viewing his deal-making approach as: blow everything up, destabilize your counterparty, and then suggest terms favorable to your position as a solution.

Through some large twists of fate, Mr. Trump has now become perhaps the largest focus of everyone's attention on the entire planet. Some commentators have dissected this approach and coined the phrase TACO — Trump Always Chickens Out — to describe the process of Trump suggesting grandiose policy positions which end up being watered down. Rather than seeing this as a chicken out, I simply perceive it as a scarcely evolved version of the Art of the Deal. Regardless, it's exhausting, and I'm concerned it's exhausting investors.

The Trump negotiation tactic of kicking the hornet's nest to sell head nets is driving the Europeans to the brink. Unfortunately for the Europeans, beyond norms and precedent, they don't seem to have a lot of negotiating leverage — but they do have something in their back pockets which could spook financial markets. The Europeans are the U.S. Federal government's largest foreign creditors, and America owes them collectively a lot of money.

This week the Danes threw a shot across the bow when it was announced a large Danish pension fund would divest itself of its entire portfolio of U.S. government bonds. The $100 million position in U.S. Treasuries, while not significant in a $38 trillion pool of Treasury debt, is more significant from a messaging standpoint — which led to a new lexicon hitting the public: capital wars.

Economic pundits have been postulating about the prospects of capital wars for some time. In the highly integrated global financial system, when so much of U.S. debt is owned internationally by rivals and allies alike, the management of this debt could become a tool of geopolitical influence. This is the only incident I recall of the selling of U.S. Treasury holdings being timed with political dissent. With this seal being broken, I'm concerned it may not be the last.

There are many underlying reasons why weaponizing financial holdings is counterproductive, and in my opinion large-scale capital battles over U.S. Treasury securities is unlikely. But it would be naive to think this type of rhetoric doesn't have the capacity to roil markets — and this week as I write this column, markets are roiling. We can only hope cooler heads prevail.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.