By Bill Stone of PNC Wealth Management
NEW YORK (
A national debt, if not excessive, will be to us a national blessing.
-- Alexander Hamilton, U.S. Secretary of the Treasury 1789-1795
Alexander Hamilton considered the possibility that the national debt could, in fact, be a blessing for the newly forming nation. This month's PNC Investment Outlook focuses on the current national debt situation and discusses a framework for monitoring the risks.
When considering the risk of sovereign default, one should consider what factors typically lead to default. Our view is that the primary drivers of sovereign default risk are market confidence and political willingness to pay. Given this view, looking purely at debt levels is an insufficient tool for measuring default risk. Our proposed quantitative and qualitative framework for judging the default risk of the United States also includes:
- foreign vs. domestic ownership of U.S. government debt;
credit default swaps;
inflation expectations; and
tenor (maturity) of U.S. government debt.
In conclusion, we judge the conventional default risk of the United States to be extremely low. This opinion rests on two main premises.
The fiscal position of the United States, though stretched, is quite sustainable, particularly if, as we forecast, economic recovery continues, lifting government revenue.
More important, the United States issues and owes in its own fiat currency, which acts as a major global reserve currency. It is almost incomprehensible that the United States would repudiate its debt on an outright basis, but rather would likely use inflation -- or in more simple terms, effectively print currency -- in an attempt to reduce any debt to a manageable level.
Our view is that the national debt is further away from Hamilton's blessing than anyone would prefer, but the tipping point to curse has not yet been reached. The U.S. fiscal situation is certainly worth pondering but not a deterrent to sound investment, especially given the alternatives. Worthy of more immediate monitoring are its possible implications for inflation and the resultant investment implications of a stretched fiscal position.
Having just returned from the
annual meeting, I was struck by how similar
views were on this subject. He made many of the same points as we did in this report. In particular, he said that as long as the U.S. borrows in U.S. dollars there is "no chance of default." We'll be publishing a short update on our observations from the Berkshire Hathaway meeting soon.
More on Warren Buffett
Setting aside the current tug of war between positive and negative factors in the stock market, including the possibility of a correction, we believe the big picture is that things are getting better on many fronts, which should be supportive of stocks and other risk assets. It is almost certain that the pace of stock gains must slow, but we expect the relative performance to remain attractive over a reasonable investment period.
Investors should remain focused primarily on valuation and fundamental factors, which we currently judge as encouraging, combined with their long-term goals and risk tolerance, when making asset allocation decisions.
--Written by Bill Stone in Philadelphia.
Bill Stone is the Chief Investment Strategist for PNC Wealth Management and PNC Institutional Investments with over $100 billion in assets under management. He is a member of PNC's Investment Policy Committee and is responsible for defining the asset allocations and portfolio strategies used throughout the organization to advise individual and institutional investors. Stone is a cum laude and honor's program graduate of the University of Dayton with a bachelor's degree in finance. He earned a master's of business administration from the Katz Graduate School of Business at the University of Pittsburgh. In addition, he holds the Chartered Financial Analyst? designation and is a Chartered Market Technician. Stone has been quoted in many publications including The Wall Street Journal, Financial Times, Barron's, Fortune, Forbes and USA Today. He is regularly interviewed by Associated Press and Reuters. He is also regularly interviewed on CNBC and Fox Business for his market insights.