American Fund Markets

So far, of course, it’s been the US economic downturn which has been getting all the attention. Wall Street saw a brief and hesitant revival in mid-April which had the markets looking for bargains, but there was still a consensus that the economy itself won’t bottom out until at least the middle of the year.

Profits are falling across the board, and the news on the US employment front has been almost universally bad in the last four months - which makes it all the more worrying that consumption in the States is still strong and savings are weak.

American Fund Markets & Personal Spending

Why so? Because it suggests that Americans have yet to understand the need to reduce their personal spending in the light of their more difficult circumstances. We have no real alternative but to conclude that the level of private borrowing must be rising to perhaps dangerous levels, and the risk must be that, if rising levels of inflation should ever push up the bank rate, the masses will respond by pulling out their stock market investments.

Indeed, there’s evidence that this is already happening. During March, US private investors withdrew $20bn from equity-based mutual funds, according to fund tracker Trim Tabs - the first time since September 1998 that such a thing has happened, and the biggest cash outflow in real terms since the stock market crisis of 1987. Not, you might think, a very promising basis for the tentative revival of this spring. But is it just a US affair?

American Fund Markets & US Consumers

Up to a point, yes. US consumers don’t buy very many foreign stocks at the best of times, and a large part of their mutual fund investments are made within the context of their pension fund arrangements - which are a lot less vulnerable to short-term withdrawals than other sectors of the market. But the mutuals themselves are a different matter.

For the last year (or until March, at any rate), American funds have been buying large volumes of European stocks, especially tech stocks, which aren’t as overvalued in Europe as they seem to have become in America. If they pull out, what happens to Europe?

And so to the unexpected strength of the dollar vis-a-vis the euro. The financial markets haven’t missed the fact that the Fed’s decision to raise US bank rates slightly since Christmas (two rises, one modest fall) stands in stark contrast to the falls that have been happening in London and Brussels.

American Fund Markets Regarding Dept Problems

 To some extent this divergence in bank rate policy is justified, given that America has a debt problem that Europe doesn’t, but the overall result has been to strengthen the dollar and deliver a boost to US bonds and equities at the expense of anything denominated in either euros or sterling.

We said a moment ago that Europe doesn’t have America’s debt problem, and we ought to explain what we mean. US consumers now have the lowest net savings rate of any developed country in the world - less than 3 per cent, or minus 3 per cent if you exclude pension savings.

American Fund Markets & Accumulated Borrowing

In theory, Europe ought to be less damaged. In practice, as we’ve seen, it might suffer a sudden evacuation of US funds.