The White House Correspondents' Association dinner, a gala where journalists and politicians pretend to be friends for one night a year, has been postponed. Not by a budget dispute or a trade war, but by gunfire. A shooting incident, the details of which remain shrouded in the usual fog of half-truths, has forced the decision. Meanwhile, across the pond, British security experts are clutching their pearls, warning that the political temperature in the United States is becoming dangerously volatile. For those of us who habitually watch the world through the lens of a Bloomberg terminal, this is not just a security alert. It is a credit event.
Let us consider the market implications. Political stability is a key component of a nation's risk premium. When a country's capital – both social and physical – is perceived as vulnerable to random acts of violence, the cost of carrying that risk goes up. We have seen this before. The spike in volatility indices following the Capitol riot of January 2021. The flight of capital from Hong Kong after the imposition of national security laws. Now, we have a shooting that forces the postponement of a major political gathering. This is not a trivial matter. It sends a signal to global investors that the United States, for all its military and economic might, is grappling with a domestic unrest that is difficult to model and impossible to hedge against.
The British security experts are right to be concerned. They understand that financial markets are, at their core, confidence games. When confidence wavers, capital seeks safer harbours. And where will it go? Perhaps back to London, where the Square Mile still offers a semblance of order, despite its own Brexit-induced turmoil. Or to Zurich, where the gnomes of the Swiss National Bank continue to play their cautious game. The immediate beneficiaries could be the traditional safe havens: gold, the yen, and the Swiss franc. The US dollar might face headwinds if the perception of political risk escalates.
Of course, one postponement does not a crisis make. But it is a data point. And in my line of work, we aggregate data points into trends. The trend here is worrying. The United States is becoming more like a developing economy in terms of its political risk profile. The assassination attempts, the mass shootings, the riots – these are not the characteristics of a mature, stable democracy. They are the hallmarks of a nation in transition, or perhaps in decline, depending on your time horizon.
The market's reaction will be telling. Look at the implied volatility in the options market for S&P 500 indexes. Watch the credit default swaps on US sovereign debt. Yes, I know that American debt is still considered risk-free by the Basel Committee, but markets have a way of pricing in reality before regulators catch up. The fact that the White House Correspondents' dinner – a celebration of the First Amendment and all that jazz – can be disrupted by a single gunman is a reminder that no institution is immune to the contagion of violence.
And what of the fiscal response? We can expect calls for more spending on security, more lockdowns of public spaces, more police presence. That means higher government expenditure, which in turn means larger deficits, which in turn means more debt issuance. The bond market will demand a premium for that added supply, and yields will rise. Higher yields increase the cost of capital for everyone, from the homeowner with a mortgage to the corporation issuing bonds. It is a vicious cycle that feeds on itself.
Now, the British security experts: they are warning of the spillover effects. They see that the anger and division that fuelled this shooting are not unique to America. They have their own share of political rancour, from the battles over Brexit to the scandals of Partygate. But they also know that America is the linchpin of the global order. If the linchpin wobbles, the entire structure trembles. As a financial editor, I cannot afford to be sentimental. I must be sceptical, analytical, and unflinching. The numbers do not lie. The price of risk is rising, and the White House Correspondents' Dinner is just the latest line item in that ledger.
Investors: take note. Rebalance your portfolios. Consider hedging your exposure to US equities and treasuries. The party is postponed, but the hangover may last longer.
