"The World Is Watching in Shock": Global Investors Are Getting Jittery as America Descends Into Political Turmoil
As major companies suspend political donations following the deadly Capitol siege, some sovereign-wealth-fund managers are putting the brakes on U.S. investment. For the first time, says one senior Wall Street executive, the country has been flagged as a political risk.
By William D. Cohan
By Amy Harris/Shutterstock.
Failed insurrections have consequences.
A number of companies, such as Goldman Sachs, Facebook, JPMorgan Chase, Citigroup, and Microsoft, wasted little time in announcing their suspensions of all political donations in the wake of Wednesday's deadly riots on Capitol Hill. Other companies, such as Comcast, GE, AT&T, Morgan Stanley, American Express, and Amazon, have taken their reactions a step further: They will halt donations to the Republicans in Congress who voted to challenge the certification of Joe Biden's election. Since—mixed metaphor alert—money is the mother's milk of politics, as they say, these pronouncements will have a serious impact, even if they have the distinct feel of giving up the sleeves on a vest. After all, the next election cycle is, mercifully, still months away.
The shocking events of January 6 have also damaged America's international standing. In Foreign Affairs, Richard Haass, the president of the Council on Foreign Relations, wrote that Donald Trump's entire presidency has resulted "in a marked decline in U.S. influence" abroad, to the distinct benefit of our adversaries, such as China, Russia, and Iran. But, he continued, the January 6 rampage—"the lawlessness and violence at the U.S. Capitol and the refusal, by Trump and dozens of Republican members of Congress, to accept the results of the November presidential election"—will further hurt U.S. foreign policy and the U.S. democracy. "We have gone from 'present at the disruption' to 'present at the destruction,'" Haass wrote.
The focus of Haass's essay, understandably, is the damage the failed putsch will do to our political influence around the world. But the storming of the Capitol has also severely damaged America's long-standing reputation as a safe haven for global investors looking for a place to park their trillions without fear or favor. The United States has turned into a risk factor. According to a senior Wall Street executive, some sovereign-wealth-fund managers—the men and women who control huge pools of capital around the world—have decided to halt, for now, new capital commitment to private-equity and hedge funds in the United States. These investors have a "risk-ranking system," he explains, for the countries they invest in, including such metrics as currency risk, rule of law risk, the risk of potential sanctions, and political risk. In the past, countries such as China, Russia, and Indonesia, as well as some countries in Africa, South America, and Eastern Europe, have checked off one or more of the boxes on the list of concerns, making them effectively non-investable. "For the first time ever," he says, "they have now flagged the U.S.—for political risk—[and] so they are holding back for the foreseeable future."
It's hard to know how serious these huge investors are about holding off on further investment in the United States. It's not as if sovereign wealth funds post such decisions on their websites. We will have to wait and see. A spokesman at the Blackstone Group, one of the world's largest investment companies with nearly $600 billion of assets under management, tells me the firm has not heard a peep from any foreign investors concerned about the ongoing political turmoil in Washington. Another senior executive at a large investment concern says he hasn't heard from any foreign investors either in the wake of the January 6 rampage. He says, though, that given the persistent low interest rates around the world, investors with huge pools of capital, such as sovereign wealth funds, may have little choice but to keep a big chunk of their money invested with the U.S. private-equity firms or hedge funds, many of which consistently post higher risk-adjusted returns than can be found elsewhere.
Jeffrey Leeds, the cofounder of Leeds Equity Partners, a midsize private-equity firm founded in 1993 that invests in "knowledge industries," says he has not heard from any worried investors either. But he is concerned about what happened on January 6, especially since it was fomented by the sitting president of the United States. "The assault on the Capitol was worse than what we have seen around the country when protests morph into riots," he writes in an email. "[I]t was a direct assault on democracy and it was incited by the president. There is simply no basis for any justification for what happened, no basis for any defense of what took place." He seems sanguine, though, that Americans will now pull together to persevere. "To make clear how strong we are as a country and as a people," he writes, "our actions now need further to isolate Trump and to do so together. Avoid, if possible, actions or words that call in to relief some of the legitimate areas of debate between the parties, to emphasize how universal our condemnation of him is. We are not in danger because we will not permit him to divide us anymore."
But if it turns out that foreign investors, who own large chunks of our $27 trillion national debt and who have invested trillions more in many of our smallest and largest companies, are souring on the American experiment, it will be a serious threat to America's position at the left ventricle of global capitalism. "The world is watching in shock to what's happening," my Wall Street source continues. "What happens if we start seeing a slowdown in capital flows, and the dollar is possibly no longer the world's most trusted safe haven?" Where once upon a time these questions would have been simply rhetorical or academic, the events of January 6 make them palpably real. Investor concern has already started showing up in the market for Treasury securities, considered the safest investment on earth. Since January 4, the yield on the 10-year Treasury bond has increased to 1.15% from 0.93%, a whopping 24% increase in six trading days. Investors are getting jittery. And it's a nervousness that shows no signs of abating, even if Biden is inaugurated on January 20 without further incidents. "I don't think this was necessarily about what insanity Trump might cause in his final days," the Wall Street executive continues, "but rather a concern around the potential for ongoing civil discord and the collateral damage that may ensue…The underlying divisiveness is not going away. It is a holy war, remember."
William D. Cohan is a special correspondent at Vanity Fair.