The Impact of U.S. Foreign Policy on Global Portfolios

 |  Includes: DVN, EWA, FXI, GMF, HAL, HAO, PKX, SLB
by: Soos Global Capital

The Council on Foreign Relations website featured an article Thursday entitled: "Belt-Tightening for U.S. Foreign Policy" which was the text of an interview with Dr. Michael Mandelbaum, the Christian Herter Professor at the Paul H. Nitze School of Advanced International Studies at The Johns Hopkins University.

It also featured a blog called "The Water's Edge" written by Dr. James M. Lindsay, with Friday's post entitled: "TWE Remembers: The Monroe Doctrine". I'd recommend a read of both. The economic implications and, ultimately, the impact on investment decisions are worth considering.

My thoughts are expressed in the following letter that I wrote to the Council:

{Beginning of letter} Letter to CFR: I enjoyed reading the interview with Dr. Michael Mandelbaum regarding “Belt-Tightening for U.S. Foreign Policy” in this age of deficit reduction. Of particular note was his description of the current U.S. role in Asia as it relates to China where our presence is seen as a counter-weight to insure Chinese non-aggression. On this point, could I ask what would in fact happen if the U.S. started to decrease (not disappear, but decrease) its presence in that region? Would China really be the threat? Would they embark on an “aggressive foreign policy”? On the other hand, is it at all possible that China, in pursuing the very economic interests that Dr. Mandelbaum goes on to state are protected by U.S. policing in the region, might in fact step up and suppress any rogue states or non-state entities who try to become trade route pirates?

The background to this query is in some way related to the article I read earlier from Dr. James Lindsay regarding the Monroe Doctrine. In discussing its genesis, Dr. Lindsay described what “geopolitical calculations” went into the formulation of the Doctrine, emanating from John Quincy Adams’ assessment of the world realities of the time. Among those calculations was the premise that a U.S. threat to push back on any further colonization of Latin America by other European countries would really be a “bluff” of sorts in that the only real heavy-weight navy that could thwart another country’s move would be Britain’s. It may be a stretch, but I wonder if the U.S. policing activity in Asia, especially in the coming years of fiscal austerity that we must undertake, already is or will quickly devolve into nothing more than a Monroe Doctrine style “bluff”. Others know, or will, that we are overstretched financially and therefore unable to commit militarily. As such, is there a chance that a diminished U.S. presence in the region could be supplanted by a non-politically aggressive but rather economically-self-interested Chinese presence? {End of letter}

The issues of U.S. fiscal austerity and its impact on economics especially in trade-route sensitive areas such as Asia and the Middle East are of critical importance to a global investment view. While this may not appear to be "today's actionable trade" per se, in setting up portfolios of assets to reflect country growth, company prosperity and longer term asset appreciation potential, these issues are paramount.

To wit, assets that I currently own in the Asia region, such as ETF's in China (FXI and HAO) or Asia ex-Japan (NYSEARCA:GMF) or Australia (NYSEARCA:EWA) or Posco (NYSE:PKX) are most certainly going to be impacted by the answers to such questions on U.S. ability to maintain a global foreign policy policing presence. Likewise, the potential for disruption of oil distribution routes out of the Middle East is likely to impact Energy sector plays that I own such as Devon (NYSE:DVN), Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL).

This issue is not an academic conversation. The reality of U.S. deficit cutting is upon us. As such, when the U.S. Deficit Commission's proposals evolve from "ideas" to "laws", asset valuation calculations will be changing apace....or at least they should be! As Dr. Lindsay stated in his article, the Monroe Doctrine was "born as a bluff based on shrewd diplomatic analysis". In today's 21st century, the likelihood of our allies and enemies being "bluffed" into thinking that the economic world order will not be materially impacted by our deficit reduction efforts, seems remote. They get it. And they'll seize opportunities to fill vacuums that the U.S. leaves behind. The likelihood, however, of blindsiding unsuspecting myopic provincially focused investors seems far greater.

Word to the wise: Call the bluff!

I will post any reply I receive from the Council.

(Note to readers: This article is solely meant to be thought provoking and is not in any way meant to be personal investment advice. Each investor is obligated to opine and decide for themselves as to the appropriateness of anything said in this article to their unique financial profile, risk tolerances and portfolio goals.)

Disclosure: Long FXI, HAO, GMF, EWA, PKX, SLB, HAL, DVN, SPX, many stocks in QQQQ. Positions may change at any time without notice.

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