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Is the U.S. Losing Its Safe Haven Status?


President Obama and House Speaker John Boehner delivered rival debt ceiling/deficit plans to the nation on Monday evening in back-to-back speeches explaining the current state of the debt debate and its impact on Americans. And though they may not have intended it this way, the message of unwillingness to compromise in Washington sounded out loud and clear.

Without a resolution, the President explained the consequences as follows:

"For the first time in history, our country's AAA credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet. Interest rates would skyrocket on credit cards, on mortgages, and on car loans, which amounts to a huge tax hike on the American people. We would risk sparking a deep economic crisis. This one caused almost entirely by Washington."

So the world financial markets are left to watch and wait, seemingly held hostage by the resistance to compromise on Capitol Hill. Our country is one week away from hitting the $14.3 Trillion debt ceiling, which could in turn cause foreign investors to decide that maybe, just maybe the U.S. is no longer a safe haven investment.

"We're at an inflection point. Investors need to brace for interest rate risk over the next 7 — 10 years," says Keith Wirtz, President and Chief Investment Officer at Fifth Third Asset Management.

"We've got Europe again, you've got U.S. government, you've got weather-related disasters weighing on peoples' minds… It's a macro-dominated Summer once again," he tells Nesto.

But Wirtz doesn't weigh in on the politics that are penetrating the financial markets. Regardless of a looming default and downgrade, he's concerned about rising rates and what's occurring in the bond market. "We're looking at treasury yield levels we've not seen in my lifetime," says Wirtz, pointing to the US 10-year note which is now yielding over 3%.

Combined with Wirtz's opinion that inflation is on the rise, he firmly declares,"the secular bull market in bonds has ended…And they (treasuries) may be the most expensive asset class on the planet today."

The safe haven investment in U.S. Treasuries is dead in his view. So what about stocks?

Wirtz likes what he sees so far from the second-quarter earnings and anticipates average earnings up 15 — 20% for the S&P 500. Further, Wirtz says that fundamentals will come to the forefront of investors' minds and drive a second-half rally.

"Much like last year we had a hot summer last year, we have a hot summer this year. The markets were caught in a range bound condition, and we think we break out of that range sometime in the Fall session," says Wirtz, who's expecting the S&P 500 to touch 1400 by year-end.

But Nesto questions the longer-term outlook.

Looking forward, Wirtz says it becomes more difficult and the picture unclear. "We're enjoying a really good equity cycle, but at some point that's gonna recede. So it's harder to get enthused about stocks over the next 3-5 years, but it's particularly hard to get enthused about bonds because where we are in the rate cycle," he says.

Stocks versus bonds, or neither? Has America lost its safe haven status? Let us know in the comment section below.