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What growing U.S. political risks mean for the markets

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Mark Rosenberg, CEO & Co-Founder of GeoQuant, joins Yahoo Finance's Sibile Marcellus to break down how the markets faring amid heightened political tensions.

Video Transcript

SIBILE MARCELLUS: The violence we saw at the Capitol last week was a clear departure from US political norms. Inauguration day is just a couple of days away, and the US is known for a peaceful transition of power. But we're seeing law enforcement, security officials across the country on a heightened state of alert as inauguration day approaches.

Now, what does this mean for America's preeminent position when it comes to global financial markets? Is the US being viewed as a much riskier proposition? I want to bring in Mark Rosenberg. He is the CEO and co-founder of GeoQuant. Mark, are US assets being viewed as riskier by foreign investors as a result of what we've seen at the Capitol unfold last week?

MARK ROSENBERG: Yeah, remarkably not yet in that we do see some shakiness and some relationship between political instability and the dollar and some, you know, early relationship between US political instability and US government bonds. But for the most part, those assets are still considered quote "haven assets" or risk-off investment plays such that when there is risk, even in the United States, the dollar and US treasuries might rally.

And we and we also see basically no relationship between US political risk and US equity markets at all, such that as, you know, our indicators of US political risk were hitting all-time highs last week around the Capitol events, so too was the S&P 500. So not yet, I think is the short answer.

SIBILE MARCELLUS: Yeah, the key two words you just said right there are, not yet. So is a potential reckoning coming? And also is this the US' first modern era election as an emerging market? When I saw you, you know, basically say that, I thought, interesting. I would never think US and associated with emerging market.

MARK ROSENBERG: Right. And I think from the economic and financial standpoint, that's true. And this is still home to the world's reserve currency, the deepest capital markets in the world, et cetera. Politically, though, our politics look more and more like an emerging market, i.e. a country where because of institutional risk and because of social risk, it's not clear that political institutions like elections will be respected, right-- that there won't be political violence around transitions of power, that there won't be arbitrary policymaking, et cetera.

And so I think this is the United States' first election with emerging market-style politics. Of course, the market and economic backdrop to that is still very much of a developed market-- and in fact, the largest developed market. And I think that's part of the reason why you don't see many consequences in the financial markets. But ultimately, you know, the dollar's reserve status and, again, the existence of the US treasury as kind of the market's risk-free asset is contingent on, you know, political and institutional stability in the United States. And if that continues to deteriorate, then so too will the dollar's reserve status as well as the global demand for US treasuries.

SIBILE MARCELLUS: And how much of a factor is it for foreign and domestic investors when it comes to looking at the political stability of institutions in a country when deciding to invest there?

MARK ROSENBERG: So it is a major factor in emerging markets. And there's plenty of evidence and data to back that up-- that, you know, political unrest or questions about institutional stability, particularly financial institutions or economic institutions like the central bank or the finance ministry, do have negative impacts for assets-- whether those are currencies, or sovereign bonds, or equities in emerging markets.

In developed markets, less so-- however, when you look at recent events around Brexit in the UK, around European stability, you do start to see where political risks are starting to affect developed market assets. And again, in our research, we do start to see the early indications of US political risk impacting US assets as well.

SIBILE MARCELLUS: And as you pointed out, US markets have been relatively unfazed by what you call emerging market-style politics. But what impact do you think this might possibly have on the dollar in terms of it being the world's reserve currency?

MARK ROSENBERG: So in the near term, very little. I don't think there's any case that the dollar is on the verge of losing its reserve currency status given the political instability in the United States. In the longer term, I think it will have a significant impact on the dollar in that if there are kind of continual cycles, if there's, say, persistent political violence in the United States, if the 2020 midterms and then the 2024 presidential elections are also marked by, you know, widespread accusations of fraud, and political violence, and uncertainty about the outcome, and whether the loser will respect the results of the election-- if you have a couple of political cycles like that, then I think the dollar will start being thought of as less of a risk-free asset in global markets, and that will hurt its reserve currency status.

SIBILE MARCELLUS: And speaking of that, you said uncertainty about the outcomes-- I mean, it's clear. We all know that incoming President Joe Biden will be leading this country starting January 20. We're all clear on that. We all know that that's official-- that's a fact. But do you think that President Trump's possible impeachment trial, if that does take place, could possibly have an impact on investors?

MARK ROSENBERG: I think it will in the near term, again, in that investors are looking, particularly, again, equity market investors are looking for greater stimulus from Washington. And the impeachment trial, just by virtue of time and effort, will probably at least conflict or clash with the congress' work on getting further stimulus.

I do think, though, again, stepping back in the longer term and looking at some of the findings of our own work, that the fact that there are more frequent impeachments, the fact that there is the need to state, as you just did, that Joe Biden is the President-elect and is going to take office, which was very clear from the election results-- those kinds of norms and those kinds of narratives will start to disrupt, I think, the market's perception of US political stability. And so the more-- you know, if, for instance, the Republicans begin to start impeaching Joe Biden right away on some pretext, I think, again, eventually this will catch up to US markets.

SIBILE MARCELLUS: Well, Mark, definitely keeping America's preeminent position in global financial markets is important-- and that's an understatement. Mark Rosenberg, thanks so much.

MARK ROSENBERG: Thanks for having me.