US-China war the only real threat to portfolios: Kotkin

The second Trump administration has given investors plenty to worry about – tax changes, tariffs and diplomatic chaos among a slew of distractions in the US.  

But in reality, there is only one threat that could bring devastating damage to portfolios that everyone should be concerned about.  

Global geopolitics expert Stephen Kotkin, who is a senior fellow at the Hoover Institution at Stanford University, told the Fiduciary Investors Symposium in Harvard the priority around the globe should be avoiding a hot war between the world’s two superpowers. 

“If there’s a war between China and the US, you’re finished. Your portfolios are finished. Everything is finished,” he said. 

“In a US-China war, every pipeline in the world is going to go up in smoke and burn. All those oil tankers at sea, they’re going to be sunk in the Strait of Hormuz, the Strait of Malacca, in order to block traffic so the Chinese can’t import energy. 

“The whole world game is to prevent war between China and the US. Everything else is just noise and manageable. I’m not worried about it – it’s competition, and it’s just life.” 

The US president Donald Trump, despite his unpredictability, has an important role in restoring global balances, said Kotkin.  

Since the start of his term, Trump has made threats to withdraw US security promises to NATO allies, which resulted in European nations significantly upping their defence spending.  

Europe accounts for 17 per cent of the global GDP, 7 per cent of the global population, but almost half of global social spending, Kotkin said. The countries could maintain its level of welfare partly because its security spending was underwritten by the US.  

“The costs of the American security umbrella – those almost 80 treaties – that’s gone sky high. We haven’t even gotten to China, where our adversary has gotten a lot better,” he said. 

“America can’t afford its commitments, and it’s got to rebalance somehow. 

“These global imbalances are real. Trump is not fixing them, and you think he’s exacerbating them. All he’s doing is revealing them.” 

The US dollar’s reserve currency status is a “seduction” for the world’s largest economy, Kotkin said. It has caused the US to live beyond its means and accumulate substantial debt.  

“We borrow in our own currency, as if we’re not borrowing any money – as if it’s free money, as if it’s play money,” he said. 

“Sure, it enables us to do these sanctions and financial shenanigans against countries we don’t like – which don’t work, but it enables us to do that and exercise our power.  

“But what it really does is sucker us into thinking that a $29 trillion debt on a $30 trillion economy doesn’t really matter when, of course, it does matter.” 

More currency options is not a bad thing, but the problem is there lacks a real alternative that could be as convertible and liquid as the US dollar. But evaluating the fundamentals of other currencies and assets is a call that asset owners, as fiduciaries, have to make on behalf of their members, Kotkin said.  

But he is of the view that there is “zero chance” an alternative currency will replace the US dollar in the short term.  

“You got deep fundamental institutional power and values here at play [in the US], and you have to beat that,” he said. 

“The only thing that can destroy the dollar is us.”