How US "Exceptionalism", and the bull market in the US$ and US equities are linked.
Since just before the invasion of Ukraine in 2022, foreigners' holdings of US financial assets has risen from US$ 20 trn. to US$ 30 trn. Of this increase 10% was down to increased holding by foreigner of US Treasuries and Notes, which, in the main, is what foreign central banks hold. The period 2020 until today is when the US$ share of global reserve asset gradually declined to about 55% from close to 60%. So, what drove foreigners holdings of US financial assets?
90% of the increase in foreigners exposure to the US (of USD 10 trn.) was in foreigners' holding of US equities!!! Today, foreigners holding of US equities are about USD 18 trn. The exposure of US residents to foreign equities is US$ 12 trn. Back in 2020 they were level pegged at US$ 8 trn each..
What I see in this is:
- the vulnerability of US$ strength to any reversal of the US equity bull market - more so than to foreign central bank action to reduce the role of the US$ as global reserves asset.
- A bear market in US equities will be a global one as international equity exposure will be sold by both US & non-US investors to raise and repatriate cash. This is because of the explosion since 2020 of cross border exposure of both US (+50%) and non-US (+125%) residents to each other's equity market,
- A drop in international exposure to US assets, would hasten the decline in the US as a global reserve currency. This is more likely to be driven by a reduction in cross border equities than a fall in central bank holdings of US$ assets, which are relatively stable since 2020.
- Cross border Flows as a result of a US equity bear market could offset flows into the USD as a safe haven currency if the bear market were (say) to be caused by an off shore geopolitical event. This is a complicated calculus as it invloves the relative sizes of safe haven and equity flows as well as hedging. But it is one to bear in mind; future gains in the US$ from safe haven flows may be limited if equties drop.
As you know, one of the major themes for 2025 is the end of US exceptionalism.
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