The Long and the Short

Short the dollar, go long America

So there you are, sitting in a glass tower in Tokyo, London or Bonn, staring a two figures on your monitor. The left, the ICE U.S. Dollar Index points downward like a ski slope at a 10% grade to a wilting greenback. Then there is the always bouncy S&P500 moving up by 10%. Which is a bit confusing as strong growth generally means a strong dollar and vice versa. But these are not normal times.

So, do you go long or short on America these days? The answer appears to be both. Treasury figures show foreign buying of U.S. long-term assets has surged to record highs this summer, especially equities. Everyone from Zurich to Singapore is piling into American stocks.

And yet, the dollar stays flat despite strong growth and tariffs which ought to push it up. The dollar isn’t sinking, really, it dropped around a couple of tariff spasms and this week’s hairy jobs and inflation data. It just hasn’t recovered like equities have. What’s afoot is a kind of financial two-step. Investors want the U.S. growth – AI may be the queen mother of all bubbles, but right now it’s also why US stocks are defying gravity. Foreign investors want access to the deep liquidity and dynamic innovation that no other market can match. Stock exchanges around the world from London to Hong Kong are scrambling to keep firms from listing in New York. The rest of the world may resent the US right now, but its still the place to be.

Now I’ll be the first to admit that markets get juiced up on their own BS, and this week’s tech sell-off has been steep, but since these firms are posting solid numbers, this may be simple profit-taking. Either way, never write behavior, or the market, off as irrational until you know what the play actually is.

On the other side of the bet, is the greenback. Shaky payroll and CPI numbers have pushed the dollar down further. The market has priced in steep Fed rate cutes – an 88% chance of five quarter point cuts by April - which will tamp down the dollar further simply because it pays less. Foreign investors want US assets, but don’t want to be left holding the bag if the dollar sinks further. The knock-on here is that those same rate cuts will fuel US growth lift equities. It’s not a contradiction, it’s simply a hedge: Short the dollar and go long on America.

A paper from the Bank for International Settlements last June showed that Asian investors held Treasuries through the worst of the trade-war drama, but the dollar dropped hardest during Asian hours. In short, the currency sinks and the stocks soar, which is turning out to be something of a windfall for foreign investors. It hasn’t been and bad play and it largely explains why the dollar is feeling dismal as US equities have been defying gravity. And yet, this too shall pass.

If history is any guide, long-term capital inflows tend to drag currencies up by sheer gravitational pull. Tariffs, if they stay put - will generally push a currency up. Or, there is the alternate scenario where the sell off becomes a rout. Most of that foreign capital has found itself in tech, and domestic money too, for that matter. That much weight in a single sector, makes an entire economy vulnerable in the event of a crash. So it a terrible time to read a recent study by MIT concluded that some 95% of generative AI initiatives are have failed achieve the sort of growth off-sets costs. At least for now.

The rest of the world may distrust - or resent - the greenback, but without an alternative it will remain the global reserve. So global markets may not like being outpaced by the US markets, but of the time being, that’s where the returns are getting churned up.