Over the past few months, I have repeatedly emphasised that the rise in the USD over the last 15 years was caused by unsecured stock investments.
Contrary to the frequent suggestion that foreigners have been withdrawing money from the US in recent months — a claim that I have never been able to verify — foreign investors have made record new investments in US stocks over the past six months. The only new aspect is that these investments are now being hedged in USD.
Even With Strong Demand for US Assets, US Deficits Cause USD Weakness
The US’s trade, current account and capital account balances are all severely in deficit, as is its fiscal balance. In order to offset these deficits and keep the USD stable,
The good news: In the short term, it does not appear that capital will be withdrawn from the US.
The bad news: There will inevitably be a sell-off, but only once the stock market bubble in the US bursts, which is currently expanding to absurd levels.
Interest rate cuts in the US and elsewhere are creating more free liquidity, which is once again flowing into stock markets. Government stimulus packages financed through fiscal deficits are creating more demand and encouraging companies to invest. This is keeping unemployment low and boosting retail sales globally. While 2026 will be an exciting year, it will also be accompanied by growing bubbles.
The Global Economy Continues to Grow
So far, the tariffs imposed by the US have largely been absorbed by US importers and have not yet had a significant impact on exporters to the US. Tariffs are a domestic tax that only affects exporters elsewhere if domestic producers are ready to take over production ‘now competitively’. Interestingly, in such situations, US manufacturers tend to raise their own prices to keep up with those of foreign competitors and increase their own earnings. However, in many areas there is not even a domestic substitute, meaning that imported products simply become more expensive due to the tariffs.
This leads us to conclude that tariffs have an inflationary effect. This is evidenced by leading indicators pointing upwards and rising goods prices. Meanwhile, service prices continue to rise sharply, driven by unabated demand — suggesting that consumers are not in financial distress.
Long-term bond yields remain high, which is a warning signal for the stock markets. While the markets are currently coping well with the level of interest rates and the overall increase in liquidity, they could come under pressure in the second half of 2026 if long-term interest rates continue to rise. This is also affecting the real estate sector, particularly in the US, where prices are falling slightly, yet remain significantly higher than before the property bubble burst in 2008. Affordability for young Americans is effectively non-existent. If real estate prices come under greater pressure due to rising long-term interest rates, the situation will become uncomfortable. The development of long-term interest rates will indicate when a risk-off phase is approaching. If 10-year interest rates exceed 4.75%, the situation will become critical.
