Edward Conard

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Upside of Inequality Oxford Unintended Consequences

AI Summary. US assets have boomed relative to the rest of the world since the global financial crisis, with European holdings of US stocks growing substantially as inflows lifted the dollar and raised returns for foreign investors, drawing in more funds. Foreign investors now have an incentive to take those considerable profits.

John Authers Bloomberg
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The dollar’s weakness risks driving a flight from US equities, “US stocks, particularly Big Tech, have been a kind of piggy bank for the world. The risk now is that foreign investors will smash the piggy bank.” @johnauthers

Will foreign investors cash out their profits from US stocks?

Core argument: US assets have boomed relative to the rest of the world since the Global Financial Crisis, with European holdings of US stocks growing at a pace described as breathtaking.

The greatest issue concerns the dollar. Relative to the rest of the world, US assets have boomed ever since the Global Financial Crisis. The growth in European holdings of US stocks has been breathtaking. This has been helped by a virtuous circle. The flows push up the dollar, which increases the returns for foreign investors and fosters confidence that the US is unstoppable, thus drawing in more funds. It’s a classic example of what George Soros calls reflexivity, or the ability of the market to create its own reality. The profits European investors are still sitting on are considerable, and they’ll now have an incentive to take those profits, which could be needed for investing in a much more difficult trade war environment at home. US stocks, particularly Big Tech, have been a kind of piggy bank for the world. The risk now is that foreign investors will smash the piggy bank. If trade flows are going to fall, as is more or less inevitable if these tariffs are imposed for any period of time, the risk is that capital flows will have to follow.

Takeaways by Macro Roundup® AI

  1. US assets have boomed relative to the rest of the world since the Global Financial Crisis, with European holdings of US stocks growing at a pace described as breathtaking.
  2. A virtuous circle drove those flows, as inflows pushed up the dollar, raised returns for foreign investors and fostered confidence in the US, drawing in more funds — an example of what George Soros calls reflexivity.
  3. European investors sitting on considerable profits in US stocks, particularly Big Tech, have an incentive to take them for investing in a harder trade-war environment at home, and if tariffs cut trade flows, capital flows risk following.

Related Articles:

  • Why the Dollar is Depreciating Today — Trade restrictions strengthen the dollar all else equal, so the dollar's depreciation after new tariffs is best explained by reduced investor confidence in the U.S. economic outlook. That same loss of confidence is reflected in U.S. stocks declining relative to foreign markets and risks an unwinding of overweight positions in U.S. assets.
  • The Trade War Will Pound Stocks — Efforts to cut U.S. trade deficits and escalate tensions with allies risk deterring foreign capital, and foreigners need only stop buying U.S. assets to hit prices, as China and Russia already have. Bridgewater estimates nonfinancial U.S. firms capture 39% of global profits though the U.S. is 15% of world output.
  • The Great European Disentanglement From US Stocks Has Only Just Started — Federal Reserve data show European investors held about $9tn in US stocks, roughly 17% of the total value of the US market. After inflation, a dollar invested in the US at the start of 2000 was worth $3.28 by the end of 2024, versus $1.63 for the rest of the world.
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