Surplus Countries, Deficit Countries, and the FX Endgame
Why global trade imbalances drive FX, why Bessent, Warsh, and Miran were put in place to unwind them, and how the dollar's reserve currency status is quietly funding the melt-up
Surplus Countries, Deficit Countries, and the FX Endgame
Today I walked through the full cross-border flows framework. How the current account and the capital account always net to zero, why that accounting identity is what actually drives FX, and why the people Trump has put around monetary and fiscal policy are the only ones in Washington who understand this structure. On the tape, Opus 4.7 dropped this morning and IGV bid into it. That is the exact positioning signal I have been telling paid subscribers to watch for (link). Tomorrow I dig into the specific positioning unwinds across cross-asset skew and where I think the next leg of the melt-up compounds.
LIVESTREAM RECORDING FROM TODAY:
Today’s Livestream: Main Talking Points
1. Opus 4.7 dropped this morning and IGV rallied on the news. That is a regime shift. For the last six months, every Anthropic and OpenAI product release has caused selling pressure in software. Today the biggest model drop of the year hit the tape and IGV is up. When a new model launches and the sector that has been getting sold refuses to make new lows, you are watching positioning reject the bear case in real time. I have been telling paid subscribers this is exactly the tell to wait for. It overlapped with another five percent day in Oracle, which is the direct expression of the same rotation.
2. The current account and the capital account always net to zero. That is not a theory. It is an accounting identity. If the US imports more than it exports, some other country is exporting more than they import. The dollars the US sends abroad must come back, and the only place they come back to is US financial assets. That is why foreign capital bids treasuries, equities, real estate, and private equity AUM regardless of the domestic growth story. If you do not understand that mechanism, you cannot explain why US valuations have been structurally elevated since 2009 while every reductionistic liquidity framework has failed.
3. A trade surplus is not a sign of competitiveness. It is the mirror image of excess domestic savings flowing abroad as capital exports. When a country produces more than it consumes, the excess output leaves as exports and the excess savings leave as capital. These are the same event viewed from two sides of the balance sheet. This is why Michael Pettis has been right for a decade on why the savings glut continues funding US asset markets, and why the dollar’s reserve currency status is simultaneously a privilege and a burden.
4. The dollar’s reserve currency status has a privilege side and a burden side. The privilege is that Treasury can issue cheaply, real yields stay lower than they should, and Wall Street dominates global finance. The burden is that the dollar stays structurally strong, which kills trade competitiveness and slowly erodes the manufacturing base. Wages stagnate because workers compete in a global market, households have to borrow to maintain living standards, and you get persistent inequality in the income distribution that feeds back into more household debt and more asset price inflation. That feedback loop is why home prices and equity valuations are at all-time highs simultaneously.
5. China has run a closed capital account through their real estate unwind, and the divergence in their economic structure is now driving global trade flows. China’s property sector has gone through a 2008-style unwind over the last two years. You can see it in the Bloomberg chart: real estate collapsing while the Goldman Sachs infrastructure build-out index rips to new highs. China’s response has been to export more aggressively to the rest of the world to prop up their domestic system, which is why rare earth, manufacturing capacity, AI infrastructure, and the space race capex have all inflected higher. The closed capital account is why you have not seen capital flight despite the real estate crisis.
6. The Eurozone is structurally short crude, which is why EUR rate pricing stays hawkish relative to the US. Germany exports more than it imports. The Eurozone as a whole does not produce its own oil. When crude rallies, the Eurozone faces a stagflation setup that the US does not face to the same degree, because 70 percent of US GDP is household consumption while the Eurozone is more corporate and export-weighted. That is why the forward curve in the Eurozone is pricing roughly 47 basis points of hikes into year-end while the US is pricing a functional pause. Real rate differentials and monetary policy divergence are now driving EURUSD, not inflation differentials. That shift is the cleanest signal that central banks have moved to the background and cross-border flows have taken over as the primary driver.
7. Cross-border flows are now the dominant liquidity channel, not central bank balance sheets. For the last five years everyone has been focused on Fed balance sheet expansion and contraction. Central banks have largely paused. The marginal mover is now the savings glut recycling through FX and capital flows. That is why you are seeing EURUSD rally with equities while bonds sit in a range. Equities and FX have decoupled from bonds and crude. Once you understand that cross-border flows are the variable, you stop waiting for the Fed to do something and start tracking real rate differentials, FX positioning unwinds, and savings repatriation.
8. Bessent, Warsh, and Miran are in place because they understand this structure and Trump wants it unwound. Druckenmiller’s commendation of Warsh years ago was specifically that he understood global capital flows better than anyone he had ever worked with. Bessent built his career trading these imbalances. Miran wrote the playbook. Tariffs were never the endgame. The endgame is shifting pressure on China, which had been rerouting exports through Vietnam, Mexico, Thailand, and India to get around direct tariffs. If the administration can actually cut a deal that forces China to boost domestic consumption and stop dumping excess savings into US asset markets, it will be the most consequential structural shift in global trade in 40 years. That is the FX endgame everyone is missing.
Slide Deck, Credit Cycle Playbooks, Educational Primers:
Below are the 3 reports/videos I have done on the current credit cycle and the bets I am taking in it. If you are trying to understand WHERE we are and WHAT to look for, go through these.
Here is the slide deck from today’s livestream:
Tomorrow: Capital Flows | Positioning Unwinds and the Next Leg of the Melt-Up
Tomorrow I map where the specific positioning unwinds are setting up across cross-asset skew. Where EURUSD skew finished unwinding and what that means for the next leg. How the G10 carry trade index making new highs connects to where global equity sectors bid next.
TOMORROW’S LIVESTREAM: LINK
See the paid subscribers section at the end of this report for the views and drivers I explained: LINK
I will expand more on this in the next positioning report exclusively for paid subscribers.
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You keep saying that you think Trump actually knows what he is doing but I don't really see that at all. In your presentation you point to the benefits and shortcomings of having the dollar as the reserve currency. One of those shortcomings is the fact that the reserve status lends the dollar to be overvalued and that has contributed to the hollowing out of the US industrial base because it has perpetually disfavored US exports and favored exports from other countries. This in turn has led to a huge build-up of dollar reserves globally that are then invested in US assets. If the Trump admin was actually serious about reversing this 50-year trend, the inevitable end result would be that asset values would have to drop since as you said one of the primary drivers of US asset outperformance has been international money flows to US assets. There is no sign that the Trump admin is remotely willing to let asset prices take the hit that would come from a reversal of these capital flows. Trump's tendency is to do the opposite and to instead TACO/talk up the market.