The cracks in the dollar hegemony are showing: when the White House begins to "dissuade" global capital.

Original Title: Trump is telling you to sell US assets

Original Author: Felix Jauvin

Original source:

Compiled by: Daisy, Mars Finance

Trump is hinting at you to sell dollar assets.

The article in the “Forward Guidance” suggests that it may be time to withdraw from dollar-denominated assets.

It is now clear that one of the core goals of the Trump administration is to reduce the trade deficit with other countries, especially the goods trade deficit.

Source: Fred

It is essential to emphasize this distinction—because the United States actually maintains a surplus in service trade!

The United States mechanically imports “goods” from countries that manufacture better and at lower costs. As the world reserve currency, the US dollar flows to these countries to complete purchases.

These offshore US dollars were subsequently reinvested in US Treasury bonds, US stocks, and other dollar-denominated assets. For decades, this mechanical demand has artificially inflated the value of the dollar, while hollowing out the American middle class that has declined due to the outflow of manufacturing jobs.

Source: MacroMicro

Essentially, the major compromise of globalization is that we gained cheap goods at the expense of a once-strong manufacturing base.

One of the basic laws of economics is the balance of international payments. Mechanically speaking, a current account deficit (the inflow of goods) must be offset by a capital account surplus (the outflow of funds to purchase the inflowing goods).

This long-standing structural capital account surplus has created a long-term structural demand for dollar-denominated assets. The direct consequence is that it has suppressed government bond yields (reducing the cost of government borrowing) and caused U.S. stock valuations to be consistently higher than those of other countries (with the P in the price-to-earnings ratio being much larger than the E).

The Trump administration has clearly stated its intention to reduce the current account deficit. Although it has not explicitly mentioned the latter half, this will inevitably be accompanied by a decrease in the capital account surplus, thus reversing the trend of low bond yields and high stock valuations. Essentially, the Trump administration is telling foreigners: take your money home.

Foreign investors have already taken action. Brent Donnelly’s chart shows that the sell-off of dollar assets is concentrated during the trading hours of these countries. The dollar remained stable during the New York trading session, but there was a rush to withdraw during the European and Asian trading sessions.

Source: Brent Donnelly

If the capital account premium of dollar assets is questioned, it is entirely reasonable for overseas asset managers to withdraw these assets. This will lead to rising bond yields and falling stock prices.

Essentially, the world needs to reprice U.S. Treasury yields—an indicator that embodies risk premiums and forms the cornerstone of global valuation. The diagram I created with my poor Photoshop skills (I’m a trader, not a designer!) illustrates this mechanism:

It remains to be seen how long the reversal of the current account deficit can last, but it points to the same conclusion: the withdrawal from dollar-denominated assets.

After all, the President of the United States has been sending you this signal.