The US and the Dollar are being thrown around in a tornado of shocks

Outlook

Today the US data includes new manufacturers' orders and the Dallas Fed business survey.

The Fed meets this week with no rate change expected, so what will matter is how Mr. Powell speaks at the press conference. This may be the trigger for Trump to make insults and complaints again or even name Powell’s successor. The angst over the choice of the new Fed chief waxes and wanes but Fed independence is a key factor in sentiment toward the dollar, as other central banks chiefs and others (like Dimon) are saying. Trump may see only that his sycophant will drive the dollar down, as he prefers.

The hot question is whether it also drives the stock market down.

The factor from left field this time is the backlash against Trump administration lies about the unjustified ICE murder of two citizens. It may result in another government shutdown, although so far that seems remote. Congress just lacks the spine. But we shall see. 

We remain stuck between two competing forces. First is revulsion toward Trump and his bad economics—tariffs not only raise inflation but inhibit growth. On the opposing tug-of-war team is not only the weird and wonderful strong US economy, but also the wonderful fundamentals of the stock market. The Economist writes that US company earnings grew 12% in 2025 vs. only 1% in the rest of the rich world countries. This year, according to Goldman Sachs, it will be 6%, about twice the rest. The dynamic US also has higher and rising productivity plus leadership in AI. Any folderol over Greenland will not affect Apple and Google’s earnings. The only things that can shove the US off the throne would be a true slowdown in the US, a revival in earnings elsewhere, or the US’ loss of AI leadership. Then we may see a rotation out of the US stock market and Sell America. It would be brutal, but we say unlikely.

Forecast

The US and the dollar are being thrown around in a tornado of shocks.

We wrote Friday that Shocks are legitimate market-movers, and in addition, a shock pertaining to the top institution, the Fed, goes automatically from a lower-case S to the upper-case Shock. Institutional factors almost always trump the economic.

Add to that observation that Trump likes to hog the limelight and is always and forever on the prowl for something, anything, to grab attention. Trump likes tornados. He can then say that only he can fix things.

Two points: shocks raise emotions too much and at some point deliver a pullback from sheer exhaustion. The dollar/Swiss franc is a good example. It’s almost as low as the previous low, 0.7424 from Jan 2015. Some reports say it’s nearing the previous low from 2011 at 0.7070. This is nuts. At some point traders will take profit or change their minds, and look out below. It can be as soon as Turnaround Tuesday.

Second, a third factor is the US stock market, Yeah, yeah, the market is not the economy but it sure affects sentiment and in other markets as well as politically. Were the US stock market to stumble, we could even see an ICE policy retreat in Washington. That would bw a shock in its own right.

The point is that when FX prices get extreme, watch out. Extreme oversold is a warning.

By the way, in case you didn’t know, the US government is closed today because of the snow/ice storm. Millions are without power and driving is wildly dangerous because of the ice. The entire east coast will have temps under freezing for another week. Richmond VA (near where we are) is on the border of terrible and not-so-bad. Our forecast was for 6-8 inches of snow but we got only about 2.  If you don’t get reports, it’s because our power went out.

Food for thought

The so-called “framework” deal offered by NATO has no validity at all—NATO can do nothing about sovereignty. This is akin to the Trump “concept” of a health care plan, now over 10 years supposedly in the making and clearly a fiction.

Canada’s PM Carney is the one who got the standing ovation at Davos. Trump’s insult to Europe was an outright lie when he said he’s not sure they would come to the US’ defense while the US would always come to theirs. Over the weekend analysts noted he knows perfectly well the only time NATO’s Article 5 was activated was when the US did it after 9/11 and everybody showed up. He often lies out of ignorance but this time the lie was aimed at his America-First base. 

Carney was right that this is a rupture in the global world order. And we can’t go back. Trump can TACO on tariffs but he cannot not retract the mistrust he has created. 

Trump pulled back on tariffs for Europeans defending Denmark’s sovereign right to Greenland, but then added a new threat, no doubt instigated by TreasSec Bessent--"big retaliation" if European countries sell US assets. As usual, he doesn’t have a plan but only the mob boss phrase "we have all the cards."

The financial press is full of stories about how, exactly, Europe could disinvest in dollar assets and whether it would matter. Numbers cited do not match up source to source. The most cited is that European countries hold nearly 40% of US Treasuries, including privately held funds (like pension funds) as well as official reserves.

Reuters notes “Deutsche Bank's George Saravelos estimates that European nations own $8 trillion of U.S. stocks and bonds, almost twice as much as the rest of the world combined.

“Europe may no longer consider the U.S. a reliable partner, but forging new trade links, supply-chain networks, and strategic partnerships takes time. A quick decoupling from the U.S. would be both hard to achieve and highly risky. For starters, there are no other markets as large or liquid as those in the U.S. – and shunning American equities would also mean betting against many of the world's most valuable, innovative companies.

"’There's no way to restructure the global economy without a lot of wealth destruction in the process,’ says Sarah Bauerle Danzman, senior fellow at the Atlantic Council. ‘Everyone knows that, which is why Trump has been able to go so far on his threats.’"

The chart from the FT shows vast amounts held in the UK, Switzerland and the Caymans that disguise their true source. For a very long time, that source was thought to be the Middle East oil countries and tax-avoiding Europeans. But any European country could siphon the capital attributed to its nationality into one of those other bundles and get an announcement effect, while keeping official reserves right where they are. 

The FT and pretty much everybody else argue that diversifying away from the dollar is a non-starter, as backed up by the BIS report last week. A little, yes, but not enough to send a punishing message. All the same, the US under Trump has lost all credibility and trust. At some point, for some excuse, that will come home to roost. The world is overinvested in America, but “Sell America” is the authentic sentiment. It’s just going to take some time.

For us in the US, it’s a tragedy.