Darius recently sat down with Anthony Pompliano to discuss the risks of a stronger US dollar, a potential global refinancing air pocket, and more.
If you missed the interview, here are the two most important takeaways from the conversation that have significant implications for your portfolio:
1. How Can A Stronger US Dollar Cause Problems For Asset Markets?
Our research indicates one significant implication of a strong US dollar is that it pressures foreign investors to repatriate dollar-denominated assets to service the 70% of global debt and 60% of cross-border lending that rely on the US dollar.
The events of 2022 provide a clear example of the potential consequences in such an environment. During a major US dollar rally from January to September of that year, the dollar appreciated by 18%, leading to a reduction in liquidity and severe declines across asset classes, as Gold fell 10%, US equities dropped 25%, US Treasury bonds declined 31%, and Bitcoin plummeted approximately 58%.
Moreover, tariff policies introduced by the Trump Administration, along with potential changes in the Treasury’s net financing policy, may accelerate dollar strength. Coupled with ongoing US economic exceptionalism—driven by tax cuts and deregulation—these factors could push the dollar even higher, increasing the pressure on markets and global financial stability.
If the Federal Reserve’s policy options are constrained by a resilient economy or persistent inflation, it may struggle to prevent the dollar from trending higher, creating significant challenges for asset markets.
2. Is A Global Refinancing Air Pocket On The Horizon?
At 42 Macro, we conducted a deep-dive empirical study on the global refinancing cycle and found it is, in fact, a key leading indicator of global liquidity.
By tracking the year-over-year growth rate of world total non-financial sector debt, lagged by four and a half years to align with typical refinancing timelines, we observe a strong correlation with fluctuations in global liquidity growth. Currently, the lagged growth rate of global non-financial sector debt is accelerating sharply, and our models project this trend to continue through late 2025.
While conventional wisdom suggests this is likely to catalyze an increase in global liquidity, the risk remains that liquidity may fail to expand meaningfully, thus creating a global refinancing air pocket, similar to the divergences observed in 2008-2009, 2011, 2015-2016, 2018-2019, and 2022. If global liquidity fails to follow the path of the year-over-year growth rate of world total non-financial sector debt, we believe it is likely to lead to severe disruptions—or even a meltdown—in global financial markets, negatively impacting asset markets along the way.
Since our bullish pivot in November 2023, the QQQs have surged 44% and Bitcoin is up +184%.
If you have fallen victim to bear porn and missed part—or all—of this rally, it is time to explore how our KISS Portfolio Construction Process or Discretionary Risk Management Overlay aka “Dr. Mo” will keep your portfolio on the right side of market risk going forward.
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If you are ready to learn more about how our clients incorporate macro into their investment process and how you can do the same, we invite you to watch our complimentary 3-part macro masterclass.
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