In this note, Stephen Jen reflects on what he sees as the most underappreciated risk in markets today: the dollar’s vulnerability in a world that no longer buys the American Exceptionalism narrative. Despite the Fed not yet cutting rates and nominal growth projections holding, US bond yields have not fallen—and the dollar is weakening.
Jen unpacks the structural and cyclical drivers behind this: an $25 trillion net external liability position, the stagflationary nature of tariffs, the risk of capital repatriation by China, and the growing perception that the US fiscal trajectory is unanchored. He argues the famed "Dollar Smile" is not broken, but policy shocks have complicated its predictive power.
The note also explores the strategic dimension of the US-China economic divorce—and warns of a world in which China finds itself increasingly isolated, and the US increasingly pressured. At the heart of it all is a blunt market message: the US may no longer be immune to the same risks it once exported.
Key Quote
“In terms of the best Sharpe ratio, I believe short dollar is the best trade.”
Table of Contents
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The US’ NFA is negative 85% of GDP
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Has the Dollar Smile broken down?
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The symbiotic relationship between the US and China
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An isolated China?
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Long Covid
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US fiscal prudence
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Bottom line
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