Investors need to focus on this crucial macro indicator going forward.
I am talking about the Net International Investment Position (NIIP).
What is it, and why will it matter?
The NIIP shows whether a country is a net creditor (positive NIIP) or net debtor (negative NIIP) to the rest of the world.
The US runs one of the largest negative NIIP positions in the world at around -80% of GDP!
Here is how we got there.
As the global reserve currency issuer of the world and de-facto guarantor of the current world order, the US enjoys the benefit of running fiscal and current account deficits (aka twin deficits) which imply:
1️⃣ A strong consumer economy benefitting from persistent fiscal tailwinds;
2️⃣ Which implies US consumers are a great target for exporter countries;
3️⃣ Which means the US imports way more than it exports (trade deficit);
4️⃣ Which implies foreign countries accumulate USDs as foreign reserves after selling products to the US;
5️⃣ Foreign countries recycle back these USDs into US financial markets (Treasuries and US stocks);
6️⃣ The US keeps supplying new Treasuries (through fiscal deficits) and it enjoys a constant flow of financial money that supports stock market and the wealth effect.
All good until market-friendly, growth-friendly policies remain in place.
But as the Trump administration is keen on changing the rules for global trades through tariffs, and US exceptionalism vibes are fading away...
...it might be sooner rather than later when the -80% NIIP will come to bite, and investors will diversify some of their foreign investments away from the US and into other markets and asset classes.
This remains a negative driver for the US Dollar, and a positive driver for foreign assets and currencies.
Agree or disagree?
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