The Petrodollar
The positive correlation of the dollar and oil wreaks havoc on the end of US exceptionalism theme, a trade we never bought into
This week’s NYC in studio media appearances:
Here is a summary of this week’s note:
Crowded investor positioning unwound: The Iran war exposed crowded trades (foreign “value” equities, software stocks, short credit). Weak fundamentals and slowing earnings outside big tech led to sharp declines in cyclicals, small caps, transports, and materials.
US dollar evolving into a “petrocurrency”: Due to the shale revolution and the US becoming a major energy exporter, the dollar now tends to strengthen when oil prices rise, reversing the historical relationship when the US was a large oil importer.
Foreign equity rally seen as fragile: Many investors piled into European and Asian stocks largely as a bet against the dollar, despite weak productivity and returns relative to the US. The oil shock exposed energy vulnerabilities in those economies.
Bond market signaling supply and policy risks: Rising real Treasury yields and widening swap spread inversions suggest concerns about increased government borrowing (war spending, tariff refunds) and the possibility of Fed policy mistakes if energy prices are treated like 1970s-style inflation.
Labor market weakening despite “stable” narrative: Employment growth slowed, unemployment ticked up, participation fell, and wage growth cooled. Meanwhile, AI-driven productivity gains in tech may be reducing hiring while boosting margins, raising risks of disruption in sectors like software.