In a recent report, Nomura has highlighted the growing concentration of global exposure to US dollar assets, warning that a setback in artificial intelligence (AI) could lead to a depreciation of the dollar. The report challenges the prevailing 'there is no alternative' (TINA) view on US dollar assets, suggesting that the current concentration poses significant risks.
Nomura's analysis reveals that the ratio of US net international investment position (NIIP) liabilities to the sum of all net creditor nations’ NIIP assets has surged to 80%. This indicates a significant funneling of Rest of World (ROW) savings into USD investments. Despite the US NIIP liabilities increasing and the USD appreciating during past crises, Nomura suggests that a decrease in US NIIP liabilities is now more plausible.
The US Federal Reserve's failure to meet its inflation target for five years, coupled with swollen fiscal and current account deficits, has led to historic highs in public debt and NIIP liabilities as shares of GDP. Trust in US fiscal, trade, and foreign policies has eroded, yet there are no clear signs of de-risking from USD assets. Nomura attributes this to the US's central role in the AI revolution, particularly in capital markets, which has driven extraordinary capital gains from the AI-driven US equity boom.
Nomura also notes that the $21.3 trillion US NIIP liabilities are starting to exact a penalty. Net primary income has flipped to deficits over the last two years, and net government interest payments have swelled beyond half the fiscal deficit. This dynamic may extend to the current account if NIIP liabilities and UST yields continue to rise.
The report warns that an AI setback could trigger a large US equity correction, amplified by extreme foreign investor exposure to US equities and leverage within the AI ecosystem. This could potentially lead to a global risk-off event.
While some argue that America's superpower status allows it to run large deficits indefinitely, Nomura believes that rising UST yields feeding into fiscal and current account deficits suggest limits to this privilege. The size of US IIP portfolio liabilities is now so large that moderate declines could outstrip declines in assets, shrinking US NIIP liabilities and depreciating the USD.
Background
Nomura's report underscores the potential risks associated with the concentration of global savings in US dollar assets, particularly in the context of AI-driven market dynamics. As the US continues to navigate its fiscal and monetary challenges, investors and policymakers alike will need to closely monitor these developments.
Nomura's report underscores the potential risks associated with the concentration of global savings in US dollar assets, particularly in the context of AI-driven market dynamics. As the US continues to navigate its fiscal and monetary challenges, investors and policymakers alike will need to closely monitor these developments.
