I usually try to avoid using jargon like this, because I think we end up running the risk of taking our eyes off the stock market if we get too wrapped up in broadcasting to the world what investing pros we are.

In this case, though, I couldn’t think of a more plain-language way of making my point.

The basic idea is that in every bull market there’s a predominant theme, or a set of stocks, that are in the forefront of the advance. For some time, the major theme, world-wide, has been AI and both the software developers and the makers of enabling semiconductors have been the stock market stars.

At some point, though, the stock market typically looks back at the sectors that have been left behind–and buys them on the notion that they are unusually cheap.

There has been a little (actually, a considerable amount) of this within the AI sphere. If the lead horse in the AI race is Nvidia, there has been ample opportunity over the past year, for example, for nimble traders to jump between it and Broadcom, a builder of AI installations. More recently, attention has shifted to makers of memory chips like Micron, in a boom and bust area often plagued by manufacturing overcapacity. AI demand has created a shortage of general memory chips, shooting their prices skyward, and creating a serious day in the sun for MU.

This is all within IT, though.

Normally, by this time the market would be looking for bargains, based almost purely on price, in left-behind sectors like Consumer discretionary or Financials, or Staples. These sectors would run for at least a few weeks, on the argument that they are too cheap, that a cyclical downturn has been too deeply discounted. At some point, the valuish argument goes, the economic cycle will turn and these sectors will pick up. Sort of like buying at an end-of-season clothing sale. Maybe not the height of next year’s style, but serviceable…and cheap. You may be collecting a substantial dividend while you wait. And they arguably can’t fall off the floor, so they have some defensive merit. I own a couple of these.

But that’s not happening yet.

I’m usually too early, so that may be it.

But it could also be that the market believes that the Trump administration policies–ICE, tariffs–that are progressively weakening the overall domestic economy will remain unchecked. So worse news, if, say, Trump is successful in tinkering with the Fed, is on the way and it makes no sense to buy downtrodden stocks now.

I read a news article today sparked by comments from a Deutsche Bank forex expert that some smaller European institutional clients are beginning to sell their US Treasury holdings. The supposed reason? …shock at Washington demanding to annex Greenland. Treasury Secretary Bessent reports receiving a phone call from the head of DB saying this was a stray comment by some random forex guy and not the bank’s official position.

My thoughts:

–first, a caveat. I’m not an expert on bonds. I’m a stock guy.

Having said that…

–I think domestic ICE operations resonate at least as deeply negatively in Europe as in the US. Europe is where National Socialism arose and where much of WWII was fought. So I think there’s a visceral aversion by individuals and institutions to providing a lower cost of capital to an administration acting this way

–on a more nuts-and-bolts level, the lynchpin of Trump’s bond strategy is being read (accurately, I think) as a return to the policy of the 1970s, when there was no independent Federal Reserve and the White House effectively set rates. For a while back then, at least, lower rates meant lower debt servicing costs. However, the low rates triggered runaway inflation. Under the Paul Volcker Fed, interest rates more than tripled before inflation got back under control. This big rise in rates meant the price of already-issued bonds got crushed.

Every professional bond investor knows about this development and fears a recurrence. Its very easy to see wanting to take money off the table in advance of another catastrophe. And there’s virtually no reason for a big bond holder to want to increase exposure now.

–if this is correct, the big issue is not whether to sell. It’s how to sell without moving the price too much. We can already see what big foreign holders (think: foreign treasuries and international banks) have been doing since the inauguration:

1. selling the dollar component of their exposure through the currency contracts,

2. shortening the duration (basically, time to maturity) of their holdings by swapping longer-dated bonds for less volatile shorter-dated ones, and

3. they’ve been doing some net bond selling.

In the case of 2), they’re not changing the fact of the risk of loss due to US rates rising, but they are shrinking the time and degree to which they’ll be exposed.

If there’s anything new in the DB comments, it’s that smaller EU banks are accelerating their exit from the dollar. Maybe their level of worry has increased recently, or maybe they’re close enough to the end of their selling plan that they’re pushing out the last bits relatively quickly, in a less price-sensitive way. If I had to guess, I’d say the latter is the case.

I’m taking off my hat as a human being and putting on my hat as a stock market analyst.

The killing of Renee Good in Minnesota and apparent plans to annex Greenland are the latest administration developments that seem to cut against the idea that the US is still the “shining city on a hill” or the “land of the free and the home of the brave.”

In fact, I was listening to a You Tube conversation earlier this morning between two historians, Heather Cox Richardson of Boston College and Joanne Freeman, a Yale professor who specializes in the revolutionary-era US. They agree that we’re seeing a replay of the Revolutionary era now, but with President Trump functioning as mad King George, and the current administration’s policies mirroring the grievances spelled out in the Declaration.

There are persistent suggestions that Mr. Trump has suffered a stroke that has left him physically and cognitively impaired. If so, the ship of state is being steered by the cabinet he has assembled, whose chief plusses, as far as I can tell, are fashionable wardrobes and extreme use of botox.

The chief underlying issue here, as I see it, is not the president or the cabinet. It’s the idea that Congress has so far chosen to turn a blind eye to every weird thing that emanates from the White House.

The rest of the world seems like it’s shifting gears, though:

–Canada, once our staunchest ally, is negotiating new trade agreements with China. And it has announced that it will stand with the rest of NATO if the US makes any attempt to seize Greenland from Denmark.

–Foreign direct investment into the US does continue to be substantially higher than into China. Over the past six months, however, the character of that investment has changed from high-tech money into the US vs. low-value-added manufacturing investment into China to the reverse.

The investment worry about Washington’s economic dysfunction is that it will result both in slowing earnings growth as well as in PE multiple contraction (to compensate for the higher risk of investing in a place where economic growth is seemingly not a priority). This worrying shift in perception appears to me to already be well underway:

–the Shanghai stock exchange equivalent of NASDAQ has more than doubled the latter’s gain over the past year,

–performance of US stocks overall has been deep in the bottom quartile of world markets since the inauguration

–the sharp decline in the world value of the dollar in 2025 is a factor driving the S&P’s poor relative performance. In my view that has been dwarfed by the negative effects of tariffs and by administration efforts to reduce the workforce

–2026 may be the year when the dollar takes center stage–and not in a good way. Foreign central banks are worrying that the administration wants to lower interest rates aggressively in order to reduce the cost of servicing Treasury borrowings. This tactic, out of the 1970s government playbook, resulted in the disastrous inflationary explosion of late in that decade–which took most of a decade and Treasuries at 20% to get back under control.

The result of all this has been that we saw last year for the first time in over a quarter-century the world’s professional equity investors shifting significantly away from the US stock market.

My sense is that so far professional investors have reacted mostly to slowing domestic earnings growth plus currency weakness. The next step, however, may well be that worries the current domestic economic situation is not going to get better any time soon will begin to express themselves through PE multiple contraction.

The Los Angeles-based Capital Group is one of the most important–and successful–global investment firms, with over $3 trillion under management. (I should mention that in the very dim past, Capital wanted me to interview for a job as a portfolio manager there, but I was young and stupid and having too much fun on my own, so I said I wasn’t interested. I don’t think that colors my perception, though.)

I think it’s interesting that in its low-key way the group says it’s now starting to place more emphasis on capital markets outside the US. The apparent reason: it considers potential developments in the Treasury market to be worrisome.

It seems to me that for a behemoth like Capital to be making a significant sea change like this (for the past quarter-century, all-US-all-the-time has been the key to superior investment results), the worry must be something it regards as very important and as something that’s not going to go away tomorrow.

My initial reaction is that this is all about the administration’s apparent intention to reduce the real value of government debt by creating inflation. One might think that a real estate veteran like Mr. Trump would remember the economic train wreck of the late-1970s/early-1980s that were the result of Washington’s efforts along this line back then. …apparently, not, however.

I don’t think Capital is skipping over the economic damage done to the US by the combination of tariffs and the use of ICE to shrink the domestic workforce, though. Arguably, its view is that this is last year’s problem and, while this drag on economic growth isn’t going away, the negative effects are already baked into today’s stock prices.

Thanks for your comment. I’m kind of just working this out for myself right now. And, as you might already know, the real experts on rates and currencies are in the big global banks, who can run circles around me.

For what it’s worth–

I’m not sure there’s a comprehensive, well thought out, economic plan in the White House. I think there is a cultural agenda that has economic consequences, though. Those consequences are, I think, by and large a drag on growth. And that’s on top of the growth drag from tariffs. Lower growth probably means lower personal income and lower corporate profits–therefore lower tax revenue for Washington.

The most straightforward way of offsetting this shortfall, and especially since Washington seems to always spend more than it takes in, is to pay a lower rate of interest on federal government borrowings. A big problem here is that about a third of the outstanding Treasury securities are held by foreigners, who can arguably go elsewhere, and who have already expressed their displeasure at the current administration by massively selling the dollar after the inaguration–to hedge against an anticipated attempt by Washington to reduce the real value of the bonds they hold.

The biggest domestic problem I see is that if the economy is humming along as best it can right now, given tariffs and ICE’s shrinking the workforce, the economic stimulus created by lowering rates will arguably mostly create inflation–too much money chasing too few goods. I think this is Chair Powell’s point, that lowering rates aggressively might lower the interest bill paid to foreigners, but will make the domestic situation worse, not better. And it’s the first step down a bad road to travel on.

Having said all this, my guess is that Congress won’t do anything to stop the administration from lowering rates once it has put its loyalists the board of the Fed.

Overall, lower rates, lower currency, higher domestic inflation is where I come out. If that’s anywhere near correct, then domestic companies that sell abroad will continue to be winners, as will foreign firms that either have US costs or no exposure to the US. The worst place to be will (continue to) be foreign luxury goods companies with large US exposure.