Klaus & Wealth Destruction (Again)
We check up on our dear friend Klaus!
The first half of 2025 was fantastic for International Markets:
DAX up nearly +20%, the Hang Seng up +20%, Brazil up +15%
Even the US Markets ended up OK, with the S&P and the Nasdaq closing up +5%.
So why is Klaus sad?
As a quick recap, we first introduced “Klaus” in “The End of American Exceptionalism - Part IV”. Klaus represents all the European Funds that were so accustomed to being invested in US Assets for so long, that they “forgot” to hedge their FX Exposure … a bit like frogs in boiling water.
Now the Euro is up +14% YTD, having a relentless rally since Zelenskyy didn’t give thanks to JD Vance back in late February… arguably, the most important event of the year, at least for Klaus… since Klaus wasn’t FX hedged.
You can debate all you want whether that fateful meeting marked the “End of American Exceptionalism”, but it sure did mark the “End of the US Dollar Exceptionalism”!
My American friends frequently underestimate the impact of this Dollar debasement on non-US Investors, so let me illustrate the point by plotting Nasdaq in Euro terms:
The Nasdaq in EUROS is DOWN 6-7% YTD and still at a 10% drawdown!
This is why I keep mentioning “Wealth Destruction”:
While American investors are cheering the new All-Time-Highs, the Klaus-es of this world and their investors have seen their wealth diminished … and the Pain Point has been the FX!
If there’s one Call I’m proud of is that, after Trump got elected and while Wall Street was cheering that Trump policies were Dollar Positive, we were advocating that Trump would be BAD for the Dollar, a view that was widely unpopular at the time.
Regarding Wealth Destruction, allow me to re-print this excerpt from an earlier piece in April, to highlight this point:
The chart above really scared me at the time! The Dollar is down another 7% since… but it dropped 50% the last time someone uttered the word “ACCORD”!!
This is why Klaus may still “panic hedge” when his Investment Committee meeting comes up - either in June or September, since none in Europe works during the summer (Socialism does have certain benefits!). After all, lets not forget that Klaus still has a lot of Dollars left to sell:
Foreigners own $19tn of US equities, $7tn of US Treasuries and $5tn of US corporate bonds (Apollo’s Torsten Sløk)!
However, at this point, the Dollar looks oversold. So what do we do from here?