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Fed Is Easing Into Major Regime Shift | Darius Dale
Forward Guidance
Monitor Global Trends: Japanese Policy Normalization Affects US Markets
The U.S. has seen its net international investment deficit double from minus $10 trillion in 2018 to minus $20 trillion by December 2023, indicating that foreign creditors now own significantly more U.S. assets. This situation creates potential unrealized capital gains that could exit the U.S. market if global capital allocators lose confidence in the U.S. business cycle's sustainability. Japan's policy normalization will be crucial, particularly influenced by its labor market dynamics, where nominal wage growth is currently at a notable 3.6% year-over-year. The Bank of Japan's monetary policy is viewed as overly accommodative according to market estimations, suggesting potential for more aggressive rate hikes than currently anticipated. If wrong about the U.S. growth outlook, substantial foreign capital could be unwound, reminiscent of the dynamics witnessed during the dot com bubble, where a minor downturn led to significant asset market corrections without a major recession. Investors must navigate these complexities cautiously in the coming year, as shifts in Japanese policy and U.S. economic health will impact global financial flows and investor sentiment significantly.
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