CHG Issue #232: Learning to Ride Again
As America pulls back from automatically absorbing risk, markets and voters are learning to price a world without training wheels.
The market is not just pricing Iran, Warsh, AI, SaaS, and New York politics. It is repricing institutions. This past week brought several disparate but related events that contained a common, but mostly unseen thread.
That thread is not that these events are all directly connected. The common thread is that the old assumptions are being repriced. The US Navy will police the chokepoints. The Fed will guide the market. The dollar will clear the world. Establishment politics will contain domestic frustration. Each of those assumptions still has force, but none of them can be taken for granted.
Hormuz and the Cost of Power
The Trump national security strategy says the U.S. no longer wants to be the policeman of the world. It wants allies and regional powers to shoulder more responsibility. It wants to avoid forever wars while preserving American dominance, freedom of navigation, technological leadership, and access to critical markets. Strategically and politically, the logic is coherent and attractive. In reality, as is often the case, it is proving to be operationally difficult.
Great powers always face the same problem: power creates commitments, and commitments lead to overextension. The U.S. wants to retain the benefits of primacy without paying the full cost of management. But a global superpower cannot simply turn inward because it is independently powerful; it still lives in the world that it no longer wants to police and without any other willing or able countries to fill the void that world will descend into chaos.
The problem is not Hormuz alone. The problem is that Iranian leverage over Hormuz would create a regional power balance Washington cannot tolerate. Control of the chokepoint brings money, coercive power, and strategic confidence, all of which increase the odds that Iran eventually crosses the nuclear threshold. The U.S. may be able to live with instability in the Strait; but it cannot live with that instability becoming the foundation of a nuclear Iran.
This is why the off-ramp is so difficult. A narrow military victory is not enough. A ceasefire between Washington and Tehran is not enough. A shipping lane is not open just because diplomats say it is open. A deal is durable only if it binds the actors who can break it.
America First is trying to convert U.S. hegemony into burden-sharing. The Iran war is demonstrating that this conversion is not as easy as the planners drew it up on paper. It is a messy renegotiation of who pays for order, who enforces rules, who controls chokepoints, and who gets a vote in the regional balance of power.
The Dollar Is Not Voting Cleanly
The same institutional tension is showing up in the dollar.
The dollar has strengthened since Warsh became Fed Chair, which looks like the market taking back its prior assumptions. Investors expected Warsh to be dovish because Trump wanted a dovish Fed. Instead, Warsh has signaled a quieter, less transparent, less forward-guidance-driven Fed. That is not obviously dovish. It is uncertainty with a hawkish bias.
The gold rally may have been pricing in Warsh. The dollar sold off over 10% after Trump was re-elected and was held down by trade policy and the prospects of political capture of the Fed. Now it has to reprice the possibility that Warsh is actually going to restore some distance between the Fed and the market. A less communicative Fed means investors have to price rates with less institutional handholding. That can strengthen the dollar even if it also raises volatility.
The dollar has moved to the upper end of its range against the yen, euro, and pound. But against the renminbi, the dollar has been in a persistent downtrend. That is a strange constellation of FX flows. It is not simple dollar weakness. It is not simple dollar strength. It is institutional sorting.
The market is not saying “the dollar is dead.” It is saying the dollar is still the strongest Western currency, while the renminbi is becoming a more credible marginal alternative in the non-Western trading system. China has a large external surplus, wants to reduce pressure from trade partners, wants to present the yuan as a serious settlement currency, and benefits from appearing stable while U.S. institutions look noisier. This becomes logical once view under the lens of the institutional crisis.
Dalio has made the point that if U.S. power looks stretched in the Middle East, it makes China’s alternative financial plumbing more valuable. The dollar remains the price of U.S. financial power, but the yuan is becoming the price of China’s attempt to build a parallel settlement system. The dollar is still dominant; it is just no longer uncontested at the margin.
Politics are Repricing the Same Thing
Last week Mamdani-backed candidates swept House primaries in NYC. Voters are not simply becoming more ideological. They are reacting to systems that no longer work.
Housing, rents, energy, affordability, and government competence are all places where old institutions no longer deliver stability. So, voters reach for alternatives that promise to control an uncertain future. Freeze rents. Tax wealth. Centralize authority. Put someone new in charge. Trump and Mamdani are surprisingly similar in that they both offer voters something new and more control. It is the political version of the same thing markets are doing: searching for a new anchor because the old one no longer feels reliable.
The election of candidates like Mamdani is important information because it tells us that the status quo is not clearing the political auction. This is not an endorsement of the policy prescriptions. Rent freezes do not create more housing, and centralized economic control does not magically create abundance. But the appeal of those policies reveals the problem underneath them. When the existing system fails to produce affordable shelter, reliable infrastructure, stable prices, or believable rules, voters do not become moderate. They reach for whoever promises control.
That is the bridge between Mamdani and Trump. One is ideological and the other is strategic, but both are symptoms of the institutional crisis. Both succeed because the inherited center no longer feels capable of managing change. The electorate is telling us that the things that worked in the past are no longer working.
Markets are saying something similar.
Foreign stocks continue to outperform U.S. stocks. Again, this is not necessarily an abandonment of America. It is a vote that the old U.S.-centric equilibrium is being repriced. The U.S. still has the deepest markets, the reserve currency, the best technology companies, and the most important military. But the marginal vote is moving toward diversification: foreign equities, China’s currency, regional power structures, and political outsiders.
Taking off the Training Wheels
In geopolitics, the U.S. is trying to move from hegemony to burden-sharing, but Hormuz shows that power cannot be retired easily. If a hostile power gains leverage over a strategic chokepoint, the regional balance changes, and the U.S. gets pulled back in.
In monetary policy, Warsh is trying to move the Fed away from the post-GFC transparency regime. Markets expected a political dove and instead got a chair willing to reduce forward guidance. That strengthens the dollar in the short run, but not because trust has been restored. It strengthens the dollar because uncertainty has to be priced again.
In FX, the dollar is still beating the yen, euro, and pound, but it is not beating the renminbi. That is the real signal. The dollar remains the price of U.S. financial power, but the yuan is becoming the price of China’s attempt to build a parallel settlement system.
And in domestic politics, Mamdani-backed candidates are winning because voters are reacting to the same instability. When institutions stop delivering, people reach for alternatives.
The old assumption was automatic American absorption. The U.S. Navy absorbs geopolitical risk. The Fed absorbs market uncertainty. The dollar absorbs global savings. U.S. assets absorb global capital. Establishment politics absorbs domestic anger.
As the US pulls back the rest of the world has to learn how to ride alone.
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I won't dispute anything here except the dollar vs CNY. realistically, the CNY is massively undervalued, probably somewhere on the order of 50% or so, maybe more, which is a key reason that China maintains the massive trade surplus that they do. combined with domestic fiscal policy that subsidizes manufacturing over consumption, they export their problems to the rest of the world. for a long time, the rest of the world loved cheap stuff. but covid alerted the West to the fact that the West put themselves in a highly risky position, and since then we have seen significant responses by other nations to China's mercantilism. after all, the US is the consumer of last resort, or had been, and a reduced market there is a problem for China given how much money the US has to spend.
taking this back to the renminbi, it's strength is a mirage, and remember, this is not the market talking, it is a highly managed currency, this is the PBOC trying to walk the tightrope between maintaining a weak enough CNY to allow its manufacturers to dominate while demonstrating strength to make their case that the CNY is a viable alternative to the dollar. of course the problem there is that as long as the PBOC continues to manage the currency, and there are strict capital controls, it is very hard to see a widespread uptake of CNY. it has its place for those nations seeking to avoid the dollar, but that is a minority of nations I would argue. UK importers are not going to pay German exporters in CNY, nor are Brazilian exporters going to demand CNY from their Japanese buyers.
the world is changing, as it needs to do, and the US is very clearly looking to reduce its responsibilities elsewhere, but TINA is real when it comes to the dollar, regardless of whatever marginal changes occur. at least that's my view.