The value of foreign-owned US equities has grown significantly over the years, with estimates suggesting that roughly 90% of the value reflects accumulated price appreciation rather than net purchases. This has created a significant exposure to US market valuations, which could have far-reaching implications for foreign investors and the US economy as a whole.

To put this in perspective, foreign equity inflows are now financing the entire US current account deficit, which means that the dollar has become increasingly dependent on the equity cycle. This is a concerning trend, as it means that the value of the dollar is tied to the performance of the US stock market, which can be volatile and unpredictable.

The implications of this are significant. If the US stock market were to experience a significant downturn, the value of the dollar could plummet, leading to a decline in the value of foreign investments and potentially even triggering a global economic downturn. This is a scenario that foreign investors should be aware of and take steps to mitigate their exposure to.

One way to do this is to diversify their investments across different asset classes and geographic regions. By spreading their investments across a range of asset classes and markets, foreign investors can reduce their dependence on any one market or asset class, and thereby reduce their exposure to the risks associated with the US stock market.

Another approach is to consider alternative currencies that are less dependent on the performance of the US stock market. For example, investors could consider investing in currencies such as the euro or the yen, which are less tied to the fortunes of the US stock market and therefore less vulnerable to its volatility.