The dollar milkshake is one of the most important macro theories of the last 20 years…
It was developed by Brent Johnson of Santiago Capital, and it starts with a simple structural fact: the dollar isn’t just a currency, it’s the operating system of global trade and finance.
every country needs dollars to buy oil, service debt, and settle international transactions. that external demand is something no other currency on earth has. not the euro, not the yen, not the yuan. the dollar is the only fiat with structural demand from outside its own borders.
this creates a feedback loop. when global stress rises, capital doesn’t flee to safety in some abstract sense, it flees to dollars specifically, because dollar-denominated debt has to be repaid in dollars. a Chilean copper miner, a Nigerian oil producer, a South Korean car manufacturer, all of them borrowed in USD, all of them generate revenue in their local currency, and all of them need to convert that local currency into dollars to service their debt.
when the dollar rises, that conversion becomes more expensive, forcing more dollar buying, which strengthens the dollar further, which tightens the screws on every other dollar borrower simultaneously. financial stress abroad doesn’t weaken the dollar. it strengthens it.
But the craziest part is what happens when the dollar weakens. dollar bears see DXY falling and declare the end of American monetary dominance. what they’re actually watching is the system reloading. cheaper dollars make dollar-denominated borrowing more attractive globally, so more eurodollar loans get created, more EM corporates issue USD debt, more offshore dollar credit gets extended through the eurodollar system, which operates entirely outside the Fed’s regulatory reach. that’s more fuel going into the milkshake.
when the cycle inevitably turns and the dollar rips back, all those new borrowers get squeezed at once, capital floods back into U.S. markets, and American equities and bonds catch the bid while everyone else bleeds.
that capital recycling is a big reason why $1 invested in the S&P 500 in 1980 became $98.68 by end of 2023. that same $1 in global equities ex-U.S. became $19.63. the milkshake explains the gap.
Johnson is clear that this isn’t sustainable forever. the U.S. fiscal situation is a disaster, the debt trajectory ends badly, and eventually the system breaks. but the sequencing matters. before the dollar dies, it probably kills everything else first. every country running the same loose monetary policy as the U.S. is doing so without the reserve currency backstop, which makes them more vulnerable, not equally vulnerable.
the U.S. is the cleanest dirty shirt in the laundry, and a falling DXY is a coiled spring, not a death rattle.
the lower it goes, the harder it snaps back.
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