If you’re immersed in the market zeitgeist, you’ve probably heard all you care to by now about the USD-US equity correlation.

I’ll be the first to admit that topic’s getting a bit tired as an excuse to put digital pen to digital page. But it’s worth the time and effort because the discussion’s actually just another way of getting at the only question which really matters: How should foreign investors approach US assets at a time when America, under Donald Trump, is reimagining its role in the world and rethinking bedrock assumptions about the nature of domestic governance?

In broad strokes, the correlation discussion’s actually quite simple. If you hold US equities as a foreign investor and those stocks have a reliably negative correlation to the dollar, that correlation’s a natural hedge. That, in turn, means you don’t have to bother FX-hedging that exposure, or if you do, you don’t need to hedge it entirely.

In recent months, the correlation’s moved rapidly out of negative territory and even flipped positive, raising questions about potentially trillions in under-hedged foreign exposure to US equities. The figure on the left, below from Deutsche Bank, shows you the other side of this — i.e., the flip from positive to negative for G10 FX versus US stocks in April and May around “Liberation Day” (it flipped back positive in June). The figure on the right breaks it down by currency. Note that the traditional correlation held for higher beta currencies in April, but ultimately flipped the next month.

As Deutsche’s Lachlan Dynan wrote in a special report, most of the banter around these correlation shifts centers on quasi-existential questions. Market participants, Dynan said, are debating the dollar’s reserve status and, more broadly, “the safety of US assets amid a more transactional US administration, potential increased taxation of foreign capital and questions on the erosion of the institutional and legal bedrock of the US.”

Those are the questions I tend to focus on in these pages, and while it’s probably true that, for now anyway, the dollar’s struggles can be traced more directly to debt and deficit concerns, it all comes back in the end to the credibility of the US as a liberal democratic (small “l,” small “d”) project. If foreigners are forced to conceive of America as something other than a liberal democracy, all bets are well and truly off.

But, Dynan in his piece was keen to point out that the USD-US equity correlation has varied in the past “when reserve status was not in question,” which suggests there are other factors at play, or at least that there could be.

One important driver appears to be the presence of US-centric “shocks.” The two figures below show up in different sections of Dynan’s analysis, but the tie that binds are earthquakes with America as the epicenter.

The figure on the left (with Dynan’s annotations) shows massive foreign inflows into US equity and bond funds around the election, then a veritable flatlining of that impulse as Trump’s policy platform took hold. The figure on the right (with my annotations) shows periods when a US-centric shock (the dot-com bust, the GFC and “Liberation Day”) drove an increase in the USD-US equity correlation. Note from the dark purple line that US growth (proxied by short-end rate differentials) was repriced dramatically lower just prior to the correlation spikes in 2001 and 2008.

“Larger-than-usual swings in underlying asset flows sponsor simultaneous buying (or selling) pressure on the currency and US assets and hence a more positive correlation,” Dynan wrote, editorializing around the chart on the left before turning to the other visual: “[E]pisodes in which US growth was repriced lower vs RoW, such as 2001/2 and 2007/8, were followed by sharp rises in the USD’s equity correlation, suggesting higher uncertainty and volatility, especially if the source is US-based, would be expected to lift the equity correlation.”

Of course, none of that rules out a role for more “structural” factors, and you don’t have to drill all the way down to foundational questions about democratic backsliding and the exorbitant privilege to touch on structural issues. For example, Dynan noted that because the US is a net energy exporter now, global growth expectations may become more important as a driver of the dollar.

At the same time, he went on, “it’s quite possible the current size of US deficits has reached a threshold at which foreigners’ willingness to fund them has become more elastic to US growth expectations and global risk sentiment than in the past, in turn driving greater alignment between risk sentiment, equities and the dollar.”