Putting More Pressure On The Dollar

Over the weekend, the U.S. State Department posted about seizing Russia's sovereign assets in the U.S. and encouraging other G-7 members to do the same. 

Congress has given us the power to seize Russian assets in the U.S., and we intend to use it.  We are working with @G7 partners to see that Russia's immobilized sovereign assets are used to remedy the damage Putin continues to cause in Ukraine. - @SecBlinken pic.twitter.com/QxJl1cwQYO

-- Department of State (@StateDept) May 19, 2024

The downsides of the United States doing this when it has persistently large fiscal and trade deficits would seem obvious, but apparently they're not. Other countries that aren't allied/subservient to the U.S. will be less comfortable holding U.S. dollar assets, out of fear that their assets might be summarily seized as well at some point. In fact, that already seems to be happening, as China just sold a record amount of U.S. Treasury bonds. 

China ditches $53 billion of US bonds in a record sell-off: - Unsustainable debt, sanctions and theft of foreign reserves have reduced the trust in the UShttps://t.co/Bcf5zOvl5U

-- Glenn Diesen (@Glenn_Diesen) May 19, 2024

Vladimir Putin Envisions De-Dollarization 

Near the end of President Putin's state visit to China, he fielded questions from Russian media in Harbin. In response to one question about an issue with the settlement of payments between Russia and China, Putin spoke about the extraordinary benefits America has gained from issuing the world's reserve currency, and how recent American policy had undermined confidence in the dollar. He concluded that the process of countries moving away from dollar settlements had begun and could not be stopped (text via the Kremlin, translated by Google):

All countries of the world trust the American economy, its power and its stability and take these pieces of paper. But this gives a huge, seemingly inexplicable advantage to the American economy and financial system. They can also be assessed directly, in certain numbers. According to our experts, this is over 10 trillion dollars, simply unearned money that fell from the sky due to the use of the dollar as a reserve world currency. In general, the obligations of the American monetary system to the rest of the world are approximately $53.4 trillion.

But as, for political reasons, the United States authorities undermine confidence in the dollar, they weaken their main, main, most important instrument of their power - the dollar itself. They cause irreparable damage to themselves. That is, to put it trivially in our well-known sayings, they are simply sawing off the branch on which they themselves are sitting. This is terrible stupidity. But they can't stop.

There are disadvantages for us in that we are forced to look for other opportunities. But there are also advantages, because a situation in which one side dictates its will to the rest of the world, including in the political sphere, using financial and economic instruments, is unacceptable. And all the countries of the world, I assure you, you only need to look at the volume of reserves and how they decrease in dollars. The whole world is reacting to this. I think this process is inevitable.

We are, of course, transitioning, and this is the right process. It is associated with certain costs and difficulties, but on the whole it is correct when we talk about switching to national currencies in settlements or creating some other settlement instruments with other countries. This process is underway, it has begun, it can no longer be stopped.

Maybe The Biden Administration Wants This To Happen

On Sunday, Balaji Srinivasan, the Stanford PhD engineer-turned-entrepreneur (in genetics and crypto) shared a post on X that included a GIF of screen captures of Jared Bernstein's op/eds over the last ten years calling for dethroning King Dollar. 

DEDOLLARIZATION → REINDUSTRIALIZATION? In theory, dedollarization enables reindustrialization. Because if you can export dollars, why build anything else? You make 99.99+ cents on the dollar for a new dollar. It's a very high margin good, made with zero effort and zero... pic.twitter.com/gj3XUcSsHl

-- Balaji (@balajis) May 20, 2024

Jared Bernstein was then-Vice President Biden's chief economist and is currently the head of President Biden's Council of Economic Advisors. Here's the full text of Srinivasan's post: 

DEDOLLARIZATION → REINDUSTRIALIZATION?

In theory, dedollarization enables reindustrialization. Because if you can export dollars, why build anything else? You make 99.99+ cents on the dollar for a new dollar. It's a very high margin good, made with zero effort and zero pollution. Why make screws or bolts or planes or trains if you can literally print money? Let someone do that overseas.

That was the logic of the ~1971-2021 era. But the problem arises when people at home and abroad start realizing they're getting diluted to prop up the dollar. Or when you're in a military standoff with China, and fiat currencies are suddenly less valuable than actual factories.

In that case, if you want to build things in America, you need to stop printing things in America. And that's why everyone from sober financial analysts like Luke Gromen to Biden advisors like Jared Bernstein have talked about dethroning the dollar, as per the gif below.

The problem is that it's much easier to launch currencies than to build factories. China spent the last 45 years shaping their economy into an industrial powerhouse, while the US spent those decades de-industrializing, regulating, and offshoring. Like the US, China does have a high-tech culture, but they also have a low-tech and medium-tech culture -- a culture of skilled laborers and factory workers.

It is very nontrivial to bring that back to the US. The best case outcome might actually be to leapfrog with robotics. So you better pray for @elonmusk and @adcock_brett and @kvogt to get humanoid robots working. Of course, Washington DC has fought AI and self-driving every step of the way, so they'll probably fight robots too.

And if that doesn't happen -- if the robotic leapfrog hits a roadblock, such as the fact that many pieces of the robotics supply chain are still made in China -- we're headed for a tough situation.

It's one where DC loses first its physical power and then its financial might, maybe overnight. Because you don't just instantly get back the factories when the world dethrones the reserve currency.

Srinivasan makes a great point here. If having a weak currency alone were enough to spark a renaissance of industrialization, Argentina would have become an industrial powerhouse this century. Hopefully, wiser heads will prevail at some point, and our leaders will think of other ways of reindustrializing besides deliberately wrecking the dollar. 

Protecting Against Dollar Decline

If you're worried about the decline of the dollar, gold can be a good inflation hedge, but as we've written before, it shouldn't be thought of as a hedge against market risk. 

Gold Isn't Going To Protect You In A Market Crash That doesn't mean it's not worth holding now, but it's not a market hedge. $GLD $ORLAhttps://t.co/Rhic4DZtei

-- Portfolio Armor (@PortfolioArmor) April 11, 2024

In that post, we mentioned a smaller gold miner we've been long since late last year, Orla Mining Ltd. ( ORLA ) , for those who don't want to just buy the SPDR Gold Trust ETF or the VanEck Gold Miners ETF . ORLA is up about 35% year to date. For those who prefer a miner with a larger market cap, there was one among our top ten names last week. 

We'll see how that gold miner performs, but, on average, our weekly top ten names have returned 23.26% over the next six months, since we started our trading Substack. 

If you want to stay in touch.

You can scan for optimal hedges for individual securities, find our current top ten names, and create hedged portfolios on our website. You can also follow Portfolio Armor on X here, or become a free subscriber to our trading Substack using the link below (we're using that for our occasional emails now).