Hey what’s up,
This is Travis (the founder) writing the newsletter for the first time in quite a long time (and publishing it here as a blog post after the fact).
Generally we have the ever-awesome Juliet dropping the latest investing happenings on you, but alas she will be leaving us soon.
She has taken a sort of Editor in Chief type of role with our friends at Onfolio, who recently filed their S1 to go public (disclaimer, I’m an investor). I can think of no one who would do a better job than her, and we all wish her luck with her new position. They are lucky to have her!
Now, onwards to some things that have captured my attention recently.
US dollar hegemony, decline, commodities, and the unintended consequences of Russian sanctions.
(And what I’m doing about it at the bottom)
There is not necessarily one single point here, but more of an area of thought that has been occupying my brain-space lately. I thought i’d share it with you.
Let’s be real, we’ve all heard the gold-nuts for decades now ranting about the upcoming collapse of the US dollar, and how the Western countries will enter eons of decline. We’ll be paying with gold and silver coins, and bartering goats for bread. Also, Aliens.
Now while they’ve mostly been a bit nutty, there was always just a grain of truth in everything they said, just enough to make you at least listen for a moment and maybe have a few coins in your closet behind to your cans of SPAM.
Well, as it turns out, “money” has ended up a bit weird, with lots of printing and bailouts and financialization and all that jazz. But, as manipulated as many currencies have become, the USD has still reigned supreme, and no legitimate contenders have come onto the scene to steal the limelight.
The entire world operates on USD. Oil is priced in USD, countries and companies everywhere borrow in USD, money in suitcases in movies is always USD. The demands are many.
Over the last couple of months though, there have been some claims and theories building up that have at least grabbed my attention, and don’t sound quite as crazy as they once did.
Where it begins
A good deal of of this story begins with the recent Russian sanctions. More specifically, the severity, speed, and line-in-the-sand-crossing of these sanctions. Sanctions can in theory be a good political tool, and IMO were rightfully used, but the way they were used might play out in unexpected ways over time.
To summarize it for you, the two big things I’m talking about here are the removal of Russian banks from the SWIFT system, and the freezing of the Russian Central Bank’s assets.
You probably know, but just in case, to overly simplify it all the SWIFT system is how banks transfer money between each other. Basically all international transfers are based on this.
Who controls the SWIFT system? The West (+ Japan).
Now, how about the freezing of Russia’s Central Banks assets? Well, in the blink of an eye 2/3’s of the foreign currency assets were frozen, to the tune of $630 billion dollars. This effectively means that (in theory) Russia could not support its own currency, and more specifically, spend any of those reserves on the stuff nations need to survive.
There is of course other stuff happening here too, but these are the big points.
Now let’s circle back around. What does any of this have to do with the US Dollar, gold hoarders, and the such?
Let’s role-play a bit. Let’s say that you were Russia. Or, basically any nation that doesn’t always see eye-to-eye with the West (oh hi there China). You’ve now seen what is playing out with these sanctions.
Would you continue operating as you always have, supporting the strength of your currency with lots of foreign reserves that can be frozen, and using the same ole’ banking system and trading everything in US Dollars, or… would you maybe change how you do some things?
I think you would change how you do some things.
I would change how I do some things.
Alternative non-USD based transaction systems have been slowly creeping their way in for years.
China has it’s own sorta-version of SWIFT (called CIPS). Russia is demanding “non-friendly nations” to pay for oil and gas in Rubles. The PetroDollar has long propped up the USD as everyone, everywhere, uses it to buy oil. Now, and this is hard to overstate its significance, Saudi Arabia is considering accepting Yuan for oil instead of Dollars.
Now, THIS is why this big gold and other commodity thesis is starting to seem like it’s finally not so crazy. Not that much of the world is suddenly going to collapse into a Mad Max spinoff, but that sovereigns (nations) will find new ways to store their reserves and wealth, and double-down on transaction systems that don’t revolve around Western control.
So, it’s not that the USD will necessarily be purposely driven into the ground, or that a new reserve currency will swoop in to take the crown. Instead, the theory is that the USD just won’t be propped up in the same way anymore, as the demand for sovereigns holding dollars goes down.
The US Dollar has been losing its dominance for foreign reserves for a while, but it’s not like there has been a close 2nd place currency for the wealth to flow to (I don’t want to hold a bunch of Renminbi, do you?). So the thesis is, that instead of storing most wealth in foreign reserves, sovereigns will choose to store it in commodities.
The likely scenario not being that sovereigns suddenly sell off everything (as that would hurt them just as much), but that moving forward they start allocating more of their reserves in other stores of wealth.
What’s the best option for them to use?
Gold, of course, as its historical precedent is already established, as well as a basket of other commodities.
Here is the quote of quotes from Zoltan Pozsars writeup:
Do you see what I see?
Do you see inflation in the West written all over this like I do?
This crisis is not like anything we have seen since President Nixon took the U.S. dollar off gold in 1971 – the end of the era of commodity-based money.
When this crisis (and war) is over, the U.S. dollar should be much weaker and, on the flipside, the renminbi much stronger, backed by a basket of commodities.
From the Bretton Woods era backed by gold bullion, to Bretton Woods II backed by inside money (Treasuries with un-hedgeable confiscation risks), to Bretton Woods III backed by outside money (gold bullion and other commodities).
After this war is over, “money” will never be the same again…
…and Bitcoin (if it still exists then) will probably benefit from all this
What to do about all of this?
*Nothing here is investment advice*
The first thing to remember is that nothing here is certain by a long shot. These are just possible scenarios, and any of these scenarios would most likely take years to play out.
I’m not a “Macro Guy”. I don’t make big bold predictions and bets on what is going to happen in the world. I instead look at possibilities and probabilities and position myself accordingly so that I’m good no matter what.
I believe that the scenarios mentioned above have at least a non-zero chance of coming to fruition.
Every person has a unique set of needs, but for those focusing on wealth preservation the recipe is usually the same: own productive assets.
Businesses with pricing power that kick off cash (I love private ones), and maybe real estate. None of these really do awesome in times of distress, but these are things that can come out on the other side holding their value better than most other alternatives.
And in this case, I personally saw the case to own more gold (ETF’s or physical, whatever). Not so much that it’s a damper on all my other investments, but enough that in times of financial quackery it can preserve its purchasing power.
I currently view it as a sort of “heads I win, tails I don’t lose much” type of bet. If sovereigns are accumulating more, inflation is rampant, and the dollar is shaky and losing ground, then gold seems to me like a reasonable bet.
I am maximizing my sleep-well-at-night portfolio.
If you want to go deeper, I really recommend giving these a read
Above I summarized a bunch of stuff from people with much higher IQ’s than me. Below are some of those high IQ people.
- Bretton Woods III – This is the paper from the quote above. It is THE writeup that everyone completely lost their shit over. Zoltan Pozsar, head of global interest rates at Credit Suisse and a dude a lot of people listen to, wrote about the changes the world is facing now. You can ignore the trader-jargon, just grab the highlights.
Want a fun 1-minute video summary instead? Kyla Scanlon comes to the rescue: https://www.tiktok.com/@kylascan/video/7087327256250551595
- Energy Cancelled. This is a long read from Arthur Hayes, the OG founder of the BitMEX crypto exchange. He’s a controversial big-brained billionaire, going deeper on possible outcomes. He has a knack for explaining narratives in simple ways, and makes some bold claims on what comes next over the next few years (read the gold price target!).
- A very concerning “bonus” clip for you. Here is David Friedberg on the upcoming 100-million person potential famine as an unexpected consequence of Russias war.
Have any thoughts on any of this?
I’d really love for you to respond and let me know!