All hail king dollar
All hail king dollar.
But for how much longer?
The US dollar, as measured by the DXY, is ripping higher.
At levels not seen for many years.
This is turning developed economies into emerging markets where they’re forced to print their currencies into an inflationary environment or be forced to default.
Why?
Because of the dollar’s reign as the global reserve currency.
Since the creation of the petrodollar system in the 70s, oil, aka energy, must be transacted in US dollars.
That means if you’re Japan, Britain or China, you need American dollars in order to buy oil for your citizens.
This increases demand for dollars, even though the Federal Reserve has printed trillions in the last few years.
You have to remember not just the Federal Reserve has printed trillions but every global central bank since Covid. The Bank of Japan, European Central Bank, Chinese Central Bank, Canadian Central Bank and many others.
A strong dollar is terrible for the world.
It’s great for Americans traveling, but it’s awful for other countries.
The Euro is now 1-1 with the dollar and the pound is crashing. The Yen is cratering to levels not seen in decades.
Let me walk through why this is a problem if you’re in another country.
Let’s say you’re a European government official.
When you came into power, the Euro to Dollar was 1-1.2 for argument's sake.
When you buy energy or goods from other countries, you transact in US dollars.
Now when the Euro to dollar is 1-1, you’ve lost 20% of your purchasing power.
Now imagine your energy prices are skyrocketing because of the sanctions placed on Russia by the West.
So your energy costs have gone up significantly and you’ve lost 20% of your purchasing power on the international market.
If you’re a small business owner, you’re done.
You can’t afford current prices.
If you’re a medium or large-sized business, you have to hope you can pass on some of those costs to your customers.
But how can you when they have to pay more for food and electricity to heat their house?
If you’re a consumer discretionary company right now, you’re screwed.
Nasdaq tech companies are going to have their earnings and revenue ruined because of the change in currency.
Why?
Because if a lot of your revenue is coming from outside the US, a stronger dollar means you’re making less money.
It’s wild to think that inflation in the US can print close to 9% and yet the dollar is up 20% on the year.
Makes no sense right?
I couldn’t wrap my head around it until I heard the dollar milkshake theory proposed by Santiago Capital, aka Brent Johnson.
He’s a great breakdown video of it.
Essentially his argument is because the world is so reliant on US dollars for international transactions, the US dollar will continue to be strong, even with a local inflationary environment, because every other currency is reliant on dollars.
Basically, the American dollar is the least shitty of all the global FIAT currencies so governments and investors are flocking to the US dollar even if they know the dollar is losing 8% of its value. They buy US treasuries, US stocks and US assets because their local currencies/assets are crap relative to the dollar.
When I first heard this theory, my mind was blown.
Couldn’t understand how the dollar continues to hold up, even when governments and central bankers around the world know how much the US has printed in the last few years and how they’ve weaponized their currency.
Like how it took Russia out of the SWIFT system, thereby forcing Putin and other countries to start transacting in their own currencies.
Eventually, the US dollar will fail as the global reserve currency, as all currencies have done in history, but it may last longer than I thought.
Why?
It’s the least shitty currency and way of transacting. So even though the market could crash and Gamestop could moon, the dollar could skyrocket causing defaults all over the world.
Sri Lanka is already there. Protests and unrest have begun because of inflation in Indonesia, Peru, Pakistan, and many other developing countries.
A strong dollar ruins their local currency and imports tons of inflation to the point where the poorest and middle class can no longer afford to survive.
This is how revolutions begin.
Been writing about this for over a year because I saw the writing on the wall. As Charlie Munger has said, inflation is how democracies die.
We’ve started seeing protests in emerging markets but don’t be surprised when we see protests in Berlin, London and Paris.
It could be here sooner than you think.
So while Americans are loving life traveling in Europe this summer, the rest of the world is on the Titanic headed toward the sovereign debt iceberg.
America is slurping the straw that is in the milkshake of the world to suck liquidity into the US dollar.
Don’t be surprised if we see sovereign countries default or print into hyperinflation to bow down before king dollar.
All hail king dollar.
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