A reader asks; What will happen when the dollar loses its reserve status?

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Note (2:05pm EDT) : The podcast was put out just prior to the FOMC announcement. In my opinion, the Fed just announced some relatively hawkish predictions with rates going above neutral. Plenty of rate hikes for 2022.  Look for the USD to strengthen somewhat.

Beware of premature warnings of the dollar’s demise

-The USD should prevail until war. China WILL NOT be a net beneficiary from war as its economy will suffer, and the yuan is not yet ready to take main stage. Given what is needed for a country to make its currency a global reserve, the yuan may not be ready for years, if ever.

5-year chart USD/RUB and USD/CNY; Hardly an indication of a loss of USD confidence, though the CNY has appreciated over the longer-term
One-year chart; UUP USDX ETF (red/green), USD/CAD (light blue), USD/JPY (purple). All rising as the dollar has strengthened
One-year chart; AUD/USD (white), EUR/USD (red/green candles). Lower values mean a higher USD

-The US is being set up for a humiliating military defeat, and its strawman politicians are purposely being presented as buffoons. Moreover, the US has recently shown a reluctance at defending its allies and is being portrayed as soft in military affairs. Yet, this has only helped to set the table. There is no currency currently available that will be able to take the USDs mantle.

The characteristics of a reserve currency

-The dollar’s process in becoming the global reserve was decades in the making; going back from Bretton Woods to until recently.
-Any nation whose currency is the global reserve needs to supply the world with enough of its currency to conduct trade efficiently. This means;

  • This country must be willing to endure persistently large balance of payments deficits and ever larger fiscal deficits (Triffin Paradox and Triffin Dilemma),
  • This nation must also be willing to offshore its productive capacity,
  • This nation must be willing to have porous borders as global citizens will be encouraged to enter this country to seek this currency to bring home.

-Is China willing to accept these circumstances in order to make the yuan the reserve currency? I say no, at least not before WWIII
-PLEASE STOP USING THE TERM PETRODOLLAR. It doesn’t apply as the US is the largest energy producer, and at one point was a net exporter of energy. The term is an anachronism and almost sounds childishly simple.

My predictions for asset prices as the dollar loses this status

-Stock prices continue to be well supported despite current circumstances. I tell you why
-Housing prices continue to rise despite mortgage rates rising 100 bps higher. I tell you why.
-What will happen to house price-to-income multiples in the US as the dollar fades in the global arena.

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22 thoughts on “A reader asks; What will happen when the dollar loses its reserve status?

  1. I noticed covid is re-entering the mainstream narrative once again.

    That is why it’s advantageous knowing what we know. It’s so important to remain objective through all of these manufactured crises. I never allow myself to become subjective about it. I respond to the narrative and adjust my choices and decisions accordingly.

    Spoos 5,000 looking more obvious every day.

    You and I know covid is a scam, it’s manufactured. We know the intent of the scam. The effects of the scam are very real, but the goal is to allow us to overcome the scam and to actually profit.

    The manufactured wars that will be coming soon and have already started is according to a script. In some regards it’s another manufactured scam, but it’s very real for the deaths and for the economic and geopolitical ramifications. Our goal is to benefit from the scams and the manufactured crisis. Our goal is to remain above the discussion and to be objective.

    I don’t waste my time complaining about particular politicians. It does me no good and they’re all plants there on purpose anyway.

    To the unwashed, they don’t understand our ways of thinking, but we don’t waste our time trying to show them anymore.we would just be beating our heads against the wall.

    Profit from the scams. Become self-sufficient because of the scams. Invest because of the scams.

    I walked past a house last night on my nightly walk and a million dollar house had set up a bunch of LED lights to light up their house in the colors of the Ukraine flag. Now that’s being subjective. I don’t even laugh at it, I observe and marvel at how people have been so easily duped once again into some sort of partisan bickering contest.

    This is exactly the scene in Orwell’s 1984 when the INGSOC party members engaged in their daily 15 minute rant against East Asia or Eurasia and Goldstein.

    Once we start taking sides in the manufactured infighting, we become ensnared.

    Know which direction the markets are going. That’s the only thing we can do at this point. Keep learning, keep reading the Bible, and keep profiting.

    1. Fauci recently stated restrictions may come back. Ukraine made Bitcon legal this week, not sure how that happens during a war and the electricity should be down in many places. The Covid and War is all a charade cover to pass and implement other laws. CBDC is in the fine print, not sure if that would tank crptos or if they would allow people to merge their cryptos they own into the CBDC. It’s a ways away but not worried about power outages and internet going down, if CBDC is going to happen. They are just testing the system to make sure it doesn’t go down.

      1. Interesting – my relative at Health Canada was in an emergency meeting recently because it is apparent that the vaccine ‘doesn’t work’ and they need a Plan B. Stat. Soooo, what could that be….? Do you smell another lockdown? Or a new and improved vaccine?

        1. Russia getting bogged down in Ukraine. Timeline to war is moving further out. Russia not doing well and I suspect this is why China is backing away for now.

          The equities have responded well.

          Maybe this is why the covid scam is reemerging. The scams need to keep going.

  2. Analysts are predicting a drop in Aussie and NZ house prices this year. Bloomberg is predicting a three percent drop. Big deal. Sydney was up 27% last year. I think it will surprise the upside. Just like the S&P level. The Fed ain’t doin’ nothin’. I think they don’t even care.

  3. Bond Traders Stunned by Hawkish Fed Are Sounding Growth Alarm – Bloomberg


    It’s always the same old same old with the Fed. It waits too long, it goes too far, and then the resulting boom/bust cycle allows the elites to pick up the pieces and consolidate their wealth.

    I doubt the FED will have to raise as much as it is considering. You and I both know that something like 2018 will happen again.

    Thus, inflation will still be elevated and real bond yields will still be coming down.

    1. Seven rate hikes and balance sheet reduction coming up in 2022…. and the market upticks. How does that happen?

      1. That’s really nothing compared to how inflation is. A couple months ago I thought they were going to blow the whole thing apart and raise rates until inflation fell back. I was wrong on that.

        I suspect that the consensus of traders and investors believe real yields will continue to remain in the basement. Even If the Fed funds rate gets the 2% and inflation is five or seven percent, there’s no way that monetary policy can fix it. Nor do I think that is the intention.

        With all of these geopolitical elements now in the mix, the Fed certainly will not be raising by 50 basis points nor drastically reducing the balance sheet. Keep in mind that the federal government here has cut back quite a bit of discretionary spending. As hawkish as the FED sounds it doesn’t seem that it will be able to nor intend to fix the causes of inflation.

        That is unless of course, they intend to overact down the line and blow it apart once again.

        I recall 2018 and how the Federal Reserve did that about face and began slashing interest rates and adding to the balance sheet. The FED has trained investors to expect more of the same. This is why every dip is bought.

        I also have to believe that people are seriously beginning to contemplate dumping dollars around the world as well as other currencies tied to it.

  4. Hi Chris, what about prices in Australian property and shares and other commonwealth countries will they likely be going up, down or sideways? Thanks.

    1. Going up. The US dollar is the global reserve and I always consider global real estate being priced in US dollars. This is one of the reasons why real estate in most countries is so expensive for its local residents. Real estate purchasers with US dollars that can be easily converted into the local currency will always overwhelm the locals.

      There’s a reason why the US dollar index is doing well. Although up to 80% of all US dollars is held overseas, which means massive monetary inflation, the central banks of the other nations must engage in the same types of policy to maintain equilibrium with the dollar.

      Thus we see massive waves of monetary inflation that had traditionally been sterilized. This seems to be no longer the case and global real estate is a direct beneficiary of all of these dynamics. Since real estate was considered an asset in the financial shell, whether or not money was sterilized was not an issue in determining ever higher prices for RE. This is why real estate tends to follow the level of monetary inflation and not price inflation. It’s like gold with a cash flow.

      Since Australia is a desirable country many people will seek to own and they will pay up. There are a number of people on this board that are already familiar with the level of foreign interest in their local real estate. These foreigners hold hordes of US Dollars and can deploy them and real estate is the most sensible mechanism to rid a lot of money at once.

    1. That will be great news. Keep buying income generating assets and get rid of the dollars as the 80% of dollars that are also held outside the US need to find a home. Foreigners will continue buying up all the real estate, while the younger folk get into all sorts of debt, cannot control spending via the quick ads in their social media, and eschew planning for the future. I see the ads on the internet and they are so retarded, and that’s because the intended audience is also functionally retarded.

      Lots of retarded people fighting amongst themselves over meaningless garbage, yet they have been engineered to hate their nation as well.

      I guess they won’t own anything, but will be happy. Buyb their houses and rent to them.

  5. Thanks as always for your analysis.

    My current situation is to replace my primary residence (condo) with a small house. The main reason is to get away from the ever increasing HOA and the restrictions associated with living in a condo community. Space to work on my hobbies is also high on the list.

    One of the benefits living in CA allows us 55 and older crowd to keep our property tax base. Since my condo has been paid off for years and I bought it in 1996, my tax base is pretty low. It costs me about $550.00 / mo to live in a $3000 / mo neighborhood. Proceeding with this property replacement plan will add about a $150K mortgage and 1.25% property tax increase on the price difference.

    The condo HOA and property tax increase on the upgrade probably buys me $50K more house. My hope is even though I have to kick in some money to get a house in a decent neighborhood the long term benefits of an older property with no CCRs or HOA will be worth it. Of course my plan is to pay the mortgage off early, either pulling money from my investments or having some really good years at my business. According to my tax accountant – once a property title is in hand it makes it more difficult to take it away from you. Your thoughts would be appreciated.

    1. Given your personal objectives, I would sell the condo and buy the house. You bring up another great point with owning real estate. If you have a mortgage on it, that’s one less reason to have it taken. They won’t take away owner occupied housing. The government may place more restrictions on them, but not confiscate.

      I like condos for cash flow, but they get beat worse in a bear market. Living in a condo can be very restraining, too.

      If the accountant says it can make sense from a financial standpoint, I would exchange them. CA real estate tax laws are peculiar and I am not up on all of it. Of course, if you didn’t need all the proceeds, I would always say rent out the condo.

      In VA I am considered elderly. I am 56, and anyone 55 or older is elderly. I am in a protected class. Ha… First year gen x is now elderly.

      1. One note of caution with a house. They are more expensive to maintain, and while common charges can be a bear, the costs of keeping the house in good shape can negate the cost savings of not having a monthly HOA/common charge expense. A new roof could negate a couple years of savings of no common charges.

        1. Thanks for your thoughts. My experience being in an HOA for the last 25 yrs or so has not been great. There are some good points but in the long run it may not be all that and a bag of chips.

          The complex recently had an assessment and a financial study done. At the time I’m thinking $6.5m worth of dues collected over about a 20 year period and they still needed $15K per unit (x 164) to fix the balcony railings? This is when I realized lacking control over your own property might be a good way for an organization to be victim to all sorts of abuses. For example the landscape contractor sees dollar signs. We owners pay our dues and never give it another thought until the notice shows up from the association crying poor. An HOA type of system is in charge of spending other people’s money. What could go wrong?

          On the flip side I can see how maintaining a house requires careful planning and having enough reserves at hand for when something goes sour. Roof is a big expense as you pointed out. Fortunately I’m technical and can handle most things myself, but for someone who isn’t, a lot of money can be dropped really quickly.

          Being about a year older than you, it looks like I’m a member of your club!

          1. You don’t need to sell me about living in a condo. It sounds like your association wasn’t managed all that well. There are some associations that are loathe to announce special assessments, and their common charge will most always cover special items with the reserve. There are many other associations that struggle and are apprehensive on raising common charges, lest this appears that it could lower capitalized values. Thus, they tend to assess these special assessments more frequently. One of my condo associations just placed a $5,500 special assessment for each two bedroom unit to replenish the reserve for no particular reason. If I weren’t making a lot of cash flow or had a mortgage on the unit I would have sold already.

            In the long run, detached houses are always more expensive than condos, but life is so much better living in a house.

            I would definitely make the move, especially at our age.

          2. I’m also in your club, AL, I was faced with ‘where to live’? last year. I had lived in Toronto for 27 years. The only thing I could afford in the city was a small condo – mortgage, condo fees, high taxes, paper thin walls (big issue when you play piano and clarinet), parking, pollution and no green space. Packed it in and bought a small house in the country for 250K – no mortgage, low taxes. It might be worth 300K now – how crazy is that? But I didn’t buy it for that – it’s peace of mind. I was raised on a farm so I can handle most chores, brother lives down the street. So far, so good here, beautiful sunset at night on my back porch, no 5G, food security. I am grateful. No regrets at all. I wish you well with your move.

            1. Lientje, thanks for your story as it inspires some hope. But a house for $250K!?! Around here (in Nor Cal) that may buy you a closet. I’ll be over paying for a house for sure but I’m also selling the condo at a price that I never dreamed was possible. The condo went from my purchase price of $144K to low $600K in about 25 years. I just can’t stomach that kind of money for a box with an HOA and feel bad for whoever buy it. It will likely sell in days.

              My 25 years living in the condo were quite good. No complaints of me playing the guitar (acoustic) and the area is as good as it gets. Even my classic cars don’t get frowned on when I rotate them out. No tweakers or people trying to break in. If this was a small house in the same area I would never move. What is driving my desire to move is the condo is aging. Built in 1990 and the HOA dues are not getting cheaper as time goes on. I have a feeling this place will eventually be a money pit, where the majority of the expense will go toward feeding a management company.

              If this deal goes through, meaning I don’t get out bid beyond my over bid (yeah, crazy huh?) it will cost me at least $100K over to be in the house. But it’s in the town where I grew up and my 85 YO mom is close by. Work is also close by. My old time friends are close by. The street is private, and while the area isn’t rural, it has that feel because that area is comprised of houses built in the 50s with no sidewalks. The 1/4 acre lot will allow me to put up a small shop building too, which I desperately need.

              There is no pocketing money from a sale of a condo around these parts so I can only hope to realize that the quality of the lifestyle and replacement home endures long after the sting of the high price.

  6. Mainstream outlets say that the markets recovered and stocks rose because the Fed is getting serious about inflation and that it says the economy is on strong footing.

    ZH says the markets rose as investors think the Fed will overshoot and make a mistake, which will cause a massive unleashing in liquidity and lower rates.

    Perhaps the drops in the OIS spreads have more to do with investors thinking inflation will fall rather than a blowup.

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