By Ross Powell, Contributor, USDR
With the final month of 2016 upon us and the Trump presidency fast approaching – assuming the latest efforts to stymie the transition of power fail – it seems like the uncertain pessimism that persisted before the election has been replaced with uncertain optimism. Equities continue along at or near all time highs, and the mood on Wall Street and at the Federal Reserve seems to be risk on. Since the election we have also seen a significant spike in bond yields and an old fashioned beat down of precious metals in line with the rising dollar – our focus in this article – breaking out to the highest levels in ten years.
Dissecting the competing narratives that are currently being employed to explain the severe and often mutually conflicting moves across different assets is messy business. How can stocks continue to shrug off the sharp move up in bond yields – interest rates – when even the perceived threat of a rate hike from the Fed over the year prior to Trump’s election led to prompt selloffs? With the theoretical arrival of fiscal stimulus in the form of infrastructure spending being baked into the cake, how will the potentially ballooning deficits be financed if not by debt issuance that is monetized by the Fed? How could the prospect of a Trump presidency go from being declared the end of the world to the ultimate boon for risk assets of all type?
The scrambling and self-contradictory attempts by financial news outlets to goal seek explanations for recent price action are transparently fictitious and lack even a modicum of substance let alone explanatory power. This is a time of paradigm shifts. We would all do ourselves a great service and dispatch of a great many headaches if at this point we casually retire the paradigm of efficient markets and genuine price discovery once and for all. Stocks, bonds, currencies, and all connected assets are – to perhaps be overly blunt – totally manipulated. The centerpiece of the manipulation regime is the petrodollar.
As the world’s reserve currency, the dollar has been a vital interest of national security for many decades. Entire operations of the US government are structured around the strategic value of the dollar and have the deep pocket off books ammo to prop it up wherever necessary. Readers not familiar with the formation and purpose of the Exchange Stabilization Fund will find it an important and valuable area of research. By the same token, systemically important financial institutions who have been given the ‘too big to fail’ moniker since the financial crisis are legally allowed to avoid marking their assets to market and from reporting their true financial condition if it is declared a matter of national security.
Ultimately the dollar will revert to the intrinsic value of all fiat currencies: zero. Since the inception of the Federal Reserve Note, it has lost almost all of its purchasing power. With all of the international efforts to circumvent the dollar and the exponential expansion of both debt and the currency supply, it is clear that the Ponzi scheme is closing in on its end. Nonetheless, the dollar – and the entire economy – is still based on faith and confidence in addition to the backdoor manipulation. Trump’s election appears to have sparked a more optimistic attitude that has contributed to the strengthening of the currency. It’s important to keep in mind that the value of the dollar is measured not in terms of absolute purchasing power but in terms of how much value it has relative to other currencies. In a world where all fiat currencies go to zero but only the dollar has an armada of manipulation behind it, it isn’t entirely surprising to see the dollar gain ground on other currencies.
However, an important impact of dollar strength takes place right here in the US. When the dollar rises in value, it means that our debt is harder to service because the interest payments become larger in relative terms. With the dollar actually strengthening on top of rising bond yields and the potential for interest rate hikes, it seems that the national debt – not including unfunded liabilities – has the potential to enter toxic territory. Indeed, many have forecast that the dollar would enter a crack-up boom phase where it would appreciate until it simply disappears and is replaced in a global reset. That scenario could be playing out right now before our very eyes.
Paradoxically, the recent strength of the dollar could end up being a precursor to its downfall. The petrodollar regime – even if foundational cracks have emerged in recent years – still requires many other nations to obtain dollars for use in international trade and the purchase of oil. As these dollars become more expensive, these international economies will be pushed to the breaking point. All of this is extremely complicated business, but the whole global financial system is so heavily intertwined through derivatives that even a small perpetuating incident can lead to outsized negative outcomes.
That currencies matter is not lost on anyone in Venezuela where they are now weighing currency for purchases rather than counting it. Nor is it lost on the citizens of India where large banknotes were terminated as part of a broad push towards a cashless society wreaking havoc on the populous. In Australia and elsewhere the war on cash is continuing. Where everything will end up is a matter of intense speculation, but the final stages of systemic gyrations before global currency and financial regimes reset tend to be particularly vicious. My recommendation is to trade in some ultimately worthless fiat money for some hard assets that hold their purchasing power in times of currency disruption. King dollar may be putting on a nice show at the moment, but the emperor indeed is without any wardrobe to speak of. Only a cloak of illusion separates it from the stark reality of the unsustainable insolvency of our debt.
Ross Powell is the Founder of Survival 401k, LLC. He graduated from the University of Texas and is a veteran Naval Officer. Ross worked in banking and finance for almost 30 years including some of the largest banks and insurance companies in the country. His intimate knowledge of the inner workings of financial institutions helps him direct clients into Solo 401k products to take control of their retirement funds and escape the pitfalls many see in modern Wall Street centric retirement portfolios. He can be reached through http://survival401k.com/.