Postcards: An Honest Question...

Something fundamentally bothers me about the State of Affairs in the Banana Republic to the southwest of Maryland.                                                                                                                                                                                                                                                                                                                                                                                                                 Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Postcards: An Honest Question...]( Something fundamentally bothers me about the State of Affairs in the Banana Republic to the southwest of Maryland. [Garrett {NAME}]( Jan 14   [READ IN APP](   Dear Fellow Expat: This week, a New York State Representative said the quiet part out loud about the rise of illegal immigration at the Southern Border. "I need more people in my district just for redistricting purposes," Congresswoman Yvette D. Clarke, 9th District of New York, [said](. [Even Elon Musk has thoughts]( The ongoing border crisis in Texas is just another case of a weakening empire. I ask a question. What is a nation if it has no real border policies, no sound currency, and no consistency in applying the laws equally to citizens? That’s not a nation. It’s not even a Banana Republic… as even those have borders. It feels more like a financial extraction center… Which brings me to another honest question. Political Risk and Emerging Opportunities For the last 12 years, I’ve worked in financial publishing and economic research. I’ve seen it all from the “experts” arguing about crashes, melt-ups, meltdowns, blackmail, panics, secret plots, and everything else under the sun. The one that has consistently caught my attention has been the forecasts calling for the End of the U.S. Dollar. Nearly every presentation, speech, and report centers on the collapse of the Petrodollar - that global trade tool that underpins the flow of more than 100 million barrels of crude worldwide daily. If the Petrodollar system ends, the argument goes, the dollar will crash. Let me tell those experts something: You’re looking at the wrong problem. The Petrodollar concept - hasn’t mattered since the First Gulf War. “Sometimes I see an equation written on a blackboard like half an equation and... I just figure it out…. Anyway… my best friend is Ben Affleck.” That’s not the crux of the de-dollarization movement fueled by emerging market economies like Brazil, Russia, China, and more (and over the last 15 years.) Even as other nations move to accept China’s currency in deal-making, oil trade is STILL referenced in U.S. dollars - they’re still basing the deal on the exchange rate of the Chinese Yuan and the U.S. dollar. Such efforts fail to grant China’s Yuan the “seigniorage” needed to sustain a global marketplace and dominate international trade. The push against the dollar isn’t about the oil trade. It’s about dollar-denominated financing… and refinancing. After the Gulf War, what happened in the early 1990s was a shift that brought emerging markets into the fold of increased dollar-denominated debt. Looking at the global inflation crisis in recent years, U.S. dollars are not bad for the global oil trade. If anything, that’s not a real issue because the dollar's value has been declining for three decades, and the “real” value of oil - even at the highs during the Ukraine War - was nowhere near the inflation-adjusted values of 2006. Consider the dollar’s use for the debt settlement - and its global reach. Nations and foreign companies have turned to the dollar due to the incredible liquidity of the money markets that weave through the global financial system. For reference, see “[Liquidity, Debt Denomination, and Currency Dominance]( from February 2023. As co-author of the report, Professor [Chenzi Xu]( of Stanford Graduate School of Business notes that [money is not just cash in your wallet](. She explains that it is a tool that allows an entity to repay debt - and there are more than just dollar bills floating around. (Look at any U.S. currency in your wallet, purse, or pocket. It reads, “This note is legal tender for all debts, public and private.”) Other instruments - sources of liquidity - can repay debts, such as high-grade corporate bonds, repos, Treasury bonds, and bills. Xu and two co-authors noted that in 2022, 60% of all “global foreign exchange reserves are held in dollars; half of all international loans, debt securities, and trade invoices are estimated to be denominated in dollars.” Why do they want the dollar-based debt? It’s convenient. As Xu, Arvind Krishnamurthy, and Antonio Coppola [write]( “The appeal of issuing debt denominated in dollars is the large and liquid nature of the dollar money market that facilitates dollar settlement. Both an oil producer and an automaker can see that there is an ample supply of safe, short-term dollar-denominated claims that can be used to settle their own liabilities. This is because there is a significant number of investors who own a substantial amount of dollar-denominated, short-term money market instruments such as Treasury bills, repos, or high-grade bank and firm debt. As a result, issuers can easily trade their revenue streams with these investors to acquire the assets required to settle their debt obligations.” [[Source]( If an oil company wants to make any outstanding debt it’s owed payable in barrels of crude, it can. But that’s not exactly a great way to do it — Forcing someone to haul oil to you? That’d be like taking chickens to a grocery store and using them to pay for a dozen eggs to replace the eggs you bought. As a technology, money enables the settlement of debts across various industries, across borders, and between parties without exchanging other assets. And when you’re the most liquid currency with the most confidence, you get the spoils (typically lower interest rates allowing you to borrow more). That’s the upside of it. But what’s the downside of this situation? One of the big problems is that nations need help to deal with a rising dollar while their currency either remains flat or falls. Suppose the local currency falls, and a company in Argentina faces higher inflation and a falling currency against the dollar. In that case, they need more local money to afford dollar-based assets to pay off debt. They might not have access to more local currency… or their cost of capital may rise significantly. Dollar-denominated debt has produced tumultuous emerging market challenges over the last few decades. And one other issue has emerged. As Howell notes in [Capital Wars]( the highly valued liquidity swaps from the United States to shore up debt in various places worldwide have been politicized in Washington. Depending on who is in charge reflects who gets access to these swaps, which again undermines the system. So - nations want to escape the U.S.-dominated debt system - significantly if the dollar rises due to higher interest rates - and can’t keep up because raising rates to protect their currencies may be a massive drag on their economy. Here’s the challenge of overcoming this. If the BRICS wants to move away from the dollar - they need a rival currency. They need something that matches the extraordinary levels of liquidity offered by the U.S. dollar. That doesn’t exist right now. China might be the next option, but it needs to radically change its financial system to make it more inviting to foreign investors. The Stanford professors and Michael Howell have explained this. “China lacks both an internationally tradable base of government-backed money market instruments and confidence in its government’s commitment not to appropriate those assets,” write the Stanford professors. ([Page 27]( It will take some time for the dollar to be replaced - especially when discussing a large international order of nations. If the Fed does cut interest rates, however, and the U.S. dollar’s strength dissipates, there is an excellent argument for investors to look abroad for opportunities. And that brings me to my last point. What to Do Over the years - I’ve seen the Crash promotions. I’ve seen the experts say that the U.S. dollar is toast. And it’s all very compelling (especially when the U.S. dollar has lost 52% of its purchasing power since 1993.) But when it comes time to the argument of “What do I do right now…” The recommendations aren’t well considered. In bold, here are some things I’ve seen as recommendations… and my take after them. “Put 50% of your net worth in Gold!” … Are you planning to swim to Canada with your net worth of gold bars in your pockets? (Maybe consider a position of 5% of your net worth in gold. Even if you own just that much, you’d be extremely wealthy, considering that about 88% of Americans own zero gold.) “Buy Bitcoin!” … Do you think the U.S. government will allow BTC to challenge the dollar? (Again, you don’t need a large concentration in BTC to make a dent.) “Buy European banks!” … Have you seen how poorly run the European banking system has been since the introduction of the European Union? (This is just a bad idea. Avoid this at all costs.) “Buy Silver Coins and Hide them In Yer Walls!” … and do what? Throw them at looters? (I own silver coins in a safe, but I’m not sure anyone would know what to do with them. I’d have to explain to a baker what a silver coin is… and why it matters.) Let’s make this simple: If the dollar will collapse (or even if you think it’s going to very soon)… as these experts say… (in contrast to the controlled burn we endure annually thanks to the Fed’s inflation targeting)… First… buy a hunting rifle, a shotgun (with shot size ranging from Slug to 8], ammo… canned goods… and at least a half acre of sun-absorbing land. You only need a tenth of an acre to plant on, but you’ll always want to overproduce. Second, you can take your funny money dollars… and put them into Equities because the stock market is a natural hedge against inflation. You can look at the last 30 years for evidence. The dollar is down 52%… and the equity market is up over 750%. Finally… and I’m very serious about this very honest question. How can no one look at the global markets and not put their money into emerging market opportunities? Have you noticed that American investors will gladly buy $10,000 in a junk cryptocurrency - that’s a scam and based in the Bahamas - but won’t put money into an honest international company like steel product giant and Luxumbourg-based Tenaris SA (TS) or Mexico-based Coca-Cola Femsa (KOF) - which both trade at great valuations, have terrific management, high F scores, and have dominate positions in growing emerging markets? I can assume it’s because they look at the emerging markets for what they’ve been over the last 30 years. They’ve sometimes been a complete basket case because of the influence of dollar-denominated debt. But if they are going to unshackle that burden - as so many people suggest - then the U.S. dollar’s value will fall - and the exchange rates (which reflect the true cost of money, according to Howell) reflect strength in their favor… then why wouldn’t you want to benefit from the flip of roles in the global order that way? How is that not a more natural hedge? Make your arguments in the chat below. As I recently noted, the United States now ranks 63rd on the International Country Risk Guide put out by PRS Group. The U.S. is one spot ahead of China. But it’s behind emerging markets with greater financial and economic stability. In the months ahead, we’ll discuss this more - especially the unsoundness of money and opportunities abroad if they meet specific financial metrics. Tomorrow, I’ll be back with insights for the Week Ahead. Stay positive, Garrett {NAME} Secretary of Defense The Florida Republic Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()