The Real Test Of The Petro Dollar System

Currently the US Dollar, traded on the stock market as (UUP), and (USDU); is the world's reserve currency. Although there is talk of the fall of the US Dollar as the world reserve currency, it's all talk and there's no signs that this will happen any time soon. Hungary recently issued sovereign bonds in Yuan - but so what? It's just a drop in the bucket. The practical fact is there is no real threat to the US Dollar's status as a reserve currency. However, there may be one. When Richard Nixon essentially created the modern Forex system by defaulting on the previous Breton Woods agreement, he cleverly supported the US Dollar with the one commodity the world needs most: Oil. By making an agreement with Saudi Arabia and then other Oil producing nations, it created natural support of the US Dollar. Nixon told them the following: Sell Oil in US Dollars, and we'll provide you with military technology, security, and other benefits. We'll do business, you'll invest in our markets, and recycle those dollars you get from our partners. It all works like a well oiled machine (pun intended) for 40+ years. There's only one thing that could disrupt it - Saudi Arabia chooses to end it. And they've threatened to do so, if the US releases classified documents about 911 which implicate Saudi Arabia.

How it could impact the markets

Under the Petro Dollar agreement, Saudis' re-invest their US Dollars in US markets, most notably, the treasury market - but also US Stocks. ETFs for US Treasuries include (GOVT) and (SCHO). Large selling of US Treasuries, the US Dollar, and US stocks, could cause the market to go down. Some worry that it could cause others to panic sell because of momentum. These fears are unfounded. It can cause temporary volatility, but nothing systemic. As the Fed says in a 19 page letter, if something is going to cause the US financial system to melt down, it's likely going to be JP Morgan (JPM).

About 911

911 was the event of our lifetime, that changed Wall St., and changed America. Although the 911 Commission 'investigated' the event, many questions remain unanswered. Families of victims want those questions answered, and have taken measures into their own hands. They want more information made public, such as 28 pages that have been classified. A lawsuit filed in New York by the victims families, headed by attorneys Jim Kreindler and Sean Carter:

A federal lawsuit moving forward in Manhattan could open the floodgates to tightly held government secrets about foreign connections to the 9/11 attacks.While the Obama administration refuses to make public the censored 28 pages of the congressional intelligence report implicating the Saudi government in the terror strike -defying bipartisan requests from lawmakers - the two investigators who authored the long-secret section will more than likely be called to testify in the lawsuit brought against the kingdom of Saudi Arabia.

Former FBI investigator Michael Jacobson and former Justice Department attorney Dana Lesemann ran down FBI leads tying Saudi officials to some of the Saudi hijackers and documented their findings in the report.Jacobson and Lesemann went on to work for the independent 9/11 Commission, where they uncovered more evidence and connected new dots to the Saudi Embassy in Washington and the Saudi Consulate in Los Angeles.During a July 30 court hearing, lawyers for 9/11 victims' families and insurers revealed that the staffers' most serious allegations against the Saudis were stricken from the final draft of the 9/11 Commission report as well."They were removed at the 11th hour by the senior staff," plaintiffs' attorney Sean Carter of Cozen O'Connor said, explaining that the decision was a "political matter."

These removed 28 pages can have huge implications not only for the lawsuit, but for the markets in general. Saudi Arabia has said that they will sell up to $750B in treasuries, should Congress pass a bill allowing the lawsuit against the Kingdom to take place, as reported here on SA:

Saudi Arabia has told the Obama administration that it willsell up to $750B in treasuries and other American assets if Congress passes a bill that would allow the Kingdom to be held responsible in U.S. courts for any role in 9/11.

What's inside these 28 pages is likely only the tip of the iceberg. Many information has come to light since the 911 commission which leaves more and more questions unanswered. One such information is the large amounts of Tritium found at Ground Zero.

Senator Bob Graham believes that 911 could only have been carried out with sophisticated logistic support from within the United States,as reported in his recent 60 minutes interview:

Bob Graham: I think it is implausible to believe that 19 people, most of whom didn't speak English, most of whom had never been in the United States before, many of whom didn't have a high school education-- could've carried out such a complicated task without some support from within the United States.

Petro Dollar system

The US Dollar enjoys global supremacy for a number of reasons, one of them being the Oil for US Dollars Petro Dollar system. Oil producing nations have agreed to sell Oil in US Dollars thus providing a natural demand for US Dollars. This is explained in detail in Splitting Pennies:

The American Forex system is a global financial Monopoly. The best example is the "Petro Dollar" trade. By pricing and selling crude oil in US Dollars, it guarantees a constant supply of buy orders for USD. This is a triple slam dunk for the global USD financial Monopoly:

Oil producing nations who want to participate in the Petro Dollar system buy USD naturally and invest much of those USD in US markets, US Treasuries, and other US denominated instruments. There could be no greater mechanism to support a currency, if one was to be constructed. ...

Remember that these are intra-country business deals, that take generations to come to fruition. Sons and Grandsons who inherit these relationships, aren't fully aware of the importance of them or the mechanics of their global operations. For example, when this de facto Forex system was created by Nixon in 1971, there was no electronic trading. This was a different market. What would happen in today's environment, if the Kingdom of Saudi Arabia decided to in one moment sell all of its US Treasury holdings?

Analysts agree however, this strategy isn't feasible, as the Kingdom has internal financial problems. Cutting off it's biggest economic and political ally in the West would be a disaster for them. On the other hand, you never know what 'event' may trigger drastic moves.

But although Saudi Arabia is a significant market player, it is dwarfed by its competition. There are other places in the world that have oil (anyway - most of the Oil from SA is not the Oil we need). Saudi Arabia's significance declines over time as their Oil fields are depleted and the rest of the world develops alternative energies. In fact, it is pressure from US Oil companies that keeps many alternative energies on the shelf. There are literally hundreds of alternatives that in 1 year could replace Oil, but are not politically feasible. The most powerful of these alternatives at the moment is Thorium Nuclear Reactors, a more potent and safe alternative to current Uranium reactors. They don't melt down, Thorium is abundant in nature, and they can even consume Nuclear waste! Why this technology isn't being used? Because Chevron (CVX) and Exxon (XOM) are making too much money. And they pay taxes (interestingly, Oil companies famously avoid offshore tax havens and pay the maximum possible tax to Uncle Sam). Suffice to say - energy is big business, and big business for Washington. So if you're worried about a Saudi fire sale and how it will impact the markets - don't. With electronic markets, there is a concern that any big orders can cause a market panic, but it would likely be very temporary. As far as the fundamental concern that Saudis' selling debt or stocks could cause a market crash, it's not possible.

Stock Investors

The Saudis' invest big in US stocks. The most notable investment was from Prince Alwaleed Bin Talal's Citigroup investment:

In the early 1990s it was almost unthinkable that a Saudi Arabian, and a Royal at that, would burst onto the global banking investment scene from seemingly nowhere - but in 1991 that is exactly what happened. Effecting a significant coup that would catapult him into the global spotlight, HRH invested heavily in Citibank (subsequently Citigroup) stocks in a bold move that surprised many. That surprise rapidly turned into admiration as the Prince's guidance helped restore the banking giant to full health, returning it to its place as the world's leading financial institution. Prince Alwaleed's investment in Citigroup has since delivered an extraordinary level of return, and represents the largest proportion of HRH's personal wealth.

The Saudis' have unknown investments in USA but they are substantial. The central bank doesn't disclose it's holdings, billionaire princes and other 'charities' controlled by the Kingdom may only disclose their holdings when it is suitable for them, politically.

It was noticed in January of this year that the Saudis started unloading US Treasuries by Bloomberg:

SAMA's own figures show reserve assets held in foreign securities have fallen by a record $108 billion in 2015. The Saudi central bank, which doesn't disclose separate figures for Treasuries, owned $423 billion in overseas securities as of November. "I come down on the side of thinking there should be more transparency," said Jeff Caughron, chief operating officer at Baker Group, which advises community banks with more than $45 billion in investments. But at the same time, "the Treasury is constrained by political sensitivities and that comes into conflict with market participants that crave more transparency. It's an understandable conflict."

So although we do not know the extent to which they are invested in US markets, we know that it's substantial, and we know they have an incentive for doing so.

If there's any take-away from this scenario, it might be a time to go long US based energy companies with an established track record of dealing with the US government, such as Chevron and Exxon . Or maybe that's part of the reason they've been seeing a rally recently, as pointed out by an SA author:

The latest rally in the energy firms is very curious. A stock like Chevron (NYSE:CVX) now trades at the highs going back for nearly a year while oil is only creeping above year-end lows.

Alternative energy stocks, which still haven't proven themselves in this tricky political environment, should be individually researched carefully. Here's a few:

If you're concerned about how the release of classified 911 information will impact the markets - consider going long energy. Don't worry about the selling of US debt. If there really was a fire sale of US Treasuries, the Fed can easily print money and buy them. As the Fed has unlimited supply of US Dollars, there's no chance in this universe or multi-verse that the US can default on its debt obligations.

Maybe it's time the "Petro Dollar" system be replaced with "Nuclear Dollar" system. It's outdated, things have changed. Since 1971, the population of the Planet Earth has more than doubled. Advances in technology are immense. Maybe it's about time we started using them.

We talk about this in our book "Splitting Pennies - Understanding Forex