Two More Threats To Dollar Supremacy
Inflation Higher For Longer And You Might Not Get It Back
Two things happened last week that may be inauspicious for the U.S. dollar in the long term. One was the Fed's almost certainly politically-motivated pivot; the other was increasing calls for the U.S. to confiscate Russia's dollar reserves and give them to the Ukrainian government. Let's address both and then look at a way to profit from the Fed's pivot.
Inflation Higher For Longer
That the Fed is influenced by politics to some extent is obvious, but the Fed's pivot last week wasn't. A year ago, our view was that the Fed would hike rates aggressively in 2023, to put a stake through the heart of inflation, so it wouldn't have to raise rates in the election year of 2024. That the Fed might cut rates multiple times in 2024, without having brought inflation down to its 2% target, is something we didn't expect. As Zero Hedge noted yesterday ("Now It All Makes Sense"), the only explanation for the Fed's pivot is political pressure from the White House. That Fed speakers such as NY Federal Reserve Bank President John Williams tried to tiptoe Fed Chairman Jerome Powell's comments back a bit on Friday doesn't do much to change the implications: The Fed may not have the independence necessary in the current political environment to bring inflation down to its stated target. That raises obvious questions about the dollar's long term purchasing power.
You Might Not Get It Back
Since the West levied unprecedented sanctions on Russia after its invasion of Ukraine in early 2022, there have been periodic calls for the U.S. to confiscate Russia's frozen dollar assets and give those to the Ukrainian government. Now the calls have gotten louder, and come from more prominent voices, such as former British Prime Minister and current Foreign Secretary David Cameron.
Nothing like telling the rest of the world their money held here can be confiscated with no due process at any time to encourage them to pull their money out of America.
— David Pinsen (@dpinsen) December 9, 2023
What Would Due Process Look Like?
The obvious reason this would be bad for the dollar is that it will make foreign countries less willing to hold dollar assets. In response to the post above, a commenter on X wondered what due process would look like in the context of international law. The problem today is that the leaders of Britain and the U.S. have no conception of international law separate from their interests (They do gesture toward the UN when it serves them, but in this case they don't, because Russia, like the U.S. and Great Britain, is a permanent member of the Security Council with veto power).
“International law” in this context just means “we say so”, since we’ve attacked more countries than Russia has. And that you (and most likely Browder as well) can’t conceive of a process for adjudicating this is part of the problem.
— David Pinsen (@dpinsen) December 9, 2023
There actually is one, that predates the UN.
Interestingly, this wasn't always the case. In the mid 19th Century, when Great Britain was far more powerful than it is now, the U.S and Britain almost ended up at war over a territorial dispute in the Pacific Northwest. Both countries claimed San Juan Island, which lays between Vancouver and what is now Washington State.
British Royal Marines occupied one end of the island, and the U.S. Army occupied the other. But there was a big difference between the U.S. in the 1850s and today: back then, America accepted the reality of multipolarity. In the end, the U.S. and Britain referred their dispute to a neutral third party, the German Empire, and the Germans, after studying the legal and geographic issues involved, ruled in favor of the U.S. The U.S. dollar would be better off if we embraced multipolarity again, and didn't threaten other countries' dollar reserves over conflicts in their backyards (particularly conflicts we helped to foment).
The Point At Stake
Some think it would be a good thing if the U.S. confiscated Russia's dollar assets, because it would discourage future invasions, but this misses the point: as long as the U.S. can unilaterally decide to confiscate a foreign country's dollar assets, any country that deviates from U.S. policy in any area would be at risk of confiscation. Don't be surprised to see calls to confiscate the dollar assets of countries that don't allow gay marriage next.
Monday Morning Update
Hedge Funds have turned bearish on the U.S. Dollar for the first time since September pic.twitter.com/DdnMkVLNGH
— Barchart (@Barchart) December 18, 2023
Let's wrap this up on a more positive note, looking at a way of profiting from the Powell Pivot.
Profiting From The Powell Pivot
As regular readers know, we post our system's top ten names for our web app subscribers daily, and for our trading Substack subscribers weekly. We were surprised to see the low quality consumer lender Affirm Holdings (AFRM) appear in our top names two months ago.
Screen capture via Portfolio Armor on 10/12/2023.
But it appears now that our system's gauge of options market sentiment may have selected AFRM in anticipation of looser financial conditions to come. As of Thursday's close AFRM was up more than 136% since then.
You can find our system's current top names on our website or our trading Substack below.
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