The Main Event
Perceive that which cannot be seen with the eye – Miyamoto Musashi
Globalism died in 2014 when the US shale fields became economically viable at scale but nobody realized it at the time. It was year the Eurodollar market began to get drained of dollars, partly due to horrible investments in emerging markets like China and partly due to the loss of cash flow from the Petrodollar market. As US shale production ramped up, US exports of dollars to the Middle East for oil declined at an increasing rate.
It followed the European sovereign debt crisis in 2012 which was a combination of post-financial crisis dislocation and a bad bet on implicitly shorting the US dollar by investing heavily in Asia with levered Eurodollars, expecting the dollar to collapse in value. The Chinese, not knowing what to do with the flood of dollars, wasted the capital on redundant real estate, industrial capacity, and infrastructure projects. Their real estate collapse is just a fraction of the damage.
At the time, the dominant investment theme in the world was the decline of the US and the rise of China – huge mistake. If not for the coordinated efforts of global central banks, the European Union wouldn’t have survived. Europe was gifted 14 years to fix their problems but tripled down on their sclerotic system.
We can see from the chart below that the dollar rose from the dead in 2012, consolidated then rocketed higher when we started reducing oil imports in 2014. The dollar moves in 2014 and 2015 looks like a massive short-squeeze.
Using the Shanghai Stock Exchange as a proxy for Chinese investment returns, a 30% decline in Chinese stocks followed, leaving the Eurodollar tidal wave of 2010/2011 deeply underwater. I firmly believe the move from 2000 to 4800 on the Shanghai was a central bank-orchestrated short-squeeze that bailed out global banks. It didn’t last long because the Chinese Communist Party reasserted itself under Xi Jinping, starting in 2012, which marked the beginning of the end of the Chinese Miracle.
“Socialism with Chinese Characteristics” is still socialism and socialists are horrible at investing capital. Today, the Chinese banking system is effectively destroyed after 14 years of cataclysmically horrible capital decisions.
Wealthy Chinese citizens have been actively moving their assets out of China for the past ten years or more along with foreign investors. The result is that China is now being run for cash, much like a company near bankruptcy cuts every possible expense, reduces inventories, lengthens supplier payment terms, and maximizes cash flow. They’re holding on by their fingertips even as their private sector, responsible for the Chinese Miracle, collapses from illiquidity.
Draining the Eurodollar Market
The fact that an opinion has been widely held is no evidence whatsoever that it is not utterly absurd – Bertrand Russell
Central banking is a British invention and central banks have been the main proponents of globalism since the Bank of England was created in 1694. The British Empire, which effectively ended in 1947, still maintains extraordinary global influence by virtue of the global markets traded in London. In fact, the Eurodollar was priced in London from the mid-1950’s until 2023 through LIBOR or the London Interbank Offered Rate.
The dollar is still the dominant global currency which every central bank needs to accumulate to buy imported food, oil, and economic inputs for their nations. If US dollars are drained from the global financial system before an alternative can be agreed upon, global central banks will become like the Abominable Snowman from Rudolph the Red-Nosed Reindeer – toothless and subservient.
The Trump Administration through the Tax Cuts and Jobs Act of 2017 offered an extremely low tax rate for domestic holders of Eurodollars to repatriate those dollars at low cost back into the US. US companies repatriated an estimate $777 billion in offshore funds in 2018 alone.
By 2019, the global banking system was increasingly bereft of dollars; emerging countries were starting to complain and ask for a new trade arrangement. Blockchain solutions were being offered everywhere. We can see from the chart below that it took the combination of COVID and the war in Ukraine to energize the use of blockchain solutions in global trade.
Source: Blockchain.com
Growth may have spiked but blockchain and stable coin transactions account for a mere 0.02% of global transaction. The dollar is still king and will remain so.
This brings us to the Main Event – the future of the global reserve currency and whether it will be controlled by the US or by the cabal of global central banks? It’s a fight between the American System of Economics, favored by the Trump Administration and Globalism, favored by the Federal Reserve, sans Kevin Warsh, and the European/Swiss/Chinese central banks plus the Bank of International Settlements.
The Trump Administration is draining Eurodollars out of the global banking system, without which, global commercial banks and central banks will be unable to maintain globalist trade expansion. Without dollar deposits, global commercial and central banks won’t have the ability to lever those deposits into global investments.
Oil and Gas
No complaint…is more common than that of a scarcity of money – Adam Smith
This is where the actions in the Persian Gulf are particularly interesting. Too many analysts are fixated on the threat to the US posed by blocking the Strait of Hormuz and not enough attention on the threat to Europe and China. US producers are selling high-priced oil, natural gas, and distillates to Europe which is further draining their stocks of Eurodollars. China is being forced to buy oil in dollars instead of yuan. This is HUGE.
If the goal is to make the Eurodollar market irrelevant, the Trump Administration is succeeding. Based on the pieces of the puzzle I’ve put together, the goal is to replace the Eurodollar market with US dollar stable coins. In effect, global central banks would need to accumulate stable coins instead of Eurodollars to transact in the oil and gas markets. The result would be to re-direct dollars away from global banks directly into stable coins which would then be directly invested in US T-bills, cutting global banks out of the trade.
Output in the North Sea has declined by 75% over the past 25 years from a peak of 4 million barrels per day to roughly 1 million barrels per day. Daily global output of oil is roughly 84 million barrels. Yet, over 70% of oil trading is priced relative to the Brent contract despite it representing just over 1% of supply!
London dominates oil trading despite the North Sea being largely irrelevant to global supply. If the Trump Administration succeeds in shifting oil trading from London and New York to Dallas, Texas, the impact on the City of London would be devastating. Overnight, Britain would become irrelevant to global capital markets.
Furthermore, the US which produces 14 million barrels of oil per day appears to control Venezuela’s 1.2 million barrels of oil per day. If the US succeeds in taking Kharg Island, it will control Iran’s 2 million barrels of oil per day, giving it effective control of 20% of the world’s oil production. With this level of market power, is it conceivable that the US can press the world to trade oil in dollars/US dollar stable coins?
No matter how you view this situation, Europe is facing an existential crisis of relevance in the global economy and global markets. Britian and the Netherlands have dominated global banking markets for 500 years. If the Trump Administration is successful, this dominance will end and with it, the extreme power of global central banks.
Stable Coins
The opportunity to secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself – Sun Tzu
The Eurodollar market has only been around since the 1950’s and is believed to be roughly $14 trillion in size. Nobody knows for sure because it is only lightly regulated according to the Federal Reserve Bank of Atlanta.
US M2 money supply is estimated to be $23 trillion meaning that at least 61% of US money supply is held outside the US – which is the definition of the Eurodollar. Much of this money sits in the reserve accounts of global central banks to be used in foreign trade while much is deposited in commercial banks, including nefarious “shadow banks” in places such as the Caribbean, Dubai, Isle of Wight, Hong Kong, Singapore, Cyprus as well as many other locations.
An estimated 40% of the world’s “dirty money” flows through the City of London and UK crown dependencies. This money moves as a function of the global drug trade, human trafficking, gun running, and shadow oil trade to escape sanctions. Is it a coincidence that Treasury Secretary Scott Bessant is focusing heavily on sanctioning the British Virgin Islands?
The City of London is responsible for much of the illegal activities across the globe; they profit handsomely from it. The US is attacking the nefarious clients of the City of London – drug cartels, the IRGC, and many others. We think of the IRGC as militants but they are reputed to be major dealers in hashish and Captagon sourced in the Bekaa Valley of Lebanon.
This implies that the ultimate goal of US strategy is to destroy both the criminal elements and the global bankers that make these activities possible. Crypto currencies such as Bitcoin have become major conduits for such illicit activities – some claim they were created for this reason.
Draining the Eurodollar markets and making it difficult to process illegal shipments has the potential to concurrently hurt the burgeoning crypto market before it can reach critical mass and replace the dollar. For this reason, I’d be very careful with investments in Bitcoin and Ethereum.
I can see a path where dollar-denominated stable coins become the crypto investment of the future and how this would greatly buttress the potential turnaround of the US economy. It’s one reason why I personally love the long-end of the US yield curve.
Long Bonds
Opportunity often comes in the guise of misfortune, or temporary defeat – Napoleon Hill
The more money is drained from the Eurodollar markets, the more control the US re-asserts over the price of its own money. The long-end of the yield curve is getting hammered over a combination of spike in diesel prices and a strong PR campaign about runaway inflation.
The price of diesel is spiking because Ukraine keeps attacking Russian refining assets creating a temporary supply constraint. It’s a desperate attempt by the Europeans to force the Trump Administration to back-off attempts to drain the Eurodollar markets and protect the US economy ahead of the mid-term elections.
The problem is that Europe is heavily dependent on diesel; 40% of the European auto fleet runs on diesel. They’re cutting off their own noses to spite their faces and it is reflected in recent elections. US diesel producers are making a fortune shipping supply to Europe, hastening the drain of the Eurodollar markets. Yes, it hurts US consumers in the short-run but it will hurt Europe far worse.
It represents a temporary supply-shock, not a condition that will impact US inflation over 10 years. The market’s over-reaction is dropping a favorable entry-point for long-term US Treasury bonds on our laps. I’m as excited as a hungry kid in a candy store.
If stable coins replace Eurodollars, there will be a huge influx of demand for US Treasury Bills and that will allow the Treasury Department to shorten the average maturity of US bond issuance. Scarcity on the long-end will bring rates back down.
Furthermore, Europe is in the process of destroying itself financially and economically. Before long, I expect a sharp decline in the value of the euro as money flows to dollars and yen – yes yen because it represents a huge short-squeeze potential. A decline in the euro will increase demand for US Treasury Bills.
The world is on the precipice of deflation; we can already see it in China where home values have dropped below 2008 levels. The US Fifth Fleet is in the process of destroying the link between the Persian Gulf and London oil markets, along with the huge margin charged for terrorist activities. The US Treasury is destroying the cash flow that allows terrorist organizations to operate.
On the road to the City of Skepticism, I had to pass through the Valley of Ambiguity – Adam Smith
Regardless of how you feel about President Trump, he has started a war with the global financial elite, particularly the old families of Europe. The US is at war with the European Central Bank, the Bank of England, the Bank for International Settlements, the Swiss National Bank, and the People’s Bank of China.
The policies of these elitist organizations destroyed the lives of the citizens of Europe and China long before Trump took office. Both economies are in an advanced state of destruction.
I’ve been watching the destruction of the Eurodollar market for 26 years and what I didn’t realize until recently was that it started hitting terminal decline in 2014. And since the Eurodollar markets are dominated by London, Paris, Amsterdam, and Frankfurt, the EU will follow the same trajectory.
We need to choose between two fighters – global central banks versus the US government. Global central banks have been dominant for hundreds of years but the power of the US government is truly staggering. When full mobilized, the US government is the most powerful entity the world has ever seen.
The financialization cycle is over after 125 years. The future is about re-building a destroyed industrial base, not about trading crypto and Mag 7 stocks. If you’re interested in learning more, visit us at https://geovestadvisors.com/ and give us a call.
Philip M. Byrne, CFA