Death Of The Dollar Standard Part 1

It’s important to understand why something is happening in order to take advantage of it — or at least to mitigate/avoid it.

This week, we’ll be discussing what it means that we’ve entered the “dollar standard” after leaving the “gold standard”.

Furthermore, I’ll explain how the “dollar standard” is the biggest reason behind the 2008 and 2020 financial crisis, stock market crashes, and how the Coronavirus pandemic was probably the best catalyst for the global dollar system to blow up.

Strap in.

Let’s start with a simple question: Why do you buy stocks?

You likely have a myriad of reasons, but now I’ll ask you a follow-up question: Will you hold those stocks until you die so that you regain your initial investment through dividends?

No is likely the answer.

After all, you likely buy stocks because you expect them to go up based on fundamental analysis, news like earnings, or other things.

Then you sell them when you see your price target reached. The assets appreciated. Capitalism, baby!

For those that partake, why would you buy options? wait until the underlying asset does what you expect it does and then you sell the options to collect the premium. Double capitalism, baby!

With both investment vehicles, the assets appreciated, and we took advantage of that to make a profit.

So, it’s the exact same thing is the case with treasury securities.

The people who’ve been buying bonds for the past years or even decades didn’t want to wait until they mature. Those people want to sell the bonds as they appreciate. What’s been the case is that bond prices have an inverse relationship with their yields: Someone who desperately wants and needs the bonds for various reasons will accept to pay a higher price (supply and demand) and therefore accept a lower yield.

By the way, both JP Morgan and Goldman Sachs posted an unexpected profit this quarter . . . why? It’s because they made a killing trading bonds.

What they know is that US treasury securities are the most liquid asset in the world and they’re also the safest asset you can hold.

After all, if the US defaulted on its debt, the loss of the investment would be the least of your worries. It stands to reason that if US treasuries become worthless anything else has already become worthless.

But, if that’s the case, why is there so much demand for the safest and most liquid asset in the world?

Quite simply, the state the global economy is in.

Trade and travel are down and probably won’t recover anytime soon. Emerging markets are struggling both with the virus and their dollar-denominated debt. Central banks around the world struggle to find solutions for the problems in the financial markets, and printing more money isn’t making the problems magically go away.

Here’s a great question then: How do we know that the markets are losing trust in central banks?

Well, for one, bonds tell us that . . . and Gold tells us that too!

Let’s look at a chart to see this:

TLT chart

Gold spot price chart

TLT is an ETF that reflects the price of US treasuries with 20 or more years left until maturity. Basically, it has an inverse of the 30-year treasury yield.

As you can see from the 5Y chart bonds haven’t been doing much from 2016 to mid-2019.

TLT actually rallied in August 2019 before the repo crisis of September 2019 took place!

So, the bond market signaled that something was wrong in the financial markets and that “something” manifested itself in the repo crisis. Ah, but that “crisis” was short-lived, though, as bonds actually started rallying in January! . . .  just as most of the world was downplaying the Coronavirus threat.

Hindsight is the year 2020.

Now, how does Gold come into play?

The Gold chart basically follows the same pattern as the TLT chart, and just like bonds it did basically nothing from 2016 to mid-2019. From June until August Gold rose a staggering 200 dollars and then again stayed flat until December 2019. After that, Gold had another rally until March when it finally collapsed.

Now, many people think rising Gold prices are a sign of inflation . . . but, where is the inflation?

PCE price indices on Friday, July 31^st, were roughly at 1%.

We’ve seen CPIs from European countries and the EU itself. France and the EU (July 31st) as a whole had a very slight uptick in CPI while Germany (July 30th), Italy (July 31st), and Spain (July 30th) saw deflationary prints.

I’m sorry to burst the bubble, but inflation isn’t rampant across the world as some might claim. Yet, Gold prices still go up even when the Dollar rallies through the DXY, despite there being no inflation from a monetary perspective.

In fact, Fed chairman JPow, apparently the final boss for all bears, said on Wednesday, July 29th, that the Coronavirus pandemic is a disinflationary event. 

I humbly disagree with him on this matter as there are certainly those who would hoard cash or gold or bitcoin rather than prop up the economy, but the Fed will never concede that as their goal is inflation, inflation, inflation.

To conclude this rather long section: Both bonds and Gold are indicators for an upcoming larger financial crisis. 

On the flip side, to signal an economic recovery bond prices should fall, and yields should go up.

But, unfortunately, the opposite is happening. Both bonds and Gold are screaming: “The central banks haven’t solved the problems!”

Tomorrow we’ll discuss why the money printer is starting to overheat and what that means for future economic conditions.