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De-dollarization: Is it the Black Swan Circling Centi Fortunes?

Jeff D. Opdyke

Jeff D. Opdyke

Jeff D. Opdyke is a global investment expert for International Living who has been investing overseas for 30 years, and the author of 10 books on investment and personal finance.

Reaching the aerie title of centi-millionaire is no easy task. Losing it is a heck of a lot simpler. Money wants to be spent. It finds ways to fritter itself away — even when you think you’re putting it to work. Becoming wealthy is a process. It takes time, hard work, effort. It’s not a one-day seminar. However, keeping wealth is also a process, arguably an even trickier one. It demands the right mindset, like tricking yourself into thinking you earn less. And it requires foresight and careful planning for those ‘black swan’ events that no one predicted and none of us are truly prepared for.

The black swan event theory is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.

Businesswoman talking to two men in a boardroom

Until the cows come home

For 40 or so previous years, the world lived inside a bubble. A cocoon of peace and prosperity, at least relative to the last millennium or so. Western interest rates largely knew just one direction — down. Asset prices (stocks, bonds, housing) largely knew just one direction too — up.

But then along comes a housing-inspired banking and economic crisis in 2008. Southern Europe falls apart as sovereign nations from Ireland to Greece plunge into fiscal chaos. Then a pandemic completely uproots the global economy in 2020. And finally, Russia decides it wants to bring an unwilling Ukraine back into Moscow’s immediate orbit in 2022.

All of these moments imposed monetary impacts on the world. They erased wealth, even for the über-rich. They’ve seen central banks pour untold trillions of dollars into the global economy, fueling inflation that touches everyone who spends money.

Most importantly, they have created a moral dilemma: How do bankers and bureaucrats manage the timebomb of Western debt? Sacrifice the human for the sake of saving government? Or save the human at the cost of an economic crisis that undermines the government… and destroys the human anyway?

Chickens come home to roost

The black swan in question is sovereign debt. In particular, US debt and the impacts that Federal Reserve rates hikes are having on Uncle Sam’s pocketbook.

It’s one thing to note that the US government now labors under more than USD 33 trillion. And it’s another thing to note that America’s Mt. Vesuvius of debt now exceeds 122% of GDP (truly banana republic territory).

What’s more important is that the Federal Reserve has hiked interest rates at an historically speedy pace, pushing rates to more than 5.5% from basically 0% in about 15 months. The result was always going to be pain. But consider what that pain actually looks like.

For fiscal 2022 (federal fiscal years end every September), Uncle Sam shelled out USD 476 billion in net interest costs on the debt. That was a record. Until this year, when net interest costs will exceed USD 900 billion, possibly even USD 1 trillion.

For comparison, the US budget for fiscal 2023 was set at USD 6.4 trillion, meaning Uncle Sam’s debt-servicing costs will very likely represent more than 15% of the budget.

But here’s the real kicker, and it gets us to that black swan worry: The 2023 budget, when Biden administration officials cobbled it together in the spring and summer of 2022, foresaw net interest costs of just USD 441 billion. The actual cost will come in at basically double that.

Why? Because even the mandarins who build America’s annual budget did not see the Fed raising interest at such a torrid pace. That was a black swan. And it naturally leads us to the possibility of another, far more dramatic black swan visiting us.

Sitting ducks

What happens if America’s debt problems spiral out of control? What happens if the bond jockeys — the smartest guys in any room — decide enough is enough and they force the government’s hand? What happens if the ongoing de-dollarization movement taking shape globally, or the movement to begin pricing oil in currencies other than the greenback, gains steam?

It’s really easy to discard each of those questions and assume they’re unlikely. But of course, the housing crash was unlikely. The pandemic was unlikely. Leicester City, at odds of 5,000-to-1, were unlikely winners of the English Premiere League in 2016.

Black swans land. And when they do, they shake up the landscape. Even for the super-wealthy, who see businesses fail, asset prices collapse, wealth evaporate.

Of course, there is an answer: Hope for the best, but plan for the worst. Because inevitably, the worst does come to fruition more often than we suppose.

A different kettle of fish

Question is, what does that planning look like when a portfolio is packed with eight or more zeros? Frankly, it looks no different than any other portfolio. The numbers are just larger.

To be truly prepared for a black swan tied to US or Western debt, or the Federal Reserve losing control of the plot, means thinking outside the dollar. Yes, the dollar, the currency the world has turned to in a crisis for the last 80 or so years.

But will that be the case if the dollar sits at the epicenter of the crisis? I would argue no. In that moment, I want assets that have no, low, or opposing correlation with the greenback. That’s Swiss francs, gold, bitcoin, and oil.

The franc will never be large enough to serve as a true global reserve currency, but it’s plenty big enough to park a bunch of cash as a buffer against the buck. Because all currencies operate on a teeter-totter (one goes up, the other must go down), a black-swan-induced dollar drop will see the franc rise out of necessity.

Gold is, well, gold. It’s the perennial anti-dollar. And the fact that gold has never slipped below USD 1,000 per ounce since crossing that threshold in 2009 is prima facie proof that the gold market is effectively serving as an insurance pool against a dollar collapse.

Take the bull by the horns

Bitcoin seems like an odd, overly aggressive call, particularly when the SEC has been so vehemently anti-crypto. But everywhere you look these days, multinational giants are racing into the crypto space because blockchain technology promises vast efficiencies and cost savings. Banking behemoth Citigroup, for instance, just recently announced a private blockchain that ‘tokenizes’ deposits and allows corporate customers to zip large sums of money around the word literally in minutes, rather than days. The benefit: Huge cost and time savings.

A technology that allows companies to erase headaches and pinch-points for customers means that technology is going to spread far and wide. Bitcoin is going to be a beneficiary of that, particularly now that major financial institutions are hammering the SEC to approve spot-price bitcoin ETFs.

As for oil, it’s the commodity best placed to benefit from the de-dollarization trend, as well as the fact that while green energy is certainly rooting fast, it’s not rooting fast enough to meet the world’s energy demands. Oil consumption just recently crossed 103 million barrels per day, while oil supply is shrinking, and while exploration companies have reined in their spending on searching out new reserves to replace reserves decaying by the day.

As such, we face an oil-covered black swan that will very likely see oil prices race towards USD 150 per barrel, and temporarily spike to USD 200 or more on weather and other unexpected events.

In a nutshell: We live in a very different world than we did between 1982 and 2020. Things are different here. And regardless of whether you’re shepherding USD 100,000 or USD 100 million, the black swans now circling will cause a great deal of financial pain if they bellyflop into our lives.

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