I’ve been talking this week about the ‘Trump Effect’.
The idea that this unorthodox presidency is radically changing the political and economic landscape. And in turn creating big, new investing opportunities.
Not that that it’s an easy task of course.
I’m not sure even Donald Trump knows what’s coming next!
But using the idea that you can — to an extent — guess the reactions of others to this chaos, you can focus on certain big picture themes that are developing.
And at the very least put them on your investing watchlist.
Yesterday I talked about the Trump effect on energy markets.
How even the threat of the end of the NATO alliance shifts the century old dynamic of energy markets.
And how middle powers from Europe to Japan would have strong incentives to shift to alternative energy sources such as renewables and nuclear.
Unless they want to remain hostage to the political whims of the USA and the military expansionism of Russia.
I also talked briefly of the immediate investing opportunity in a number of defence companies that stand to benefit from this ramp up in geo-political tensions.
Today I want to talk about how Trump’s policies will affect that other source of US global power.
Namely, the US dollar.
In a way, control over oil, military strength and dollars reserve currency status are the three components of US strength.
Commodities — such as oil — are priced globally in US dollars giving American companies big trade advantages.
‘The dollar is our currency, but your problem’ as Nixon-era Treasury Secretary John Connally once put it in the seventies.
But this could all change soon…
The China question
There’s no question who Donald Trump’s really got in his sights.
In his eyes, the US has got the raw end of the deal from China for the last decade. China’s prosperity has been at the US’ expense.
Whether you believe that or not, the result has been the recent threat of tit-for-tat tariffs. A potential trade war looms.
Currencies are part of the proxy war right now.
The Chinese yuan has fallen steadily lower in the last few months. It’s at its lowest level in more than a year against the US dollar.
This of course offsets any US tariffs to a certain extent by making Chinese imports cheaper for US companies to buy all things being equal.
What will Trump do in reaction to this?
Who knows? No doubt we’ll get a tweet to tell us soon.
But currency wars are dangerous for both sides.
As I mentioned yesterday, China is a big holder of US debt.
To Trump this is an ace card. After all, this is a man who has been through four bankruptcies in his business life and survived. He’s used to winning against creditors!
The unthinkable outcome at the end of all this cat and mouse is that the US reneges on their vast debt bill.
The US may refuse to pay China back or Trump could seek to make a deal reducing the terms of the debt somehow.
As Trump’s shown in recent months, you never know how far he’ll go. And here’s the danger for the US dollar…
Faith in US credit results in faith in the US dollar.
As you’ll no doubt know, US debt is growing fast.
It’s just hit a post-World War Two high. And with Trump’s recent tax cuts, the budget deficit is set to soar.
There’s no one with a plan to do anything about this right now. Republicans are in awe of Trump’s popularity. The Tea Party movement of fiscal responsibility seems to have been over-run by the MAGA crowd.
The debt can’t rise forever. Unless in reality there’s no plans to ever pay it back.
Make no mistake…
If the US ever defaults, their dollar quickly becomes just another worthless fiat currency.
Where to next then?
That’s what the old-timers will tell you. A return to money backed by something ‘real’.
There’s signs some of the US rivals might agree too…
Russia and China have been steadily building up their gold reserves since the 2009 GFC.
But the gold reserves in the US and most Western countries are still a lot higher. Fort Knox holds around 8,000 tonnes. Germany has 4,000. If the world went back to gold, this would still be a market dominated by the USA and the West.
So, I think a return to gold is unlikely to appeal to US rivals for political reasons. They may as well keep the dollar.
But what about another currency taking over from the US dollar?
China have made some attempts to leverage their market size and price commodities in Yuan.
Late last year, China sold the first Yuan-denominated oil contracts with Russia. And right now, China is looking to set up a similar deal with Iran, who are feeling the pinch from Trump’s sanctions.
Iran will likely offer discounts to Chinese refiners, and China might readily scoop up ample supplies on the cheap.
‘We don’t have any problem selling our oil’ to China, an Iranian official told The Wall Street Journal.
But it’s unlikely the broader world would trust the Yuan as a global reserve currency. Or any other currency for that matter.
For all the dollar’s flaws, it’s still head and shoulders above most other fiat currencies in terms of trust.
Which leaves one last option…
In a world where trust is at an all-time low, cryptocurrencies like bitcoin are the perfect answer.
The very core of cryptocurrencies is to be immutable — that is, no one can control it and change it to suit their own agenda. The rules of the game are there for everyone to see. And they can’t be gamed.
Furthermore, as a software-based currency, there’s unapparelled degrees of flexibility and freedom.
Its money 2.0.
If you’re in any way pessimistic about the changing world order, you need to have at least a small exposure to crypto.
I’m not saying this will happen or even that it’s probable. But look at the results if it does.
One bitcoin todays trades for around US$6,500.
There will only ever be 21 million bitcoins. It’s hard-coded into the protocol. Though remember, a bitcoin is dividable to eight decimal places so that figure is more than enough to handle trillions of transactions.
I repeat, no one person or group can change this.
Now let’s say the excess of money printing, the excess of debt eventually results in the world losing faith in fiat-based currencies run by the central bank cartel.
And it turns to bitcoin instead.
What would one bitcoin be worth in this scenario?
If it replaced the coins and notes in circulation only, and not bank deposits and electronic money, then one bitcoin would equal US$238,000.
If it replaced all forms of money, one bitcoin would equal US$3.5 million.
Even if it just replaced gold as a hedge to this possibility — after all that’s a big part of golds value — one bitcoin would be worth US$64,641.
Or about ten times its value today…
Death of the dollar?
This might all sound a bit far-fetched to you.
But that’s the exercise I’m undertaking this week.
Not to necessarily predict Trump’s short term moves. But to look at the long-term consequences of a Presidency that is seeking to disrupt the current world order.
The global domination of the dollar is built on more than just US strength. It’s built on trust in its values and institutions. Trust that the US will live up to and support the rules-based world it’s helped create.
If the US has decided this rules-based world no longer suits it, then the consequences for the world will be dramatic.
And the US dollar is likely to be a casualty of this loss of trust too.
Cryptocurrency could be a hedge for your portfolio against this extreme outcome.
Contributing Editor, Markets & Money