It has been an interesting few weeks with U.S. banks collapsing and the Fed stepping in to rescue what would have likely been a contagion run on the banks to the tune of around $400 billion. The Federal Reserve had been reducing its balance sheet along with raising interest rates as part of quantitative tightening (QT) to get inflation under control. But roughly two-thirds of that QT that has been ongoing for nearly a year was reversed in just two weeks.
I guess QT ended up being transitory, not inflation. The Fed created this $400 billion out of thin air and injected the new liquidity into the banking system via loans. These may be short-term loans that will be paid back, but I would not be surprised if there are more bank failures ahead and the need for even more liquidity to prevent an economic collapse. These are the natural consequences of running a fractional reserve banking system. Or as Saifedean Ammous put it this week:
Fractional reserve banking would not survive in a real free market. It currently only exists because the Fed is a cartel with a monopoly on banking & currency, which effectively taxes full reserve banks to subsidize fractional reserve banking scams. Currently, the fiat cartel rejects applications of any banks that want to offer full reserve banking, because if they did not, then the slightest problem in the banking system would result in a run on all fractional reserve banks to the full reserve banks. Full reserve banks did not disappear because there is no demand for them on the market; they disappeared because central banks were created with the express purpose of devaluing money to bail out fractional reserve banks. That’s why you have only fractional reserve banks in the corrupt fiat cartel banking system.
The incredible thing is that the new Fed Bank backstop has the scope to inject as much as $2 trillion. This is coming as the total U.S. debt has just topped $30 trillion. And to put this number in perspective, it took 215 years for the US to reach $7 trillion in debt. It then took only 27 months (March 2020 – June 2022) to add another $7 trillion. The CBO projects the U.S. will add another $19 trillion over the next 10 years. I think this is a conservative estimate.
The dollar has crashed lower as a result, with the dollar index down from 106 to 102 in just a few weeks. Likewise, gold and bitcoin have both shot higher, with gold adding nearly $200 to reach $2,000 for the first time in over a year. Bitcoin has soared roughly 45% higher from under $20,000 to $28,500 in under 3 weeks!
But this is literally just the tip of the bad news iceberg for the U.S. dollar. The de-dollarization trend that was slowly making waves in the global economic system has become a full-fledged tsunami of nations rapidly abandoning the dollar.
In the past few days alone the following events have transpired:
- China and Brazil made a deal to ditch the U.S. dollar and use the Yuan instead for trade. The transactions will bypass the Western SWIFT system and instead go through the Cross-Border Interbank Payment System CIPS, a Chinese version of SWIFT.
- Saudi Arabia has joined a China-led security bloc and trade alliance that includes China, Russia, India, Pakistan, and others.
- China and UAE have completed the world’s first Yuan-settled liquified natural gas (LNG) trade in a blow to US Dollar dominance. UAE has been one of the biggest allies of the United States in the Middle East, but this might be ending.
- France just paid for oil in Chinese Yuan for the first time ever. The Chinese national oil company CNOOC and France‘s TotalEnergies made their trade on the Shanghai Petroleum and Natural Gas Exchange.
- Kenya signed a deal with Saudi Arabia and UAE to buy oil with Kenyan shillings instead of US dollars. The President of Kenya warned citizens to “dump US dollars within the next two weeks.”
- Russia’s President Putin just forgave $20 billion in debt that African nations owed to Russia.
- China has cut US Treasury holdings to the lowest level since the global financial crisis. And the sales are accelerating at the same time China is increasing its gold reserves. Foreign central banks have been liquidation treasury holdings at the fastest pace in nearly a decade.
- Saudi Arabia, United Arab Emirates, Egypt, Algeria, Argentina, Mexico, Iran and Nigeria are among the latest countries that have expressed interest in joining BRICS. 🇸🇦🇦🇪🇪🇬🇩🇿🇦🇷🇲🇽🇳🇬 The BRICS overtook the G7 in GDP this week.
This is all relevant because the United States has prospered largely due to the dollar having status as the world reserve currency. U.S. leaders made a deal to protect Saudi Arabia if they demanded payment in dollars for their oil and this ensured strong demand for the dollar. But if the world dumps dollars and dollar-denominated assets rapidly, all of the inflation that has been exported globally comes home to roost and the dollar’s value will collapse dramatically.
Adding to pressure on the dollar are rumored plans for the BRICS nations to create their own currency that is at least partially backed by gold and other commodities. Combined these nations represent the majority of the world population and the fastest-growing economies. This rush to exit dollars has also been driven by the freezing (stealing) of foreign reserves of a G20 member (Russia).
In the meantime, President Biden’s 2024 budget request calls for $4.7 trillion in tax increases and 87,000 new IRS agents in an attempt to pay for massive increases in spending. The United States has sent over $100 billion in weapons and money to Ukraine so far. It seems U.S. leaders are openly agitating for war with both Russia and China, pushing those two countries together in the process. These moves will put additional pressure on the dollar and motivate investors to shift their wealth to safe-haven assets.
The Federal Reserve is now paying big banks like JPM $750MM in interest every day on their reserves and parked repos. Meanwhile big banks like JPM are paying 0.1% in interest to their depositors.
The writing is on the wall with the petrodollar en route to losing world reserve status. United States leaders have abused the power of having the world’s reserve currency, exploited other countries, and used heavy-handed tactics and violence in an attempt to maintain it. But it is now slipping away and many countries are all too eager to abandon the U.S. dollar.
Saudi Arabia beginning to trade oil for currencies other than the dollar is the tipping point. The Federal Reserve has signaled that they are close to ending rate hikes and many believe they will need to pivot to rate cuts again by year-end. This adds more downward pressure on the dollar, pouring gas on the fire.
If you think inflation has been bad in the past few years, it is nothing compared to what is likely coming over the next few years. Power-hungry politicians will look to use this crisis to introduce central bank digital currencies (CBDCs) as a solution. And while one could argue that CBDCs would be more efficient, lower costs, and remove friction from the monetary system, it opens the door to increased government surveillance, an end to financial privacy, and the potential introduction of an Orwellian/Black Mirror social credit system.
Given this outlook, we believe the safest course of action is to increase exposure to scarce stores of value such as physical gold and Bitcoin in your possession and free from counter-party risk. Central banks have been buying gold at the fastest clip in decades and the long-term chart shows a very bullish cup and handle pattern targeting $2,800 per ounce.
We are also bullish on other finite resources such as copper, lithium, nickel, oil, and natural gas moving forward. We have reduced our exposure to U.S. dollars and are taking active steps to hedge against what we see as increased odds of significant dollar devaluation ahead.
We have a smaller allocation to a handful of stocks, as the market could see a rally in the months ahead with rate hikes ending and the Chinese economy ramping back up after lockdowns. We hold some tech stocks but see the greatest opportunities in junior and mid-tier mining stocks that are near the most undervalued levels, relative to the metals that they mine, that they have ever been.
But there is still the problem of trusting financial institutions, particularly after there have been rumors swirling about potential liquidity issues at Charles Schwab that caused credit default swaps (the cost to insure bondholders against a default) on Charles Schwab to surge. A recent headline in the Dallas Morning News reads: Charles Schwab’s growing paper losses raise questions for investors. We already know that several large banks are at risk, but many fear brokerages could also face issues.
Perhaps the government and Fed would step in and print more money to make investors whole, but there is a limit to how many times they can paper over issues like this without causing inflation to spike higher and confidence to be lost in the U.S. dollar. This is why we prefer physical metals stored safely in your possession or Bitcoin stored on a hardware wallet, both solutions that do not require trusting members of the legacy financial system.
We think gold can rise toward $3,000 this year and silver can climb toward record highs of around $50 per ounce. And while we continue to increase exposure to precious metals, we think Bitcoin will continue to outperform not only gold and silver but all asset classes.
The Bitcoin halving is now less than a year away, which will see new supply output cut in half. The Bitcoin price has historically enjoyed strong rallies leading up to the halving and even stronger rallies in the 6 to 12 months following the event. Adding to our bullish outlook for Bitcoin is the recent decoupling from stocks with several days when the Bitcoin price advanced even though the major stock indices declined. Bitcoin also appeared to act as a hedge against market uncertainty, with money flowing into the cryptocurrency sector in the midst of the worst banking crisis since 2008. Investors are starting to wake up to the utility of Bitcoin and the perils of a fractional reserve fiat monetary/banking system.
Furthermore, Bitcoin has continued to rally in the face of coordinated attacks by the Biden administration and different government agencies. They have gone after all of the major crypto-friendly banks in the United States, attempting to close off-ramps from the dollar into crypto. And they are going after the largest exchange in the world, Binance, and the largest exchange in the U.S., Coinbase.
Despite all of this, crypto prices have continued to move higher, with Bitcoin, in particular, doing well up 75% year to date in 2023. Bitcoin’s hash rate has powered to new highs and adoption continues to increase with the number of non-zero Bitcoin wallets making fresh records this month.
I think the fact that this is happening at the same time as major bank failures in the United States and accelerating de-dollarization is no coincidence. This also increases the odds that there is nation-state-level Bitcoin accumulation taking place. Crypto has been the best-performing asset class over the past 10-15 years, but if central banks start rushing into this sector with unlimited supplies of fiat money, we may really see fireworks ahead.
We are in the early stages of a dollar collapse. It is more important than ever to take steps to protect your hard-earned wealth. Click below to receive our newsletters, model portfolios, trade alerts, and chat room access.