When people ask me how I look at things I usually give a simple answer. I do this because the level of complexity I am willing to accept as reality is far greater than most people are willing to explore. I’m also aware that when I give a long detailed explanation, I get a lot of distracted, confused and sometimes upset looks. Nevertheless, if I were in the Matrix, I’d clearly be a red pill person.
If you read my MarketWatch articles (http://www.marketwatch.com/journalists/kirk_spano), or really anything else I write, you might have figured out that each time I write, it’s like a chapter in a story. I’m not trying to explore everything all at once. It’s a process. I journey.
As with every journey there is always a back story. Here’s some of the back story on the journey that is close to beginning in international currency and debt markets.
The United States is still the most powerful nation on the planet. It’s goal is to remain powerful. However, it is willing to cede some of that power in return for peace and continued prosperity.The United States is also aware that in the event of a power vacuum, economically or geopolitically, neither of those goals remains likely for long. So, it is a balancing act how the United States must behave.
If America should overextend militarily, then she could become bankrupt and find itself with more enemies. If the United States avoids acting militarily in certain situations, then the world’s enemies could thrive and cause more harm.
Economically, the nation has procured massive benefits, not understood by most people, from being the world’s reserve currency. The ability to make international transactions in one’s own currency is a benefit worth trillions over time. There is no small benefit to being able to print the world’s money either. That is why so many people fear the rise of China, they may make a claim on the world’s reserve currency someday – I expect it is an ineviiability.
So, at the heart of U.S. policy there are then two goals that supercede all others.
First, avoid World War III, even if it means manipulations, deceipts, less-bad deals and small wars as consequences.
Second, remain the reserve currency as long as possible, and when faced with the inevitability of having to share that distinction, find good terms.
In the past 6 years, the Obama administration has taken a deliberate approach to avoiding even the small wars. At least, that is what it appears on the surface. America has dialed down its military in the Middle East, even though Iran has backed a wicked terrorist army. America also did not respond with force to Russia over Ukraine. Or did it?
I would argue that the economic sanctions with Russia are significant, but something else that the U.S. has been planning for years finally came to fruition recently. The United States, with Saudi Arabia as an alley – we can debate how willingly – have put the screws to both Russia and Iran by lowering the price of oil below what those countries need to survive as threats.
Over the next year or two, the U.S. will lose a few small oil and gas producers – that’s inconsequential – due to low oil prices. However, Russia and Iran cannot survive economically without oil near $100/barrel. Already we are seeing both nations start to capitulate.
While I suspect that neither nation will go where we want them to with regards to geopolitical matters, the U.S. is doing what it can using economic pressure. Ultimately, I think we bomb Iran and draw a line with Russia in multiple regards that leads to Putin’s demise. We’ll see. I hope you can see the delicate and dangerous nature of the world right now.
The rabbit hole of today’s world goes deeper of course if you accept my top two goals of the U.S. which I cannot prove, but neither can you disprove. Only common sense and following the money supports me. I think that is enough.
So, how does the U.S. avoid WWIII and remain at least co-reserve currency? Well, we will need the help of China. This means cooperating with them on the Asian Infrastructure Investments Bank. That is actually already occuring despite the rhetoric. To think that the U.K. and Australia did not have our tacit agreement to participate is naive.
Ultimately, the U.S. is going to off load a lot of responsibility to China for watching over Iran and Russia. How? China needs oil and gas, Russia and Iran have to sell it. Russia and Iran will become beholden to China. The Chinese wil be able to use the Yuan in those transactions making it almost instantly the second international currency.
The U.S. and Saudi Arabia benefit in this equation as well. The European market completely opens up to U.S. and Saudi oil and especially natural gas, with Iran and Russia focused on China. Cheniere, which is opening the first U.S. LNG export facility in a few months, already has contracts to export natural gas to Spain.England and Italy. This is the tip of the iceberg (LNG is frozen, get it?). And, the U.S. will be paid in dollars.
Saudi Arabia continues to be a player of course and more importantly, they get Iran neutralized at some point. Their agreement to continue the petrodollar is a major component to our continued assistance with their security matters.
Sometime in the next few years, I suspect sooner than later, but I won’t quibble over a year or two, we will also see a very strong dollar event. Why will this occur? Because much of the world is in over its head financially and there are people holding a lot of dollars who want to see the international markets tip over. That will happen shortly after the Federal Reserve starts raising interest rates.
Going back to the Chinese, they won’t mind the coming crisis at all. They have a lot of dollars. And, the Yuan is at least at some level still pegged to the dollar. A strong dollar event will allow China to do the same thing our very rich investors, banks, corporations and institutions are waiting for – an opportunity to buy the emerging markets growth assets of tomorrow for cheap.
It is clearly an interesting world we live in, but at the end of the day, it is all about avoiding big wars and maintaining economic superiority, even if we have to share the stage. Build cash reserves the same way the very rich have been doing. Stop worrying about catching a few percent here and there from now until the end of the bull market – which I believe is soon.
When the markets turn over, it will be sudden. If your algorithim, or the algo of the guy you subscribe to isn’t telling you this already, it’s the wrong math. We already are seeing it (https://www.youtube.com/channel/UCkjMBcOGKyHieSmTKHeHMHQ).