Voltaire once said “To learn who rules over you, find out who you can’t criticize.” Perhaps the modern day corollary to this may be “To learn who is attempting to break free from being ruled, find out who the rulers are criticizing most heavily.”
This past weekend I had the opportunity to meet a friend of a friend, Luke Gromen, who publishes a unique macro- and thematic newsletter for institutional investors, “The Forest For The Trees”.
Over the course of the afternoon he shared some of his observations, research, and analysis from recent trends in the global financial system. Trends with potentially significant implications to the Fork in the Road.
Our discussion centered around evidence indicating that a reordering of the global financial system may have already begun with the US Dollar and Treasuries beginning to lose share in global trade usage and their 41-year monopoly on the purchase of oil as ‘petrodollars’.
The evidence like pieces of a puzzle, when pieced together, seem to point to a very fundamental change in the system.
- A number of countries have recently opened their own physical gold exchanges, priced in their local currencies…
- For only the second time since 1971 (since Nixon took us off of gold and the Saudi’s agreed to price oil in dollars shortly afterward in 1973) these same countries and others are looking to purchase oil in alternate currencies like the yuan (the first was Saddam Hussein’s play in the early 2000’s to purchase in Euro’s)…
- Real purchasing power continues to erode as the ‘hard’ necessities we need to live, food, shelter, energy, healthcare, education, etc…, continue to rise rapidly…
- Monthly Foreign purchases of US Treasuries have fallen y/y more often in the last 18 months than they have in the prior 20+ years combined suggesting a move by foreigners and countries away from US dollars…
- China and numerous other Emerging Markets (like the BRICS) are purchasing record amounts of gold…
- Foreign nations realize that their problems are being caused by the usage of the dollar as the sole currency in which oil can be priced?
- China and Emerging Markets (C/EM) no longer need the dollar to acquire any goods in the physical plane and are now big enough to do something about it (for the first in 350+ years they account for the majority of trade)?
- C/EM decide to do what Nixon did in 1971 and change the rules (of the global financial system)?
- Countries stop adding to their hoard of US dollars as dollars are no longer the sole currency in which oil is priced and the inflation we’ve effectively exported returns home?
I’m not an economist or institutional investor but these observations seem pretty significant to me. In case you’re wondering, these points aren’t based on obscure and questionable sources, but rather on a large number of world-class publications like the WSJ, Economist, and the NYT.
“… they understand that the west’s blind faith in the value of treasuries can be used to their advantage to buy real assets – they know you can’t wire a house w/ Treasuries or fuel a car with treasuries, only w/ copper and gasoline respectively…” – Luke Gromen, LinkedIn Portfolio Managers, Research, Capital Markets & Consulting Professionals group
While we shall have to wait and see how history unfolds, these developments could certainly contribute to a more volatile, uncertain, complex, and ambiguous world and will likely require different approaches and (currently non-existent) real, tribal leadership in order to meet these challenges head on.
As I called out in my first post, it will also require heretic leaders. It was a pleasure chatting with ‘Heretic’ Gromen and I truly appreciate his advice: question the system and watch what the actors do vs. what they say, all in the interest of the greater good.
Given this focus on doing these things in the interest of the greater good, Luke is actually quite bullish on what these developments might ultimately mean for America – a renewed focus on real trade & commerce vs. our current system, which has evolved to become ‘hyper-financialized’ as a result of repetitive short-term decisions made over the past 40+ years.
“But like any rip-roaring party, the party usually doesn’t end when the hosts are still having a good time…it ends when the neighbors call the cops” – FFTT, April 2014
Are you ready to see the Forest For The Trees? If so, leave a comment and become a heretic!
PS: In the future Luke and I are planning a short series of more detailed conversations about this ‘Financial Fork in the Road’.
“You can’t connect the dots looking forward, you can only connect them looking backwards”- Steve Jobs, Stanford University commencement address
Image: shutterstock/EM Karuna