Happy Friday!
I was going to write about the Fed’s first rate hike since 2018, but I just didn’t have it in me. We’ve already discussed this too much, and there’s not much else to say. The Fed is way behind, they should have done this a year ago, and 25 bps does almost nothing to temper inflation.
Don’t misunderstand. I’m glad they’re finally doing something, but this is the same team of economists still buying bonds just a few weeks after January’s CPI came out at 7.5%.
Anyway, this week I expanded on the Amazon stock split. It’s a subject that often confuses clients, so hopefully, they feel a little smarter going into the weekend.
I just don’t care
The Wall Street Journal reported this week that Saudi Arabia may start accepting renminbi for oil payments and why this could be the beginning of the end for the U.S. dollar. We had a few calls this week from clients, so it’s worth quickly discussing.
More broadly speaking, there is a fear that it would be cataclysmic for our economy if the USD lost the reserve currency status. It’s become this whac-a-mole theory that won’t go away.
It began with “we’ll never pay off all this government debt,” then moved to “our kids will be speaking Mandarin a decade from now,” and somehow landed on oil contracts. It’s like a hypochondriac – those worried about the dollar losing its reserve currency status will neither be convinced nor satisfied until we lose it.
Let’s push aside the fact that this story pops up periodically (usually after some public tiff between the U.S. and Saudi Arabia) and focus on a few facts.
For starters, there’s almost no chance that the USD will get replaced anytime soon. As of 2019, more than 88% of foreign exchange trading involved the dollar, and nearly all commodities are priced in dollars. It also dominates as a payment currency for global trade, with a 79.5% share of currency usage in value.
The USD also represents 59% of all known central bank foreign exchange reserves. The next closest is the euro at 21%, so there is nowhere near enough euro in circulation, let alone any other currency, to replace the total value of dollars held.
That is unless the euro were to gain against the dollar by multiples of where it stands today. Last I checked, Europe’s economic prospects haven’t looked all that great for the last two centuries, and not sure how that gets better amid an energy and potential food crisis.
Back to China, the renminbi accounts for around 5% of international trade and 2.1% of central bank reserves. That’s it. Oh, and China’s blatant manipulation and strict currency controls make it even harder to envision how they could unseat the dollar.
Said another way, even if central banks wanted to dump dollars because they were either afraid of our country’s finances or fear that we’d cut them off from the dollar network if they disagreed with our Western politics like we did to Russia, they don’t have much choice right now. It’s almost mathematically impossible – at least in any investible timeframe.
Second, China buys 25% of all Saudi oil, so it makes sense that Saudi would want to cater to one of their top clients. I have no clue if this is actually going to happen, but my point here is if it were, I don’t blame them. If a client that accounted for a quarter of my revenue asked me to kick a nun down a flight of stairs, my only question would be, “head or gut?”
But let’s say that they do start contracting oil in renminbi. Saudi Arabia then has a bunch of renminbi in their bank account over time. What are they going to do with it? Unless that 5% of international trade grows a LOT (like multiples higher), they’ll probably want to convert that monopoly money into something they can use to pay for stuff. If so, I’m guessing the USD is top of the list (at least for now).
I don’t mean to employ sarcasm to over-simplify or downplay this story, but rather just point out that it took 7-8 decades for the USD to become the biggest and most trusted currency, and it would take a lot for it to unwind from here. And even if it were to happen, why would not being the reserve currency imply doom and gloom? Every other currency right now isn’t the reserve currency, and most countries aren’t actively quelling zombie apocalypses.
Speaking of China…
Last year, the big story out of China was Xi’s desire to return to common prosperity (aka communism). He regulated how long citizens could play video games, shut down the entire “for profit” education industry, and reigned in tech companies that caused over $600 billion in Alibaba’s market cap to disappear in months.
This spooked international investors for obvious reasons. Add in the absolute comical way Chinese companies list their shares here in the U.S., and it was a perfect storm for one of the worst selloffs in Chinese stocks ever (both abroad and mainland).
Well, it appears that Xi’s now acting like he did some drunken tweet at 1am, woke up to the unhinged Twitter mob, and issued an apology begging social media’s forgiveness after immediately deleting the tweet. We’re talking an almost 180 on the rhetoric, which caused a huge reversal in the Chinese markets this week.
I guess being “uninvestable” to the rest of the world sucks a little more than he may have realized six months ago. Or perhaps seeing what’s happening to Russia is starting to test their love of suppression and slave labor. Hard to say. Unlike most Americans over the last three weeks, I don’t claim to be an expert on geopolitics.
Universally despised.
The blinding insanity of changing our clocks twice a year could soon end, thanks to a bipartisan bill that may make it to Biden’s desk. If signed, daylight savings will become permanent as of November 2023. This one falls under my ABF category (About F’ing Time).
The only time changing clocks was remotely beneficial in my life was back in college when spring forward meant an unexpected extra hour at the bars on Saturday night. It was like finding that $20 bill in the pocket of a pair of pants you haven’t worn in a year.
But that’s about it. Now that I have kids, all it’s done is convince me never to fly abroad with the entire family. Because if they can’t handle a single-hour change, nobody wins by moving the clock up by 8-12 hours on them.
Enjoy the weekend…
Mike on Markets 