Is The US Dollar REALLY In Danger? Maybe Not | Brent Johnson

Introduction

In this section, Adam Taggart introduces the guest speaker Brent Johnson and discusses the recent headlines predicting the end of the US dollar as the world's reserve currency.

Brent Johnson's Background

• Brent Johnson is introduced as a CEO and portfolio manager at Santiago Capital.

• Adam Taggart praises Brent for developing the "dollar milkshake theory," which explains global currency action in 2022.

Current Assessment of Global Economy and Financial Markets

• Adam asks Brent about his current assessment of the global economy and financial markets.

• Brent responds that there are numerous problems in the market, but it doesn't mean that markets won't continue to go up or sideways. He describes it as a violently sideways market with no clear trend or answers.

• Brent believes that sometime in late second quarter or second half of the year, there will be some kind of shock or risk-off event.

The Threat of De-dollarization

In this section, Adam Taggart asks Brent Johnson about his thoughts on de-dollarization and its impact on the US dollar.

Thoughts on De-dollarization

• Adam asks for Brent's thoughts on de-dollarization and whether it poses a serious threat to the US dollar.

• Brent responds that he thinks people have lost their minds over de-dollarization. He believes that while countries may settle trade deals in currencies other than USD, they still need dollars to settle those trades.

• According to Brent, if you look at central bank reserves around the world, the US dollar is still the dominant currency. He believes that de-dollarization is a long-term trend, but it's not going to happen overnight.

Impact on the US Dollar

• Adam asks Brent about the impact of de-dollarization on the US dollar.

• Brent responds that he doesn't think de-dollarization will have a significant impact on the US dollar in the short term. He believes that there are other factors at play, such as interest rates and inflation, that will have a greater impact on the value of the dollar.

The Dollar Milkshake Theory

• Adam asks Brent to explain his "dollar milkshake theory."

• Brent explains that his theory is based on supply and demand dynamics. He believes that there is a shortage of dollars around the world, and as central banks print more money, it creates more demand for dollars. This leads to a situation where all currencies are being sucked into the US dollar "milkshake," which causes the value of the dollar to rise.

Potential Outcomes

• Adam asks Brent about potential outcomes if his theory plays out.

• Brent explains that if his theory plays out, it could lead to a situation where all asset prices denominated in dollars go up significantly. However, this would also lead to higher inflation and potentially social unrest.

Inflation vs Deflation

In this section, Adam Taggart asks Brent Johnson about his thoughts on inflation versus deflation.

Thoughts on Inflation vs Deflation

• Adam asks for Brent's thoughts on whether we're headed towards inflation or deflation.

• Brent responds that he can make a strong case for both inflation and deflation. He believes that it's important to focus on understanding what could cause each of them and then check those things off as we move forward in time.

Potential Outcomes

• Adam asks Brent about potential outcomes if we experience inflation or deflation.

• Brent explains that if we experience inflation, it could lead to higher asset prices denominated in dollars, but also higher inflation and potentially social unrest. If we experience deflation, it could lead to lower asset prices and potentially a depression.

Investing Strategies

In this section, Adam Taggart asks Brent Johnson about his investing strategies.

Long-Term Horizon

• Adam asks Brent how he approaches investing in the current market environment.

• Brent explains that it helps to have a long-term horizon and a framework to work through. He believes that trading headline

The Dollar Milkshake Theory

Brent Johnson discusses his theory that the US dollar will go much higher in the years ahead due to a sovereign debt and currency crisis. He believes that the United States capital markets and the US dollar are the cleanest sturdy shirts out there, making them safe havens during this crisis.

The Framework of the Dollar Milkshake Theory

• The United States and the US dollar are safe havens during a currency crisis.

• Capital flows coming into the US will push U.S asset prices higher.

• Gold, U.S equities, and the dollar will trend up high but characterized by terrifying drawdowns along the way.

• The theory is about a sovereign debt crisis. If other currencies are seen as better safe havens than USD, then Brent's theory would be wrong.

Importance of Eurodollar Market to Brent's Theory

• All other countries out there and all other central banks are in the same boat as America with massive debts that they can never pay off.

The Importance of the Euro Dollar Market

In this section, the speaker explains how the euro dollar market was created and why it is important for the US dollar.

The Creation of the Euro Dollar Market

• The euro dollar market was created in the 1950s and 60s when dollars were flowing around the world due to their high demand.

• Borrowing in dollars allowed for a lower interest rate than borrowing in local currency, leading to a market for dollars outside of the US.

• This euro dollar market is now bigger than the market for dollars inside of the US.

The Importance of the Euro Dollar Market

• The euro dollar market creates a demand for US dollars that no other currency has.

• When central banks print or do bailouts, they are doing it for their own domestic markets. However, when the Federal Reserve does it, they are doing it for the whole world because of this demand.

• All fiat currencies lose value over time, but relative levels matter. Demand for USD is higher than any other currency due to this euro dollar system.

De-Dollarization and Substitute Markets

In this section, the speaker discusses de-dollarization and whether there is a substitute market that could replace the massive euro dollar market.

De-Dollarization and Substitute Markets

• To de-dollarize, a substitute would need to be found for this massive euro dollar market.

• No other major fiat currency has a similar dynamic as there is no Euro Yen or Euro Yuan Market currently doing something similar.

• There is nothing on the radar currently that could replace this market.

The Eurodollar System and Defaulting on Dollar Liabilities

In this section, the speaker discusses the consequences of defaulting on dollar liabilities and how it can lead to a credit crunch. He also explains that for the rest of the world to get out from underneath this euro dollar system, they have to be willing to burn their assets at the same time.

Defaulting on Dollar Liabilities

• If dollar liabilities get defaulted on, that is the rest of the world defaulting on themselves.

• This would lead to a credit crunch similar to what happened in 2008 when mortgages started failing.

• For the rest of the world to get out from underneath this euro dollar system, they have to be willing to burn their assets at the same time.

• Defaulting on a dollar-denominated loan will result in burning trust and make it difficult for borrowers to obtain loans in other currencies.

The Zeal with Which Dedolarization is Being Reported

In this section, the speaker talks about how dedolarization is being reported with great zeal and why it's understandable given that US has been kind of a bully. However, he believes that knocking off the bully is not as simple as it seems.

Dedolarization Reporting

• The zeal with which dedolarization is being reported is understandable because US has been kind of a bully.

• Knocking off the bully is not as simple as it seems because he got there by being bigger, stronger and meaner than others.

• It's hard but not impossible for someone else to become the bully.

The Dedolarization Story

In this section, the speaker talks about the dedolarization story and how countries are banding together to call out the US. He also discusses whether this confederation will hold together tightly or not.

The Dedolarization Story

• Countries are banding together to call out the US.

• There is a question of how long-standing solidarity will be amongst these cast of characters.

• The enemy of my enemy is my friend as long as that is the case, but it can last for only a little while.

• While US has been a bully in many ways, it has also been a massive force for good in the world and humanitarian aid.

The Role of the US in Modernizing the World

In this section, the speaker discusses how the subjugation of one group by another has been a recurring theme throughout history. He argues that Pax Americana has played a significant role in modernizing the world and making goods flow easily across borders.

The Subjugation of One Group by Another

• Throughout history, one group has often subjugated another.

• Conquest and expansion of territory have been common themes throughout history.

• Empires or regimes have used different tools to achieve their goals, but it's essentially the same story over and over again.

The Role of Pax Americana in Modernizing the World

• Pax Americana has led to modernization and made goods flow easily across borders.

• The supply chain was hyper optimized before COVID-19 disrupted it.

• The US Navy put a stop to modern-day piracy off the coast of Africa, allowing goods to continue flowing.

• While some may argue that the ends do not justify the means, we are where we are today because of Pax Americana.

De-dollarization

In this section, the speaker discusses de-dollarization and how many countries are slowly weaning themselves off the dollar. He also talks about how Russia's invasion of Ukraine accelerated this process.

De-dollarization

• Many countries are slowly weaning themselves off the dollar.

• A couple of decades ago, 70%+ world reserves were held as dollars; now it's down to 59%.

• The weaponization of the Western financial system against Russia accelerated many countries' plans to de-dollarize.

This transcript is relatively short, so there are only two sections. I have organized them chronologically and avoided mixing sections.

The Future of the US Dollar

In this section, the speaker discusses the recent headlines about the potential end of the US dollar as a world reserve currency and explains why people should not accept these headlines as a given.

Misleading Headlines

• The media is constantly reporting on new trade deals and speculating about the future of the US dollar.

• However, people should not accept these headlines as a given because they are often misleading and do not tell the whole story.

• Similar headlines have been reported for decades, but that does not mean that they will necessarily come true.

• People need to be cautious when reading these headlines and understand that just because something is being discussed does not mean it will actually happen.

Importance of Dollar Reserve Status

• The speaker emphasizes that he is not suggesting people go all-in on the US dollar or ignore potential risks to its reserve status.

• However, he believes it is important for people to understand that if the dollar were to lose its reserve status, it would be a significant event with far-reaching consequences.

• Entire industries have been built around the idea of preparing for this possibility.

Examples of Misleading Headlines

• The speaker provides an example from 2019 where China entered into a deal with Iraq to pay for oil in services instead of dollars.

• This was heralded as an end-of-the-dollar moment by some media outlets, but in reality, it only accounted for less than 10% of Iraq's oil exports and was never actually implemented.

• People need to be aware that just because something is announced or discussed does not mean it will actually happen.

Conclusion

In this section, the speaker concludes his discussion by emphasizing the importance of being cautious when reading headlines about the US dollar and understanding that just because something is discussed does not mean it will actually happen.

Importance of Caution

• The speaker concludes by emphasizing that people need to be cautious when reading headlines about the US dollar.

• They should not accept these headlines as a given and understand that just because something is being discussed does not mean it will actually happen.

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The Future of the US Dollar

Brent Johnson discusses the future of the US dollar as a reserve currency and its potential replacement by other currencies.

The Parent-Child Analogy

• Brent Johnson uses an analogy to explain how the US dollar's status as a reserve currency is similar to a parent-child relationship. He suggests that even if other countries want to de-dollarize, the US has a say in it due to its position as the biggest player on the block.

• He acknowledges that the US may lose its status eventually, but it still has some power in deciding whether or not other countries can replace it.

The BRICS Currency

• Brent Johnson does not give much credence to reports about a new BRICS currency that could potentially compete with the US dollar. He argues that getting five or six countries to agree on how they will implement and enforce such a currency would be difficult.

• He also points out that since 2009, when BRICS was formed, several of these currencies have lost value against the US dollar. Therefore, he suggests that people who believe in this idea should invest in those currencies now rather than wait for them to become real.

Sanctions and Their Effectiveness

• Brent Johnson agrees that sanctions do not work in the long term but points out their impact on countries like Venezuela, Iran, Cyprus, and Russia. These countries have experienced lower GDP growth and living standards due to sanctions imposed on them over time.

The Future of the US Dollar as a Reserve Currency

In this section, the speaker discusses the current state of Russia's economy and how it affects their tax receipts. He also talks about the idea that the US is helpless in enforcing its will and cannot build a coalition of willing nations.

The US Will Not Willingly Give Up Its Position

• The US has run the world for 100 years and they are not going to willingly seed that position.

• If the US ever feels threatened, they will use every tool in their toolkit to keep their relative space on top of the mountain.

• All reserve currency regimes have come to an end, but it's going to be a long and painful road before we see multi-polarity or a new global reserve currency.

De-Dollarization is Difficult Even Under Best Circumstances

• Project de-dollarization would be extremely difficult even under best circumstances.

• If other countries try to de-dollarize while the US is actively trying to stop them from doing so, it makes it even more difficult.

• It's probably going to take much longer than most people think for de-dollarization to play out.

Probability of New Global Reserve Currency

• We will probably see multipolarity in our lifetimes, but whether we see a new global reserve currency or a new unipolar global currency is unlikely.

• It's more likely that de-dollarization will take five to ten years easily.

The Future of Global Reserve Currencies

In this section, the speaker discusses the future of global reserve currencies and how it relates to politics, geopolitics, and military power.

Multi-Polarity in the World

• The world is headed towards multi-polarity where China and Russia exert influence over their regions while Brazil influences South America.

• The US is currently the only global superpower but may lose its position within 10 years.

Importance of Global Reserve Currencies

• Global reserve currencies are not just about economics but also about power.

• The US benefits from having the global reserve currency as it allows them to get away with things that other countries cannot.

• No country will willingly give up its global reserve currency as it is a power position.

Outlook for Fiat Currencies and Gold

In this section, the speaker talks about his outlook for fiat currencies and gold.

General Outlook for Fiat Currencies

• Over time, fiat currency loses value which is why governments like it.

Outlook for Gold

• Gold is expected to go much higher than its current value over time.

• Ultimately, gold will be the winner in the race between fiat currencies and gold.

Fiat Currencies and Inflation

Brent Johnson discusses how fiat currencies lose value over time and predicts that we will see inflation in the years ahead. He also believes that there will be deflationary scares along the way.

Fiat Currencies Lose Value Over Time

• Fiat currencies all over time are going to lose value.

• In general, fiat currencies around the world, not just the US dollar, are going to lose value versus real things.

Predictions for Inflation and Deflationary Scares

• Brent Johnson predicts that we will see inflation in the years ahead.

• He also believes that there will be periods of deflationary scares along the way.

• For us to get to the next phase where "the money printer goes brrr" or helicopter money, we need to get a deflationary scare.

• Brent Johnson still thinks that we are going to get one of these deflationary scares before we get the next dramatic move higher in Risk Assets.

Politics of Announcing QE

• It would be political suicide for the Fed to announce QE right now with inflation still at high single digits.

• If there's a scare and markets go down 20 or 30 percent and a bunch of layoffs happen in bankruptcies, then it gives them cover to come in and say okay we're going to save the day.

Conclusion

The video concludes with information on how viewers can continue learning from Wealthion's online conference and schedule a free portfolio review by a financial advisor.

• The replay videos of Wealthion's online conference from last month are still available for purchase at wealthyon.com/conference.

• If you're feeling vulnerable about the prospects for your wealth, then consider scheduling a free no strings attached portfolio review by a financial advisor who can help manage your wealth keeping in mind the trends, risks, and opportunities that Brent has mentioned here.