Social order at the expense of liberty is hardly a bargain – Marquis de Sade
The Bretton Woods conference took place in July 1944 where the soon-to-be victors of WWII hammered out a new international monetary system. For the American worker, it was something akin to Robert Johnson meeting the Devil at the Crossroads in Mississippi where he reportedly sold his soul to become the master of Delta Blues.
John Maynard Keynes wanted the newly created International Monetary Fund to hold the world’s gold to back units of currency created by the IMF. Instead, the US delegation told the conference that the dollar would be the world’s global reserve currency and that the US military would safeguard global trade while giving our trade partners preferential access to US markets. In effect, we allowed our trade partners to charge tariffs to US goods while the US allowed them unfettered access to our consumers. The new Administration wants to end this benefit after 80 years.
This system allowed western powers to act as one against the growing might of the Soviet bloc to ensure Marxism wasn’t allowed to spread. It’s ironic that 80 years later, the only way to maintain the system is for the system to revert to extreme forms of Socialism bordering on Marxism.
Decision Time
Everything has its limit – iron ore cannot be educated into gold – Mark Twain
I’m not an adherent of Keynesian economics but I appreciate the extraordinary intellect of the man. He understood that the global dollar regime would lead us to this point where we have too much debt and too large of a trade deficit. To keep the dollar system working, we’ve had to make the US dollar our largest export.
Over my lifetime, I witnessed the loss of extraordinary competitive advantage of industries ranging from automobiles to the production of pharmaceuticals. Think of the export of each industry as an input into the great dollar export trade. Americans were pushed into either service industries or high value-added vocations requiring extensive university training.
When this avenue was exhausted, the only thing left to drive growth was the wealth-effect fueled by extreme growth in debt from the consumer all the way up to the US government. But as Mark Twain wrote above, everything has its limits. The consumer is tapped out and the US government owes $37 trillion.
Artificial Everything
This means that to entrust to science – or to deliberate control according to scientific principles – more than scientific method can achieve may have deplorable effects – Friedrich August von Hayek
It’s not a coincidence that Hayek’s “The Road to Serfdom” was published in 1944, the same year as the Bretton Woods Conference. It’s as if the Universe gave us the intellectual path to counter the dollar system. Where Hayek’s friend, Lord Keynes, told us how the structure of the US economy would change under the dollar system, Hayek told us how society would necessarily change. Together, their words proved prophetic.
A month ago, I happened upon an interview with Hayek from 1970 where he said that the weakness of Socialism stems from its inability to harness the knowledge and motivations of millions of market participants, always leading to sub-optimal outcomes. This interview was a eureka moment for me because I finally understood the extraordinary movement towards AI and why Microsoft is considering building a data center in the Harrisburg, Pennsylvania area that would require enough electricity to warrant the re-starting of the infamous 3 Mile Island nuclear plant.
What if we could create a system that gives central planners 60% to 70% of the necessary insights into market demand while concurrently giving them the means to exert control over dissension? Real-time information for government control is the only end-product that makes any sense for such an investment because AI doesn’t provide enough market-driven benefits to warrant such an investment. As smarter people have already figured out, much of AI’s benefits have already been commoditized.
MAGA Threat
Intellects whose desires have outstripped their understanding – Friedrich August von Hayek
The real threat of the MAGA movement is that it runs antithetical to the dollar system and globalism. It’s why the new Administration is opposed by coastal elites, the military industrial complex, European elites, and big government proponents. MAGA represents an existential threat to their power and wealth.
On the flip side, the dollar system represents a threat to the personal liberty and economic prospects of those who are not directly aligned with it. Putting the question in this form allows us to see its true nature – interests of one party versus the interests of the other party. I believe people should vote for the system that best reflects their own interests. It’s why I can embrace people from both sides of the question; who am I to tell people how to vote?
Ultimately, MAGA policies make it impossible to maintain the US dollar as global reserve currency because these policies focus on reversing lost US industrial capacity. The fewer goods imported into the US, the fewer dollars escape the US economy to fuel the global economy. It’s that simple.
This reversal started in 2014 when shale oil and gas became economically viable. The US now exports oil and gas after decades of importing oil. Few people realize how monumental this shift truly is. We went from funding the Petrodollar trade to draining dollars from the international banking system as foreign countries use their dollar reserves to buy our energy.
This is why there is a fight between MAGA and globalists for political control. The US dollar won’t lose the coveted reserve currency immediately because there is nothing to replace it but it will happen because the US cannot have a healthy, balanced economy and the reserve currency at the same time.
Market Impact
A nation that is afraid to let its people judge the truth and falsehood in an open market is a nation that is afraid of its people – John F. Kennedy
The direction we choose as a nation is critical to formulating a long-term investment plan. The dollar system favors a continuation of the past fifteen years – wealth-effect, technology, plus bigger government. MAGA means a decentralized re-shuffling of our asset base with investment centered on physical assets and capital-intensive projects.
Despite the Blitzkrieg we’ve experienced since January 20th, the question of which direction we choose is far from decided. Momentum favors MAGA but the dollar system is formidable with high barriers to exit. In addition, we don’t know how people will react when the deflationary downturn picks up steam later this year.
The Administration seems to want to maintain the best aspects of the dollar system while jettisoning the undesirable features; I don’t believe it’s possible. As an example, Treasury Secretary Bessent wants to weaken the US dollar to maintain US competitiveness even as the global forces of supply/demand favor its continued upward movement in currency markets. He’s going to be very disappointed because the dollar is scarce in international markets – even as we have excess dollars in the US economy. Here’s a link to a piece where I explain this paradox. https://geovestadvisors.com/china-v-dollars-ii-impact-on-eurodollar-market/
Worse, as the Administration tries to reduce the power of Washington and Wall Street, they’re going to lose the power to maintain the markets – no good deed goes unpunished. It’s unknowable whether the President’s popularity will survive a stock market correction.
I think a broad stock market correction is inevitable. For the past year, fissures in our domestic economy have been neatly obscured to give evidence that the dollar system is still working. For instance, it appears that the FHA may have been covering for missed mortgage payments on low-income mortgages and capitalizing those missed payments for the past year. This is an interesting video I came across. https://www.youtube.com/watch?v=iKdtyDnGM-o
Whether they like it or not, this problem now belongs to the new Administration. We learned that retail sales rose a disappointing 0.2% versus January’s negatively revised decline of 1.2% (from -0.9%). Unadjusted for inflation. retail sales were up a mere 3.1% over the year despite massive government spending. The US consumer can no longer keep the global economy elevated. It smells like recession, perhaps a big one.
Conclusion
There is only one side of the market and it is not the bull side or the bear side, but the right side – Jesse Livermore
If we set aside the emotions of seeing red hats or misgendering, there is a very simple choice in front of us – stay the course or change course. Either way, we have a doozy of an economic downturn in front of us and it’s clear to me that the top seven stocks aren’t going to provide shelter from the storm as the current Administration does not favor them.
The success of the dollar system (and globalism) is dependent on the strength of the US consumer. Regrettably, the US consumer is past steroid-induced peak performance and is now suffering the after-effects of reliance on steroids and adrenaline rushes. Atlas is about to drop the world.
When this happens, I expect the supply of dollars in international markets to tighten, either driving interest rates higher in the Eurodollar markets or resulting in a spike in the dollar versus other currencies. The latter seems far more likely because the Fed will be forced to slash rates.
We’ll be able to get a better sense of the state of the electorate once we hit the deep part of the downturn – will they stay or will they go. For now, we need to be cognizant that AI is alive and well in the stock market, ready to reverse any aggressive directional bets we may want to make. You can successfully swim against the tide only if you know there are sharks below the surface. Just look at Chinese and European stock markets running higher even as both regional economies are dumpster fires.
Fortunately, we’re doing well this year so if you’re interested in learning more, visit us at https://geovestadvisors.com/ and contact Paul Hurley.
Philip M. Byrne, CFA
