According to Truflation, the US dollar has lost nearly 25% of its purchasing power since January of 2020:
Many everyday Americans struggling to pay their monthly bills may argue that's an understatement.
What the US dollar does, vs real things as well as vs other national currencies, has very real implications -- economically, financially & geopolitically -- for everyone watching this video, regardless of where you live.
For a better sense of what it's likely to do from here, we're fortunate to speak today with Brent Johnson, CEO & Portfolio Manager at Santiago Capital, and developer of the Dollar Milkshake Theory (DMT).
In today’s discussion, Brent offers an important update to the DMT, which provides clarity both dollar bulls and bears should understand.
Here are my key takeaways from the interview:
Brent revisits his Dollar Milkshake Theory in order to clarify it, explaining it as a framework for understanding the unfolding sovereign debt and currency crisis. DMT essentially predicts that all fiat currencies (including the US dollar) will fail and be replaced by a new currency regime…but the numerous vast advantages that the US holds and *will* wield ensure that the dollar will fare better through the collapse than other currencies and, as a result, capital will flow into the US and support its economy and markets better than other nations.
While Brent acknowledges that his expecting timing for the dollar endgame was initially too aggressive, he maintains that the DMT framework has been largely accurate in predicting currency, capital & market movements.
Since Brent predict such back in 2018, interest rates have risen significantly, bond prices have dropped, and the US dollar has strengthened. US equities and gold have also increased in value, validating his theory that the US would outperform due to capital inflows driven by higher interest rates and global economic conditions. Brent points out that while these trends are not linear, the overall direction and continued momentum remain consistent with the DMT’s predictions.
Brent notes that global cooperation during the COVID-19 pandemic postponed an inevitable crisis. However, increasing geopolitical tensions since then, such as those between the US and China, and the retreat from globalization indicate that the next debt crisis will be harder to manage. He points out that the world is moving towards regional supply chains and geopolitical blocks, making coordinated economic responses more challenging.
He anticipates the US dollar will
strengthen relative to other fiat currencies, causing potential global credit crises due to the difficulty other countries will face in servicing dollar-denominated debt (aka the Eurodollar system). This could lead to significant market drawdowns, as tightening liquidity pressures global economies. Brent also explains that while fiat currencies may lose value against real assets over time, the dollar's relative strength will create volatile financial conditions.
Brent emphasizes the importance of a diversified portfolio and cautious investment strategies. He advises against making extreme bets on market outcomes and highlights the need for liquidity and protection against potential downturns. He stresses that holding diverse asset classes and employing hedging strategies can help mitigate risks associated with market volatility.
Brent ensures his clients portfolios are diversified across
blue-chip US equities
short-term fixed income
gold
real estate, and
agricultural commodities.
He uses options to manage risk, buying calls when he expects upside and puts when he anticipates a pullback. He believes in holding gold as a hedge, despite short-term price fluctuations, due to its long-term value preservation and insurance against financial instability.
Brent shares two key life lessons
First, investing should be based on realistic expectations rather than personal desires or ideals, and being a contrarian within specific investment spaces, like natural resources, can prevent becoming a victim of market sentiment. Brent recounts how early in his career, he invested based on what he wanted to happen rather than what was likely and stresses the importance of objective analysis in portfolio management.
Second, he advises that in times of market extremes, it’s better to prioritize safety and incremental gains over attempting to achieve high returns. He likens this approach to consistently getting on base in baseball rather than always swinging for home runs. He suggests that buying inexpensive insurance, like puts on major indices, can protect against large drawdowns, and stresses that steady, cautious progress often leads to long-term success in volatile markets.
For the full interview with Brent Johnson, watch the below video:
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