Stock Talk - De-Dollarization: Here's Why It's Not a Thing

Episode Date: November 22, 2024

Is the U.S. dollar's dominance is under threat? We’ll explore what de-dollarization really means, its drivers like China’s push for yuan-based trade, and the evolving landscape of global currencies. I analyze key trends in the Dollar Index (DXY), compare the dollar’s performance to gold and other currencies, and address concerns about shifting trade dynamics. You'll also learn why the doomsayers predicting the dollar's demise have been wrong for years and how this narrative might impact investors. Whether it’s digital currencies like Bitcoin or geopolitical developments, I’ll help you separate fact from fear, so you can stay focused on your long-term investment strategy.   #DollarIndex #GlobalCurrency #DigitalCurrency #FinancialPlanning   About Chris Perras, CFA®, CLU®, ChFC®, Chief Investment Officer: As CIO, Chris is the lead investment strategist and director of research at Oak Harvest Financial Group. Chris develops the firm's core market outlook, putting his decades of experience and expertise to work for our clients. He hosts Oak Harvest's podcast, "Stock Talk," available on the website with new episodes each week. He completed his undergraduate studies at Georgia Tech, and went on to obtain an MBA from the Harvard Business School. Driven by a desire to maximize his knowledge and skill set, he acquired financial planning and investment management qualifications, becoming a Chartered Life Underwriter (CLU®), a Chartered Financial Consultant (ChFC®), and a Chartered Financial Analyst (CFA®).   Stock Talk is a weekly vlog/podcast dedicated to discussing the Oak Harvest Financial Group Investment Team's perspective on what's happening in the market. Hosted by Chief Investment Officer Chris Perras, each episode brings you our views on stocks, the market, and the economy — with a little education thrown in for good measure. Listen each week and help stay connected to your money!   Do you need a retirement plan that goes beyond allocating funds to truly fit your needs? We can help you create a retirement life plan customized for your retirement vision and legacy. Call us at 877-896-0040 or fill out this form for a free consultation: https://click2retire.com/Connect   Important disclosures: Content of Oak Harvest podcasts expresses the views of the speaker and is for informational purposes only. Oak Harvest believes that any data, articles, or information cited are reliable at the time of creation, but does not warrant any information contained herein to be correct, complete, accurate, or timely. References to third-party analysts should not be seen as an endorsement of their views or recommendations, and you should do your own research before investing. The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you, and nothing in this podcast constitutes personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities. Indexes such as the S&P 500 are not available for direct investment and your investment results may differ when compared to an index. Any specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss, and past performance is not indicative of future results.

Investors, fear mongers do one thing better than everyone else I know. What's that? This is going to be the biggest crisis in the baby boomers life. We haven't seen the crash yet. This coming is the biggest in the world history. I think we're in for the biggest bear market that any of us have ever experienced. That's spreading fear and conjuring up the latest and greatest rationale for U.S. investors not to be invested in equities. Harry Dent, Robert Kiyosaki, Robert Prector and Jerry Grantham, all noted Dumers,

all horrifically wrong on their outlooks for U.S. equities over the last decade. Investors, since the COVID pandemic ended and the Russian-Ukraine war began, one of the loudest arguments for anti-equity and anti-American investment, more specifically, has been something called de-dollarization. Okay, so what is de-dollarization and should you be losing sleep over it at night? The punchline answer is no, don't lose sleep over it. Don't worry about it harming your domestic investments in the next few years. But yes, keep an eye on it because it will create opportunities here and abroad.

First off, what exactly is de-dollarization when financial folks discuss it? Well, it generally refers to a significant reduction in the use of U.S. dollar in the world of trade and finance. I'm going to reference the DXY Index as the dollar index in this piece, as it's probably the broadest and most common measurement of the U.S. dollar versus our trading partners and other world powers. Okay, so take a look at the current weights in the DXY index. index of the six currencies that make it up. Now look at the 20-year chart of the DXY index. In this chart, up and to the right indicates the dollar getting stronger first our trading partners.

That is, our currency is more valuable in trade, not less. And remember, investors' currencies are relative value game wherever you look at them. One country's currency is strengthening at the expense of another. Given the trend in this chart, what makes Doomers so loud and vehement about their so far, Very wrong prediction of the dollar's demise? Why are many economists and alarmists concerned about the trend away from the dollar into alternative currencies?

So first and foremost, a less dollar-centraled world might mean a redistribution of power, influence, and economic leverage away from the US and into other countries. It could possibly lead to increase volatility and uncertainty in financial markets. The most visible proponent of a de-dollarization has been, you guessed it, China.

Knowing that the holder of the reserve currency of the world has special powers, China, under Prejudice in Qi, has sought to increase the use of its own currency, the Wan or Renembi, for cross-border transactions when it can. As China tries to broaden its economic power, the rise of the Yuan would represent a challenge to the established order of the US dollar, the reserve currency. In 2010, less than 1% of China's foreign trade payments were settled in the Yuan compared to over 80% in US dollars. By March, 2004, over half of Chinese payments were settled in Juan, marking a doubling of its share in the five years since COVID ended. Where else are there early signs of

de-dollarization? Folks, in the commodity space, especially in oil, traders are increasingly pricing transactions in non-US currencies. Some of this is due to China's reliance on Russia for oil and energy, but subtle shifts are coming out of the Middle East as well. Since the Russian Ukraine War broke out two years ago, there have been further concerns by our U.S. trading partners over our politicians weaponizing the dollar and using it as a U.S. foreign policy tool. As a result, there's been a growing interest in finding alternatives to the U.S. dollar. Investors, in mid-2023 at the 15th annual BRICS. Summit in South Africa, Brazil's president called for the creation of a common currency for trade between the BRIC countries as an alternative

to the U.S. dollar. of account of referent for the commerce that not substituted our moedas national. The BRICS are countries Brazil, Russia, India, China, and South Africa. According to Jean-François Robin, before the Russian-Ukraine war, the share of Russian exports denominated in Juan was around 1%. Today, as of mid-2023, it's about 15%. Other minor data points are that Argentina announced that it would repay parts of its debt in Chinese currency in Pakistan, recently denominated oil import contracts in the

Juan. Over the last decade, both China and Saudi Arabia have reduced their holdings of U.S. treasuries by over 40%. So mathematically, yes, the trend is slowly moving away from trading taking place in the dollar towards other instruments and currencies. But has it made a difference to the U.S. consumer? First, let's look at the U.S. dollar versus another common store of value, gold. Since 2015, gold pricing dollars is up about 145%. Over the same period, gold priced in Chinese won terms is up almost 200%. Folks, neither currency has been a good store of value for the last 10 years, but the Chinese wand has clearly weakened, not strengthened, against the US dollar over the same time period. Take a look at the dollar-want chart for the

last 10 years. Up and to the right is a stronger dollar in a weaker wand. Investors, I think it It shouldn't come as a surprise that the Chinese wand has weakened against the dollar, even as China has tried to diversify outside U.S. dollar trade. To me, it looks like the wand weakness is highly correlated to Chee's movement away from capitalistic tendencies and back towards a more centralized communist rule for China. Investor, your money goes where it's treated best and most fairly without friction, be taxes or government intervention. Is the U.S. dollar really going to be supplanted by a currency of a communist,

or centralized planning government like China? Do you really think the Russian ruble with a Russia controlled by a dictator will supplant the dollar, or the Brazilian Real when that country is struggling, or any of the countries in the Middle East, given the concentration of their economies in the energy patch and the tendency for wars in that region?

I don't think so. Recently following Donald Trump's reelection to a second term, many in the media have focused directly on the effects of his policies on the US dollar. For what it's worth, here's an overlay of the DXY in 2016 and 2017, first, 2024. So far, the dollar is doing nearly the exact same thing it did in the fourth quarter of 2016.

Back then, it rallied strongly on Donald Trump winning the 2016 election. However, investors, it then sold off in 2017 with the tariff talk with strong domestic and global growth, and inevitably the weaker dollar helped multinational earnings in 2017, leading to higher stock prices. Investors, I get the need for Dumaers to constantly grasp at the next fix.

This is the tipping point moment. Maybe they need to sell books, subscriptions, or charting services that worked once and got them labeled a financial guru or a top caller. Or maybe they want to generate clicks and views for advertising dollars. But are their opinions or scare tactics helping you in your financial situation? Yes, investors, there is a movement away from fiat and paper currencies into digital form. Bitcoin believers see Bitcoin and Bitcoin. is the future store of value and future digital currency.

Given the performance of the Bitcoin asset, regardless of what currency it's been held in since 2015, it's hard to argue with them. It's up over 45,000% since I first heard about it in the summer of 2015. I can find few assets, if you want to call it that, speculative or not, that have been approached that return. Maybe this is the new global currency,

even though few trade in it, while many are trading it. Investors, the world has been moving towards a digital world for the last 50 years. Moving away from bills to bits and bytes, moving away from coins to Coinbase, moving away from banks and bricks to bits, clicks, and swipes. My sons are both 27 and 24. They will rarely, if ever, stop in an ATM to take out some cash on the way out to date night on the weekend. Investors, they'll never, ever enter a bank lobby unless it's to secure a safe deposit box or sign a mortgage document. Even then, they may never do that, given the likes of DocuSign and Adobe e-signatural technologies.

Investors, against the nearing decade-long, dumer calls from the likes of Jeremy Grantham, Harry Dent, Robert Precter, and Jim Grant, and a myriad of retired billionaire hedge fund managers that come on CNBC almost monthly to scare viewers. What has happened? While the world might try to shift away from dollar dominance, it should be a long road for that movement,

given the horribly unstable and unfriendly alternatives. investors, it's still a bull market, the dollar is still the default currency of the world. And as investors, Martha Stewart would say, at least for investors. Now that's a good thing. For myself, from everyone here at Oak Carvis, the investment team, from James, Troy, Jessica, and everyone, have a great Thanksgiving.