King Dollar?

I don’t need to tell EM investors about the downsides of a world dependent on the dollar.

A strengthening greenback has destroyed the returns of many an investor, and obliterated the carry prospects of many a manager of many a vintage.

Lately, though, I’ve been wondering just how close we might be to the demise of the dollar as the global reserve currency.

I know. We’ve heard it all before — heck, I’ve said it all before — and yet the dollar remains king.

I was wrong, wrong, wrong. But at least I was in good company.

Recall that a decade ago, Zhou Xiaochuan — then governor of the PBC — issued a stirring call for reform of the international monetary system.

In his plea, Zhou mentioned John Maynard Keynes’s Bancor, the latter’s idea for a global currency whose value would have been referenced to some 30 commodities. It remains an elegant, if imperfect, solution.

Despite all we knew ten years ago, has the world economy reduced its dependence upon the dollar?

Pas du tout:

Screen Shot 2019-09-17 at 1.07.20 PM

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The Bank of England’s Mark Carney delivered a most-provocative speech at Jackson Hole last month that is well worth reading. Says Carney:

In the new world order, a reliance on keeping one’s [macroeconomic] house in order is no longer sufficient. The neighbourhood too must change.

A thoughtful central banker is telling us once again that we need a different international monetary and financial system.

And emerging markets are a principal reason why.

According to IMF data, EM constitute 60% of global GDP (on a PPP basis). This figure is 4x larger than the U.S. contribution.

Emerging markets’ growing share of global output exacerbates the demand for dollars, and the trendlines suggest EM will exhibit more demand for dollars in the future than the United States could possibly be expected to provide.

Indeed, Carney notes (in footnote #25), EM “external liabilities could double as a share of GDP by 2030.” And, what’s more, that “investment funds could represent 40% of market-based finance flows to EM [economies].”

This is a potential disaster.

EM authorities are already prisoner to a doom loop in which capricious capital flows sow the seeds of future volatility (see below).

Screen Shot 2019-09-17 at 1.07.32 PM

And things are getting worse.

Setting aside global dollar scarcity, the Bank of England’s research shows that investment fund flows to EM have grown from 10% to 30% of portfolio flows since the Global Financial Crisis. Meanwhile:

Redemptions by [EM] bond funds (with large structural mismatches) in response to price falls are five times those for [EM] equity funds (with lower structural mismatch), [which in turn] are twice as responsive as advanced economy equity funds.

What we knew 20 years ago remains true today — only at a larger scale.

Something has to change.

* * *

So, what is the solution?

The Euro? The RMB?

Behold Carney’s punchline:

While the likelihood of a multipolar [international monetary and financial system] might seem distant at present, technological developments provide the potential for such a world to emerge. Such a platform would be based on the virtual rather than the physical … Technology has the potential to disrupt the network externalities that prevent the incumbent global reserve currency from being displaced.

Read it again. Slowly.

He’s talking about cryptocurrency.

As a small business owner who has had to negotiate the global payments morass, a global digital currency strikes me as quite useful. Imagine a world where the frictions of international exchange are reduced, cross-rates are eliminated, and a global unit of account works in more people’s favor.

(I’m still sorting out the store of value bit …).

Carney mentions Libra in his speech. The ideas behind Libra are fascinating. That Facebook will inevitably plug Libra into its social network leaves me anxious about how dystopian the future might be.

Admittedly, I know very little about crypto / blockchain.

[Disclosure: That ignorance has not stopped me from nibbling on some Bitcoin and Ethereum; I’ve also staked claim to territory on Blockstack].


If Carney is right. If the probability of a world in which digital currency could achieve reserve status is higher than we think, then investing in EM may be radically more different — and more promising — than most of us currently imagine.

Alla prossima,



Something cool happened last month. I purchased some shares in Kehinde Wiley’s painting “Saint Jerome Hearing the Trumpet of Last Judgement” via Otis, an app on my phone.

The idea behind Otis is that it democratizes access to “alternative assets” — primarily art or cultural assets — by offering membership interests in them. You can read the offering circular for the Wiley painting on the SEC’s website here.

Wiley’s painting was the first “drop” released on the platform and the shares are sold out, with participation from 662 investors in a $250,000 raise.

Every time I’ve mentioned Otis and the idea of buying shares in a painting, people look at me quizzically and question my intelligence.

Valid question!

But here are three reasons why I think the doubters should examine their priors.

  1. Experimenting — We are moving into a world in which more assets can be securitized / tokenized, and then distributed to smaller investors. I am trying to wrap my head around the digitization of tangible assets and its implications for me / EM / the world at large. I love the idea of capital markets enabling the creation of art. Who knows where this could lead?
  2. Supporting Creatives — I like people who create things, and I like to support them.
  3. Collecting Assets — I’m no aficionado, but I really like Wiley’s work, and not just because he painted Obama’s presidential portrait. One of his delightful paintings — Willem van Heythuysen — is showcased in our local fine arts museum. It’s impossible to miss in a hall that contains paintings from the Renaissance and Baroque periods, and the juxtaposition is superb. This is an asset that was fun to collect.


U.S. Pensions

The Center for Retirement Research released a study that does not inspire much confidence about the state of the U.S. pension system.

Since 2001, plans have incrementally reduced their assumed return from 8.0 percent to 7.2 percent. But, the average annualized return for public plans from 2001-2018 has been only 5.9 percent.

A pessimist might say, “Hang on a minute, those allocators get paid for that track record?”

An optimist might say, “Yeah, but mega-cap buyout funds are compensating for the decline in yields that their fixed income portfolios are delivering.”

A realist might read the rest of the paper and see that only 30% of public pension assets are valued at NAV.

Moreover, when the researchers redistribute the assets according to fair value hierarchy, 23% of them fall in Level 3 — meaning they are “assets where fair value is determined using unobservable assumptions.”



Ray Dalio on China

Ray Dalio thinks you should probably invest in China.

He’s a billionaire. And in the United States of America, the amount of money someone has is how we determine the value of his or her opinion.

It’s really stupid.

But not as stupid as this: in his video, Dalio shares charts that illustrate historical parallels among the Dutch, British, American, and Chinese “Reserve Currency Empires.” The exhibits plot six variables, such as technology and education, output, “military,” etc.

He then asks, wouldn’t you have wanted to invest in the Dutch / UK / U.S. empires?

I don’t know, Ray.

For starters, one of these empires is not like the other.

Hint: in three of these, the batons were often brought out to protect the interests of capital. In the other, they’re often brought out for other reasons.

Second, how did investors in those stock markets fare? If I recall my history correctly, Amsterdam and London were not exactly bastions of financial stability. Did Daniel Defoe make out well from his interactions with the stockjobbers?

Hint: he did not.

Anyway, Ray is rich, and everyone knows that rich people get rich by making other people rich.

So maybe you should listen to what he says?

You definitely should not ask yourself, “Why am I seeing this pitch? On YouTube?”

In any event, if I’m forced to pick among billionaires’ opinions on this issue, then I choose George Soros.


My Friend Wrote a Book: An Update

Back in April, I interviewed my friend John Gans about White House Warriors, his book on the U.S. National Security Council.

It’s often said that it’s better to be lucky than good, but John landed a twofer. Not only did he enjoy extraordinary timing for a book launch — releasing it months before Trump fired his third National Security Advisor — but he also wrote something good.

You don’t have to take my word for it. The New York Times asked him to write a piece about the Bolton blow-up last week, and he’s been doing the rounds on TV and radio. If you haven’t picked up a copy, why not grab one now?


From the Bookshelf

No part of the aim of normal science is to call forth new sorts of phenomena; indeed those that will not fit the box are often not seen at all. Nor do scientists normally aim to invent new theories, and they are often intolerant of those invented by others. Instead, normal-scientific research is directed to the articulation of those phenomena and theories that the paradigm already supplies.

— Thomas Kuhn, The Structure of Scientific Revolutions (University of Chicago Press: 1996)

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