Dear HODLers and Hivers,
Lately, in the different podcasts I listen to, I have heard more and more about this "Dollar Milkshake Theory".
It was formulated a few years ago and the way to think about the global monetary policies, FX and assets was quite new.
And the good thing is ... it worked
While many economies and central banks (European...) where continuing their low interest policy and QE, US was the first to 'tapper' and tried to lower their balance sheet.
Since it had higher interest rates and was seen as safe, capital from all over the world came to buy US Bonds.
As most of the international trades (apparently c.79%) is done in USD and the US Consumer Market is the biggest in the world; this strengthen the USD position.
Big international corporations have to hold USD to continue their daily business and are also investing in USD denominated assets.
During the current crisis and despite US printing out of thin air 7 000 bn USD (vs 2 000bn in 2008), USD gained versus other currencies, why?
Because it is seen as a safe-haven, most central banks and foreign corporations have debt denominated in USD (therefore they need USD to pay interest).
This is why USD is appreciating relative to other currencies.
And guess which asset is denominated in USD, scarce (compared to most others) and cannot be created out of thin air?
B
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T
C
O
I
N
Lately I have also written on why Bitcoin is important for emerging economies and citizens to protect their wealth in USD denominated assets. This is another strong underlying demand to take into account !
Migrant workers, remittance market, and currency depreciation are pushing Bitcoin's adoption
đź‘‘ Why Bitcoin will be crowned the global reserve currency đź‘‘ - Part 1
Johnson argues that the deck of the global monetary system is stacked in the favor of the U.S. dollar, and that it doesn’t matter which central bank starts quantitative easing (QE)
He believes what matters is which central bank captures that QE.
Watch the interview with Pomp to explore his thinking in full depth. It’s a masterclass in macro and is perfect for investors of all levels.
“The strength of the dollar is [going to] cause such chaos in the global monetary system that the safe haven that gold has always provided I think [will be in] higher demand and there will be a point where they [gold and the dollar] rise together.”
Main axis of this theory:
1. A “Strong Dollar” which is so strong that the whole world is “wrapped up” around its strength.
2. Somehow, in the face of this unprecedented dollar strength, both Gold and the Dollar rise “together”.
3. While this is happening, equity prices, measured in Dollars, also rise.
Mr Johnson's theory is not a mainstream view
The dollar rises versus foreign currencies
Gold rises compared to the Dollar and foreign currencies
Equities rise relative to the Dollar and foreign currencies
Therefore, equity values will rise simultaneously with the price of gold (measured in dollars, which rises versus foreign currencies).
Sources:
https://www.realvision.com/the-dollar-milkshake-theory
https://www.goldmoney.com/research/goldmoney-insights/milkshakes-sugar-highs-and-gold-a-response-to-brent-johnson-s-milkshake-theory
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