Hey There Income Hunter,

 

I have been pounding the table on how inflation can cause havoc on the markets …

 

Then we get the Russian invasion and the seriousness of de-dollarization comes front and center.

 

De-dollarization is a process in which foreign holders of dollar assets liquidate their dollar holdings because the monetary system is transitioning into a broader, more neutral basket of currencies.

 

Once you enter this stage of the long-term cycle of a reserve currency, the stocks and bonds in that currency trade completely differently than they have in the past. 

 

In this case, it’s due to the fact that foreign countries that import energy have had to hold dollars and bonds in reserves for use in settling energy transactions. This has created consistent demand for dollars and bonds for 75 years.

 

It has also given the US access to cheap financing, as it has been able to spend and support the economy with stimulus.

 

That privilege is now ending and it will force the US to recreate itself on the global stage as a contributor of goods and services instead of being the sole contributor of currency for all trading partners.

 

So, in effect. de-dollarization will force the US into re-industrialization and that’s a great thing …

 

Today, I’ll share supporting data on how the markets have changed so you can consistently crush it.

 

A New Day

 

Prior to the breakout of Covid, almost every fund manager deployed a variation of the 60/40 portfolio. That’s 60% stocks and long 40% bonds.

 

The correlation between stocks and bond yields was very tight prior to 2008, so when stocks went up, bond yields went up, meaning bond prices went down.

 

Since the US was the reserve currency for the world our trading partners had to support both markets … This was because they needed to hold dollar assets for use when settling their transactions when trading with the rest of the world.

 

However, 2008 was a major turning point in terms of our trading partners desire to hold massive amounts of dollars. 

 

You see, when the US decided to bail out their domestic economy and banking system during the housing crisis, it let the dollar collapse, which severely hurt all the nations that had been holding US assets.

 

That decision caused a total re-think by our trading partners of the dollar as a reserve currency.

 … 

 

This caused a chain of events that has changed the dynamics of the markets including:

• A 2010 paper written by the World Bank suggesting a new monetary system made up of multiple currencies backed by gold to be used as a reference point.
• The people’s Bank of Chine (PBOC) declares it no longer needs to accumulate foreign exchange reserves, meaning US dollars. 
• China launches a gold and oil exchange to make it efficient for their trading counterparts to exchange dollars for Yuan to buy oil.
• Russia began trading oil in Yuan. 

De-Dollarization: The New Trend in Global Markets

 

All of the above events led to less demand for dollar assets and that caused a slow transformation in the relationship between stocks and bonds … 

 

Then Covid and now the Russian invasion has sped up the change and the stock/bond the relationship has done a 180. 

 

The chart below shows the iShares 25+ maturity Treasury Bond (Ticker:TLT) and the SPDR S&P 500 Trust ETF (Ticker: SPY). 

 

Notice, how stocks and bonds have become positively correlated for the first time in many decades. 

 

 

This is such a key point for successful trading. The point is if you don’t understand the macro forces you can get hit with unforeseen losses and they can wreck your returns. 

 

However, if you get the macro drivers and how they impact different sectors of the market you can crush it!

 

1. The end of globalization. For the first time in 100s of years the reserve monetary system will be a basket of multiple currencies … This has already created a paranoia between countries with individual alliances and separate trade deals being negotiated all the time. 
2. The US decision to put its domestic issues ahead of the rest of the world by allowing the dollar to lose value has alienated our trading partners. This WILL cause a migration away from US assets for years.
3. Sanctions: When you freeze a country’s reserve assets it is considered an issue of national security. This was by far the US’s most aggressive move against a trading partner … And it may create a much larger supply/demand issue for natural resources than we have seen to date.  
4. The Good News – It creates incredible opportunities for traders that understand the global macro dynamics within the new monetary system.
5. The Bad News – The US purposely hit Russia hard so they can come to the negotiating table dealing from strength as the leading countries design the new monetary system. However, it also guarantees a really difficult transition from a financial market economy to a real manufacturing economy. 

 

Again, these massive global macro drivers make it easy to make money if you are aware of their impact on the markets.

 

Here is a peek at my highest conviction trade for 2022 … 

 

 

Bring It Home

 

As you can see in the chart above, money flows for the past 10 years have been away from hard assets into financial assets and that trend has now reversed.

 

There is an event in the months ahead that I believe will send silver and gold soaring.

 

My Power Income Trader subscribers receive exclusive trades and reports on everything macro and policy driven.

 

If you have not subscribed we would love to have you join us. These markets are going to remain volatile and erratic for years, but with the right game plan it is not difficult to stack profits.

 

Live and Trade With Passion My Friend,

Griff