Hey There Income Hunter,

The dollar continues to be the dominant currency in world trade, capital flows and reserves.

This puts the US in the enviable position of being able to print the world’s money and to inflict sanctions on its enemies.

The US now has an arsenal of sanctions, which it wields more than any other weapon.

In fact, there are currently 8,000 US sanctions in place, which allows our government to cut off opposing countries from accessing money and credit by preventing financial institutions and others from dealing with them.

However, countries hurt by US sanctions are developing ways to go around them or undermining US power to impose them.

This represents the final chapter of a reserve currency and it means the US will have a tougher time selling its debt.

Today, I want to show the changes we can expect in the months ahead and its impact on the markets.

Share of Central Bank Reserves by Currency

• • USD     51%
  • EUR     20%
  • GOLD   12%
  • JPY        6%
  • GBP       5%
  • CNY       2%

Over the past couple of years, the US has increased its currency in circulation and the amount of securities it must issue to pay for the debt.

It will become increasingly difficult to find willing buyers because it is unattractive to buy US debt at negligible nominal yields and negative “real” yields adjusted for inflation.

Holding US Debt As A Store of Value Is No Longer Advantageous

China holds $1 trillion in US debt and as things heat up over Taiwan it is possible the US will apply capital controls and sanctions on the Chinese.

If that happens, then other countries holding dollars and bonds could get nervous and liquidate their holdings. 

Capital controls are a big issue when a reserve currency country is near the end of its cycle, as the US is. Any controls put on prices, capital flow etc. could trigger a global selling of dollars and bonds.

China and Russia are cooperating with each other to develop an alternative payment system that will attract many other trading partners looking to avoid sanctions.

The development of the Chinese digital currency and capital markets is detrimental to the US. The Biden administration must decide whether it wants to fight China’s progress or accept it and work to improve the US at home. 

Probability of Widespread War

The Russian invasion of Ukraine could easily expand into eastern Europe, which would likely force the US to get involved.

You also have China turning up the heat on Taiwan. You must keep in the back of your mind that China and Russia may be coordinating efforts to distract the US from its problems at home and split its focus between a war in the South China Sea and one in Ukraine/Europe.

History has shown that when the world is in transition from a declining leader to a rising one, the risk of the enemy getting more aggressive is elevated.

That is what I think we are seeing right now with China. 

History also shows that the winner of the technology war usually wins the economic and military war. 

The US on paper still has a lead in technology, but that is changing fast. China is making dramatic changes to more heavily regulate its technology companies as a play to improve its military capability through technology. 

Bring It Home

As I mentioned in yesterday’s letter, war depresses the economies of the countries involved. 

China, as an exporting and surplus nation, has a stronger balance sheet than the US who is the largest importing debtor-nation in the world. 

This is a big advantage for China since it allows them to play strategically, as opposed to the US, which is anxious to improve its financial situation so it can reset the real economy and grow out of debt burden.

Inflation has thrown a major wrench in US plans, and as traders we need to understand the limitations inflation and COVID have inflicted on our government and the Fed. It is our job to exploit their ineptitude and limited options they have in front of them. 

The government's only choice, with the Fed’s help, is to facilitate a serious drawdown in stocks, which will send money into quality non-US countries and hard assets.

Then, once we anticipate helicopter money falling from the skies again, the buy signal into US stocks will be back.

And you can stay ahead of all of those moves with my Power Income Trader system.

Until then …

Live and Trade with Passion My Friends,

Griff