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Wither The Coin of the Realm


The mighty U.S. Dollar, the coin of the realm (where the “realm” is the entire world), appears shaky for the first time in a long time. Replacements like the Euro, Yen, or crypto are periodically offered up (forget the Chinese Yuan, as it is not even a freely-floating, deliverable currency). At the end of the day, just about anything vital and strategic that a nation needs trades in U.S. Dollars. The USD, as measured by The Federal Reserve Trade Weighted Nominal Broad Dollar Index, has swooned 7.2% since March 23rd of this year. During that same time, gold has hit new all-time highs and has increased 25%.

Surely, we have had U.S. Dollar weakness during the period of time between the financial crisis and now, but this time it just feels different. For the first time, at least a decent chunk of investors (foreign and domestic) are starting to feel that perhaps we don’t have our “stuff” together as well as Europe, Japan, and China. Many feel that our response to the COVID-19 virus has put us on our back foot in relation to the rest of the developed economies of the world. The U.S. leads the world in cases and deaths. Moreover, the plan to deal with the virus is fragmented by state, as opposed to a executing a national strategy. Our reopening of the economy and schools has been very disappointing and seems to be leading us back to the beginning more than to the end—or even the middle—of this disaster.

Additionally, there are our ballooning deficits and Treasury borrowings. We have become very comfortable in the feeling that, when all the dust settles, capital goes where it is most stable. Since Europe showed from 2008 onward that the fabric of the Union can fall to pieces in a crisis (or a Brexit!), there are only two flavors: Japanese Yen and U.S. Dollars. Since the financial crisis, the U.S. has had a better economic run than Japan, and the risk-free assets aren’t at negative yields (except for some slight blips in T-Bills). Since March 23rd, the Yen has appreciated 5% versus the USD. The Fed has already made it very plain that they are going to do whatever it takes to support the financial markets and the economy as best they can. They have and will continue to buy enormous amounts of the nation’s debt. However, we believe they would prefer not to buy it all! International demand is still necessary.

We think there is something else at play with the USD and how it relates to stability. For what could be the first time in our history, we have a sitting President who has already said, months before the election, that it won’t be legitimate. If he is not the declared winner, he may not accept the results because he feels that they will have been “rigged”. President Trump on Thursday night:

“It’s a fraudulent election. Everybody knows it. You don’t even have to know politics to know it. Fifty-one million ballots are going to be indiscriminately…sent out to people who didn’t even ask for them! People are just going to say hey, I got a ballot, that’s great, let me vote. And it’s a terrible thing. They’re trying to steal the election.”

On the other side, we have statements like this from House Speaker Pelosi back in June:

"What we saw in Georgia the other day was shameful. It was either a disgrace of incompetence or a disgrace of intention to suppress the vote. It looks like part of a pattern of traditional GOP voter suppression in the state. It’s all part of the republican playbook because they're afraid of the voters. They're afraid of the vote.”

Since that time, things have only gotten worse. Democrats express concern that the U.S. Post Office will suppress voting by mail-in ballots. It would seem then that both supporters of the President and former Vice President will not accept a loss.

In the 2000 Presidential Election, the election was not decided for over a month after Election Day following a ruling from The Supreme Court. When the Court’s decision came down, the loser, Vice President Gore, conceded and the Clinton Administration handed over power (minus some White House items, some have said!) to President Bush. The financial markets reacted to the initial lack of election clarity negatively but mildly. Perhaps a caveat is in order because the financial markets had already been hit hard by the bursting of the “Dot.com” bubble a few months earlier. However, it was not on anybody’s mind that there would not be a peaceful transition of power once the Supreme Court decided.

Now, it seems that the entire populace, be they Trump supporters or Biden supporters, will be outraged if their candidate does not win and may very well contest the election. We already have unrest due to COVID-19 and its related economic fallout, as well as protests against social injustice. The run-up to the election—and especially its aftermath—could very well create national unrest that we have never seen before in this country.

Suddenly, the Coin of the Realm looks quite shaky.

 

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