To The Moon

What is going on with the USD?

As per the screenshot above from SCMP, there are increasing talks about the threat to USD’s global currency status. Could the USD be dethroned? Will there be competition to be the next global reserve currency?

Will there be a new global currency? Is there a chance for a new currency to replace USD as the global reserve currency?

For this, there will be a few considerations starting with the US economy. The US economy is represented by the GDP that is contributed by both the private and public sectors.

Let us look at the de-coupling from the USD with the rise of another trading bloc known as BRICS.

Let us look at some alternatives going forward.

First, let us look at some concerns about the US economy:

• Federal fiscal mismanagement

• Fitch downgrade & their concerns

• Earnings concerns (S&P500)

United States 2022 Budget Overview

The federal deficit in 2022 was $1.4 trillion, equal to 5.5% of the gross domestic product, almost 2% points greater than the average over the past 50 years (CBO article)

Detail of 2022 Federal total revenues and total outlays

Following this, a compromise was made regarding the debt ceiling. An estimated budget deficit of USD$1.5 trillion is forecasted by the calendar year ending September 2023. However, there are recent reports suggest that the deficit could be closer to USD $2 trillion instead.

Source: https://fred.stlouisfed.org/series/A091RC1Q027SBEA

The Fed’s deficit is a major concern as the recent interest on debt payment has topped USD$969B. This is more than the budget spent on US defence. It seems that more debt will be incurred and this debt cycle is spiralling in the wrong direction.

As the Fed accounts for about 37% of the GDP, the impact on the economy can be significant. Such federal expenditure can only be affordable so long there are buyers of US debts (in treasury bills and bonds).

Fitch downgrades United States with various concerns

When the above news broke on 1st Aug 2023, the markets took a tumble. Fitch has cited the following reasons in its article on why the downgrade of the United States’ long-term rating to “AA+” from “AAA”.

This reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA-rated’ peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.

• Erosion of Governance

• Rising General Government Deficits

• General Government Debt to Rise

• Medium-term Fiscal Challenges Unaddressed

• Exceptional Strengths Support Ratings

• Economy to Slip into Recession

• Fed Tightening

S&P500 earnings

Despite the bull runs in the market, there are still some concerns about a coming recession amidst the sticky inflation and rising interest rates.

From the recent CBO leading economic indicators (LEI) update, it continues to signal a recession ahead for the USA.

From the Factset data report above dated 21 July 2023, it has reported an S&P500 blended earnings decline of -9.0% and it is potentially the largest earnings decline reported by the index since Q2 2020. (Blended earnings include the actual earnings and the expected earnings for the rest that are yet to be announced.)

Despite this, the market has been her irrational best. Ceteris Paribus, a drop in earnings should see a similar drop in the stocks but the recent AI craze has powered the market to recent heights.

Who is BRICS?

BRICS is a grouping of the world economies of Brazil, Russia, India, China and South Africa formed by the 2010 addition of South Africa to the predecessor BRIC.

According to gov.za, BRICS is an acronym for the powerful grouping of the world's leading emerging market economies, namely Brazil, Russia, India, China and South Africa. The BRICS mechanism aims to promote peace, security, development and cooperation.

As per the watcher guru article, about 40 companies have expressed interest to join the BRICS alliance. For the coming BRICS conference in August 2023, 69 countries are attending this event. From this development, there seems to be a separate “alliance” emerging apart from the “US-led West” where countries pivot away from the USD to their native currencies.

An alternate asset class - Cryptocurrency??

As per Statista’s data, the global cryptocurrency market is due to grow from $38B (2023) to $65B (2027).

Cryptocurrencies are expected to grow at 14.40% CAGR by 2027 and could attract more funds to head its way.

US SEC has received several applications for spot bitcoin ETF and this is emerging to be one of the important asset classes to look out for.

July 19 (Reuters) - The U.S. Securities and Exchange Commission (SEC) has accepted applications to create spot bitcoin exchange-traded funds from six firms including BlackRock for review, the first step in the agency's process for deciding whether or not to approve the latest round of proposals.The SEC also formally acknowledged applications from Bitwise, VanEck, WisdomTree, Fidelity and Invesco for similar spot bitcoin ETFs, with those proposals appearing on the Federal Register Tuesday and Wednesday.

The approval for these ETFs is likely to increase the demand and interest for Cryptocurrencies.

Cryptocurrency in China & Hong Kong

China has banned Crypto in China & Hong Kong since 2021. Yet, China was Binance’s biggest market with a reported USD$90 Billion transacted in May 2023 as per the WSJ article:

Extract from the WSJ news article:Binance, the world’s largest crypto exchange, was supposed to leave China behind when the country made cryptocurrency trading illegal in 2021.Almost two years later, users traded $90 billion of cryptocurrency-related assets in China in a single month, according to internal figures viewed by The Wall Street Journal and current and former employees. The transactions made China Binance’s biggest market by far, accounting for 20% of volume worldwide, excluding trades made by a subset of very large traders.China’s importance for Binance is openly discussed internally, according to the current and former employees. And despite the ban, the exchange’s investigations team works closely with Chinese law enforcement to detect potential criminal activity among the more than 900,000 active users in the country, according to some of the current and former employees.

Hong Kong on Thursday reinstated retail crypto trading at select exchanges in what could serve as a test case for China reversing its 2021 ban on cryptocurrencies as per reported by Fortune in its 01 Jun 2023 article.

Hong Kong SFC has allowed crypto trading for retail clients starting 1st June 2023. As per the article, 2 crypto exchanges have been registered by SFC with more planning to follow suit. According to Politico’s recent article dated 26 June 2023, China has been leaning into the cryptocurrency market:

If China gets back to the crypto game, it will give a major boost to the industry.

My (previous) view on Cryptocurrency

In times past, I have stayed away from Cryptocurrency for the reasons of:

• Regulations. In some countries like China, cryptocurrency has been banned. In the absence of regulations, there is also a lack of protection for customers.

• Security. Hacks have caused various to lose millions in crypto.

• Governance. Mismanagement has seen the downfall of several exchanges and rug pulls by some alternate coins.

Yet, some of my crypto friends have suggested workarounds like soft or hard wallets. Though it does not isolate me from regulatory risks (eg crypto being outlawed in certain countries), it has addressed my concerns about security and governance.

My investing muse

Over the years, I have invested in different regions with Asia being one of the biggest holdings. It is not about the risks associated with the US & her currency but also the opportunities from others. The options that I have considered included diversifying to other asset classes, non-USD stocks and away from the USA. Other regions with growth potential include Asia, Africa and the South American continents. One of the non-USA countries that came to mind is BRICS.

Personally, my biggest gains are in real estate. I have been buying Hong Kong dividend (defensive) stocks as part of my portfolio. I plan to limit my US holdings to a handful of companies while increasing my Asian portfolio. The other regions of interest include BRICS and the African continent. If USD loses its place as a global reserve currency, the next best option may not be another fiat currency. This is where crypto needs to be a valid consideration.

Crypto may turn out to be an interesting option, a contender. Crypto like Bitcoin may stand to gain due to its market leader status in crypto. This is a topic that demands more research as I seek out the industrial applications of its blockchain technology and the sustainability of powering such an asset class. I do not see crypto as another equity but rather as another currency.

This does not mean that the USD will fall soon but there are more concerns and the economy is weakening. Let us consider hedging so that we can limit our risks associated with a certain currency, country and asset class.

@TigerStars

$S&P 500(.SPX)$