“International politics has become more and more like a dysfunctional relationship, in which the partners aren’t able to split up, but can’t stand being together.”
— Mark Leonard, The Age of Unpeace
Are rising interest rates good or bad? The market seems to think they’re good — the Dow is up nearly 5% this week. The S&P climbed 6% and the Nasdaq is downright giddy, levitating past 8%.
But if you’re a speculator living on margin, have an adjustable rate mortgage or are a small business owner wearing out the chip on your credit card, you may think differently. Rising interest rates could put the kibosh on your future plans. More on the bounce in markets in the P.S. below.
According to the Fed’s playbook, “slowly killing the economy” will ultimately save it. Unless, of course, Russia’s war in the Ukraine further impedes supply chains. Or the West’s laundry list of sanctions force Russia to sell cheap oil and energy elsewhere, like China or Kazakhstan.
“Russia’s war shows that a surgical redesign of supply chains is needed,” The Economist proclaims this week, “to prevent autocratic countries from bullying liberal ones.” The eternally liberal (classically liberal, that is) and free-trade supporting newspaper dedicated this week’s issue entirely to the disruptions the Russian invasion and Western sanctions will have on globalization. It’s worth a read.
“The Russians are never going to want to have dollars in their central bank reserves again,” Demtetri Kofinas, my Wiggin Sessions guest, concurs, but looks at the situation with a slightly more jaundiced eye. While The Economist adroitly skirts the challenges faced by both autocratic and liberal nations, Demetri sees a straight line. The West’s sanctions will change Russia’s perception of the world… and could signal that the end of the U.S. dollar’s 78-year run as the world’s reserve currency is nascent — something we’ve talked about before.
Last Thursday, we learned, by way of Sean Ring in Rude Awakening, that Russian Foreign Minister Sergei Lavrov is tired of the West weaponizing the economic order:
We will solve the problem — and the solution will be to no longer depend on our Western partners, be it governments or companies that are acting as tools of Western political aggression against Russia instead of pursuing the interests of their businesses.
We will make sure that we never again find ourselves in a similar situation and that neither some Uncle Sam nor anybody else can make decisions aimed at destroying our economy.
We will find a way to eliminate this dependence. We should have done it long ago.
China, too, will be thinking about how quickly the world took action against Russia’s economy, especially as it sets its sights on Taiwan.
“It’s going to cause the Chinese to think a lot about their foreign exchange mix,” Demetri says. Any other countries that might draw U.S. ire will look to “really just get out of the dollar.” We may end up “seeing a kind of bifurcation of the international monetary system.” Again, from The Economist:
China views the collapse of Russia’s fortress economy in the face of Western sanctions as a botched experiment from which to learn before it considers going to war over Taiwan. Saudi Arabia is cosying up to China. The world’s autocracies have too little in common to form a cohesive economic bloc, but they are united in their desire to reduce the influence the West has over them, in areas from tech to currency reserves.
What does a bifurcation of the monetary system mean? It means one with dollars at its core… and another built around something else.
“It’s bullish, I think, for gold,” Demetri concludes, because “central banks and these new currency blocks are going to need to anchor their currency.”
What about cryptos? Demetri has thoughts on the role of crypto in this new world order, too. He shares them in our newest Wiggin Session, which we’ll post tomorrow.
Follow your bliss,
Founder, The Wiggin Sessions
P.S. “Jim was completely off the mark, wasn’t he?” asks reader Joseph S., referring to Jim Rickards’ “Countdown to Crisis” webinar earlier this week. “The market did not collapse at 2 p.m. on March 16, did it?”
We can only assume Joseph didn’t watch Jim’s whole presentation… or misunderstood what Jim was trying to say. The Federal Reserve’s interest rate hike is the catalyst that will eventually send the markets tumbling. It kicks off the “Countdown to Crisis.”
As we explained yesterday, there was something fishy about the bounce in the major indexes — which Jim acknowledged could happen. And during the broadcast, he explicitly recommended an options play that expires in June… proving that he wasn’t expecting an immediate fall.
It’s coming, though… just wait.