Connect with us

Latest

News

Paradigm shift. The end of the petrodollar approaches, can America withstand the disruption?

The petrodollar system is being undermined by exponential growth in technology and shifting geopolitics.

Alex Christoforou

Published

on

4,027 Views

In 1974, the United States agreed to purchase oil from Saudi Arabia, provide weapons, guarantee the preservation of Saudi oil wells, and provide unconditional cover for the brutal dictatorship.

In return, the Saudi Arabia agreed to invest the dollar proceeds of its oil sales in U.S. Treasuries, financing America’s appetite for spending, and fueling America’s hegemony, and 20 trillion dollar debt.

Via Zerohedge

Still, the underlying concept of how Petrodollar recycling, or as some call it, petrocurrency mercantilism works, leaves some confusion. So in order to alleviate that, here courtesy of Cult State, is a quick and simple primer that should hopefully answer all questions. From CultState:

So what is petrocurrency mercantilism?

It’s when a national bank and an energy producer collude to generate artificial demand for a currency at the expense of the purchasing power of other currencies.

The flowchart below shows how it all works.

The Coming Renaissance of Macro Investing: via Barrons

In the summer of 1974, Treasury Secretary William Simon traveled to Saudi Arabia and secretly struck a momentous deal with the kingdom. The U.S. agreed to purchase oil from Saudi Arabia, provide weapons, and in essence guarantee the preservation of Saudi oil wells, the monarchy, and the sovereignty of the kingdom. In return, the kingdom agreed to invest the dollar proceeds of its oil sales in U.S. Treasuries, basically financing America’s future federal expenditures.

Soon, other members of the Organization of Petroleum Exporting Countries followed suit, and the U.S. dollar became the standard by which oil was to be traded internationally. For Saudi Arabia, the deal made perfect sense, not only by protecting the regime but also by providing a safe, liquid market in which to invest its enormous oil-sale proceeds, known as petrodollars. The U.S. benefited, as well, by neutralizing oil as an economic weapon. The agreement enabled the U.S. to print dollars with little adverse effect on interest rates, thereby facilitating consistent U.S. economic growth over the subsequent decades.

An important consequence was that oil-importing nations would be required to hold large amounts of U.S. dollars in reserve in order to purchase oil, underpinning dollar demand. This essentially guaranteed a strong dollar and low U.S. interest rates for a generation.

Given this backdrop, one can better understand many subsequent U.S. foreign-policy moves involving the Middle East and other oil-producing regions.

Recent developments in technology and geopolitics, however, have already ignited a process to bring an end to the financial system predicated on petrodollars, which will have a profound impact on global financial markets. The 40-year equilibrium of this system is being dismantled by the exponential growth of technology, which will have a bearish impact on both supply and demand of petroleum. Moreover, the system no longer is in the best interest of key participants in the global oil trade. These developments have begun to exert influence on financial markets and will only grow over time. The upheaval of the petrodollar recycling system will trigger a resurgence of volatility and new price trends, which will lead to a renaissance in macro investing.

Let’s examine these developments in more detail. First, technology is affecting the energy markets dramatically, and this impact is growing exponentially. The pattern-seeking human mind is built for an observable linear universe, but has cognitive difficulty recognizing and understanding the impact of exponential growth.

Paralleling Moore’s Law, the current growth rate of new technologies roughly doubles every two years. In the transportation sector, the global penetration rate of electric vehicles, or EVs, was 1% at the end of 2016 and is now probably about 1.5%. However, a doubling every two years of this level of usage should lead to an automobile market that primarily consists of EVs in approximately 12 years, reducing gasoline demand and international oil revenue to a degree that today would seem unfathomable to the linear-thinking mind. Yes, the world is changing—rapidly.

Alternative energy sources (solar power, wind, and such) also are well into their exponential growth curves, and are even ahead of EVs in this regard. Based on growth curves of other recent technologies, and due to similar growth rates in battery technology and pricing, it is likely that solar power will supplant petroleum in a vast portion of nontransportation sectors in about a decade. Albert Einstein is rumored to have described compound interest (another form of exponential growth) as the most powerful force in the universe. This is real change.

The growth of U.S. oil production due to new technologies such as hydraulic fracturing and horizontal drilling has both reduced the U.S. need for foreign sources of oil and led to lower global oil prices. With the U.S. economy more self-reliant for its oil consumption, reduced purchases of foreign oil have led to a drop in the revenues of oil-producing nations and by extension, lower international demand for Treasuries and U.S. dollars.

ANOTHER MAJOR SECULAR CHANGE that is under way in the oil market comes from the geopolitical arena. China, now the world’s largest importer of oil, is no longer comfortable purchasing oil in a currency over which it has no control, and has taken the following steps that allow it to circumvent the use of the U.S. dollar:

– China has agreed with Russia to purchase Russian oil and natural gas in yuan.

– As an example of China’s newfound power to influence oil exporters, China has persuaded Angola (the world’s second-largest oil exporter to China) to accept the yuan as legal tender, evidence of efforts made by Beijing to speed up internationalization of the yuan. The incredible growth rates of the Chinese economy and its thirst for oil have endowed it with tremendous negotiating strength that has led, and will lead, other countries to cater to China’s needs at the expense of their historical client, the U.S.

– China is set to launch an oil exchange by the end of the year that is to be settled in yuan. Note that in conjunction with the existing Shanghai Gold Exchange, also denominated in yuan, any country will now be able to trade and hedge oil, circumventing U.S. dollar transactions, with the flexibility to take payment in yuan or gold, or exchange gold into any global currency.

– As China further forges relationships through its One Belt, One Road initiative, it will surely pull other exporters into its orbit to secure a reliable flow of supplies from multiple sources, while pressuring the terms of the trade to exclude the U.S. dollar.

The world’s second-largest oil exporter, Russia, is currently under sanctions imposed by the U.S. and European Union, and has made clear moves toward circumventing the dollar in oil and international trade. In addition to agreeing to sell oil and natural gas to China in exchange for yuan, Russia recently announced that all financial transactions conducted in Russian seaports will now be made in rubles, replacing dollars, according to Russian state news outlet RT. Clearly, there is a concerted effort from the East to reset the economic world order.

ALL OF THESE DEVELOPMENTS leave global financial markets vulnerable to a paradigm shift that has recently begun. In meetings with fund managers, asset allocators, and analysts, I have found a virtually universal view that macro investing—investing based on global macroeconomic and political, not security-specific trends—is dead, fueled by investor money exiting the space due to poor returns and historically high fees in relation to performance. This is what traders refer to as capitulation. It occurs when most market participants can’t take advantage of a promising opportunity due to losses, lack of dry powder, or a psychological inability to proceed because of recency bias.

A current generational low in volatility across a wide spectrum of asset classes is another indicator that the market doesn’t see a paradigm shift coming. This suggests that current volatility is expressing a full discounting of stale fundamental inputs and not adequately pricing in the potential of likely disruptive events.

THE FEDERAL RESERVE is now in the beginning stages of a shift toward “normalization,” which will lead to diminished support for the U.S. Treasury market. The Fed’s total assets stand at approximately $4.5 trillion, or five times what they were prior to the financial crisis of 2008-09. The goal of the Fed is to “unwind” this enormous balance sheet with minimal market disruption. This is a high-wire act a thousand feet in the air without a safety net or prior practice. Additionally, at some not-so-distant future date, the U.S. will need to finance enormous and growing entitlement programs, and our historical international sources for that financing will no longer be willing to support us in that endeavor.

The market participants with whom I met theoretically could have the ability to accept cognitively the points made in this article. But the accumulation of many small losses in a low-volatility and generally trendless market has robbed them of confidence and the psychological balance to embrace any new paradigm proactively. They are frozen with fear that the lower- return profile of recent years is permanent—ironic in an industry that is paid to capture price changes in a cyclical world.

One market legend with whom I spoke suggested he wouldn’t have had the success he enjoyed in his career had he begun in the past decade. Whether or not this might be true, it doesn’t mean that recent lower returns are to be extrapolated into the future, especially when these subpar returns occurred during the quantitative-easing era, a period that is an anomaly.

I have been fortunate to ride substantial bets on big trends, earning high risk-adjusted returns using time-tested techniques for exploiting these trends. Additionally, I have had the luxury of not participating actively full-time in macro investing during this difficult period. Both factors might give me perspective. I regard this as an extraordinarily opportune moment for those able to shed timeworn, archaic assumptions of market behavior and boldly return to the roots of macro investing.

The opportunity is reminiscent of the story told by Stanley Druckenmiller, who was promoted early in his investment career to head equity research at a time when his co-workers had vastly more experience than he did. His director of investments informed him that his promotion owed to the same reason they send 18-year-olds to war; they are too dumb to know not to charge. The “winners” under the paradigm now unfolding will be market participants able to disregard stale, anomalous concepts, and charge.

RELATEDLY, THERE IS a running debate as to whether trend-following is a dying strategy. There is plenty of anecdotal evidence that short-term and mean-reversion trading is more in vogue in today’s markets (think quant funds and “prop” shops). Additionally, the popularity of passive investing signals an unwillingness to invest in “idea generation,” or alpha. These developments represent a full capitulation of trend following and macro trading.

Ironically, many market players who wrongly anticipated a turn in recent years to a more positive environment for macro and trend-following are throwing in the towel. The key difference is that now there is a clear catalyst to trigger the start of the pendulum swinging back to a fertile macro/trend-following trading environment.

As my mentor, Bruce Kovner [the founder of Caxton Associates] used to say, “Nobody rings a bell at key turning points.” The ability to properly anticipate change is predicated upon detached analysis of fundamental information, applying that information to imagine a plausible world different from today’s, understanding how new data points fit (or don’t fit) into that world, and adjusting accordingly. Ideally, this process leads to an “aha!” moment, and the idea crystallizes into a clear vision. The thesis proposed here is one such vision.

Liked it? Take a second to support The Duran on Patreon!
Advertisement
Click to comment

Leave a Reply

avatar
  Subscribe  
Notify of

Latest

ABC’s Ted Koppel admits mainstream media bias against Trump [Video]

The mainstream news media has traded informing the public for indoctrinating them, but the change got called out by an “old-school” journo.

Seraphim Hanisch

Published

on

Fox News reported on March 19th that one of America’s most well-known TV news anchors, Ted Koppel, noted that the once-great media outlets like The New York Times and The Washington Post, have indeed traded journalistic excellence for hit pieces for political purposes. While political opinions in the mainstream press are certainly within the purview of any publication, this sort of writing can hardly be classified as “news” but as “Opinion” or more widely known, “Op-Ed.”

We have two videos on this. The first is the original clip showing the full statement that Mr. Koppel gave. It is illuminating, to say the least:

Tucker Carlson and Brit Hume, a former colleague of Mr. Koppel, added their comments on this admission in this second short video piece, shown here.

There are probably a number of people who have watched this two-year onslaught of slander and wondered why there cannot be a law preventing this sort of misleading reporting. Well, Russia passed a law to stop it, hitting dishonest media outlets in their pocketbook. It is a smart law because it does not advocate imprisonment for bad actors in the media, but it does fine them.

Going to prison for reporting “the truth” looks very noble. Having to pay out of pocket for it is not so exciting.

Newsmax and Louder with Crowder both reported on this as well.

This situation of dishonest media has led to an astonishing 77% distrust rating among Americans of their news media, this statistic being reported by Politico in 2018. This represents a nearly diametric reversal in trust from the 72% trust rating the country’s news viewers gave their news outlets in 1972. These statistics come from Gallup polls taken through the years.

 

Liked it? Take a second to support The Duran on Patreon!
Continue Reading

Latest

Empire Of Absurdity: Recycled Neocons, Recycled Enemies

Despite America’s military threats, bellicose speechifying, brutal sanctions, and Cold War-style conflict-framing, the incumbent Maduro seems firmly in control. 

Antiwar

Published

on

By

Authored by Major Danny Sjursen (ret.) via AntiWar.com:


There are times when I wish that the United States would just drop the charade and declare itself a global empire.

As a veteran of two imperial wars, a witness to the dark underside of America’s empire-denial, I’ve grown tired of the equivocation and denials from senior policymakers. The U.S. can’t be an empire, we’re told, because – unlike the Brits and Romans – America doesn’t annex territories outright, and our school children don’t color its colonies in red-white-and-blue on cute educational maps.

But this distinction, at root, is rather superficial. Conquest, colonization, and annexation are so 19th century – Washington has moved beyond the overt and engages in the (not-so) subtle modern form of imperialism. America’s empire over the last two decades – under Democrats and Republicans – has used a range of tools: economic, military, political, to topple regimes, instigate coups, and starve “enemy” civilians. Heck, it didn’t even start with 9/11 – bullying foreigners and overturning uncooperative regimes is as American as apple pie.

Still, observing post-9/11, post-Iraq/Afghanistan defeat, Washington play imperialism these days is tragicomically absurd. The emperor has no clothes, folks. Sure, America (for a few more fleeting years) boasts the world’s dominant economy, sure its dotted the globe with a few hundred military bases, and sure it’s military still outspends the next seven competitors combined. Nonetheless, what’s remarkable, what constitutes the real story of 2019, is this: the US empire can’t seem to accomplish anything anymore, can’t seem to bend anybody to its will. It’s almost sad to watch. America, the big-hulking has-been on the block, still struts its stuff, but most of the world simply ignores it.

Make no mistake, Washington isn’t done trying; it’s happy to keep throwing good money (and blood) at bad: to the tune of a cool $6 trillion, 7,000 troop deaths, and 500,000 foreign deaths – including maybe 240,000 civilians. But what’s it all been for? The world is no safer, global terror attacks have only increased, and Uncle Sam just can’t seem to achieve any of its preferred policy goals.

Think on it for a second: Russia and Iran “won” in Syria; the Taliban and Pakistan are about ready to “win” in Afghanistan; Iran is more influential than ever in Iraq; the Houthis won’t quit in Yemen; Moscow is keeping Crimea; Libya remains unstable; North Korea ain’t giving up its nukes; and China’s power continues to grow in its version of the Caribbean – the South China Sea. No amount of American cash, no volume of our soldiers’ blood, no escalation in drone strikes or the conventional bombing of brown folks, has favorably changed the calculus in any of these regional conflicts.

What does this tell us? Quite a lot, I’d argue – but not what the neoliberal/neoconservative alliance of pundits and policymakers are selling. See for these unrepentant militarists the problem is always the same: Washington didn’t use enough force, didn’t spend enough blood and treasure. So is the solution: more defense spending, more CIA operations, more saber-rattling, and more global military interventions.

No, the inconvenient truth is as simple as it is disturbing to red-blooded patriots. To wit, the United States – or any wannabe hegemon – simply doesn’t possess the capability to shape the world in its own image. See those pesky locals – Arabs, Asians, Muslims, Slavs – don’t know what’s good for them, don’t understand that (obviously) there is a secret American zipped inside each of their very bodies, ready to burst out if given a little push!

It turns out that low-tech, cheap insurgent tactics, when combined with impassioned nationalism, can bog down the “world’s best military” indefinitely. It seems, too, that other regional heavyweights – Russia, China, Iran, North Korea – stand ready to call America’s nuclear bluff. That they know the US all-volunteer military and consumerist economy can’t ultimately absorb the potential losses a conventional war would demand. Even scarier for the military-industrial-congressional-media establishment is the logical extension of all this accumulated failure: the questionable efficacy of military force in the 21st century.

Rather than recognize the limits of American military, economic, and political power, Bush II, Obama, and now Trump, have simply dusted off the old playbook. It’s reached the level of absurdity under the unhinged regime of Mr. Trump. Proverbially blasting Springsteen’s “Glory Days,” as its foreign policy soundtrack, the Donald and company have doubled down. Heck, if Washington can’t get its way in Africa, Europe, Asia, or the Mideast, well why not clamp down in our own hemisphere, our traditional sphere of influence – South and Central America.

Enter the lunacy of the current Venezuela controversy. Trump’s team saw a golden opportunity in this socialist, backwater petrostate. Surely here, in nearby Monroe Doctrine country, Uncle Sam could get his way, topple the Maduro regime, and coronate the insurgent (though questionably legitimate) Juan Guaido. It’s early 20th century Yankee imperialism reborn. Everything seemed perfect. Trump could recall the specter of America’s tried and true enemy – “evil” socialism – cynically (and absurdly) equating Venezuelan populism with some absurd Cold-War-era existential threat to the nation. The idea that Venezuela presents a challenge on the scale of Soviet Russia is actually farcical. What’s more, and this is my favorite bit of irrationality, we were all recently treated to a game of “I know you are but what am I?” from Secretary of State Mike Pompeo, who (with a straight face) claimed Cuba, tiny island Cuba, was the real “imperialist” in Venezuela.

Next, in a move reminiscent of some sort of macabre 1980’s theme party, Trump resuscitated Elliot Abrams – you know, the convicted felon of Iran-Contra infamy, to serve as Washington’s special envoy to embattled Venezuela. Who better to act as “fair arbiter” in that country than a war-criminal with the blood of a few hundred thousand Central Americans (remember the Contras?!?) on his hands back in the the good old (Reagan) days.

Despite all this: America’s military threats, bellicose speechifying, brutal sanctions, and Cold War-style conflict-framing, the incumbent Maduro seems firmly in control. This isn’t to say that Venezuelans don’t have genuine grievances with the Maduro government (they do), but for now at least, it appears the military is staying loyal to the president, Russia/China are filling in the humanitarian aid gaps, and Uncle Sam is about to chalk up another loss on the world scene. Ultimately, whatever the outcome, the crisis will only end with a Venezuelan solution.

America’s impotence would almost be sad to watch, if, and only if, it wasn’t all so tragic for the Venezuelan people.

So Trump and his recycled neocons will continue to rant and rave and threaten Venezuela, Haiti, Cuba, and so on and so forth. America will still flex its aging, sagging muscles – a reflexive habit at this point.

Only now it’ll seem sad. Because no one is paying attention anymore.

The opposite of love is isn’t hate – it’s indifference.

*  *  *

Danny Sjursen is a retired US Army officer and regular contributor to Antiwar.comHe served combat tours with reconnaissance units in Iraq and Afghanistan and later taught history at his alma mater, West Point. He is the author of a memoir and critical analysis of the Iraq War, Ghostriders of Baghdad: Soldiers, Civilians, and the Myth of the Surge. Follow him on Twitter at @SkepticalVet.

Liked it? Take a second to support The Duran on Patreon!
Continue Reading

Latest

Secret deal between DOJ and Clinton lawyers exposes Deep State corruption (Video)

The Duran Quick Take: Episode 111.

Alex Christoforou

Published

on

The Duran’s Alex Christoforou and Editor-in-Chief Alexander Mercouris discuss newly released transcripts from disgraced FBI agent Peter Strzok that reveal the US Department of Justice and the Clinton Lawyers struck a secret deal that blocked the FBI from accessing Clinton Foundation emails, during the Hillary home server “investigation”.

Remember to Please Subscribe to The Duran’s YouTube Channel.

Follow The Duran Audio Podcast on Soundcloud.

Via Zerohedge


The Justice Department and Hillary Clinton’s legal team “negotiated” an agreement that blocked the FBI from accessing emails on Clinton’s homebrew server related to the Clinton Foundation, according to a transcript of recently released testimony from last summer by former FBI special agent Peter Strzok.

Under questioning from Judiciary Committee General Counsel Zachary Somers, Strzok acknowledged that Clinton’s private personal email servers contained a mixture of emails related to the Clinton Foundation, her work as secretary of state and other matters.

“Were you given access to [Clinton Foundation-related] emails as part of the investigation?” Somers asked

We were not. We did not have access,” Strzok responded. “My recollection is that the access to those emails were based on consent that was negotiated between the Department of Justice attorneys and counsel for Clinton.” –Fox News

Strzok added that “a significant filter team” was employed at the FBI to “work through the various terms of the various consent agreements.”

“According to the attorneys, we lacked probable cause to get a search warrant for those servers and projected that either it would take a very long time and/or it would be impossible to get to the point where we could obtain probable cause to get a warrant,” said Strzok.

The foundation has long been accused of “pay-to-play” transactions, fueled by a report in the IBTimes that the Clinton-led State Department authorized $151 billion in Pentagon-brokered deals to 16 countries that donated to the Clinton Foundation – a 145% increase in completed sales to those nations over the same time frame during the Bush administration. 

Adding to speculation of malfeasance is the fact that donor contributions to the Clinton Foundation dried up by approximately 90% over a three-year period between 2014 and 2017, according to financial statements.

What’s more, Bill Clinton reportedly received a $1 million check from Qatar – one of the countries which gained State Department clearance to buy US weapons while Clinton was Secretary of State, even as the department signaled them out for a range of alleged ills,” according to IBTimes. The Clinton Foundation confirmed it accepted the money.

Then there was the surely unrelated $145 million donated to the Foundation from parties linked to the Uranium One deal prior to its approval through a rubber-stamp committee.

“The committee almost never met, and when it deliberated it was usually at a fairly low bureaucratic level,” Richard Perle said. Perle, who has worked for the Reagan, Clinton and both Bush administrations added, “I think it’s a bit of a joke.” –CBS

Later in his testimony last summer, Strzok said that agents were able to access “the entire universe” of information on the servers by using search terms to probe their contents – saying “we had it voluntarily.”

“What’s bizarre about this, is in any other situation, there’s no possible way they would allow the potential perpetrator to self-select what the FBI gets to see,” said former Utah Rep. Jason Chaffetz – former chair of the House Oversight and Government Reform Committee until 2017 and current contributor to Fox News. “The FBI should be the one to sort through those emails — not the Clinton attorneys.

Chaffetz suggested that the goal of the DOJ was to “make sure they hear no evil, see no evil — they had no interest in pursuing the truth.”

“The Clinton Foundation isn’t supposed to be communicating with the State Department anyway,” said Chaffetz. “The foundation — with her name on it — is not supposed to be communicating with the senior officials at the State Department.”

Republican-led concerns that the DOJ, under the Obama administration, was too cozy with the Clinton team during the 2016 presidential campaign have grown louder in recent days. Earlier this week, Fox News exclusively reviewed an internal chart prepared by federal investigators working on the so-called “Midyear Exam” probe into Clinton’s emails. The chart contained the words “NOTE: DOJ not willing to charge this” next to a key statute on the mishandling of classified information.

The notation appeared to contradict former FBI Director James Comey’s repeated claims that his team made its decision that Clinton should not face criminal charges independently.

But Strzok, in his closed-door interview, denied that the DOJ exercised undue influence over the FBI, and insisted that lawyers at the DOJ were involved in an advisory capacity working with agents. –Fox News

Strzok was fired from the FBI after months of intense scrutiny over anti-Trump text messages he exchanged with his mistress – FBI lawyer Lisa Page. Both Strzok and Page were involved at the highest levels of both the Clinton email investigation and the counterintelligence investigation on President Trump and his 2016 campaign.

Liked it? Take a second to support The Duran on Patreon!
Continue Reading

JOIN OUR YOUTUBE CHANNEL

Your donations make all the difference. Together we can expose fake news lies and deliver truth.

Amount to donate in USD$:

5 100

Validating payment information...
Waiting for PayPal...
Validating payment information...
Waiting for PayPal...
Advertisement

Advertisement

Quick Donate

The Duran
EURO
DONATE
Donate a quick 10 spot!
Advertisement
Advertisement

Advertisement

The Duran Newsletter

Trending