Managing media influence
As Investment Counselors, we often observe that clients share common worries or concerns around the same time. This correlation can be attributed to the fact that these concerns are frequently discussed across various media sources, simultaneously. For better or worse, this is the world we live in.
Guarding against media-inflated worries
Today, we are in a 24-7 news cycle with heavy competition between news outlets, as well as many other sources, all vying for our attention. It can lead to a feeling of being bombarded all the time. Due to the sheer volume and accessibility of news, it seems that there is more news today than ever before. Recently, we have faced some fairly significant challenges:
- the COVID-19 pandemic
- the Russia-Ukraine War
- high inflation
- rising interest rates
- the US debt ceiling showdown.
Looking back, however, crises in the past were no less dramatic and challenging:
- 1970s: Nixon ends the Gold Standard and introduces wage and price controls; the Vietnam War; OPEC oil embargo; 1973-75 Recession.
- 1980s: Interest rates hit all time highs; worst recession in 40 years; Chernobyl nuclear disaster; Black Monday stock market crash.
- 1990s: the Gulf War; a global recession; the Bosnian genocide; the Asian financial crisis.
- 2000s: Dot com bubble bursts; global recession (2000); invasion of Iraq by US-led coalition; a global financial crisis; another global recession (2009).
The implications of this type of environment can lead to genuine investment risks, where investment decisions become driven by emotion rather than long-term objectives. At ATB Investment Management, we strongly believe that successful investment decisions are made through a disciplined and rational process that intentionally ignores the noise.
Understanding de-dollarization: should you worry about it?
With that in mind, a common topic that has emerged during recent client conversations is de-dollarization. In simple terms, this concept refers to the concern that the US dollar (USD) may lose its status as the global reserve currency, which is the default international medium of exchange. Periodically, whenever there’s a noticeable decline in its value relative to other currencies, this topic gives rise to negative prognosticating about a USD collapse.
The USD achieved its status as the world’s reserve currency following the end of World War II and the Bretton Woods agreement, which introduced the gold convertibility system. In 1971, President Nixon terminated gold convertibility, marking the beginning of the era of floating currencies driven by market forces. This shift led to a dramatic increase in global trade which then, and now, is largely denominated in USD.
There are strong incentives for the US (or any country) to have and retain the status of a reserve currency, such as the ability to settle their balance of payments in their own currency. Given this advantage, it is understandable for other countries or economic blocs to seek to replace the USD. Therefore, it is also natural to wonder how this situation will unfold in the foreseeable future.
An Interesting Fact to Consider
According to the 2022 Triennial Survey by the Bank for International Settlements, the share of global transactions conducted in USD was over 88%. This figure is roughly the same as reported in their 2019 survey, and higher than it was a decade ago.
The Bottom Line
To retain the status of a reserve currency, a country must have deep and liquid capital markets. The US Treasury market is the largest and most liquid debt pool in the world. The fact that the USD remains the clear currency of choice during crises demonstrates the significant global trust in this market.
While other nations aspire to replace the USD in this role, such a transition would require them to open their capital accounts and dramatically increase the depth and liquidity of debt denominated in their local currency, among many other factors. (Note: China has a closed capital account, meaning there are restrictions on the ability of capital to move freely in and out of the country).
In conclusion, it is expected that the USD will continue to retain its status as the global reserve currency simply because there is currently no viable alternative to replace it.
Math for fun and good health
With summer approaching and to help take our minds off the ever-present news cycle, we’d like to end with a fun math puzzle, and contribute to a good cause!
Investment Counselor, Ralph Jaglal, will donate $100 to the Alberta Mental Health Foundation for each of the first five correct answer sets that are emailed to him at email@example.com. Get your answers to him by July 31st.
Find the Integer solutions for:
AB + C = 2020
A + BC = 2021
(hint: there are two sets of integer solutions)
Wishing you a fantastic and safe summer!
- BCA Research: De-Dollarization: Fact or Fiction, April 21, 2023
- BIS Quarterly Review, December 2022
- BCA Research: Is The Dollar’s Reserve Status Under Threat?, August 27, 2021
- The Time to Invest Rarely Feels Perfect; ATBIM
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