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The Bear Case for the US Dollar

The dollar bear case with insights from Luke Gromen, Juliette Declercq, and A.G. Bisset

Key Takeaways

Luke Gromen, founder of Forest for the Trees, LLC:

  • Deteriorating fundamentals will lead to a globally synchronized move away from the USD as a reserve currency

  • Foreign countries are seeking alternatives to dollar dominated trade to avoid jurisdictional controls via USD hegemony

Juliette Declercq, founder of JDI Research:

  • Inflation driven debasing of the USD

  • USD is a momentum beast and the momentum has turned

A.G. Bisset Associates:

  • Purchasing Power Parity, Mean Reversion, and the Global Commodity Production cycle all pulling the USD down in this current down cycle

USD Bears

Even if you’ve been trying to hide away in a foreign country during this pandemic as we have, someone, somewhere, somehow, has probably said to you in some way, some amalgamation of the following: “The Fed is printing a shit ton of money, is debasing the US Dollar, and the entire world financial system is on the brink of collapse”.

It’s almost like we’ve become conditioned to only think in extremes these days (please watch The Social Dilemma).

If you’re a FinTwit regular, this message has been unavoidable, and more likely than not, you’ve contributed to it. If you watch mainstream financial media, then in between Cramer’s cerebral palsy inducing schizophrenic rants and the Najarian’s pitching you a get rich quick trading academy, you’ve probably heard it as well, though only in 60 second soundbites. If you’re the FinMeme type (bless you @litquidity), then your synapses are already trained to only correlate thoughts via industry-specific, politically incorrect images and so this is probably what comes to mind.

In all seriousness, even legit publications like The Financial Times are beginning to operate in the extremes over this topic, recently publishing an article subtly titled, “The end of the dollar’s exorbitant privilege”. In it, they discuss reasons why they believe the USD will crater by 35% next year while simultaneously losing its ‘privilege’ as the worlds reserve currency. The author of the article, Stephen Roach, a Yale economist, believes that the collapse in US domestic savings (net savings between Households, Businesses and the Government) and the massive Current Account deficit the US has been accumulating over the years (we’ll discuss this more in detail below) will transition the world away from US dollar dependence.

“Talent borrows. Genius steals.” – Oscar Wilde

We’re hardly either. So when discussing a topic as multi-variate and wide-ranging as this one is, we’ll be doing quite a bit of both from people with brains much bigger than ours to try to glean some insights into where the greenback may be moving in the months and years ahead. Specifically, we’re going to be borrowing/stealing (piggybacking?) from three of the highest quality brains we know of on the subject:

– Luke Gromen, founder of Forest for the Trees, LLC. – from “US Dollar Deep Dive” MACRO Voices with Erik Townsend

– Juliette Declercq, founder of JDI Research – from “US Election Outlook, US Dollar, Real Yields and More”

– A.G. Bisset Associates – from “The 15-year dollar cycle: what drives it?”

Spoiler alert: all of the viewpoints below are bearish-to quite-bearish. Because we try to keep things as balanced as possible, if you know any prominent USD bulls out there, please send them our way as we would love to incorporate their thinking into our future coverage of this theme.

Let’s begin with Luke as he has, for quite some time now, been very vocal about the secular decline in the USD, its loss of reserve currency status, and basically the end of the USD as the overlord of the global financial system. In this interview, he makes a very compelling case that the end of USD hegemony that began in 1971 (the end of the Bretton Woods system), has already begun, and if we stop looking for the ‘all at once’ catalyst for the end, and instead focus on events that have already occurred, then it actually becomes quite clear that things are already headed in this direction.


Let’s first look at the Dollar Cycle from a post-Bretton Woods starting point:

Simple enough. The US runs deficits by buying a bunch of stuff from abroad (a net importer = Current Account deficit) which supplies the world with the dollars it needs. It then finances those deficits by issuing US Treasuries that are bought by foreign investors, which recycles those dollars back into the US (= Capital Account surplus) and closes the loop.

So, what does the US Current Account look like today? Negative…Quite negative.

To fund these Current Account deficits, the US has had to get dollars recycled back into the system. To get an idea of how this system looked from a dollar’s standpoint, Luke breaks down the following central bank purchases of US Treasuries from 1971 through today:

These numbers illustrate the Dollar Cycle equation holding up through 2014. The US runs a Current Account deficit by nature of providing the world dollars by being a net importer (deficit spending), and in return, those dollars come back into the system through foreign central bank purchases of USTs. Since 2014 though, the second part of that equation has begun to reverse.

This is the first point to be made from the ‘events are already taking place’.

Foreign Central Banks of the past viewed US Treasury (UST) purchases as the preferred safe-haven asset for their reserves. Today, that truth no longer appears to hold. Instead, Luke states, they are preferring Gold to Dollars.

According to the below, this is not a lie.

This should not come as much of a surprise. Over the last few months, there has been plenty of coverage of China publicly announcing they will (most likely) begin reversing their UST holdings, either through maturities without repurchase or outright selling (here and here).

Russia, who back in 2017 owned $100B+ of US debt, has reduced their holdings to today to just under $15B, a decrease of 85%.

Looking back at the Balance of Payments Identity from above, if Current Account deficits are now being funded by fewer recycled dollars coming back into the system via foreign central banks, and assuming foreign investment stays constant, this would seemingly put increased pressure on The Fed to continue its QE forever program (purchasing large quantities of USTs), and further push us down the MMT path of deficit financing. This may be (and we’re speculating here) why back in April they (The Fed) very quietly exempted the US banking system from including USTs from their leverage ratio calculations (sure the release says ‘temporary’ but, yeah right). This means that banks can effectively buy an infinite number of USTs and they won’t count against their capital ratios (which was the case under Basel III up until that point). This effectively “allowed the Fed to do infinite QE without having to call it that.” While this could help fill the gap created by foreign central banks preferring gold to treasuries as their reserve currency, we would be very surprised if US banks could single-handedly offset this.

Now we are just going to openly steal because the way Luke describes these events beginning in ’71 through today is pure gold (pun fully intended):

“After 1971, we outsourced our jobs and our factories abroad to foreign countries. Those nations would make stuff, send it to us, we would then emit dollars to those nations in payment, and then they would recycle those dollars back into our financial markets into our capital account. And then that capital account recycling would, number one finance US government deficits, as the treasury buying treasury bonds ties into that point I made earlier about how much of our deficits were sterilized by foreign central banks.

They rolled into US agency markets providing cheap credit to the US housing market, they rolled into subprime markets, basically funded consumer lending so that US consumers could turn around and buy more of the goods those countries were producing. So the (foreign) producers were on the current account surplus side, the United States was down at the biggest current account deficit side. Now, all this works as long as those surpluses they’re running are being recycled back into our capital account, into our capital account surplus.

But my first point I made was in 2014, they stopped doing that at the treasury bond level, they stopped buying treasury. So now, suddenly our current accounts deficit, which is by far the biggest in the world in which is more than 100% made up of US government deficits, not trade deficit. Suddenly, we’ve got to finance our own deficits for the first time in 50 to 70 years and there’s no one around with enough balance sheet to do that other than the Fed. And so we tried to finance it ourselves at first and that describes what happened from 2014 through last year when you had this period of a rising dollar and you had rising LIBOR and then last year you had Fed fund rates get squeezed over interest on excess reserves.

And as the US banking system got force-fed treasuries, finally the banking system ran out of balance sheet to buy these treasuries last September, and that was the repo rate spike. And once the repo rate spike happened the Fed had to begin growing their balance sheet again, and at that time we said they’re probably never going to stop and then we had COVID. And they tried to stop earlier this year, we had COVID and that’s why we have to print the most. If you just look at that current account chart, we run the biggest deficits. And if we run the biggest deficits and the people financing our deficits to stop financing our deficits which they did six years ago, then we have to print the most.”

“Fiscal problems aren’t a problem until the sovereign nation in question has to print the interest on the debt” – Luke

We touched on this point in an earlier Editorial (Debt, Deficit, and Future Financing), and looks like, finally, Luke agrees with our assessment.

Issuing debt to service interest or dividends (you listening Exxon?) is the fiscal equivalent of a black hole that not even Matthew McConaughey could navigate his way through (even using morse code via dust and gravity to communicate to himself across a different dimension of space-time would be ineffective).

If you look at the current setup in the US and its ability to service its debt, at first glance you could be mistaken that it doesn’t look too bad. But if you dig just one layer deeper and include outlays for Mandatory spending (on entitlements like Social Security, Medicare, etc.), then the situation becomes much worse. To that if you add Discretionary spending (Department of Defense, HHS, etc, which are less discretionary than you’d think) as outlays, well…let’s just say the first time our editor/brand ambassador Ryan saw this chart his editorial comment was, “This chart is fucking SCARY”, and he’s a dude that climbs 1,000ft rock walls with a smile on his face (the equivalent of an  over-leveraged sovereign balance sheet for finance nerds).

The point was made by Luke two years ago that in the next crisis, the US fiscal situation was going to “get irrecoverable and the Fed will basically always have to be involved from that point forward in some way, shape or form…COVID pushed us to the point of no return”

In summary, the move away from the USD driven by ugly US fundamentals (growing Current Account deficits and a loss of faith in the USD as a safe haven) has driven foreign central banks to begin favoring gold over the USD.


“Everybody’s looking for the next Michael Jordan on the basketball court, but what they don’t get is that he’s walking up to the golf fairway (referring to Tiger Woods)” – Phil Knight story via Luke

A move away from the dollar, not for weariness of fundamentals, but instead to subdue the US’s judicial power over geopolitics via control of the currency supply, is another ‘event’ that is already taking place. Because all transactions that take place in USDs must be cleared through the US banking system, all countries that transact in USDs are subject to US jurisdiction in legal and trade matters. This is the power the US flexes when it sanctions a country like Iran, giving major countries that want to do business with these sanctioned countries a strong motivation to move away from the greenback.

“When the majority of trade being done between Russia and China (biggest energy exporter and biggest energy importer, respectively) is no longer in dollars, that’s an event” – Luke

What does this look like? This:

Yes, for the astute observer, it would appear there may be an uptick in trade settlements in 2020, so we’ll keep you posted as we receive more info.

In 2017, China (the world’s largest energy consumer) established the Petroyuan as an alternative to the Petrodollar to transact in the oil markets with its commercial allies, such as Russia (the world’s largest energy exporter), Venezuela (the world’s largest oil reserves), and Iran (the world’s fifth-largest oil producer), all three of which are under US sanctions.

In 2018, the first Petroyuan futures contract was issued, and according to Jordan Knauff & Company, “From a standing start in March 2018, 12% to 13% of crude oil futures are now traded in renminbi in Shanghai. In January 2019, the daily trading volume of front-month crude oil futures on the INE [Shanghai International Energy Exchange] averaged 248.5 million barrels. Per The Wall Street Journal, this comprised roughly 20% of global trading in similar contracts at the time and was close to trading volumes in front-month futures contracts of Brent crude oil (Brent), the European benchmark traded on the ICE in London. At the end of March, a year on from its launch, the Shanghai contract’s trading volume made up approximately 14% of the global activity in similar futures. This represented about half the volume of Brent.”

The world’s superpowers are fully incentivized to move away from the dollar system, and the ground has already begun to shift beneath our feet.

“China testing digital currencies is an event” – Luke

We won’t belabor this point too much as the entire media landscape has covered quite well the shifting digital currency landscape. But we do want to emphasize the degree of change here. A move towards any other currency, including a digital currency, is a move away from the USD. As Luke mentioned and as reported by the WSJ, “China’s Commerce Ministry said it would expand a pilot program for its digital currency to include a number of large cities, advancing a pioneering initiative by a major central bank to launch an electronic payment system…“DC/EP” or “digital currency/electronic payment,” is rolled out to the public, it would be the first electronic payment system launched by a major central bank.”

“Rapid ongoing progress with digital technologies has increased the prospects for the adoption of new forms of digital money for both domestic and international transactions. These include central bank digital currencies (CBDCs) and the so-called global stable coins (GSCs) proposed by large technological companies or platforms.”– IMF Policy Paper: Digital Money Across Borders: Macro-Financial Implications

Even the IMF is expanding its research into the Central Bank Digital Currency space and exploring it as a legitimate alternative to the fiat system we currently employ.

If you want a deep dive on the crypto front (which we will begin covering in detail over the coming months), give this Real Vision video with Raoul Pal a watch. A classic.


The silver lining, as Luke puts it: “if the dollar gets weaker, it’s probably good for global growth and it’s probably good for risk assets broadly as well as commodities and gold.”

But enough of all that positivity. Let’s end this section with more intellectual theft:

“Ultimately, where it gets a little trickier and I just don’t have a great answer for it, is the capital flight side. The capital is already here, remember we talked about that net international investment position of negative 50 to 55% of GDP, and all that capitals here. [the US being a debtor nation means that A LOT of foreign capital already resides within the country, that’s one component of how a Current Account deficit that large can be created.]

And so, if the dollar falls too far or gets really disorderly, then you have to start worrying about capital flight related selling of assets. And that’s probably the feds worst-case scenario, because then what do they do

They basically have to let the market crash, or they have to completely destroy the sanctity of markets, or distribute maybe more apropos and destroy the remaining vestiges of the illusion of the sanctity of markets by stepping into supporting stocks, supporting credit spreads, supporting corporate bonds, etc., to stem that capital flight.

Because if you get a crash on capital flight because the dollar is weak, Feds got to raise rates to stop the dollar being weak, and that’s not going to help the market crash. That’s not going to help an economic crash.”

Let’s shift gears now and take a look at how Juliette is thinking about this as she is coming from a slightly different angle, albeit deriving a similar outcome.

Juliette makes two great points in her discussion in this podcast:

  1. “What will drive the USD going forward is the Fed and US fiscal authorities’ ability to debase the USD through higher inflation.”

  2. “USD is a momentum animal…upside momentum has collapsed, and this is a game-changer. The USD is an object in motion that stays in motion because it’s the world’s reserve currency.”

We couldn’t talk about the dollar without talking about the inflation monster that, depending on who you listen to, is either “definitely around the corner” or “definitely never going to happen”. Definitely one of those though…For sure.

Juliette postulates that The Fed is the only developed market central bank in the world that still has the ability to break forward interest rates from the outlook, which would drive real rates further into negative territory (could be around negative 2.5 – 3%). Additionally, The Fed is calling on the other fiscal authorities for more cooperation on stimulus efforts, meaning that, combined, they would have much better odds to drive inflation higher when compared to their Japanese and European counterparts.  With the BoJ and ECB yield curves already “as flat as a crepe” (she said in her incredibly distinct French accent) and the “frugals dragging their feet”, the ability of these two developed markets to drive inflation is going to be muted vs. the US.

A scenario where US real rates are -3% vs. 0% to some positive yielding rates in other developed markets implies a larger drag on the USD going forward (to understand this, you might want to spend some time reading up on the impact of rate differentials in currency markets), and when combined with Luke’s view of foreign central banks having already begun to search for alternative safe haven reserves, then inflation driven negative real rates (remember, real rates = nominal rates – inflation) becomes a reinforcing negative pull away from USDs.

Compounding this further is, “The Fed’s shift to Flexible Average Inflation Targeting or “FAIT” (not being sarcastic, we swear) and its associated de-emphasis of the NAIRU… A paradigm shift away from more than two decades of monetary policy.” Essentially, if The Fed is now targeting an average rate of inflation, this means they can, and have announced they will, allow the economy to run ‘hot’ (inflation above the target of 2%) for a period of time in order to achieve their ideal average across time (see ‘The Fed’ segment on our last Markets piece). Effectively, the Fed allowing for inflation to run above 2% pushes real rates in further negative territory, reinforcing the pull away from the USD given the rate differential with other currencies.

To her second point about the USD as a momentum animal, this is the double-edged sword of being the world’s reserve currency. Dollar moves are, “self-reinforcing and it gives the change in the trend a staying power”. Effectively, the bull trend in the dollar that began in 2011 has seemingly run its course, and a collapse in moment for the reserve currency builds up a lot of kinetic energy given the number of transactions that take place in that currency (even if they are decreasing per Luke’s points above). The shift to a bear trend carries an exorbitant amount of momentum because of this weight.

Juliette’s conclusion: “The USD slide has only just started; the end of this recession will see much stronger inflation trends than we have seen in the past”.

Merci Juliette. Merci.

Shifting gears one last time, we move away from fundamentals and on to a more technical point of view driven by the big brains on Brisset. They believe a new 15-year cycle that began in January 2017 will continue to unfold through 2024. The prior three 15-year cycles saw the USD fall against the EUR for an average of 8 years with an average decline of 52%. They look at these USD cycles just like any other easily observable cycle like the business cycle, or the commodities, equities, interest rates, unemployment cycles etc. All of them are driven by economic fundamentals and investor behavior. The USD is no different.

Looking at the USD/EUR chart, it’s hard to argue.

The three drivers to these USD cycles, as they put forth, are:

Purchasing Power Parity (PPP)

  1. The theoretical exchange rate that allows you to buy the same basket of goods or services in another country and is used to compare pricing differences in different currencies (another way to look at this is the Big Mac index). Two countries would be in equilibrium if their basket of goods were priced the same, taking into account their currency exchange rates.

Mean Reversion (MR)

  1. “A strong and persistent force in the financial markets. It exists and persists because investors seek cheap assets to buy and expensive assets to sell.”

  2. Basically, when an asset becomes too cheap, investors buy and when assets become too expensive, investors sell. This balancing act bases the cheap/expensive conclusion relative to some historical mean, therefore the actions, buy/sell, will revert prices closer to that historical mean. i.e., they Mean Revert.

  3. Whilst this has not held up in the recent performance of equities, for example, it could be the case that we’re simply in an over-extended leg of the bull part of the cycle.

Global Commodity Production (GCP) Cycle

  1. Because commodities are traded in USD, the two are highly correlated

  2. “The currency cycle is driven by the global economy and global forces that a single government has limited powers to change.”

  3. This one deserves a sketch:

All three of these forces (PPP, MR, GCP) work hand in hand and reinforce one another, which sounds like it draws parallels from Juliette’s comments about the momentum beast that the USD is. Any one of these alone may not be enough to drive momentum, but when all three work in tandem, they can become that influential force that can push the beast up or down.

PPP shows us that, relative to the EUR, the USD is overvalued. MR illustrates that investors should be selling the USD against major currencies, self-prophesizing the move down closer to its historical average. The GCP cycle is the puppet master moving the global macro forces with pitiless indifference to what the USD wants to do, and with many arguing about how cheap commodities are when compared to other assets, this could imply the beginning of a new super-cycle that would work in tandem with a weaker dollar (the challenge here is to get the relationship of causality right: will the lower USD drive commodities higher or will higher demand for commodities drive the USD lower?)

Note that A.G. Bisset’s paper is not necessarily suggesting a loss of reserve currency status as Luke does, instead suggesting that the PPP, MR and the GCP are the forces pulling the USD down and that an eventual reversion of these three gravitational pulls will reverse. It’s in the nature of cycles to do so.

However, if we bring all three of these outlooks together (Luke, Juliette, AGB), it’s not impossible to imagine that this 15-year cycle eventually changes the nature of the USD cycle, where instead of bouncing back to a bull market once the correction is overdone, it stays depressed for long enough to lose its reserve status, or, at the very least, to force the market to consider moving the global monetary system to something new. Only time will tell.

How nice is it to have read this full article that had no mention of the elections? You’re welcome…