Oil prices are denominated in dollars because the US economy is by far the world's largest and can contend with the bizarre dynamics of the "eurodollar" system (which is a somewhat misleading term as it broadly refers to the offshore creation of dollars through global finance).
Neither the euro nor the yuan can provide a stable pricing system for petroleum on a global basis at the present time, and no other currency has anywhere near the global heft to stand as a pricing alternative for a global commodity such as oil.
That being said, the interest rate challenges of the US are magnified in Europe, and China is still in a rampant money printing phase, with even Tier-2 Chinese cities going all out to goose real estate sales and revive the moribund property market (which is a mainstay of local government finance in China). It's worth noting that the Blackstone bond default earlier this month involved office properties in Finland--commercial real estate vacancies are a global problem brought on by the extreme lunacies of government-ordered lockdowns (which were always more severe elsewhere than in the US).
China is pressing the Saudis to settle oil purchases in yuan rather than dollars, and the Saudis are giving them some leeway at the moment, although how that plays out in the long run is problematic, given the paucity of investment options for the Saudis that use yuan instead of dollars--meaning the Saudis are taking on the currency risk for the Chinese, quite possibly as a means to sustain the premium Saudi Arabia typically charges Asian customers over and above quoted market prices for their crude.
China of course is already paying for Russian oil in yuan, and taking full advantage of the pricing disequilibria brought on by the various sanctions and the price cap to get Russian oil at a bargain basement price. Russia has limited ability to exchange yuan for dollars, and so this has the virtue for the Chinese of binding Russia even tighter, as Russia becomes a semi-colonial captive market for Chinese goods as a direct consequence (Russia sells oil in yuan and buys imports from China also in yuan, both on China's terms. You don't need a degree in economics or finance to see who wins that exchange).
However, with Russian oil production down year on year by ~9-10%, and this was before the threatened 500kb/d production cut that was supposed to take place this past month (but which global data shows no evidence of happening), the net economic benefit to China of this captive market is problematic, and certainly accumulating empty containers in Shanghai suggests that China's much-touted "reopening" is having about as much bang as the alleged Russian "spring offensive" in Ukraine.
The fact that Russian oil production and Russian oil exports can organically drop by 10% while the price for Brent crude is dropping by even greater percentages illustrates the magnitude of the current global recession.
All of which creates a global economic structure that bears more than a little resemblance to a rickety Jenga puzzle, and the operative question is which is the critical support piece that is going to get knocked out to bring the whole thing crashing down.
With the ECB trying to curtail lending to highly indebted companies and restrict leverage within European banks, it's tough to see how troubled European banks like Deutsche Bank and even the UBS/Credit Suisse combine avoiding fresh liquidity challenges in the very near term, and the ECB lacks the political leverage within individual Eurozone countries to react the way the Fed does when there's a liquidity crisis. Credit Suisse was solvable in Europe only because UBS was both Swiss-based and large enough to absorb Credit Suisse. If a similar phenomenon happens with Deutsche Bank there is no German institution capable of simply absorbing Deutsche Bank's operations in a shotgun wedding sort of merger. CommerzBank is the second largest German institution and its nowhere near large enough to execute a stock-based acquisition.
Thus if a liquidity crisis emerges in Deutsche Bank in the next few weeks, either the Bundesbank or the ECB will have to make some very awkward and ugly choices--the only likely way to deal with a liquidity crisis at Deutsche Bank is to nationalize the entity, which would completely scramble European finance--suddenly the German government becomes a counterparty in a notional $42 Trillion of derivative contracts.
By comparison, the Fed currently holds only ~$280 Billion of commercial mortgage backed securities, the type of security that is a likely financial flashpoint here in the US in coming months. In other words, Deutsche Bank by itself has 150 times the default and counterparty risk of the entire Federal Reserve. Even if all of the Federal Reserve's holding of residential and commercial MBS assets are taken into consideration, Deutsche's counterparty risk is still nearly 20 times that of the entire Federal Reserve.
A liquidity crisis arising from CRE defaults unfolds largely as a replay of the 1980s S&L crisis, as the impact of rising interest rates on commercial real estate plays the exact same catalytic role now as then. Setting aside questions of moral hazard, the S&L crisis was "successfully" managed through the creation of the Resolution Trust Corporation, which existed to take over and then unwind commercial real estate portfolios in an orderly manner which preserved asset value and limited ultimate exposure to losses by the government. The Bundesbank lacks the currency control to establish such an entity, and the ECB lacks the political remit to do so.
Thus right now it appears that the US is still in the strongest position in the global race to the bottom--meaning the dollar comes in last. If that scenario plays out, the dollar will see its status as the global reserve currency strengthened by default (as the last global currency standing). That would almost force the Saudis to shy away from accepting yuan in payment for oil, as the currency risk will become too great for them to want to absorb. In that scenario they can force China to do the dollar conversion for them, and take all the currency risk while also paying top dollar for Saudi oil in a down market.
Yet even if the Saudis were to try pricing oil in yuan, China can't relinquish enough control of the yuan to allow for global finance to handle much volume in yuan. You can't have a global reserve currency that has tight capital controls, and China's are some of the tightest.
Barring another shift in the global outlook, it's hard to see exactly how Saudi's pricing oil in dollars ends any time soon, and certainly not in 2023.
Accordingly, I am less concerned for the moment about the global status of the dollar than about the potential for a bank run at a systemtically significant US institution having an amplification effect that catches other banks up in the same mania--a replay of the First Republic contagion from SVB's collapse, if you will. If you have sufficient cash reserves (and anyone who is currently living paycheck to paycheck is well advised to take whatever curtailments to the living standard are necessary to build up a cash reserve post haste), keeping all cash in FDIC insured accounts and having a 2-3 month cash reserve in a different FDIC-insured bank from your primary banking institution would give you the buffer to withstand a bank insolvency at your primary institution, while maintaining still-viable FDIC protection for your cash.
It is also prudent to pay attention to the price of gold and silver, not just in dollars but also in yuan, pound sterling, and the euro. If the banking system goes seriously off the rails to where currency viability is threatened, large moves in the price of physical gold and physical silver are likely to be early warning signs (think "flight to safety").
It's hard to see crypto having much cachet as a flight to safety while Binance is being targeted by US regulators, so crypto assets are highly problematic at this point.
One should probably also be stocking up on non-perishable food items. A currency collapse anywhere in the developed world is going to have extreme ripple effects that will greatly disrupt food processing and delivery, meaning part of the fallout of a currency crisis could easily be a spate of empty grocery store shelves. The US got a taste of that from the dislocations of the lunatic lockdowns, and it freaked a lot of people out. Having a food buffer to ensure adequate nutrition in a period of economic upheaval would probably be a tremendous stress reliever.
Most crisis and disaster preparedness boils down to time-management. When the SHTF, the longer the time frame in which you have to make decisions and the better off you will be.
empty office buildings are prime real estate for gut reno into 10X10 WEF "smart city" cells. and no end to the data that can be mined and gambled on emanating from there.
There's been more than a little talk about that, but no actual movement of any significance.
It's a couple of years of real estate market correction before the market will support that sort of transition, by which time many of the precincts with vacant space will be challenged to find the people to occupy the rehabbed buildings.
i hope you're right - you have a good track record. my sense is that this would be driven by public money or "public-private partnership" grift. the plan extends outside cities too for example https://www.save1familyny.org/about.html
Ah yes, New York zoning laws. The most corrupt expression of government this side of Chicago.
The problem isn't whether there would be available money. The problem is the very dynamic that is destroying the value of commercial real estate is making it unsuitable for housing. By the time the economics of rehab makes sense the community infrastructure will have eroded to the point where the occupancy projections won't be there.
One of the enduring virtues of the American system is that government always has to work through the private sector, and when it comes to affordable housing the private sector guards their corruption and graft quite zealously. A reality that Klaus Schwab and the rest of the faux intellectuals in the WEF are quite unable to recognize.
Compounding this huge problem is crime. The pandemic years plus the leftist activism has resulted in empty commercial real estate in many downtowns, now plagued with drug-addicted homeless and associated crime. Everyone has heard about the tens of thousands of homeless in San Francisco, with their drug needles scattered everywhere, right? The same situation is now in many US cities, to a lesser extent, but just as entrenched. The cities’ governing bodies have been taken over by left-leaning people who will need to address crime before being able to revive the downtowns - but they are philosophically loath to take any of the hard measures necessary to end this crime! So any remedy is likely to take a long time, and meanwhile, all of the problems of devalued REITs you discuss will come true. I think we’re in for a long long recession.
As always, I so appreciate your efforts to give us hard data and sound analysis, Mr. Kust...
Indeed, those "catch and release" and "defund the police" chickens are really coming home to roost! The lockdowns were merely gasoline on the already smoldering inferno beneath the surface.
One of the implicit themed in most of my work is the question "What do we do now?" People always have to deal with the consequences of government choices. People have to contend with the rising interest rates, with the diminution of credit, with inflation and, eventually, deflation.
If I can put a few more facts in front of people, my hope is they'll be better equipped to make good decisions for their lives and be better able to withstand whatever comes next.
Indeed, barring a literal miracle of miracles, we are in for a very rough ride and a very hard landing in the very near future.
Welcome to interesting times!
What do we do if/when petrodollar collapses? How should one prepare?
The petrodollar is more narrative than substance.
Oil prices are denominated in dollars because the US economy is by far the world's largest and can contend with the bizarre dynamics of the "eurodollar" system (which is a somewhat misleading term as it broadly refers to the offshore creation of dollars through global finance).
Neither the euro nor the yuan can provide a stable pricing system for petroleum on a global basis at the present time, and no other currency has anywhere near the global heft to stand as a pricing alternative for a global commodity such as oil.
That being said, the interest rate challenges of the US are magnified in Europe, and China is still in a rampant money printing phase, with even Tier-2 Chinese cities going all out to goose real estate sales and revive the moribund property market (which is a mainstay of local government finance in China). It's worth noting that the Blackstone bond default earlier this month involved office properties in Finland--commercial real estate vacancies are a global problem brought on by the extreme lunacies of government-ordered lockdowns (which were always more severe elsewhere than in the US).
China is pressing the Saudis to settle oil purchases in yuan rather than dollars, and the Saudis are giving them some leeway at the moment, although how that plays out in the long run is problematic, given the paucity of investment options for the Saudis that use yuan instead of dollars--meaning the Saudis are taking on the currency risk for the Chinese, quite possibly as a means to sustain the premium Saudi Arabia typically charges Asian customers over and above quoted market prices for their crude.
China of course is already paying for Russian oil in yuan, and taking full advantage of the pricing disequilibria brought on by the various sanctions and the price cap to get Russian oil at a bargain basement price. Russia has limited ability to exchange yuan for dollars, and so this has the virtue for the Chinese of binding Russia even tighter, as Russia becomes a semi-colonial captive market for Chinese goods as a direct consequence (Russia sells oil in yuan and buys imports from China also in yuan, both on China's terms. You don't need a degree in economics or finance to see who wins that exchange).
However, with Russian oil production down year on year by ~9-10%, and this was before the threatened 500kb/d production cut that was supposed to take place this past month (but which global data shows no evidence of happening), the net economic benefit to China of this captive market is problematic, and certainly accumulating empty containers in Shanghai suggests that China's much-touted "reopening" is having about as much bang as the alleged Russian "spring offensive" in Ukraine.
The fact that Russian oil production and Russian oil exports can organically drop by 10% while the price for Brent crude is dropping by even greater percentages illustrates the magnitude of the current global recession.
All of which creates a global economic structure that bears more than a little resemblance to a rickety Jenga puzzle, and the operative question is which is the critical support piece that is going to get knocked out to bring the whole thing crashing down.
With the ECB trying to curtail lending to highly indebted companies and restrict leverage within European banks, it's tough to see how troubled European banks like Deutsche Bank and even the UBS/Credit Suisse combine avoiding fresh liquidity challenges in the very near term, and the ECB lacks the political leverage within individual Eurozone countries to react the way the Fed does when there's a liquidity crisis. Credit Suisse was solvable in Europe only because UBS was both Swiss-based and large enough to absorb Credit Suisse. If a similar phenomenon happens with Deutsche Bank there is no German institution capable of simply absorbing Deutsche Bank's operations in a shotgun wedding sort of merger. CommerzBank is the second largest German institution and its nowhere near large enough to execute a stock-based acquisition.
Thus if a liquidity crisis emerges in Deutsche Bank in the next few weeks, either the Bundesbank or the ECB will have to make some very awkward and ugly choices--the only likely way to deal with a liquidity crisis at Deutsche Bank is to nationalize the entity, which would completely scramble European finance--suddenly the German government becomes a counterparty in a notional $42 Trillion of derivative contracts.
By comparison, the Fed currently holds only ~$280 Billion of commercial mortgage backed securities, the type of security that is a likely financial flashpoint here in the US in coming months. In other words, Deutsche Bank by itself has 150 times the default and counterparty risk of the entire Federal Reserve. Even if all of the Federal Reserve's holding of residential and commercial MBS assets are taken into consideration, Deutsche's counterparty risk is still nearly 20 times that of the entire Federal Reserve.
A liquidity crisis arising from CRE defaults unfolds largely as a replay of the 1980s S&L crisis, as the impact of rising interest rates on commercial real estate plays the exact same catalytic role now as then. Setting aside questions of moral hazard, the S&L crisis was "successfully" managed through the creation of the Resolution Trust Corporation, which existed to take over and then unwind commercial real estate portfolios in an orderly manner which preserved asset value and limited ultimate exposure to losses by the government. The Bundesbank lacks the currency control to establish such an entity, and the ECB lacks the political remit to do so.
Thus right now it appears that the US is still in the strongest position in the global race to the bottom--meaning the dollar comes in last. If that scenario plays out, the dollar will see its status as the global reserve currency strengthened by default (as the last global currency standing). That would almost force the Saudis to shy away from accepting yuan in payment for oil, as the currency risk will become too great for them to want to absorb. In that scenario they can force China to do the dollar conversion for them, and take all the currency risk while also paying top dollar for Saudi oil in a down market.
Yet even if the Saudis were to try pricing oil in yuan, China can't relinquish enough control of the yuan to allow for global finance to handle much volume in yuan. You can't have a global reserve currency that has tight capital controls, and China's are some of the tightest.
Barring another shift in the global outlook, it's hard to see exactly how Saudi's pricing oil in dollars ends any time soon, and certainly not in 2023.
Accordingly, I am less concerned for the moment about the global status of the dollar than about the potential for a bank run at a systemtically significant US institution having an amplification effect that catches other banks up in the same mania--a replay of the First Republic contagion from SVB's collapse, if you will. If you have sufficient cash reserves (and anyone who is currently living paycheck to paycheck is well advised to take whatever curtailments to the living standard are necessary to build up a cash reserve post haste), keeping all cash in FDIC insured accounts and having a 2-3 month cash reserve in a different FDIC-insured bank from your primary banking institution would give you the buffer to withstand a bank insolvency at your primary institution, while maintaining still-viable FDIC protection for your cash.
It is also prudent to pay attention to the price of gold and silver, not just in dollars but also in yuan, pound sterling, and the euro. If the banking system goes seriously off the rails to where currency viability is threatened, large moves in the price of physical gold and physical silver are likely to be early warning signs (think "flight to safety").
It's hard to see crypto having much cachet as a flight to safety while Binance is being targeted by US regulators, so crypto assets are highly problematic at this point.
One should probably also be stocking up on non-perishable food items. A currency collapse anywhere in the developed world is going to have extreme ripple effects that will greatly disrupt food processing and delivery, meaning part of the fallout of a currency crisis could easily be a spate of empty grocery store shelves. The US got a taste of that from the dislocations of the lunatic lockdowns, and it freaked a lot of people out. Having a food buffer to ensure adequate nutrition in a period of economic upheaval would probably be a tremendous stress reliever.
Most crisis and disaster preparedness boils down to time-management. When the SHTF, the longer the time frame in which you have to make decisions and the better off you will be.
So, in the short term, having cash reserves (<250K) in FDIC insured banks, and/or NCUA insured credit unions is a good idea?
What about IRAs in stock equities? Would you liquidate those? What’s a safe space right now? Relatively speaking..
And golden & silver are good investments at the moment ?
Would investing in annuities be a good idea at this juncture ?
Every financial advisor has their own take, and they are selling something generally speaking.
So do you think the SHTF is not imminent?
I heard India is going to a digital currency in July is this true?
I’m just trying to preserve my retirement capital which seems to be teetering on what happens outside of my decisions.
I really value your in-depth analysis tremendously .
empty office buildings are prime real estate for gut reno into 10X10 WEF "smart city" cells. and no end to the data that can be mined and gambled on emanating from there.
There's been more than a little talk about that, but no actual movement of any significance.
It's a couple of years of real estate market correction before the market will support that sort of transition, by which time many of the precincts with vacant space will be challenged to find the people to occupy the rehabbed buildings.
i hope you're right - you have a good track record. my sense is that this would be driven by public money or "public-private partnership" grift. the plan extends outside cities too for example https://www.save1familyny.org/about.html
Ah yes, New York zoning laws. The most corrupt expression of government this side of Chicago.
The problem isn't whether there would be available money. The problem is the very dynamic that is destroying the value of commercial real estate is making it unsuitable for housing. By the time the economics of rehab makes sense the community infrastructure will have eroded to the point where the occupancy projections won't be there.
One of the enduring virtues of the American system is that government always has to work through the private sector, and when it comes to affordable housing the private sector guards their corruption and graft quite zealously. A reality that Klaus Schwab and the rest of the faux intellectuals in the WEF are quite unable to recognize.
dire but true.
Compounding this huge problem is crime. The pandemic years plus the leftist activism has resulted in empty commercial real estate in many downtowns, now plagued with drug-addicted homeless and associated crime. Everyone has heard about the tens of thousands of homeless in San Francisco, with their drug needles scattered everywhere, right? The same situation is now in many US cities, to a lesser extent, but just as entrenched. The cities’ governing bodies have been taken over by left-leaning people who will need to address crime before being able to revive the downtowns - but they are philosophically loath to take any of the hard measures necessary to end this crime! So any remedy is likely to take a long time, and meanwhile, all of the problems of devalued REITs you discuss will come true. I think we’re in for a long long recession.
As always, I so appreciate your efforts to give us hard data and sound analysis, Mr. Kust...
Indeed, those "catch and release" and "defund the police" chickens are really coming home to roost! The lockdowns were merely gasoline on the already smoldering inferno beneath the surface.
Thank you for your kind words.
One of the implicit themed in most of my work is the question "What do we do now?" People always have to deal with the consequences of government choices. People have to contend with the rising interest rates, with the diminution of credit, with inflation and, eventually, deflation.
If I can put a few more facts in front of people, my hope is they'll be better equipped to make good decisions for their lives and be better able to withstand whatever comes next.