Brent Johnson: Dollar Strength in 2020, What is the Future of the Dollar?

Everybody loves to throw stones at the dollar. The US Government, it's spending the Federal Reserve. But compared to what Japan? I mean we're approaching what, 100% of GDP in our debt, but Japan's got 230%. Right. So I mean this is the way the whole game works all around the world. It's not unique to the. But the US has it better than anybody else. Brent, what does the future hold for us? We have a lot of real estate investors that follow us and I love income property because you can get these great 30 year fixed rate, ultra cheap, arguably negative interest rate mortgages. And then if inflation comes, it's going to debase that debt even further. You're probably getting free money now. And I call that inflation induced debt destruction. By the way, I created a name for it. But what does the future hold? I mean, where are we going next? It's a little hard to tell what the pandemic really threw a wrench into.

It didn't really did. First of all, I don't have a crystal ball. I could very well be wrong on this.

But you can do magic tricks.

But I can do magic tricks. A few of them. A few of them. But I really kind of think the next call it three to four years, two to four years. I think on a relative basis to the rest of the world, the US is going to do pretty well. But that doesn't mean things are good. It just means better than everywhere else. What I think is going to happen is as this capital flows into the US the dollar will get stronger and US dollar asset prices. I think we'll be able to fund our treasury. I think US stocks will rise. I think real estate in certain places will do okay. Commercial real estate, I'm kind of worried about.

Oh, I would be worried about that too. Yeah.

So I think it kind of depends on where you're located and where your if you have a very good job with very secure income and you think that that income is secure for the future and you can borrow a 30 year mortgage at 2 or 3%, whatever the percent is, and lock that in, I think that's a pretty good deal. Right. And you get your cash flow from the properties are coming in and paying your, paying your mortgage, then I don't have a problem with it at all. I don't know that we're going to have a run in real estate the way we have for the last 20 years. I think that's 30 years. I think that's probably unlikely.

I agree with you there. The cyclical markets where people are speculating, they're really lost. Interestingly, the vast majority of those markets we were talking just for a brief second off air before we started about, I mean, you're from San Francisco, you're in Tahoe right now. And how people are potentially. Well, we're seeing it already, but I don't think it's potential anymore. I think it's reality now. People are leaving big cities. Right. And the cities are the overpriced real estate markets. Those high density areas are what we call the cyclical markets. And they're leaving them in favor of these boring linear suburban markets that just kind of chug along and you buy housing there for yield, not for appreciation or capital gains. Thoughts on that?

Yeah, no. And I think, you know, the nice thing about real estate is that you don't see it priced every day when you, when you own stocks or bonds and it's in a brokerage account. As much as you may try to divorce yourself from it and be a long term investor, you can still see the price every day. And you see it go up and down. And whether you admit or not it affects you. You know, when you, when you buy real estate, there's really. You don't see the price of it every day. Yeah, maybe you know, it went up a little bit. Maybe you know it went down a little bit. But until you sell it, you or until the guy next door sells it, you really don't know. And in the meantime, you're just collecting your income. I think it's a way to do some kind of disciplined investing and keep your emotion that's out of it. And it's a good way to generate income. I like it. I just think you just need to be careful and make sure you know what you're getting into.

Yeah, good stuff. You talk a lot about geopolitical issues and we touched on a few things, but did you want to bring up anything more there? I mean, there's an awful lot going on in the world when you get past the coronavirus news.

Yeah. So the thing that I think people really need to understand, and this kind of goes back to my dollar argument and going back to the two separate dollar markets. There's the US domestic dollar market and there's the Euro dollar market. So because money is loaned into existence, you need monetary velocity to be taking place or you need credit expansion to be taking place. The monetary system is a system that is designed to grow. If it starts to go in reverse, the whole thing cracks and it crashes. And that is why? Whenever we get into a recession or negative trending markets, the Fed or the central bank has to come in and plug that hole. That's what they're there for. They're there to go and issue new dollar collateral to re collateralize the system. That's QE or bailout that we had in 2008. The problem is that that big market outside the United States exists as well and the Fed does not have any jurisdiction over it, has no authority over it, and really doesn't have the ability to recollateralize that system when it crashes. And that's what's happening. That market has gotten so big, but now it's contracting. New dollar loans aren't being made. So the whole the system is starting to crack. But the only person or the only institution in the world that can issue new dollar collateral is the Fed. What they have had to do is open swap lines, which is basically a way to give a foreign central bank dollars so that that central bank can then re collateralize the system with dollars. But the problem is extremely big. It's in the trillions. I personally don't think that the Fed has the political capital to bail out the rest of the world. While things are not necessarily great at home, in other words, I find it hard to believe that we're going to be able to justify giving Brazil 500 billion if people in Bakersfield are unemployed, or giving Norway or France a swap line if we're trying to save Boeing. I mean, France has. Boeing is a significant industry or a significant company and industry with national security implications. In the United States, of course, its biggest competitor is Airbus in France. If we're bailing out the ecb, which bails out France, which bails out Airbus, how can we justify that when Boeing's in trouble? So politically I don't think it's as easy for the Fed to bail out the rest of the world as it is in theory. But I do think these swap lines will be used as a weapon or they will be used as a carrot and a stick, so to speak, to further our geopolitical goals. In other words, Brazil, you want a swap line? Fine. Then you have to toe the line. You have to vote with us on this UN resolution or trade with this certain country, whatever it is. And I think those quote unquote loyal, for lack of a better word, to the United States will get dollar liquidity and swap lines and those that don't, won't. And I think it's going to become a big geopolitical issue as we move forward over the next couple of years.

What about military tensions? North Korea just blew up their liaison office. That's just crazy. Iran, maybe some of that's been distracted by the pandemic, but there's definitely some tension in the world.

Yeah, I mean, I think that's going to continue to bubble up. We've got these populist movements all over the world. Populist movements tend to play into nationalist movements, and then nationalistic movements tend to cause frictions between different nations. I mean, we've seen this thing between China and India in the last couple days. We've got the problems in the Middle east, as we always do. Syria still happening. I unfortunately think. I think this will likely end in some kind of a military or. It won't be solved without some kind of a military conflict, unfortunately. I hope that doesn't happen, but I can see it happening.

Yeah, I can, too. Election. It's amazing how distracted we've been from the fact that usually we'd have a hot presidential campaign going on. Right now, it's been sort of not much at all. What are your thoughts?

So my thoughts are that Trump will win, but I'm not as convinced of it as I was, say, a year ago. I think it's going to be an absolutely crazy five or six months leading up to it. What I am extremely certain about is whichever side wins, the other side won't accept it. So if Trump gets reelected, the Democrats will argue it wasn't fair or da, da, da, da, and vice versa. If Biden wins, the Republicans will say it was rigged or they were. Everything was, you know, geared against Trump or whatever.

Vote by mail fraud, you know.

Right, right. One of those things. And so I unfortunately don't see this election bringing us together. And interestingly and honestly, I don't know if it makes much difference who wins, to be honest. I think. I think if Trump wins, it would likely be a little bit better for the dollar, but I don't think it really matters. I think the dice is largely cast, and now it's just a matter of who's playing the roles. I think this is going to play out the tension with China. I think that's not going away. Whoever wins, I think if Trump has done anything well over the last couple years, I'd say he has raised the awareness that maybe China's not our best ally to a level that even if the Republicans don't maintain power, I don't think the Democrats are going to turn around and go soft on China. I think for a Number of reasons that cat's kind of out of the bag. And so, you know, MMT is coming, you know, multi trillion dollar stimulus plans are coming, infrastructure bills are coming, the universal basic income, it's probably coming. And Covid has been a big part of this. If you've locked down entire economies, you're going to have some social ramifications of that. And one of the ways to appease the social ramifications is give them some money. So. Yeah, anyway, I don't paint a pretty picture, unfortunately.

Yeah, yeah. And there's the other thing, and it's not an economics thing as much, but just a lot more intervention in our lives, a lot more tracking by tech companies, contact tracing, phone location data mining, all sorts of stuff like that. I mean, if you want to turn a society or an entire planet into an Orwellian fantasy boy, nothing's better than a pandemic to have a reason to do all that. Right.

It's pretty amazing. I was talking to a good friend of mine who's done a lot of work on this as well, and he is quite honestly much more up to speed on the pandemic and the science behind all of the virology and stuff. But the one thing that we both agreed to was that regardless, there's the theory that it's the most deadly thing in the world, and then there's a theory that it's all a scam and it's a flu. It's a flu. And. But they're using this to, you know, exert control. Regardless. To me, it doesn't matter which one of those it is because regardless, the speed with which and the ease with which they were able to get everybody to just go home and stay there.

Yeah.

Was pretty impressive.

Yeah.

You know, and so if you just step back and analyze the situation, it was pretty incredible. And I find that to be pretty scary, to be honest.

No question about it. People just sort of accepted that. But I don't think they'll be able to get away with that. Again to the same. Or maybe they didn't get away with it. Maybe it really was needed. That's an argument that will probably never be settled, but who knows? But it's also amazing. Brent and I know we gotta wrap up, but how delicate the economy really is, how major corporations. I mean, I'm not talking about a restaurant owner, okay. That has 16 days that they can survive without income. Right, right. I'm talking about Boeing. I'm talking about other giant companies that needed bailouts immediately. I mean, that's just so ridiculous to me that they spent all those years in the gravy making tons of money and didn't have to have. They weren't required literally by law by some corporate governance principle as public companies to have a rainy day fund. They had no contingency plans whatsoever. It's like, give us a bailout. Yeah, we bought all our stock back and all the execs got rich for years, but now we need a bailout. Doesn't that blow your mind? It's ridiculous.

It's pretty incredible. Not only that, but a lot of the. And this is not just the US that's going on in Europe too. A lot of the policies and programs that were put in place for the banking system to have to do certain things and not invest in risky things, those are now being loosened in order to combat the coronavirus. It's just. It's crazy. It's crazy.

It really is. All right, we'll wrap it up with any closing thoughts as to where we're going or whatever you want.

Yeah, I think between now and the election we've had this amazing rally in the equity market. I continue to believe that in the years ahead the equity market's going to go a lot higher, but I think we're going to have another soft spot between now and the election. I think the Fed will largely try to dampen that, but we'll see if they'll be able to do it. I think what I would say, and you've done a good job of explaining as well, is it's a relative world. You might not like the US dollar, but figure out a better currency than the dollar. Is it good to hold gold? Yeah, it's great to hold gold. I don't think you should have 100% of your portfolio in gold. It's never a bad idea to just have some cash on the sidelines, have the rainy day fund. Right. So if you've got cash, you don't have to get in a big hurry to spe. But I think the predominant force right now is deflation. Inflation is going to come, but I just don't think we're there yet. So having some cash sitting around isn't a bad idea anyway. I guess just be flexible, be open minded and try to survive the next couple years.

Brent, you want to give out a website or Twitter handle?

Yeah, sure, I have a website. Basically just has my contact information on it, but it's santiagocapital.com, feel free to call me or email me. I'm pretty active on Twitter, it's Santiagoau Fund. You can find me there and do a number of podcasts and stuff. And enjoyed talking to you and always happy to come back and do it again.

Excellent. Brent Johnson, thanks for joining us.

Absolutely.