Monday was unambiguously bad for anyone hoping to see evidence of dip-buying or other signs of a break in what’s morphed into a proper storm for financial assets of all sorts.
The across-the-board nature of the selloff is harrowing, but it speaks to something more important than any given day’s price action.
As is typical of periods when panic reigns, demand for USD cash was evident. When everything, including long-end US Treasurys and gold, sells off at once, it’s indicative of a deep-seated psychological disposition we often lose sight of during better times.
I talked a bit about this while documenting the dollar’s inexorable trek to multi-year and, depending on which gauge you prefer, multi-decade highs, but I wanted to reinforce it.
This comes back to the strength of the shared myth we call the dollar. Most forms of money, including the dollar, have no intrinsic value. In the final estimation, they derive their value from the scope and conviction of an underlying network of believers, for whom the question isn’t whether any one individual believes the dollar is good money, but whether that individual thinks everyone else believes it is.
If I believe you believe in the dollar, my own opinion is irrelevant because I need to transact with you economically. When it comes to the dollar, “you” effectively means everyone on Earth. The network of dollar users includes essentially all economic actors. It’s possible to pay for goods and services in other countries with US dollars. You can’t, generally speaking, pay for goods and services in the US with foreign currency. In most cases, anyone (or any nation) residing outside the network of dollar users was excommunicated — they didn’t willingly leave, they were forced out.
Crucially, none of that precludes the use of alternative networks, it just means that in the final analysis, such networks are poor substitutes. Crypto adherents are fond of claiming they’ve rejected the dollar (and all fiat money), but that isn’t true. For all but the most ardent believers, the choice between Bitcoin and US dollars is no choice at all if it’s presented as an all-or-nothing proposition. That is: You have to choose one, right now, and you can never use the other again. In that scenario, virtually no one would choose Bitcoin because doing so would severely and immediately curtail their capacity to transact with predictability and regularity in a frictionless way.
That could change. In fact, it will change. There’s (virtually) no chance the US dollar will be the dominant form of money 1,000 years from now. There’s no guarantee the “US” will even exist by then, let alone its official currency. But, for now, the dollar is the most powerful shared money myth on Earth, and it’s not a close contest.
Regular readers know I’m fond of quoting Yuval Noah Harari, even while acknowledging that doing so has become something of a cliché. His musings about the distinction between myths and objective realities are applicable in this context. “The dollar… exist[s] in the shared imagination of billions, and no single individual can threaten [its] existence,” he wrote years ago, adding that,
If I alone were to stop believing in the dollar, in human rights, or in the United States, it wouldn’t much matter. These imagined orders are inter-subjective, so in order to change them we must simultaneously change the consciousness of billions of people, which is not easy. A change of such magnitude can be accomplished only with the help of a complex organization, such as a political party, an ideological movement or a religious cult. However, in order to establish such complex organizations, it’s necessary to convince many strangers to cooperate with one another. And this will happen only if these strangers believe in some shared myths. It follows that in order to change an existing imagined order, we must first believe in an alternative imagined order.
The dollar’s buoyancy during episodes of acute panic — episodes during which nothing else will do and everything that isn’t tied down is sold to obtain USD cash — are evidence that no such “alternative imagined order” currently exists. Nor is it likely to exist anytime soon.
As one CIO told Bloomberg on Monday, “the moves into cash are being funded by the sales of both stocks and bonds.” He could’ve added gold. And Bitcoin.
In the linked article, Denitsa Tsekova and Cecile Gutscher used a chart which showed cross-asset performance for May. A footnote read: “Dollar denotes Bloomberg Dollar Spot Index, other currencies measured against dollar.”
“May’s manic cash grab” and “everything that isn’t tied down is sold to obtain USD cash”… while I understand the thought process in this description, I also can’t help but think this is describing only one part of the dynamic at play. For each party selling to “grab cash”, some other party is buying and releasing the same amount of cash. Each time I hear a Bloomberg commentator describing a drop in equity values as something like “investors are moving into cash”, I can’t help but wonder why they don’t seem to acknowledge the other investors who are doing the buying and by definition are moving out of cash.
Well, I mean, “investors” aren’t the only people facilitating buying and selling, my friend. It’s not necessarily accurate to say that for every “investor” who sells a share of a liquid company, there’s an “investor” on the other side. If you go out and establish a large bearish position in options, it’s not like Warren Buffett is on the other side of it as an expression of his long-term faith in corporate America.
I remember a time just before the USSR fell apart someone asset the two most important forms of currency in Russia were the US $100 bill and a pair of Levi’s jeans. The jeans became such a problem that Russia put an embargo on international travelers restricting the number of pairs of Levis they could bring into the country at something like 6 or 8 pairs.