KCG has always pivoted through global market changes for both individual and family office clients. As your Portfolio Manager I make decisions and provide fiduciary advice informed by my awareness of the current market, economic and geopolitical matters and this differentiates KCG within the financial services industry.  Or…as I wrote in my Client newsletter just a week or two ago, “My job is to tell you about what’s happening in the market and the economy, how it impacts your investments, and what I’m doing about it.”
What’s Happening?
Despite inflation, the US maintains relative economic and political strength.  The dollar continues to serve as the majority of the world’s reserve currency.  Central banks and international institutions hold US dollars in their reserves, which gives the dollar stability and global acceptance.  We are the largest economy in the world and our economy is backed by diverse industries, innovation and technology.  Our markets attract global investors seeking safety and profitability.  These factors contribute to the dollar being perceived as the most powerful currency.
How did we get here?  In 1971, there were more foreign-held dollars that the U.S. had gold. Our imports were greater than our exports, and import prices fell relative to exports.  Too much currency was leaving our shores.  Nixon ended the gold standard in an attempt to prevent a crisis (if there was a run on gold).
Henry Kissinger, U.S. Secretary of State at the time, played a pivotal role negotiating the Petrodollar Agreement.  In the wake of the 1973 oil crisis, Saudi Arabia committed, in exchange for military equipment, training, and security guarantees, to use the U.S. dollar exclusively for the oil pricing and sales.  The dollar became the world’s primary reserve currency.
Until quite recently the dollar has been widely used in international trade; because – since June of 1974, oil transactions have been executed in dollars, further enhancing the strength of the U.S., both financially and politically.
But then… This demand for dollars supported our immense debt which was brought on by our “borrow and spend” policies.  Today those policies are called “Modern Monetary Theory” or MMT.  This theory is being executed as policy and basically states that countries with their own currencies can print more and more money without worrying about accumulating debt. No need to worry about how much is collected through taxes or debt issuance.  Just print baby, print!  The resulting inflation is seen simply as a constraint on spending.  So print some more.
In June of 2024, fifty years later, the Petrodollar agreement expired and in July, Saudi Arabia chose not to renew it.  The expiration of the Petrodollar agreement opens the door for oil sales in other currencies and significantly erodes U.S. financial and political potency.  On January 1, 2024, Saudi Arabia, Egypt, the UAE, Iran and Ethiopia joined Brazil, Russia, India, China, and South Africa in an economics cooperation bloc called BRICS to counter U.S. financial and political leadership.
BRICS represented as many as 3.5 Billion people, economies worth over $28.5 Trillion and make up ~28% of the global economy.  BRICS nations account for ~42% of global crude oil output.  The end of the Petrodollar agreement and the collaboration of the BRICS nations is causing a trend of de-dollarization and could be disastrous for the U.S. as it accelerates.  Smaller trading blocs are using other currencies to erode dollar dominance and the U.S. ability to use the dollar as a foreign policy weapon.