Listen Now:
The Smart Take:
Here it comes again… F. E. A. R. This time manifest from headlines of the U.S. dollar’s demise as a reserve currency, spiraling inflation, low growth and an expressway to investment-return hell.
Listen to Kevin Kroskey, CFP®, MBA cut through the B.S. to understand what the economic risks are or are not and how they do or do not translate to your investment strategy.
Here are some of the things we will discuss in this episode:
- The questions we’ve been getting from clients about the headlines on the US dollar’s demise.
- What are the biggest concerns and risks that exist currently?
- We’ll sort through the historical evidence on the dollar.
- Which investments would respond favorably in this environment?
- We’ll explain why we think this is largely a non-issue for well-diversified investors.
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Kevin Kroskey:
Today on Retire Smarter, should retirees change their portfolio strategy based on predictions of the US dollars demise? Here it comes again, F-E-A-R or Fear. This time it’s manifesting from the headlines of the dollars demise as the reserve currency, spiraling inflation, low growth, and Expressway to investment return hell. I’m Kevin Kroskey. Today I’m going to cut through this BS to help you understand what the real economic risks are or are not, and how they do or do not translate to your investment return strategy, today on Retire Smarter.
Walter Storholt:
To another edition of Retire Smarter, I’m Walter Storholt. Joining us today is Kevin Kroskey, CERTIFIED FINANCIAL PLANNER, MBA, and of course, wealth advisor at True Wealth Design serving you throughout northeast Ohio, southwest Florida, the greater Pittsburgh area, but able to meet with clients from anywhere. Just visit truewealthdesign.com to set up your time to meet Kevin. Good to be with you this week. How is your world, my friend? Welcome back to the show. Been a couple of months.
Kevin Kroskey:
It has been. I’m good. I heard Tyler’s podcast with you last time and you gave him my beloved egghead alert and I figured I had to come back on and be like the dog on the post and pee on the podcast and stake my claim again.
Walter Storholt:
He’s not only stolen the show from you, he’s even stealing your little taglines and liners. He was really angling for that. I could tell he was purposely slipping in some words.
Kevin Kroskey:
Yes, he wanted you to hit the button.
Walter Storholt:
You’re right. It was telegraphed, but I loved it. Things going well in your life, my friend?
Kevin Kroskey:
Yeah, we’re good. Sun’s shining. Kids are in school. Mom and dad are good. Business is good. Can’t complain.
Walter Storholt:
Very glad to hear it. We got a good show today. I loved your intro, Kevin, a little bit over the top than you most normally are, but I think you were doing that on purpose as we talk about the dollars demise and the role of fear maybe in financial news and trying to distill all this down into what should we actually take from it and put into our financial plans.
Kevin Kroskey:
You got it. We’ve had probably a handful of questions, I talked to Tyler about it. I said, “Hey, I’ve been getting these questions. Have you been getting them?” I got the head nod up and down, not side to side. And there’s been a lot of this in the headlines recently. There was a conference about the BRICS and not the bricks that you build your houses with, but the BRICS or the acronym for countries like Brazil, Russia, India, China, and South Africa, and there’s several others that have joined onto this. The conference was just in August, when they’re talking about, “Hey, we should have this other currency that we can all rely on and lessen our dependence on the US dollar.” And Russia, after they invaded Ukraine, the US froze about 330 billion of Russia’s US dollars reserves. “Hey, if we want to be a bad actor too, that we don’t like that and we don’t want our money frozen. We’re going to come up and we’re going to de-dollarize yours and move away.” And some of this is valid.
I don’t want to make it sound like all hyperbole. It’s definitely the fodder for a lot of conspiracy theories. It’d be interesting to see what traffic we pick up on podcasts and land here just from what we’re talking about. But if some clients have the question, there’s probably a lot more that do. Part of our job as advisors is really cut through the noise and figure out what matters and what doesn’t and help explain that to people. It’s one of those things where you look back about the internet over the last decades, tons of more information today, but it doesn’t necessarily mean that that’s a good thing. You have to sort through it and figure out what matters or what.
Walter Storholt:
This is all these buzzwords that we’ve been hearing in the news with BRICS. I feel like I’ve seen that over and over, but hard to sometimes distill down what those things mean to then our everyday investing lives.
Kevin Kroskey:
You got it. Back in the two thousands, BRICS became a popular acronym, and that’s emerging market economies were doing really well back then, and investment returns were quite handsome for investing in those emerging economies. This BRICS nomenclature isn’t anything new. Some things are valid here when you think about this, blockchain technology and cryptocurrency is largely built upon. There are different ways to go ahead and settle contracts and things like that. This is another, I mentioned conspiracy theory. You have some gold bugs that were digging into their territory here and crypto people too. This is a very fine dance I’m going to try to do here over the next 20 minutes, Walt.
Walter Storholt:
I think we should do a whole conspiracy theory episode at some point. That would be amazing.
Kevin Kroskey:
I don’t know. No, thank you.
Walter Storholt:
Kevin’s thoughts on UFOs and JFK and all sorts of things.
Kevin Kroskey:
Moving right along, there is some validity to this. One of the benefits about blockchain technology, not necessarily cryptocurrency, is the ability to go ahead and have transactions settle, have these smart contracts, and just have a cleaner line of things. One of my personal pet peeves and things I hate the most is title insurance. You think of all insurance and insurance that you have on your home or your car or on your health are all insuring things that may happen in the future. Title insurance is something that is insuring something that happened in the past. Basically, the people did a decent job in doing their title search and conveying clean title. It’s right up there in the BS as far as I’m concerned. But as our mortgage market has developed over the decades, you need to have these pools and clean title to the mortgages, the lenders will require that you have this title insurance.
My understanding is only about 2% of premiums are paid out in claims for title insurance. Where for say, car insurance, about 50% of premiums are paid out. It’s BS.
Walter Storholt:
That’s a large gap. Large gap.
Kevin Kroskey:
Yes. The blockchain technology in these smart contracts, I think in theory could make title insurance go away. Now when or how far down the road, who knows? But that could be a pragmatic example of the payment and settlement and smart contracts. Some of that’s being talked about for these BRICS and maybe they’re going to use the blockchain to do these things, but they’re really talking about dethroning the US dollar in a sense and just lessening the reliance on the US dollar. And just for perspective, when you look at the US dollar’s dominance, it’s about 88% of international transactions, quite a bit, and roughly about 58% of global reserves.
Why is it that way? To have a reserve currency, you need to have economic and political strength and stability. Now, most people listening to this are probably domiciled in the US, probably born and raised. And we all have that good, healthy home country bias. And sure, we’ve had quite a bit on the news about much political disarray that we’ve had over the years, but maybe dog with least fleas is the phrase that comes to mind, Walt, capitalism.
Walter Storholt:
Dog with least fleas, I like that. Did you come up with that or did you lift that from somewhere?
Kevin Kroskey:
It’s a common saying. Maybe I’m just supplying it here.
Walter Storholt:
I’ve never heard it. I’ve never heard the dog with least fleas. I like it though.
Kevin Kroskey:
Nothing I do is original, but I implement well. There you go. But you need to have this economic strength and political stability. And again, the US has it, and then you have this network effect because once people will rely on it, we’ve built it up over time and these markets are very liquid and the payments are acceptable. It’s just there. I will say that when you look at some of these risks, I guess before we get into solving the problem and really looking at the risks, what are the things that people are concerned about if this were going to come to fruition? Really the concerns are, and think of settling commodities, buying and selling commodities, mostly oil, because oil is the largest commodity that’s out there. But if you’re settling transactions and not in dollars, but in this other currency or on the blockchain, then it’s going to reduce the reliance on the dollar. And if that happens, then these countries could also reduce their US dollar reserves.
That’s how it’s going to play out. Now, what would that do to us here in the US? That would in theory weaken the US dollar relative to other currencies. It would make commodity prices higher in general, and then it’ll also make interest rates higher in general and all that triangulates to lower growth too. It’s bad stuff. And this isn’t anything new. Candidly, this has been around for decades, ever since we got off the gold standard and things like that. It’s like, “Okay, the US is going to hell in a hand basket,” and it’s nothing new. Walt, you had many years on the radio in different forms, I imagine. And this, a lot of this was on AM radio type stuff, and you would hear a lot of gold advertisers saying, “Now’s the time to buy gold because US dollar’s going to hell,” or something along those lines.
Walter Storholt:
It’s been around for a long time. Or selling seeds and food kits that’ll last you for months when everything dies around you and how you can be the last one standing.
Kevin Kroskey:
Hell just go buy guns and thunder-guns.
Walter Storholt:
Guns, ammo, safes and gold. That’s the trifecta plus.
Kevin Kroskey:
I am not saying that some of this isn’t valid, but it’s quickly spun into hyperbole by many different players, often for their own economic benefit, incentives matter. But let’s just look back in true Retire Smarter way here. What does the historical evidence say? Let’s start with history. Do we have some history that we can refer to maybe see what would likely manifest if this came to fruition? If we just go back really since 2000, the dollar share of the world reserves has dropped by 15% since 2001. I mentioned 58% of global reserves in US dollars. Just 20-ish years ago, it was quite a bit higher. It was call that low 70%. What’s happened over that time, Walt? Has the US gone to hell in a hand basket? Have returns been low? Has inflation been runaway on balance over that time period? No, actually, if you look over that time period until recently, despite the higher interest rates that we’ve had through 22 and into 23, interest rates actually fell over 1% and we have not had runaway inflation. That’s just looking back over the last 20-ish years.
Walter Storholt:
Despite a lot of crises in that timeframe, still prosperous and quite good actually.
Kevin Kroskey:
You got it. And it’s a 15% change. That’s the absolute change. But to have it on a percentage basis, it’s probably like round numbers. It’s about, 15% global change on the low seventies is a little bit less than 20% total. If we go back a little bit further in time, Walt, take a gander here, back in time, what was the reserve currency before the US dollar?
Walter Storholt:
The reserve currency before the US dollar? Boy, I don’t know. I guess it would’ve been like, are we going way back like England times?
Kevin Kroskey:
Yes. Ding, ding, ding. Good job. I thought you were going to get that. I believed in you there Walt and you didn’t let me down.
Walter Storholt:
Are we really back in the 1700s here or did that come much later?
Kevin Kroskey:
No. The US prominence really was the last hundred years. If you think about late 1800s, we talked about these BRICS and emerging markets, if you go back to the 18 hundreds, US was the emerging market.
Walter Storholt:
That makes sense.
Kevin Kroskey:
We grew to dominance over the decades and really have remained there on many fronts. But I have some data just looking back, say from World War II era. 1940 to 1960 in the aftermath of World War II, my attempt at being clever here, the pound sterling, AKA the ex-king of the reserve currency. It had a 34% decrease in global currency reserves, and that was largely at the expense of the US increasing by 33%. 34% decrease, pretty significant even larger than the last 20 years that I mentioned in the prior example.
And now what happened to bond yields and what happened to growth. If you look at it in bond yields over that time, the US bond yields, because they need to have a relative comparison here, increased by about 2% and the UK has increased a little bit more, but still under 3%, 2.8. And for growth after inflation or, AKA real growth, 3.6% in the US but still a pretty decent 2.6% in the UK. These are two different time periods where we have actual evidence of this happening. You have the ex-king, the pound sterling, where they did lose the reserve currency status and you also had the US have a pretty big decline over the last 10 years in the reserve status, but still certainly the largest reserve currency that’s out there. But you didn’t have these bad outcomes.
These things that people are actually fearing when they ask the question or when they’re reading these headlines. Clearly there are other factors than just reserve currency. They’re factoring into inflation, into demand for government debt and into growth. It’s incredibly complex. That’s the economic impact. We talked about the fears and the economic risks. We talked about the economic historical evidence. Now I’m going to change gears and say, “Okay, economics is not necessarily investments. Making an economic prediction does not yield a straight line to this is what’s going to happen in investment markets.” But let’s think through this with a little bit of a keen eye and say, “Well, what are these investment implications even if this risk were to happen?” As with most things, Walt, I would say it depends. If you think about longer duration bonds, if anybody owned long bonds in 2022 on rates increased quite a bit and quite rapidly long government bonds lost pretty much just about as much as stocks did.
If rates were to rise a lot again from here and all these risks of these countries selling their government debt and yields going forever, higher inflation being run away, yada yada, those long bonds certainly would be hurt. However, short bonds today, short government bonds, if you look at T-Bills are yielding north of 5% and they’re going to mature in just a matter of months. If rates are going higher, we have a north of 5% in an income yield right now that is pretty strong healthy cashflow, and then that bond’s going to mature in just a couple of months and we’re going to reinvest at those higher rates as they keep inching upwards. If you have shorter bonds, as rates are going higher and you already have a healthy income return, that should bode pretty well and provide some protection for you if that were to happen.
Just think about what are you going to have in your portfolio and why different asset classes are going to address different risks and they behave differently in different environments. You just need to be very thoughtful and think through this as well as how you’re assembling your total investment recipe. A few other things I’ll mention briefly, we’ve talked about, at least for our clients, systematic trend following strategies. These are just looking for price trends and capitalizing on them. Whether the price is going up or down, it doesn’t necessarily matter. In 21 and 22, when commodity prices were going higher, bond yields were going higher, AKA bond prices were going lower, these trend strategies that followed those price trends profited quite handsomely. That could be a good diversifier and historically has shown to be just that. And then on the stock side it gets a little bit more complex.
Without getting too wonky here and staying away from the egghead alert, stocks historically do fairly well in slowly increasing inflation environment. It’s been an interesting run here that we’ve had in 22 and now changing course in 23. We’ll see how this plays out. But it usually depends on the rate of change. If the rate of change is quite fast, then stocks maybe going to be a little bit more hamstrung. At the same time, it depends on what type of stocks are you talking about. If we own foreign equities, say from the UK, Europe, Japan, Australia, even Canada, and our currency is weakening relative to some of these other currencies, when we bring the money back and convert it to US dollars, then we’ll have more dollars. It gets a little complicated when you’re talking about currency exchange and things like that. But all this, you put it together in your portfolio.
I just talked on a few different asset classes. There’s some asset classes you should probably already have in your portfolio that even if these risks of the dollar rises that they fear come to fruition and come to fruition quickly, there’s still quite a bit in your portfolio that should do okay, particularly with where interest rates are already. There’s a fear that’s out there. I don’t think it’s necessarily going away, but hopefully this is at least cutting through that fear. Probably a healthy amount of BS too to really look at what historical evidence has shown and then also make the connection to your investment strategy and just think through how your investments are likely to respond, even if these risks were to manifest.
Walter Storholt:
It’s so tough for the average investor, I feel Kevin, to be able to see the headline about something like BRICS and then be able to get it all the way down to this level of analysis, it’s so hard to get past that fear and that eye-catching headline to really get to the skinny of how it’s going to impact somebody. I’m greatly appreciative of episodes like this where we can say, “All right, here’s something dramatic feels like the sky’s falling. What context can we put this into?”
Kevin Kroskey:
I think it’s ultimately, this was something that I thought was important because we were getting questions on it, was in headlines. I think it’s one of those things we can chalk up to being about as boring as it sounds.
Walter Storholt:
Somebody’s trying to make it a lot more exciting than it is.
Kevin Kroskey:
I didn’t want to say that at the outset of the podcast because we definitely would’ve lost people even quicker than what we probably did. But you do have to think through this from an investment strategy standpoint. There’s probably a lot of people that just look at a bond fund and say, “Okay, hey, I got some bonds, I got some stocks.” And most people typically have large US S&P 500 type stocks. I think if you don’t have a thoughtful investment process in a well-designed portfolio to be very robust and all weather like to withstand a multitude of environments that we just don’t know what is really going to show up. Again, I think this whole US dollar quickly declining is not really based in reality.
I think it’s going to continue over a slow trend, but nonetheless, you still need to have a thoughtful process and a well diversified portfolio before you can just chalk it up and say, “Hey, I don’t really need to worry about that,” and you do need to think through these things. I guess I would say for our clients, I’m very comfortable with our investment strategy, and we could chalk this up as boring as it sounds, but if somebody’s listening and they’re not sure that they have a well-thought-out strategy and they’re not sure how their portfolio is going to respond to this or any other risk for that matter, we’d be happy to have a conversation with you and explore a relationship and give you a second opinion.
Walter Storholt:
Very easy to get in touch and set up that time to visit and see if you would be a good fit for the True Wealth Design team. All you have to do is go to the website truewealthdesign.com. We’ll link to that in the description of today’s show. There is a button that says, “Are we right for you?” You click that and schedule a 15-minute call with an experienced advisor on the team, see if you’re a good fit, and if it makes sense to move forward with doing a review and putting together a plan or a second opinion of how you’re currently structured for retirement and your financial future. Again, the number to call is also 8-5-5-T-W-D-Plan. That’s 8-5-5-8-9-3-7-5-2-6, or again, online truewealthdesign.com. All that contact info in the description of today’s show, find it easily there and get in touch, ask questions about this kind of stuff, about what else is on your mind when it comes to your financial plan and your financial life.
Kevin and the team will help make sure that you are on the right track and that you have a good understanding of all the inner workings of your financial plan. Kevin, love the education that you and Tyler provide for us on this show. I learned something every single time we talk, and thank you so much for your help and guidance today.
Kevin Kroskey:
Thank you, Walt.
Walter Storholt:
All right, take care of yourself. Don’t be a stranger. Come back and see us again here on the podcast soon, okay?
Kevin Kroskey:
All right, will do.
Walter Storholt:
I appreciate it. That’s Kevin Kroskey. I’m Walter Storholt. Thanks so much for joining us and we will talk to you next time. Right back here on Retire Smarter.
Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance references, historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
