Russia-Ukraine Crisis: What If The US Dollar Stops Dominating The World Market? [TFC 133]

As the US is being increasingly challenged by some of these guys… these are all an extended narrative. These little disputes here and there, to me, are just timeline events towards the eventual or possible eventual downfall of the US-dominated financial system and into a new order of financial… whatever system that comes out of it. 

With that, how do you then play this game? How do you position yourself? How do you look at some of these things? That is what I want to talk a little bit more about today.

Good morning, everyone. I welcome you to another day with The Financial Coconut. In our podcast, we will be debunking financial myths, discovering best financial practices and discussing financial strategies that fits our unique life. You get it, ultimately empowering us to create a life we love while managing our finances well.

I’m your host, Reggie aka your Chief Financial Coconut and today we’re going to talk a little bit about what is happening out there in the global order. I throw my hat in, give you more mass, more information for you to grapple yourself around what is happening. At the same time, three different tools that I would explore going forward to try and manage this impending or increasing risk of a shakeup in the global financial order.

And also, Coconuts, stay tuned all the way to the end. I have a short announcement to make at the end. But on this topic, I want to first clarify that I’m not some geopolitical expert although I tell everybody I’m a pseudo geopolitical expert. At least I’m an enthusiast. But I’m not a geopolitical expert, neither am I an economist. 

Anyway, economists are horrible at predicting the future. There’s a lot of study of the past. Everyone is guessing on what’s going on but there is a general narrative out there that suggests that the US-dominated or at least the US dollar dominated global financial system is coming to its end. 

The word is “coming”, not “the end”. Not the end yet. I am a firm believer that even if this was to happen, which seems like there’s an increasing possibility… If this were to happen, it’s going to be a few decades out kind of situation. So maybe 1, 2, 3 decades out? It’s going to take a few more crashes, China expanding out its ecosystem, maybe an unanimous global financial system out there.

You don’t know what’s going to happen, nobody really knows. But if it were to happen, it’s not going to be a now and it seems like there’s an increasing chance of it happening. To put it very bluntly, what does it mean? It means that if one day the US dollar no longer is the global reserve currency… that means it’s not the big brother anymore. It’s not the big dollar that everybody holds, then what’s going to happen is, the US dollar is going to come down by a lot. It’s going to have a massive drop in its value. 

By extension, all the US dollar denominated assets, like your US equity, your paper gold, paper silver, your bond funds, your… Whatever you have, everything that’s denominated in the US dollar, which is quite a lot of things out there today, even a lot of these currencies that you own are backed by the dollar. If the dollar crashes and no longer is the dominant power, it will depreciate along. There’s a very high chance that all these things that are under the dollar system will all crash, will all get depreciated very massively. So I think today’s episode is preparing for the very out-of-the-money situation.

It means 10, 20, 30 years down, there may be such a possibility. With this in mind, how do we prepare for it? Why do I subscribe to this idea? Or at least, increasingly subscribe to this idea that it seems like an increased possibility of the US dollar system failing, collapsing or transiting into something else?

If you look at the Ukraine-Russia situation… I will not go into the details of it. Everyone on the internet is trying to sell you some idea of it and most of them are US-leaning. Everybody is coming from a moral high ground to say “Russia shouldn’t attack Ukraine”, blah, blah, blah.

But they don’t talk about how the EU (European Union) and NATO (North Atlantic Treaty Organization) has consistently pushed its borders closer and closer to Russia when actually, post-Cold War, the mutual agreement is there will be this belt. All these Baltic (states): Estonia, Latvia, Lithuania, Belarus, Poland, all these people should be neutral parties such that the US Federation and the EU guys will not come together. 

But EU has been expanding for the longest time ever. EU has been pushing its borders and pushing its boundaries towards Russia. I’m not coming from the moral high ground “oh, big guy should not bully the small guy.” I’m just looking at it from a very geopolitical view that Russia is also feeling threatened, so this is one view. 

But more importantly, you should recognize that everybody in this game has their own incentive. Germany and the EU and France… actually, they are the least incentivized to attack or fight back or be angry with Russia. The reality is Russia has built Nord Stream 2, direct access to funnel its natural gas, oil to Germany directly. 

If you go and search “Nord Stream 2”, Germany is very disincentivized to attack Russia… all that. Now bo bian (no choice), the US drum, drum, drum this thing “oh, moral values…” Suddenly, the EU have to bend to this major narrative and block Russia and have sanctions. It’s going to make it worse for them.

If you look at this whole group of what is happening where EU is one group, Russia is one group, the US is one group, China is one group, actually the best guy that gains the most is the US because as this region gets very messy, money has to flow somewhere and when it flows, where does it flow? Flows to the “safe haven”, right? The place that everyone is familiar and that is back to the US shores. 

So a lot of fear in the early days of the war saying, “oh, maybe there’ll be a correction to the market, blah, blah, blah”. You look at what’s happening. Money has flown out of Russia, flown out of the decks in Germany, flown out of France and go into the US dollar system. So actually the US guys, they’re the happiest. Really, if you look at it. 

That’s why their media is all out on this. If you understand how media works, once there’s one or two channels that’s drumming it up and they are getting a lot of traction, everyone else will drum it up further because they want to get your eyeballs, they want to make money out of this thing. 

Like us, we also need to have listeners. If not, (we have) no advertiser. It’s a model incentive structure for the media companies. So all and all, US is the biggest beneficiary in this whole game at this point in time. Russia, EU (they’re) a little bit wonky, both sides are struggling. It’s going to be painful for them. Of course, some will say Ukraine, blah, blah, blah… I get it. I don’t want to go into that discussion. You take your moral positions. 

The other guy that’s a little bit quieter and more interesting is China. China doesn’t really seem to have a very aggressive position on any one of them at this point in time. This really reminds me of the Three Kingdoms where the US and the EU is 曹操 (chinese general). They are the dominant player in the game today. Russia is like 孫權 (chinese general). It’s backed in the corner. It’s cozy in its own place, not the best place to be. It has continued to hold its power in the region by struggling to expand and do its thing.

And then you have China, which is 劉備 (chinese general) in this part of the world, the 蜀国 (state in China) which has grown wealthier and wealthier and wealthier and have natural land borders, natural sea borders to protect it. It’s becoming increasingly a threat to 曹操, which is 吳国 (state in China). 

For all of you listening, if you don’t understand the Three Kingdom reference, it is fine. Just know that there’s a big power, the dominant power which is EU and the US. They are kind of together. They are not exactly the same. Don’t see them as the same, but they are more or less together. So the US and EU is one dominant power. And then, there’re two smaller powers, which is Russia and China. They are kind of friends, but they’re not really friends. Everybody wants to be 老大 (boss). Everybody wants to be the big guy. 

With this in mind, you see this whole jostling of the global order now. It’s increasingly prominent. For a long period of time, it just feels like the US is the big guy. Everyone is playing the game but now, you’re seeing this dynamicism in geopolitics and it directly affects the financial markets and the currency and the dominance of the US dollar.

I think that is enough to set the context for today’s discussion. If you guys are like super big buff on trying to understand these things, let me know. Maybe I will get some of my friends to come together to expand and have a deeper discussion on geopolitics and the future of it. But that is a whole different podcast on its own or maybe like a special segment. Maybe we should do some special stuff. 

But more importantly, with this observation of an increased jostling of global power, how can us, retail investors, protect ourselves? That is the question. I’m going to bring you to the very first tool that I’m exploring and looking at and that is physical gold and silver.

Wow. Very old school, physical gold and silver. Hide under the carpet, put in your wardrobe, buy a new safe to do it. But there is a reason for this. For a long time, I didn’t really care about gold and silver as much because I also have the very concentrated portfolio, value investing mindset, trying to find good businesses and all that stuff. So I’m also in that camp. 

But this is a situation where I increasingly cannot avoid… I cannot avoid the reality that because all of these “value stocks”, good companies, they are all listed in the US or indirectly tied to the US dollar system. If the US dollar system crash, it will have a very direct impact on my whole portfolio.

That is why I’m looking at trying to put away some of these money into spaces where it is less impacted or if not, even run counter to the collapse of the US dollar system. The classic one is the physical gold and silver. It’s been proven again and again in history. There are multiple downfall… the Dutch, the UK. There are multiple downfalls for many, many, many centuries. 

There’s always a period of time when there’s increasing volatility in the market, uncertainty of the global order that people resort back to gold and silver. Whether or not you think gold or silver has inherent value or inherent utility, or not, does not matter in this case because the goal is not to derive utility or try to create cashflow. The goal is simply to try to allocate some money away to insure against this crazy situation where the US dollar system collapses or some people will call out-of-the-money option, depending. Either way, it just means that if this s*** happens, at least you have some sort of protection, some sort of build up to transit to another system or at least don’t have your whole portfolio get eroded massively. 

So then, the question is why physical? Why not just buy paper gold and silver? So easy, just click and then you can own it. The reality is those things are backed by the US dollar system. It is on the futures market. It is backed by the US dollar system so if the US dollar collapse, everything goes bonkers, do you want to get exposed to this risk? You don’t want because that is not the goal of even considering this part, which is what you are trying to solve. You’re trying to solve this risk and that’s why you got to own it in the physical form and not in a paper form which is directly tied to the US dollar system.

Of course that being said, I think there is a need for expanded discussion of gold, silver investments. We’re going to try to do more of that, going forward. I will say another thing that you should note, a lot of people will say “oh, maybe silver is better or gold is better”, whatever is better. There’s one thing that’s important to recognize, that is: gold’s per ounce value is way higher. In other words, your storage costs to own gold is much lower than silver. You want to own one ounce of gold and the equivalent value is like what? 50 ounce? 100 ounce? I think about 50… close to 100 ounce of silver.

So by ounces, (it) doesn’t sound very big, right? 1 kg and 50 kg and 2 kg of gold, a 100 kg of silver, where (are) you going to put these things? So think about it, think about it. There is discrepancy in this storage capacity. Some people will say “oh, maybe I should own gold instead of silver because gold is much lighter, higher value per ounce”, so storage cost is much lower. 

All that being said, I’m not trying to promote this doomsday prepper kind of view. I’m not Peter Schiff. That guy is just trying to sell you gold. He owns this whole operation to sell gold so… whatever, I’m not trying to do that. What I’m just trying to say is, this is an insurance strategy to mitigate the potential crazy outsize impact of a US dollar collapse. 

What I would think is over the next two decades, when you see some sort of receding of the price… When gold and silver price come down, when the spot price plus premium is lower… Because yes, if you buy physical (gold or silver), you go to the bullion, they actually have a markup, which is the premium on top of the spot price. 

Whatever price you Google online, you see… The price of silver, the price of gold, those are spot price. Those are market prices in the futures market. If you buy the physical, you have to go to the bullion, whatever bullion you choose, and buy from them. Usually there’s a markup. From what I hear out there in the market now, the markup is very high because the demand is very high. Don’t buy now. 

Eventually there will be a period of a little bit more stability, I will say. The market will once again, repeat its old ways of like, “okay, maybe the risk (is) not so high already” and then the whole thing will come down. The VIX (Chicago Board Options Exchange Volatility Index) will come down. People will start to forget this thing. Prices come down, spot premium come down then you can explore accumulating a little bit. At least that’s what I will do. 

(This is) not financial advice. I’m not trying to tell you to do this but based on the logic flow to manage this outsized risks, this is the plan. Of course, I’m not going to do it now. I’m going to wait for the prices to come down, the VIX to come down, markets to kind of rally again. Everybody forget this underlying big risk that everyone is jostling. All the big boys are jostling for power and it potentially will collapse this system. Only then when prices come down, I will look at this thing and accumulate little bit by little bit. 

Once again, this is a long, long risk. It’s not (like) the next day, China is going to take over or next day, there’ll be a world war. The media always hypes it up. It’s a lot more complicated than this but I will say in the next two decades, there will be a lot of things happening and you got to keep observing. Maybe this little bit, 1-2% allocation will be a good insurance for you, maybe. At least for me. So (this is) not financial advice. Very scared, I very scared. (This is) not financial advice. 

Which brings me to the second tool that I’m observing to try to meet this goal and that is Bitcoin. Yeah, yeah. I have changed my position. I’m going to share with you a little bit more after a word from our sponsor. 

Okay. Don’t tag me and say “oh, I become a Bitcoin maximalist”, I am not. I’m not a maximalist by any ounce of the idea. But the Bitcoin ecosystem, the blockchain, has shown its resilience for more than a decade now. It’s been relatively stable in terms of its operation, not in terms of price… not its price. 

Please don’t look at the Bitcoin price alone. Look at the hash power, look at the stability, look at the transaction rates. Look at those things that show that this system is functioning and people are committed to the system through hash power and not through capital injection to beat up the Bitcoin price. Sounds very foreign, right? Okay, slowly… Slowly I will explain in more episodes to come or at least share my perspective. 

Why am I looking at Bitcoin then? Exactly because of this resilience that it has shown over more than a decade, where it has shown some sort of resilience and consistency and trustworthiness over time. It works, it’s functional and people believe in it. There is enough resources to coalesce around this thing where a lot of hash power are being dedicated to it to keep it going. 

Of course, people will say, “oh, then what about Ether? What about Zilliqa, Solana?” All those things, (it is a) whole different discussion. Those are like utility stuff and I’m not interested in all those for today because what is my goal? My goal, to look at today’s discussion, is to manage the outsized risks of the US dollar collapse. 

When the US dollar collapse, where (the) money goes? Nobody knows so you want to find some intermediary that are relatively detached from the US dollar system and can hold some sort of values such that eventually, when the new financial orders settle in, there will be a relative ease in transition for you to push your financial wealth to the next system. 

I think Bitcoin has found its position in such a problem, right? If I want to solve this problem, this is my goal then Bitcoin becomes a potential solution. I’ll make it clear. Me taking a position here, saying that Bitcoin can be a tool to mitigate this thing is not me saying that, “oh yeah. Bitcoin to the moon!” No, I hate those people. I hate the to-the-moon people because they’re too simplistic. The way they look at things, oh my god, (it) doesn’t work. People will say, “oh, but they made money”. Okay, whatever. If that is your fundamental measurement of whether they understand something, then I don’t know why you’re here. I believe a lot of us listeners, all of you listening in, has a much deeper depth and rigour than just, “oh, make money means (it’s) right.”

Anyway, so I will echo Schmoff and I will also echo The Financial Horse to say that yeah, maybe 1 to 2% of your portfolio in Bitcoin gives you that long, long out-of-the-money option to prevent these kind of things from happening”. Whether or not Bitcoin takes over the world and all that, I think this is a little bit 夸张 (exaggerating). 

At least in my view of the world, my understanding of how things work, I think the probability is very small where cryptocurrencies and Bitcoin take over the world. I’m not saying it’s impossible, (it’s) very small. I’m not a maximalist but I will say as an intermediary to transit to the next system, the next globally accepted financial system, it has its position. It has its functionality and it seems that it could be something. 

So once again, 1 to 2% as a management, as a risk management kind of insurance tool, it’s great. At least for me. Yeah, not financial advice. Okay, please. Don’t tag me and say I’ve become a maximalist. I haven’t, okay?

And don’t… Yes, relax. I’m very afraid people cut out certain portions and say “yay, Financial Coconut has pivoted”. No, I haven’t. I’m very traditional by the essence of it but I look at what works and what am I trying to do here. In this premise, I think this is a potential tool. 

Which brings me to the third tool to manage this situation, which can be quite complicated because there are many tools to meet this goal whether is it art pieces, or whether is it physical properties, as long as you own something that is relatively separated from the financial system, a physical thing, I think it can serve as a tool for this. 

All of them have their own inherent characteristics. It’s a lot more complicated. If you want to learn more about properties, you should check out Coconut Avenue. We have a new season so go and search your favourite podcast platform and search Coconut Avenue. We will have all the property discussion there, so shameless plug. Because it’s my show, I can plug whatever I want to plug. 

But okay… After looking at all these things that I’ve learnt over time and explore, I feel that the third tool that people can explore is the Chinese financial market.

Yes, I am a China bull. Yes, yes, yes… But this time, I want to move away from picking individual stocks because I think it’s getting a little bit too complicated, trying to pick individual stocks as the Chinese government tries very hard to change up its financial system, change up its government system and essentially change up the business system that we understand. 

With all these changes and all these fluctuations, maybe you want to avoid single stock picking. You can buy the broad indexes to position yourself. But why? Why the Chinese financial market? Because the question is after the US collapse, who is next? Who has the highest probability of becoming the dominant power or at least the highest probability of negotiating the new order? I believe it’s China. 

I’ve been a strong Chinese bull for a long time. I’ve lived there, I’ve seen what they’ve done. I also recognize that the US has shifted a lot of its military capabilities away from China’s coast. They’ve given up trying to protect… what they call “protect”. They’ve given up trying to put all their big ass guns near China. They have moved closer to Guam. They have moved their battleground to Australia and all that. 

The US recognizes this. China is not shy of it. China is increasingly trying to challenge the US global order with its new financial ideas like its own coin, like the China digital Yuan. These are all interesting things that the Chinese people are trying to do. They’re trying to make it more affordable, faster to transact using the Chinese ecosystem. 

Like we’ve talked about in the other episodes, what is interesting is what underpins a currency system? What is the value of a currency system is the amount of things you can buy, the amount of services you can get, the amount of things you can do with this dollar, with this currency. If China is the factory of the world, they produce almost everything, doesn’t that, by extension, mean that if you own the Yuan, you can buy a lot of things? Interesting? 

This is the part where I think a lot of people are jostling and trying to understand. If you didn’t know, China, Japan, Korea has already signed agreements to trade between each other directly using their home currency. As US try to continue to sanction Russia, where does Russia go? They have to go to China. They have no other place to go and they have signed an agreement to sell oil and all these things to China. This is China essentially coalescing the region, trying to huddle up with all these people to come together to bypass the US. 

If there’s the next bunch of people to go to or the next market to look at, I really think China is the one. Whether does it broker a global system or whether does the Yuan become its new system because of its low cost to operate, faster speed to transact… The Swift system is very expensive and very slow, which is the US dollar system. It’s very expensive, very slow. They charge you a lot of fees through this whole system. 

But China is trying to make it cheap, fast, accessible and all that, with this whole digital Yuan thing. If anything, China is probably the next one that will take over as the global order. So that will be the home currency of the world, your reserve currency of the world. 

I feel that with that, this is the part where more people should explore the Chinese financial market and try to see and understand more and see if it fits your investment palette. Not just from an angle of “oh, there’s a lot of growth here, can make a lot of money. Growth, growth, growth”, but also factor in this potential happening where the US dollar collapse then maybe China is the next big thing. 

If you have investments under the Yuan ecosystem, if the Yuan now becomes the reserve currency of the world, the value of the Yuan will fly. If the assets you own are in Yuan, you will fly. So it’s… People will make it sound very complicated, which is fair. There’s a lot of complication in between, but at the core, pretty much this is what it means. 

So yes, I want to reiterate that this is an outsized probability that it may happen. It’s not definitely will happen. The US dollar may collapse and the new order may come but it’s just seems like it’s more and more “may”. The risk and the probability is increasing, which is why I’m looking at some of these things that I will continue to observe and let it play out in the next decade. 

So these three tools are, number one, physical gold and silver. Don’t own paper, because paper is directly tied to the US dollar system which fundamentally goes against the goal of what we are trying to do.

Number two is Bitcoin. Bitcoin has shown its ability and its consistency and its trustworthiness over the decade. It’s not about Bitcoin to the moon, but it’s just really about whether can it stay as an intermediary as the world renegotiate its financial system. 

Number three is the Chinese financial market. It’s a little bit of an upside potential. If the Yuan continues to become more and more promising to replace the US dollar, then if you own assets in the Yuan, then that is also an additional upside potential for you. 

With that, I hope you learnt something new today. See ya.

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Okay… To be fair, all these tools can have multiple episodes on their own. Let me know if you want to learn something in more specific, we will keep expanding on these discussions as we prep for this transition. I’m quite a believer that it will transit. It’s just when, how, how’s it going to look like.

I’m not too sure also, so let’s just keep observing. Don’t (be) too scared. (You) don’t need to be too afraid of this thing. Just a little bit, 1 to 2%, put it as an insurance. Yeah, pretty much that’s the idea. 

And yes, the announcement. I’ve been doing this podcast and you guys have been listening to the podcast for a long, long time. It’s coming more than… It’s already more than two years at this point in time and we are looking to do some refresher. These Tuesday monologues has been great. I’ve get to know you guys a lot. You guys get to know my voice a lot and we can have a good discussion in different aspects. I don’t really need to care about other people. I say what I want to say and then you listen and then you give me questions. We work through this process to get… Keep iterating on my learning also. 

But I’ve also reached a point where, I’ve to manage the team, manage the company. There are many other things ongoing. I feel like we should shake it up a little bit, bringing other voices on to Tuesdays.

So we will be trying… We will be trying to change the Tuesday format. Instead of monologues, to move towards like a trio-banter discussion of something, let’s say inflation risk, or I don’t know, the new budget or something. So it’s going to be a more of a trio discussion. I’m casting a trio to come together to discuss on latest happenings or latest concerns that you will have in the personal finance space. 

I will not rule out doing monologues from time to time if there are certain things that I want to say on my own but you will start to see a mix of banters and monologues on the Tuesday segment. Eventually, if the banter works very well, you guys love it and you feel that it’s a more approachable method, I see the numbers doing well then yeah… We will transit everything to a banter. 

What I want to say is thank you for loving what we do and supporting us and continue to like, share, subscribe. Give me (a) 5-star rating so that I can convince the sponsor to give me more money and we can continue to run this thing.

So pretty much that’s the situation. And yeah, I look forward to hearing more from you. Come to our Telegram group. Let’s chat. If you have any thoughts on the end of an era of monologues, it’s okay. I feel you. Let’s see if we can do better. With that, take care. See ya. Bye.