12-10-21 The Age of Humility: The Geopolitical Death of the Petro-Dollar Orchestrated by BRIC

The week has ended at highs for all markets with the US market closing at a record high, although Europe and the Asia-Pacific bloc have ended the day in the red despite weighting a weekly rise. The dollar and euro have been strong, the pound remains weak. Gold closed the week in the green, Cryptos and crude oil closed lower with the dollar strong, coupled with Biden's reserve release agreement.

US indices this week have traded higher from Thursday, especially at the open on Friday which pushed the market higher on expected inflation data. The unemployment report has supported this rise.  The Federal Reserve meets next week and is expected to accelerate debt buying tapering policies. Next week may be important for the end of the year in the markets with the FOMC meeting. There is an expectation of giving Jerome Powell the green light which if so is likely to respond to the market this bullish bluster of continued overvaluation. The most likely action is the reduction of asset purchases, as such a request has been made by the various state governors, as it is suggested the process will end in March. This reaction caused a massive sell-off, causing for two previous weeks two red Fridays, but this week equities have positioned higher after spending the week hesitant, rising again reaching the height of previous highs. Coronavirus strains have clouded the week. But state funds and futures seem to be taking the Fed seriously, and its 10-year interest rate has reached 1.487%. Arguably, the bullish pull from the US has spilled over to all indices. Monday's late-session rally has seen the price progress gradually into today, in good spirits. The S&P500 ended at 4,712.02 points, up 3.80%, DOW JONES at 35,970.99 points, up 4.02%, NASDAQ 15,630.60 points, up 3.61%.  The S&P 500 VIX volatility index has fallen by -39.06%, a sign that the market is correcting its behavior.

European indices closed lower today, although they closed the week in positive territory. DAX closed at 15,623.31 points, +2.99%, CAC 40 at 6,991.68 points, +3.34%, FTSE MIB at 26,721.98 points, +3.02%, IBEX 35 at 8,360.20 points, +1.44%, and FTSE 100 at 7,291.78 points, +2.38%. The EURO STOXX 50 closed at 4,199.16 points, up +2.92%.

In Asia-Pacific, NIKKEI 225 closed at 28,437.77 points, up 1.46%, HANG SENG at 23,995.72, up 0.96%, NIFTY 50 at 17,511.30, up 1.83%, and S&P500/ASP 200 at 7,353.50, up 1.55%. Pacific indices led the declines today. Chinese real estate defaults have been a scourge for the international market all week.

Currencies have been characterized by a strong dollar, strong euro and a sustained yen. Crosses of note have been AUDUSD +2.43%, NZDUSD +0.82%, USDJPY +0.59%, EURJPY +0.56%, GBPUSD +0.21%, EURUSD -0.02%, EURGBP -0.2%, USDBRL -0.68%, USDCAD -0.89%, USDMXN -1.77%.

Gold rallied on the last day of the week on the back of the US inflation data. It closed at $1,782.72, up +0.4% due to the safe-haven appeal that has been boosted by the news of higher consumer prices in the US. This was held back by interest rate hikes as inflation was not as high as expected. Consumer prices have seen the biggest annualized increase since 1982 prompting the Federal Reserve to trim its bond purchases more quickly. The decline from Wednesday's European session into Friday has been halted and generated the rise by the CPI. Silver is up 1% at $22.14 an ounce. All other metals have rallied accordingly.

The crypto this week has lived a situation of cascading downward accumulating the virus, cascading resignations of managers, and restructurings of companies in the blockchain sector. Ethereum has had a more bullish week than Bitcoin, but despite that, it has broken lower, even though the mid-week figures were not so negative, between Thursday and Friday they have led to a sharply bearish close of the week. BTCUSD closed at $47,898 and ETHUSD closed at $3,980.96. This week, despite large purchases of Bitcoin by whale investors, prices don't seem to have reflected. Largely this week's drop is because, over the previous weekend, large amounts of Bitcoin were liquidated by fearful investors.

(Decrypt) This week highlights the big bet on NTFS by fast-food chains like White Castle. Football clubs' investment in NTF fan tokens, where according to BBC fans have spent more than $350 million.

(IMFNews) The International Monetary Fund (IMF) has warned of systemic risks to financial stability and seeks the creation of a comprehensive and coordinated global regulation of cryptocurrencies. The aim is to prevent the mobilization of digital capital to finance radical movements, organized crime, or terrorism, as well as to protect consumers and investors. The $2.5 trillion market capitalization of the market may reflect "froth in an environment of exaggerated valuations". Challenges include the cross-sector and cross-border nature that makes oversight and enforcement difficult. The U.S. government through the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and the OCC issued a joint statement of intent, and instructions to banks to adequately monitor cryptocurrency activities. The UK and the Financial Conduct Authority have invested $670,000 in training on detecting criminal uses of cryptocurrencies. In Japan, the Financial Services Agency announced plans to limit the issuance of stablecoins to banks and wire transfer companies in 2022.

(cryptonews) Positive news for Brazil, which passed a bill to regulate Bitcoin in the country. Vitalik Buterin anticipates probable centralization in the second layers of Ethereum. Three possible scenarios are raised, the first a development of low consumption of computational resources to perform block validation. The second is a centralized blockchain, in which one of the "rollups" such as Arbitrum, Optimism, Zksynk, StarkNet, or others do a good job and achieve 10,000 transactions per second, which would corner a large part of the market. The third scenario explains a future where there is no dominant rollup and everyone can process hundreds of transactions per second, that scenario would have all decentralized validation, robust censorship resistance, and distributed block production. Although it seems like the ideal scenario, the "trilemma" (triple dilemma) of decentralization, scalability, and security would be fulfilled, Buterin is not optimistic and believes that this could not be sustained over time and market pressure tends towards centralization, with the second scenario being the most likely formula. A strong Ethereum base layer will be what will guarantee decentralization according to Vitalik.

Crude oil has performed in line with all Commodities depending on the FED and the dollar. Crude oil has returned to 1 month ago prices after a long fall, which has been reversed since December 1st. Crude stockpile sales agreed with China at their last meeting, Biden has communicated his intention to sell 18 million barrels of crude from the strategic reserve on December 17, as part of the price cooling plan.  He announced last month that he would release about 50 million barrels from its reserves along with other countries to combat the rise. This sale had been approved in 2018, with the remaining barrels to be made available in the coming months (Reuters). West Texas oil (USOIL) has closed at $71.95 a barrel, and Brent (UKOIL) has closed at $73.35 a barrel.

Since the destruction of the gold standard, the entire planet has used the dollar as a currency of exchange. Since the beginning of the 21st century, economic cooperation between Russia and China has been growing and in 2009 it became Russia's main trading partner. The sectoral structure of trade links between the two countries is characterized by an expansion of Russian hydrocarbon sales, on the one hand, and a very pronounced growth of Chinese exports of manufactured products on the other. This cooperation had been limited exclusively to exports, detecting the lack of diversification, and the intensification of tourism, transport, and innovations between the two countries.

This began to change with the creation of the New Development Bank (NDB) in which Brazil, Russia, India, China, and South Africa (BRIC countries) announced the creation of the NDB and the Contingency Reserve Arrangement (CRA). This has been promoted as an alternative to the International Monetary Fund, which has traditionally been controlled by the United States, Europe, and Japan. The objective of this was none other than to finance infrastructure and sustainable development in emerging markets and developing countries, with an initial capital of US $100 billion.

This has been happening at a time when the US monetary expansion has been taking place in line with the cold war that this country has been generating against its largest producer. China, as the government of the Asian country, has been getting closer and closer to developing countries, making China the largest creditor of debt on the planet.

This idea of a development bank is not new. The Russo-Asian Bank (1895-1910) created in St. Petersburg under the name Russo-Chinese Bank, was created to lend money to China and issue government bonds to finance the indemnity to Japan under the Treaty of Shimonoseki, after the First Sino-Japanese War. Sergey Witte, Russian finance minister at the time, with French diplomat Auguste Gérard.  In the partnership, the Russians had a 37.5% share, and the Bank of Paris and the Netherlands (Paribas) 62.5%. This is how the Trans-Manchurian Railway was created. It would continue to be present after merging with the Bank of the North, naming the new bank as the Russian-Asian Bank. And in 1917 the Bolshevik Nationalization and bankruptcy made this entity disappear since the French feared that this popular movement would appropriate the Chinese Eastern Railway, and it was put in the middle of all the Franco-Russian setbacks until it was closed in bankruptcy.

This New Development Bank has prompted what was going to end up scaring many. Russia asking for Gold or stable currencies instead of dollars to sell its oil. And trading in Euros, and other currencies, instead of dollars. China and Russia began to conduct their internal operations in their national currencies, and to de-dollarize their economies, considerably limiting their operations with dollars to, among other things, evade US sanctions, so many are wondering if others will join this movement of gradual de-dollarization. The annexation of Crimea marked the turning point in Russia's cooling off with Western countries and the beginning of its de-dollarization.  During Xi Jinping's visit to Russia in 2019, Moscow and Beijing reached a pact to replace the dollar with national currencies in international agreements between them.

The Bank of Russia recently revealed that the Eurasian country receives more euros than dollars for its exports to China, and the countries of the European Union.  Already in 2020, the share of the US currency fell below 50% for the first time according to the Russian Reserve Bank. Comparatively speaking, in 2015 90% of deals between China and Russia were made in dollars. The dollar was replaced by the euro and the yuan in the case of the Russian Federation. And the euro and the ruble in the case of the People's Republic of China. As well as gold. The yuan is unlikely to occupy a notable place given its volatility, and for them, the realistic alternative is to gradually move to settlements in digital currencies.

China, for its part, after its trade war during Donald Trump's tenure began to de-dollarize more sharply. The Beijing authorities feared a situation similar to that of Russia, which has been heavily sanctioned and even threatened with expulsion from the SWIFT system.

(Urdupoint.com,2021) Moscow has clinched a deal to abandon the dollar in transactions with India. New Delhi, according to UrduPoint News. Alexander Mikheev, director general of Russian export arm Rosoboronexport has said on Tuesday "By tradition, we nominate all operations in dollars for ease of calculation. Effectively, Rosoboronexport has moved almost 100% away from US currency seats. As for India, all settlements are made in rubles and rupees. We are actively practicing offsetting projects, which are also present in the contracts signed today. This is normal modern practice, one of the trends in the world market. With this approach, the parties do not face the risk of payment delays in fulfilling our contractual obligations to our partners. ".

The accelerated implementation of the digital yuan during this year, accompanied by all the legislative changes made by the Chinese government, has put all eyes on what can happen to the dollar. The People's Bank has turned China into one of the countries with the greatest progress in this aspect, when they achieved the milestone in 2020 to stop using the dollar in their stock market transactions, replacing it with the yuan (RMB - Renminbi), with the medium-term objective of being a digital exchange currency. In a scenario in which China has the largest reserve of dollars in the world, after so many disagreements, the country of the Middle Kingdom has considered starting to decouple the yuan from the US currency to emerge as a global reference currency. It is quite likely to see that China's allied countries such as Cuba, Venezuela, Iran, or North Korea, may coordinate such a strategy to protect their local economy from the disagreements with the United States and its allies.

CBDCs are the current goal of all developed countries, in particular, the Digital Euro and the Digital Dollar are the projects that have the most momentum.  The eYuan is the first real attempt to distribute a public digital currency in large economies, ahead of the US. Even the Bahamas has the so-called "Sand Dollar". Others like El Salvador have chosen to adopt Bitcoin.

(aden.org,2021) "The use of cash will be reduced by at least 40% in the next decade," according to Zhu Min, president of the National Institute of Financial Research at Tsinghua University, in August. The theoretical difference between digital currencies and cryptocurrencies is that the former is backed by central banks, as is the case of the eYuan, while cryptocurrencies are not. This, being private projects, generates greater volatility and less financial security, as they do not have the backing of monetary institutions. On the other hand, cryptocurrencies do not store personal data, historical records of user transactions and facilitate freedom of action.

The U.S. approach to such monitoring is according to Republican Senators Marsha Blackburn, Cynthia Lummis, and Roger Wicker that there may be a problem of spying and data security towards U.S. athletes during the upcoming Winter Olympics in Beijing 2022. This has generated this week a severe diplomatic problem between China and the United States, with veiled threats between the two sides.

(Senate.gov, 2021) "Olympic athletes should be aware that the digital yuan can be used to surveil Chinese citizens and visitors to China on an unprecedented scale....". These warn that the Chinese Communist Party could not only use the digital yuan for surveillance but is already doing so. The letter calls for a briefing to be held with the Senate Committee on Commerce, Science, and Transportation within a month. In June, another senator, Tom Cotton, expressed deep concern to the president that China would attempt to collect DNA from the U.S. team during the Beijing games. "Olympic athletes should be aware that the digital yuan can be used to monitor Chinese citizens and visitors to China on an unprecedented scale, in the hope that they will keep digital yuan wallets on their smartphones and continue using it upon return." The senators' concern extends stating that these are not mere hypotheses, but facts. They accuse digital payment platforms of being employed not only to surveil Chinese citizens but also to help threaten and arrest people. And concludes "The U.S. State Department, Treasury Department, and Commerce Department protect the privacy of American athletes."

After the US-Russia meeting, Putin considers NATO expansion in Ukraine and Eastern Europe a red line, and Biden would pull out a series of blocking measures in case of military intervention in Ukraine, the novelty is that he will pressure Germany to stop gas from the Nordstream channel in case this happens. Something that only benefits the United States and China. (France24, CNN, Reuters, Reuters, AP, 2021) European Commission President Ursula Von der Leyen has assured that Russia would be punished if it invades Ukraine. "The European Union will respond appropriately to any further aggression, including breaches of international law," "punishments will be composed of an extension of existing sanctions regimes and extra restrictive measures that the EU will work with international partners," "we would prefer to engage constructively, but that is up to them (Russia). Currently it is Russia's deliberate decisions and aggressive actions that continue to destabilize Europe's security," she said. The sanctions are aimed at applying restrictions to the energy sector or disconnecting Moscow from the SWIFT banking system and restricting investors from buying Russian debt on the secondary market.

Moscow wants to prevent NATO's creeping expansion on its borders and refuses to allow the organization to include Georgia and Ukraine. Putin also questions Ukraine's intentions and wants assurances that Kyiv will not use force to try to regain ground lost in 2014 to Russian-backed separatists, although the Ukrainians have ruled out such a possibility.

There is no doubt that digital currencies will have a great potential for adoption in the BRIC region, with China leading the way with e-RMB. Especially in countries that suffer economic blockades, or are part of the countries that are not being accepted by their ideologies or behavior before the Western axis. Countries experiencing funding constraints will be able to find recourse through the e-RMB.

We are facing what could be the forced end of free money. These factors will sting the United States, which will find itself with more and more bills in its banks, with no way out because it will take a long time to burn all the trillions of printed dollars.

The Weimar Republic, characterized by its political and social instability, staggered by frequent coups, and an economic crisis that led to the Hitler regime taking power, is a possible scenario to contemplate for the US economy. Exacerbation and internal conflicts, which may increase as all countries de-dollarize. On the other hand, the crisis in the Chinese real estate sector may cause the bankruptcy of the Chinese economy, which is currently de-dollarizing on the one hand and disengaging from the foreign debt of investors in its companies on the other. This is accompanied by the "nationalization" of its companies to get in tune with its political mindset. e-RMB seems to make sense from the point of view of the BRIC economies. Xi and Putin's anti-liberalism comes back in the two slogans called "the four identifications": "The great rejuvenation of the Chinese nation and the Chinese dream". It consists of balancing the principles of white power and hard power - they called it strength and virtue - exercising absolute authority over the subjects while recognizing their duty of public assistance. The essence of the Chinese dream slogan is the dream of a firm nation. Xi once said, "A sword is made on a whetstone and a man is forged in hardship." The combination of wealth and repression is already beginning to be perceived outside China's borders as a reverberation spreading through the land where the Dragon stands.

Happy Trading and Happy Friday!

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*This article only expresses my opinion and under no circumstances represents an investment recommendation, but a purely educational document.