No Country for Old Men
That is no country for old men. The young
In one another’s arms, birds in the trees,
-Those dying generations-at their song,
The salmon-falls, the mackerel-crowded seas,
Fish, flesh, or fowl, commend all summer long
Whatever is begotten, born, and dies.
Caught in that sensual music all neglect
Monuments of unageing intellect.
W.B. Yeats, Sailing to Byzantium, 1928
The first half of 2021 has, at times, been startling. With such a tumultuous beginning, it is easy to relate to the title of this strategy piece: No Country for Old Men. Just a few “highlights”: riots in our cities, occupation of the Capitol, COVID and variant spread, vaccine roll-out, social media’s grip on Wall Street, and initial public offerings of everything from Robin Hood to Uber. It has caused us to ponder the un-ponderable, and plumb portions of the brain we seldom exercise only to realize that, perhaps, we have seen this before. Upon reading Jeffrey Garten’s new book, “Three Days at Camp David”, we were struck by the similarities fifty years ago, almost to the day. It was August 14, 1971, and President Richard Nixon had come to the stark realization that the Bretton Woods Agreement of 1944, assuring the convertibility of the U.S. dollar to gold, was unsustainable. To illustrate the problem, in 1955, the U.S. enjoyed $21.7 billion worth of gold (at the $35 per ounce price) to apply toward $13.5 billion dollars in liabilities by foreign governments. By 1971 that healthy gold surplus had evaporated, and the U.S. held only $10 billion of gold to cover dollar liabilities of $40 billion. The country had printed too much money.
A talented pool of the President’s advisors came together at a secret meeting at Camp David – the likes of Treasury Secretary John Connally, a young Treasury official named Paul Volcker (a future Federal Reserve Chairman), George Schultz, Casper Weinberger and others agreed on a structural change to the world economy and a major shift in U.S. economic policy. Following World War II, the U.S. was the sole power left standing, economy intact. It was inherent on our young country to provide an economic structure for a rebuilding world. The dollar was key, and it was determined at Bretton Woods, a small New Hampshire town, that every dollar held by governments would be convertible to gold at a rate of $35 an ounce. This made all countries comfortable in utilizing the currency in international trade and the U.S. dollar become the world’s currency. The concept of the US dollar as a “reserve” currency took hold globally.
By 1971, however, the U.S. had flooded the globe with dollars and no longer held enough gold to convert the currency as requested by other nations. At the same time an economic global titan had emerged. This Asian power was buying up assets, dominating trade, and snapping up U.S. companies. Japan was a terrifying competitor having rebuilt after the war with ample U.S. assistance. The U.S. had sustained its first trade deficit in decades, and Nixon was troubled and watched inflation begin to rise domestically. Despite the move upward in rates he did not want the Federal Reserve Chairman, Arthur Burns, to raise interest rates to stymie the inflationary trend, for fear of stifling the economy and, therefore, his re-election chances. At the same time U.S. post-war defense promises to NATO countries and Japan were stressing the U.S. budget. To make matters worse, there was an unpopular war being waged in Vietnam that was sapping resources that the nation needed. At home, racial tensions were running high and anti-war protests were breaking out. In addition to closing the Federal Reserve Gold Window, Nixon devalued the dollar and imposed tariffs and price controls in the U.S. to help aid the country’s economy. These were highly objectionable to many domestic companies as well as to international trading partners. Japan was incensed that they were never consulted on the issue. The scenario was eerily like today, fifty years later.
Today we are pulling out of decades of war in Iraq and Afghanistan, we have made clear to our allies that they must start bearing a larger portion of their defense costs, and China, instead of Japan, is the new titan tilting global trading patterns. Tariffs have been implemented, inflation is stirring, and trade deficits widen. The dollar has fared well as a reserve currency after the shock of 1971, this despite massive U.S. debt accumulated since that historic economic re-set. We wonder if we are not at another inflection point, much akin to 1971. What might that look like?
We would begin with the impending introduction of the Chinese Central Bank Digital Currency (CCBDC). Already in use in major cities in China, this digital currency, backed by China, will revolutionize trade payments. The current SWIFT system for interbank messaging to facilitate international currency transfers will look quaint, and possibly obsolete. Trade related payments will be seamless, quick, and not dependent on some obscure bank’s operating hours. These payments will flow 24/7. It comes to mind the instances when we were delayed in traffic, desperately hoping to make it to the bank drive-through window in time to deposit a check. We are now moving rapidly away from this ancient model. Your phone in your pocket now enables such transactions 24/7. SWIFT transfers among banks are likely to be the next “normal” financial transaction to slowly fade away.
China’s introduction of the CCBDC will also allow them to enjoy unfettered access to data on every digital transaction. Once rolled out, we expect the Federal Reserve to move quickly with a Federal Reserve backed digital dollar. This will be as revolutionary as coming off the gold standard in 1971. Banks worldwide will scramble to find their place. Will each citizen in China and the U.S. have an account at the central bank? Will commercial banks be needed any longer? What becomes of paper currency? What control will we have over our banking data? Will the IRS have access to all our spending histories? Banks must reevaluate their roles in this new environment. Will the enormous government dollar-denominated debts being accrued become a permanent reality? Will foreign appetite for government bonds continue to enable U.S. debt creation with the adoption of the digital dollar, and perhaps even an alternative digital currency? More questions than answers, no doubt.
Alps, Apple & Aspirations
A close eye should be kept on Switzerland. In the past decade the Swiss National Bank has enacted policies to allow purchases of foreign stocks. The Swiss have accumulated sizeable holdings in large capitalization stocks such as Apple and Microsoft. These holdings have yielded huge returns to the Swiss government and will enable them to manage Swiss Franc strength against the Euro. This is important to Swiss manufacturers since it maintains the pricing of their goods at competitive rates in the Euro zone. Bitcoin and other digital currencies have been welcome in Switzerland. The town of Zug has been dubbed “Crypto Valley” with many digital currency start-ups springing to life. If China and the U.S. introduce digital currencies, it could spark activity in other non-central bank digital currencies. Switzerland will benefit.
The blockchain aspect to Bitcoin is proving its utility in numerous supply chain areas, enabling the digital tracking of assets, and ownership. The technology will only improve. Consider the deed on your home: today we acquire title insurance to protect our home ownership and a deed is filed at the courthouse, as it has been for over a century. We have a sneaking suspicion our grandchildren will chuckle when they learn we took great efforts to grow massive stands of timber, then cut them down and treated them with chemicals to create paper, only to memorialize our home ownership on this paper and hire attorneys to get the document to a basement room at a county courthouse and file the paper in a dank file to sit for time eternal. Blockchain-type processes will make this complex, arduous and expensive undertaking evaporate. Perhaps your digital deed will be on your phone, tablet and home PC, city digital deed pool, and county digital legal files, not to mention on every other deed blockchain being utilized.
It is quite likely that this inflection point will also feature technology breakthroughs in areas in which we have already witnessed progress. In the COVID vaccine efforts, messenger RNA and CRISPR technology has been center stage. (Check out our “Good News” spots at our website, www.derbend.com.) These companies in the gene sequencing arena will thrive as they tackle other diseases.
Space offers huge areas of commercial appeal. Private companies are driving the sector and more attention is being drawn to business models in space. NASA no longer owns this segment of the economy. Mineral mining on the moon or migration to Mars anyone?
Electrification and alternative energy will show solid growth as the technology improves. From transportation to solar power, battery technology will steadily be the focus. Quantum computing is just being tapped commercially and will open new revenue streams across every business sector. 5G cellular service will open huge vistas in industrial automation that will drive product innovation. The list is a long one, the future is bright.
We saw similar challenges fifty years ago and stared them down. A controversial president had able advisors around him and succeeded at altering global commerce with a courageous policy move. We will succeed again. Rest assured, it is no country for old men; invest accordingly!
E.B. “Chip” Beard
August 12, 2021