Welcome to our Friday mailbag edition!
Every week, we receive some great questions from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.
Today, we have questions on China’s challenge to the U.S. dollar’s reserve currency status, energy independence, decentralized finance, and the efficacy of electric vehicles (EVs)…
So let’s get started…
Reader Chris T. was in touch with his thoughts, which we published in our mailbag:
Having read both parts of your position that the U.S. dollar will remain dominant in the world, I still believe you passed over a couple of topics just a little too quickly or easily.
The Chinese have, in fact, made strong inroads to being able to buy Saudi oil with the yuan. And as the U.S. continues to put a stranglehold on Russia, the Chinese continue to work closer with the Russians.
When you look at the oil-producing strength of Russia, and its likely continued relationship-strengthening with China… and the fact that most of the European nations rely on Russia for oil and gas… it would be foolish not to think that if the U.S. ostracizes itself from Saudi Arabia, potentially all of the Organization of the Petroleum Exporting Countries (OPEC), China, and Russia, this could make for an expedited loss of currency dominance.
The U.S. cannot afford to be at odds with every other major nation and their constituents and believe our currency will remain the dominant currency.
I believe you oversimplify the realities and the stability of the U.S. fiat as the reserve currency for the world.
Remember, the Chinese and Russians have been increasing their gold reserves at a tremendous rate. If the rest of the world decides to get on the gold standard, in addition to all the other issues discussed, it could leave the U.S. fiat in a very weak position.
– Chris T.
And in a great example of the dialogue developing among readers, Florence and Ernie responded to Chris’ comments:
Chris is absolutely right on. We are shooting ourselves in the foot. We need to reopen all our oil-producing capabilities, or our idiot government is taking us down the tubes. We also need to pursue efficient and safe nuclear technology.
– Florence L.
I feel that Chris T. has called it perfectly. The U.S. dollar “bully” has been on the wrong path since abandoning gold in 1971.
It can still hang on for a lot longer than it should because most of the world is living on credit and debt now. However, this has never been sustainable in the past, and it will not be sustainable this time.
– Ernie R.
Hi Chris, Florence, and Ernie. First of all, I am truly inspired by the depth of your conversations with each other.
My team and I work hard to provide you with distinct insights and actionable ideas regarding the state of the U.S. and the global financial world and economy. But I am thrilled that this dialogue is developing amongst all of you. So, thank you for that.
Now, to your comments, I’ll say this: We absolutely need to grow and maintain a strong level of energy independence here in the U.S.
In today’s world, this means focusing on oil and natural gas production and more efficient refining.
It also requires expanding into a more dominant and cost-effective level of alternative energy independence for tomorrow. This includes wind, solar, geothermal, and safe nuclear energy.
The stronger we are with respect to energy and power for today, and for whatever transitions are coming in the future, the stronger we are economically – for our domestic population and for our allies.
And that brings me to the specific point Chris is making about oil, the U.S. dollar, and China.
I want to be clear about this, because I know it’s an area many readers are watching closely.
I’m not saying that the U.S. dollar isn’t under some sort of threat from the Chinese yuan.
However, it’s a long way from losing its reserve currency dominance. That’s because of the size of the U.S. economy (even if it hasn’t grown as quickly as that of China). And the long-standing advantage that the U.S. dollar has (and still enjoys) as a global reserve currency.
And we’ve witnessed how much the dollar has strengthened in this period of financial, economic, and global geopolitical uncertainty – as the Fed has pivoted to a tightening posture.
During this period, the People’s Bank of China has effectively done the opposite. It has continued along its path of a more dovish approach to monetary policy.
China will absolutely seek to foster relationships with Saudi Arabia, and with any other oil-producing nation, to ensure it has the energy sources it needs to run its economy.
It will also do everything it can to pay in yuan, and thus push more yuan out into the global economy. That won’t stop. And it will make a dent in U.S. dollar dominance.
However, given the general make-up of trade and reserve currencies around the world, it will still take decades, if ever, for the yuan to take over that post from the U.S. dollar.
That said, it’s also true that the U.S. is not consolidating its global trade position as quickly or as steadfastly as I would do if I was running the country. The same goes for its domestic economy, from a manufacturing and production standpoint.
That’s largely due to the lack of a plan. Our general predisposition to the sort of ugly bi-partisan politics that makes efficient planning impossible is not helping, either.
The net result will be that China pushes ahead. So the U.S. needs to push ahead more than it’s currently doing from an economic and financial standpoint. And the two will remain interdependent on their mutual supply chains for decades, at least.
Next, reader Ron R. writes with some key questions related to our New Money investing theme…
Is the “banking revolution” spoken of tied in any way to the new financial regulatory framework brought about by the scandals revealed last year in the Robinhood-Citadel collusion scandal, which proved that nothing is illegal on Wall Street, while creative money-handlers create workarounds to the regulators?
Is the “revolution” in FinTech actually the installation and use of a new financial framework designed to inspect trading, while speeding up transaction clearinghouse time?
If so, who are the key players in this newly designed regulatory platform for the audit and validation of short selling, preventing naked short selling on the scale we see in so many Wall Street financial Institutions?
Have you named any of the FinTech firms picking up on the new “financial pipeline” facilitators?
– Ron R.
Hi Ron, thanks for such an excellently framed question on a very important topic. Decentralized finance – or DeFi, for short – is a big part of the banking revolution you mention. It will disrupt and transform our financial system for years to come.
DeFi falls under our New Money investing theme under our overall theme of the Great Distortion between the markets and the real economy.
Let me start by saying that although it would be impossible for me to answer your questions in detail here today, I plan to address this subject in more detail in future essays. So look out for more from me on this topic in the coming weeks and months.
In the meantime, I think it’s important to consider what DeFi is. As an emerging sector, it may not be familiar to all our readers.
In a nutshell, DeFi is a means to provide financial services and transactions outside of the traditional banking system. It uses cryptocurrency and/or blockchain technology to manage financial transactions.
The idea behind Defi is that it can effectively democratize finance. It replaces powerful, traditional, centralized institutions with peer-to-peer (P2P) relationships that can provide an array of financial services.
Those services include everyday banking, making and taking payments, loans and mortgages, complicated contracts, and asset trading.
PayPal is an example of a publicly traded company operating in this space. It facilitates digital payments. Mastercard is another. It is investing heavily in the DeFi space and blockchain-based finance.
There are also many non-publicly traded companies that are taking on niche fields from mortgage titles to non-fungible tokens (NFTs).
All companies operating in the DeFi space are experiencing tough times in these choppy markets. But many have good long-term prospects.
And for our purposes here and in my paid subscription, Distortion Report, when I write about the topic, I’ll stick to publicly traded companies and exchange-traded funds (ETFs).
So be sure to keep an eye out for more from me on this emerging topic in future Inside Wall Street dispatches. And thanks again for your message, Ron.
[Editor’s Note: If you would like to subscribe to Distortion Report, where Nomi gives in-depth analysis of individual investment recommendations under her five key investing themes, including New Money, click here.]
Finally, I’ve written about the key role electric vehicles (EVs) are playing in the New Energy transition several times now… and the various ways you can play this trend for profit. (You can catch up here, here, and here.)
But reader Thomas R. doesn’t believe it’s as straightforward as that…
Internal combustion engines waste almost ALL the gasoline that goes into them. Most of the energy extracted from the gas is given off as waste heat. What little energy is converted to useful power goes to move the heavy vehicle around! If an internal combustion engine is running, it is using gas. So, if your car is stopped with the engine running, it is using gas!
Electric vehicles (EVs) are a little better. They do not give off nearly as much waste heat. And they do not emit much in the way of gasses.
However, most of the electrical energy is still used to move the vehicle around. There are a lot of gaseous emissions generated at the power plants that produce the electricity they need to run. EVs are very far from being “zero emissions,” as Biden claims!
– Thomas R.
Hi Thomas, thanks for writing in. You’re right. EVs run on electricity that is, largely, still produced from fossil fuels in many parts of the world. To that, I’d also add that energy is also used to manufacture the vehicle – and, specifically, the battery.
But while EVs aren’t exactly zero emissions, they are far greener than fossil fuel-powered alternatives. Not just a “little better.”
That’s because EVs are responsible for considerably lower emissions over their lifetime than conventional vehicles.
Take the Nissan Leaf. This EV has long been the world’s best-selling electric car. It had global sales totaling 577,000 vehicles by February 2022. Its mass-market scale profile makes it a good example.
A 2019 study showed that the lifetime emissions of a Nissan Leaf EV were about three times lower than for the average fossil fuel-powered car.
What about indirect emissions?
Well, studies have shown that the total indirect emissions from EVs pale in comparison to the indirect emissions from conventional vehicles.
For example, Argonne National Laboratory, a U.S. Department of Energy multidisciplinary science and engineering research center, found that, between 2011 and 2019, EVs cumulatively offset 1.4 billion gallons of gasoline consumption.
Even when factoring in carbon dioxide (CO2) emissions from electricity consumption, EVs have reduced emissions by 6.9 million metric tons.
And with hundreds of billions earmarked for clean energy development worldwide, it’s a safe bet that these figures will continue to improve over time.
That’s it for this week’s mailbag. Thanks again to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
In the meantime, happy investing… and have a fantastic weekend!
Editor, Inside Wall Street with Nomi Prins