Is this the beginning of a new financial order?
Abraham George Market Musings
The markets are waking up to new challenges and new information. The ‘risk-off’ mood in other markets is forcing gold and oil to go through the roof. Even with all inflationary fears, bonds are rallying.
Currencies are very mixed. Euro and Sterling are falling due to the geographical proximity to the war in Europe. Safe haven currencies like Swiss francs and Japanese yen are doing nothing but the Aussie dollar and New Zealand dollar have caught a bid. The greenback is the best of the lot and very soon the Dollar Index could be challenging the 100 dollar mark. Equity markets very much want to go up but in such a situation of uncertainty, it is pressured down. We don’t know how long this can prevail but the more it carries on and more innocent lives are lost in Ukraine and for Russia, Putin will be getting weaker and the united resolve of Ukraine and its supporters will get stronger. Let’s leave politics and war aside as that’s all there for all of us to see.
I think out of all this, we are seeing the beginnings of a new financial order. This was already underway but the war has hastened how this could play out. The increasing isolation of Russia and its ejection from the SWIFT financial network is driving Moscow into the arms of Beijing. China has been building up its own version of SWIFT called the Cross-Border Interbank Payment System (CIPS). A collaboration with Russia’s own system looks increasingly likely.
This is what the 83-year-old economist Michael Hudson had to say, “Developing nations will seek to join at the same time keep SWIFT - moving their reserves into the new system.”
This could be the beginning of the end of dollarization for good. Many countries that are threatened with ‘democracy’ or those displaying diplomatic independence will be afraid to use US banks and would want an alternative financial system.
This is what Zoltan Pozsar, a veteran from the New York Fed but now working as a strategist with Credit Suisse had to say in a podcast with Bloomberg. “If Russia’s foreign exchange reserves can be rendered nigh - worthless on a moment’s notice from the White House, what’s the incentive for other central banks to hold onto dollars as a safe asset. India is already having trade with Russia denominated in rubles and rupees. In the short term, the SWIFT action and other sanctions will hurt Russia more than anyone. But the uncontested reign of the dollar as a reserve currency is going to be challenged and recent events are paving its way for a quicker end.
It was a 30-year process for the US Dollar to dethrone the British Pound as the global reserve currency, with the outbreak of World War I in 1914 and ending with the Bretton Woods Agreement in 1944. So this could be long drawn.
There are huge complexities to this possible financial system when cryptocurrencies are thrown into this mix as well. It is nice to be in the markets at such a time as this as we are on the cusp of a newly emerging financial order.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is a co-founder of a new hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.