Warren Buffett Predicts Dollar Market Crash? Why The US Dollar Will Collapse W/ Inflation Stocks

by birtanpublished on September 29, 2020

Okay so buffett bought stock in a gold company and that got everybody freaked out because they were already worried about the dollar so a lot of people think that gold is a hedge against a dying dollar that's losing value and they thought hey

If buffett's getting into gold and that's a huge signal well in the last video we went over the proper way to analyze gold and we talked about how what really matters for gold prices is how much of a return

You're getting elsewhere so how much of a return you're getting in stocks bonds and other assets if that return is low then people are going into gold so it's not as big of a direct link to the dollar

But clearly there's still something going on with the dollar right and that's what we're going to talk about in today's video we're going to break down the exact signal that you'll need to look for to know that the dollar is

Really gonna collapse and before we get into it if you have not checked out our free training on how to trade these types of markets then definitely do that now there's a link in this video and down below in the

Description and comments teaches you the exact strategy that myself and all our fallible members have been using we're up over 50 this year working out really well regardless of where the dollar is going

So check that out if you haven't already now to understand the right way to analyze the dollar we got to go to the master i'm talking about the global macro legend george soros and i know how some people

Feel about soros but actually it seems like this generation's new george soros is bill gates especially based off your guys comments so maybe soros is very happy to not be the guy that everyone

Hates for once but hate him or love him he is a legendary speculator worth billions of dollars he's very good at it and he's written a lot about how he does it so we're going to go over

George soros's currency framework to understand what's happening with the dollar we can start with a quote at any moment of time there are myriads of feedback loops at work some of which are positive others

Negative they interact with each other producing the irregular price patterns that prevail most of the time but on the rare occasions the bubbles develop to their full potential they tend to overshadow

All other influences so markets like much of nature are composed of infinite feedback loops and understanding these feedback loops gave soros a big edge back in his prime and they're a key key part of his theory on

Reflexivity which is also a key part of analyzing currencies like the dollar and reflexivity long story short is basically a feedback loop best way to understand it is with an example so we could use

Tesla as an example a reflexivity feedback loop can explain why its price keeps going higher and higher so the first part to kick off the feedback loop is someone looks at tesla and says hey this is a great company i want to buy it

So they take their money and they buy shares and what happens to the price of those shares because they start buying they go up a little bit right supply and demand so then what happens

Is that some other investors see this first group of investors buying and the price going up and they think hey all of a sudden tesla is popping up on their price scans and they're thinking this might be a good stock the price is

Going up so they buy in too what happens when they buy in the price goes up even more so the first investors start thinking hey i was clearly right when i bought the first

Time the price has only gone up let me buy more so they buy more price goes up even more then you have the third group of investors who are like you know i never wanted to get into tesla it didn't look

Like a good company but the price keeps going up so maybe it is a good company and they buy and you can see how this keeps going and it's a self-reinforcing loop because as you buy and the price gets better it

Looks like you're right so you buy more and you make more money because people keep buying and it's that feedback loop that keeps pushing tesla's price higher and higher and the same thing can happen on the way down right all of a sudden

One person is like you know what tesla is not a good value for me anymore i'm gonna sell if they're selling well then the price is gonna drop a bit right so the next group of investors is like hey i love tesla but now the price is going

Down it must not be the same type of investment so they sell and then so on and so forth and you get the cascade of the price lower and that's pretty much how bubbles form and bust in markets and across

Everything it's that reflexivity loop so you can keep that in mind when we're talking about currencies because currencies are the same thing it's supply and demand for an asset but the asset instead of a stock

It's a dollar so to understand what's happening with the dollar we got to look at the primary feedback loops and that reflexivity at work in the dollar so we're going to take a look at soros's currency equation and we'll see why the

Dollar is at a short-term high and there will be some reversion in the mean meaning it's going to go lower but here's some things to understand but let's go over the basics to

Understand how to analyze currencies so like all markets exchange rates which you know are between currencies are driven by supply and demand and currency supply and demand can be

Separated into two broad categories fundamental and speculative so the fundamentals those are things like the trade and balance sheet of the currency issuer so the country so like the us what's our trade balance

And then of course what's our fiscal and monetary policies are we printing like crazy is powell at the home with this printer oh he is okay yeah not great for the currency and then of course budget deficits we're spending like

Crazy in our control of the money supply all things that affect the dollar those are the fundamentals then we can look at the speculative demand and that's centered around the expectations of the relative and future value of the dollar

So think about exchange rate trends how many yen can we buy with one dollar interest rate differentials are interest rates better here or in japan and relative market opportunities because if you want to invest in the us

Then you need dollars to do that so guess what you have to buy dollars to simplify it even further currency supply and demand is comprised of three things trade non-speculative capital

Transactions and speculative capital flows and i know this is getting into the weeds here but yeah this is for the macro nerds and this article and video are way simpler than trying to read

Soros's alchemy of finance because that thing is a mess lots of good stuff but it's so confusing but yeah this is some real real macro stuff so trade affects exchange rates because of the balance of

Trade so what's the balance of trade well countries sell goods in their home currency right so what's a u.s thing hot pockets you can only buy hot pockets in dollars so for other countries to try and buy

Those hot pockets they got to exchange their japanese yen or whatever for our dollars and then vice versa if we want to buy something from japan so a trade surplus would be hey everyone

Wants our hot pockets and we got a bunch of money flowing into our country and people converting into dollars that would be an appreciating force on the currency it would push the dollar higher but if everyone was focused on buying a

Product out of japan which i can't think of one off the top of my head other than my favorite export anime well then people would be getting rid of dollars and converting into yen and that wouldn't be good for the dollar so

That's how balance of trade affects the currency then you got speculative capital flows right and that's just speculation it's the buying and selling of currencies like the dollar or whatever people trading

With no underlying asset so the speculative capital moves in search of the highest total return money wants to move to where it's treated the best right where it's going to get the best return

So that total return is made up of exchange rate differentials interest rate differentials and local currency capital appreciation lots of words that's why this stuff is heady so of those three the most

Important are those exchange rates because they fluctuate way more than interest rates or relative market returns so it doesn't take much of an exchange rate decline or increase to completely

Overshadow everything else so in the short term over a few months to a few years those exchange rates are driven by speculative flows but in the long term economic fundamentals which is trade and non-speculative capital transactions

Those are the ones that dominate what's happening with the exchange rates so it's the dynamic tension between these two that determine the trend of different currencies so if we look back to

Currency supply and demand these top two trade in the capital transactions they're long term and this bottom one number three is short term a few months to a few years and trying to fit these things

Together is not easy and that's why we have alex and makarots to do it for us but it's nice to understand at least what's kind of going on so soros broke this down into a really easy

Friendly equation in the alchemy of finance which is not at all at least for me but maybe i'm stupid so here's the different variables that go into the equation e which is the nominal exchange rate

Which is the number of foreign currency like how much yen for buying one dollar so if e is going up then that's strengthening the dollar i which is the nominal interest rate v domestic versus foreign price level so

How fast are domestic prices rising versus foreign prices then we got v level of economic activity and non-speculative capital flow t is trade balance and b is government budget these are basically all the

Inputs that go into the equation of what affects the dollar and other currencies so the thing to understand is that the importance of each one of these individual drivers it shifts over time so each regime has a different

Factor that matters more and that's why forex markets are really tough to forecast because most of the people are keying off the thing that work during the last cycle while unaware of what's driving the current one are you guys

Still with me or did you fall asleep well i'm gonna keep going so we've been in a big dollar bull market that kicked off in 2011 and that was driven by this equation which i'm not even going to try to break down but basically

What it's saying is that u.s growth was stronger on a relative basis compared to the rest of the world and this led to good interest rates in the us which drove exchange rate appreciation the dollar

Becoming more valuable and that brought in speculative flows because better interest rates dollar being more valuable money is going to go there and that money goes into our assets like stocks and

Bonds and this ended up driving our relative market outperformance like our stock market has been crushing it so as a result the us dollar really benefited because the total return equation

People were getting a great return on the dollar and that's the most important factor in driving speculative flows and remember these speculative flows are what determines the trend of the

Dollar over the short to medium term so here's an interesting chart shows the us relative growth to the dollar you can see how related they are so you can see when the us growth this blue line

Was really strong then the dollar was rising but that growth compared to the rest of the world peaked in 84 one year before the dollar turned around and the dollar is this yellow line so you can see the u.s

Relative growth is a leading indicator of the dollar here once again growth peaked in 98 before the dollar turned over and now in the present time u.s growth peaked in 2015 and now we've seen the top in the dollar so things are

Changing all the factors that we just mentioned that created that bull market from 2011 are no longer supporting the dollar so that relative growth yield spreads exchange rates they're all working against the dollar now and also

We've got a terrible trade balance sheet and a widening budget deficit you can see right here trade balance crashing deficit exploding can't stop printing so now out of all the factors the dollar only has its

Relative market performance working in its favor because our markets are still crushing it to the moon right look at this print our way to the moon so reflexive processes tend to follow a certain pattern in the early stages the

Trend has to be self-reinforcing otherwise the process aborts but as that trend keeps extending it becomes increasingly vulnerable because the fundamentals such as trade and interest payments move

Against it the fundamentals deteriorate the trend can't keep going so that trend instead of being backed by those strong fundamentals it's basically held up by the previous belief there's a bias like the dollar kept going up so it

Should keep going up but eventually a turning point is reached and people wake up and then you see the loop in the other direction so if our market performance is the only thing that's holding up the us dollar right

Now well we know it is historically stretched you can look at this chart right here and this is another concept from soros benign versus vicious circles so during a benign circle that's when the currency will appreciate

And during a vicious one is when it depreciates so benign circles in the us are characterized by low inflation and easy fed a strong dollar and u.s outperformance a vicious circle is marked by above trend inflation a weak

Dollar in u.s underperformance so those are the circles or cycles that it keeps going through right now we're in a benign one because the dollar was strong right from

2011 but you can see our equity market right here is way above the trend that was set before so capital concentration in the u.s which is important right because people

Want to put their money where it's going to be treated best if they want to put in the u.s then they're buying dollars and that's pushing the dollar higher well that concentration is likely near its zenith its peak

The valuation premium placed on u.s financial assets is over 1.5 standard deviations above its long-term average you can see right here it was uh at this point near the dot-com bubble the great financial crisis

Trump tax cut and now covet ccpv and it no longer has the support of tailwinds of positive growth yield or exchange rate differentials like we said everything is turning against the dollar so really the one thing that's

Preventing the dollar from completely tipping over and collapsing is relative u.s asset outperformance and where is all that out performance coming from well it's coming from the bullish trend

In tech which we're all very familiar with stocks such as tesla which we just used in an example so if we know that the market is being held up by tech and the dollar is being held up by the market then what's the signal

That we should be looking for well we should be looking for when u.s tech begins to bend when the trend starts to turn around because then we can look at the dollar which was being supported by the market which is

Being supported by tech when that support gives away then yeah the dollar is going to fall so we are in the final final bullish phase of the us dollar it's ready to turn around now and when it turns around it's going to go into

One of these vicious circles where it's going to depreciate a lot and if this kind of reminds you of the boom bust cycle of our economy well yeah everything is cycles the tricky part is trying to figure out how

They all fit together so the new regime when the dollar is falling will likely be led by commodities emerging markets cyclicals and value now an important thing to understand

Is that this is just a standard cyclical turn in the dollar it's not a huge secular thing and in no way does it reflect the usd's status as the world's reserve currency so no

This isn't the death of the dollar this is a normal process you can see it's happened so many times over the last few decades right dollar value goes up and it goes down and goes up again so right now the dollar is near

A major support and we should be seeing a bounce which it looks like we are seeing that bounce but if the bounce doesn't last and there's a failure at this point right here well then that would be an

Important signal and it would tell us that the trend down for the dollar is starting for real but for right now it's still in this long term five year consolidation the break below this level would mark the start of a new

Regime and remember this doesn't mean it's the end of the dollar and the end of the us right now i know when we do our dalio videos he loves to talk about that he's real excited for the dollar being over

Or something i don't know he just seems very biased and in favor of china to me but anyway in the next video we'll explain more about why this isn't the death of the dollar as everyone thinks it is if

You want to see that make sure you subscribe if you haven't already take this training because all this dollar stuff is more long term but most of us are invested in these equity markets

So we need a strategy that works right now and in the future of course but you need to be more tactical and this will help you do that free training will teach you exactly how to do it there's a link in this video

And down below in the description comments take the training subscribe and i will see you in the next video stay followed out there bye

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