Episode 59: A SWIFT kick in the Assets

In this episode, I unpack one of the most underappreciated turning points in modern financial history and explain how this single act shattered the 80-year global trust network. Once you see it, you won't be able to look at interest rates, the price of gold or the US dollar the same way again.

Transcript

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Welcome to The Sovereign Guide. I'm your host McDonald. Let's get started. If you can hear my voice, you probably identify as a busy person after all who isn't busy these days. Emails, meetings, texts. You can't get away from the busyness without it seeking you out and finding you. And in our busyness, insidious things creep up on us that we're not necessarily connected to small data points. That's weird. Price of gas costs a little more. That's interesting. It looks like our IRA is doing really well. That's weird. Look at the price of gold. Huh? That's strange. I now need a visa to enter the UK and so on and so forth. Our business keeps us constantly distracted by the tiny data points that surround us in our lives. Our busyness keeps us constantly connected to the micro data points of our life, and it's very rare that we can stand up, stand back, widen the aperture, and notice that the particular data set that you picked up this morning say those that I've just rattled off with a much broader vision, start to turn into a trend. Trends sneak up on us this way. Can anybody associate any particular event with, say, the collapse of long-term government bonds over the last five years, outside of the standard trope that we now hear about gold? Is there any one defining mark in its trajectory from its lows of $280 an ounce in 2002 through today at somewhere around 5,000? Where was the real breakout? We don't notice these because we're pulled into the busyness of our lives, and I'm wanting to hit pause for a moment to do just that. To take you back to 10,000 feet with an aperture as wide as we need to identify groundbreaking moments that didn't feel that impressive at the time, but only with hindsight we look back and say, this explains a lot. What I'm gonna share with you, I want to give tremendous credit to Grant Williams, the thinker, writer, and economist who was the one to really connect these dots for me. What I'm going to show you is a groundbreaking moment in history that can point to major trend changes in a number of critical markets. Economies, asset classes, and the very inflation that we feel today in 1944 at a place called Bretton Woods, New Hampshire. The United States invited the world into its house and it promised them their seat at the table was safe. In 2002, the US didn't just ask one guest to leave. They showed the entire room that we own. The chairs, the table, the locks on the door, and you can be kicked out at a moment's notice. When that happens, you can't unsee that. The world is now looking for a new place to meet with World War ii. Still raging in 1944. 44 nations, oddly enough, met at a hotel in New Hampshire, Britain, woods, New Hampshire, to ensure, do their part, at least to try to ensure that there wouldn't be another great depression or another World War for that matter. The deal was this. Every country was going to peg their currency to the US dollar, and in return for that, the United States committed promised to peg the US dollar to gold at a specific price of $35 an ounce. What this would do is it would make the US dollar effectively globally useful liquidity that turned it into essentially liquid gold. It was as good as gold, but you could conduct trades in anything all around the world with the confidence of it being worth the gold of $35 an ounce, but the freedom and portability and speed and low drag exchange of simply exchanging hands with US dollars. the net result. Was supremely successful. The US effectively became the world's central banker, the one that provided the stability, the liquidity, and the neutral ground from which everybody could meet and trade and so on and so forth. This, this agreement gave the US dollar essentially an exorbitant privilege, what was later termed an exorbitant privilege. 'cause the world had to use the US dollar. If you were doing any serious business of any significance anywhere in the world, you would use US dollars. I myself have lived through this. You probably have too. I have negotiated for well-cooked maggots in Northern Mozambique with US dollars. I've paid bribes to get through questionable border posts in certain country and Latin America with US dollars. I've paid cash to get my family, my kids, into a small seedless Cessna aircraft. Fly out of Meine Columbia over the jungle of the Amazon and into the tiny village on the west coast of Columbia called Bio Solano, paid for with US dollars in cash. I have many such stories. I'm sure you have your own. This system has worked for nearly 80 years in 1971, Nixon took the United States off the gold standard, effectively, what they call shutting the gold window. Yes, there used to be actual windows at banks that you could go and give them dollars, and they would give you the equivalent value in gold. But it wasn't until two years later in 1973 when the SWIFT system was created. Swift is something you would've seen. If you've ever sent any significant wires or anything to a counterparty anywhere in the world, you would've seen people asking for your swift number. Swift is. An interesting system that has also, like the Bretton Woods Agreement worked amazingly well to make business easier than ever. SWIFT stands for the Society, S-W-I-F-T, the Society for Worldwide Interbank Financial Telecommunications. It was built specifically to provide the, essentially, the digital plumbing for what has now become well, what then became in 1971. Thanks to Nixon's Gold dislocation. A purely trust-based system. It used to be, Hey, use the US dollar because it's as good as gold to now, hey, use the US dollar because we can pay you with more US dollars. It was founded in 1973, as I say, by a cooperative, it's actually 239 banks from 15 different countries to replace the slow, insecure, old telex system that used to be used around the world, clumsy and expensive, and prone to failure. This new, standardized, neutral common language. For global finance. Now, the SWIFT system is not a bank, it's a secure messaging network. Think of it as kind of a highly encrypted WhatsApp or iMessage only. It's a message system for 11,000 banks around the world. This is what allows a bank in Brazil say to tell a bank in Japan, we are debiting our account for a million. Dollars and crediting yours and being able to do it with complete certainty because the system, the actual plumbing, the infrastructure is solid. Huge benefits emerged obviously for nearly 50 years now. 1973, over 50 years, swift had been the invisible trust layer, the layer of digital trust. That kind of helped us forget about the fact that dollars maybe weren't backed by gold. International commerce banking became instantaneous and friction free. This has been the case. The SWIFT system stacked on top of the Brett Woods agreement meant that the global order had rested beautifully on a promise. The promise was the dollar is the neutral tool for trade, and then something happened. On February 24th, 2022, that explains so much about the world that you live in today, that it might just blow your mind. You might remember that day as the moment when Russia invaded the Ukraine, huge for all around the world. Media outlets a buzz with this. Unbelievably unethical, immoral decision for Russia to invade Ukraine. The Russians, of course, taken the side. They did. They said, Hey, it's always been Russia, Ukrainians in that area. Some of them saying, Hey, we're kind of Russian ourselves, but the vast bulk of the world at large. And of course, the central sovereign nation of the Ukraine decided this was absolutely an invasion and the world needed to respond. This is a tricky one. What do we do? Send in troops, reanimate, the Cold War, which would now be a multipolar war because it's no longer just two nations with nuclear weapons. Or do we figure out more effective tools that may be, won't risk as many human lives or cost as much money? This has been the default now essentially since the United Nations came into power and its own power in 1945. Of course, betrayed many times with the countless international excursions by many countries around the world. But the response was, as we've seen so commonly in those years since sanctions, sanctions on Russian oil sanction, on Russian trade sanctions on businesses in the US and throughout the developed world, blocking them to do business with the Russians. But there was something else that the American Presidential Administration decided to do as well. They did something that structurally broke this global trust network. They froze the assets of the Russian Central Bank that were still functioning and flowing inside the SWIFT system. Over 300 billion US dollars worth of assets were blocked inside the plumbing, and Russia was excluded from its use. They found out that the SWIFT system and the global Banking Agreement wasn't actually a beautiful, centrally, collectively owned Central Park. It was a private club. And you were no longer invited. When trust networks are violated, even if we are not the one that pays a price, we suddenly become aware of the fact that we could be on the out. We too us the Uruguayan government. Us, the Zambians, the Australians, we too could fall afoul of the United States administration's whimsy, and be completely excluded from this most valuable country club. Trust networks are the hidden dividend of civilization and all human relationships. They take decades to build, and they can only be built through boring, predictable behavior, and they can be shattered in minutes progress even for you as an individual. In your friendships, in your, at the relationship level, so individually for you with your friends in a relationship level, say in a marriage, or at the global level of, say, international trade requires us to be vulnerable to a shared system, a mutual agreement someplace that we both say over here we do this and nobody does otherwise. By cutting off Russian access and seizing this 300 billion in reserves, the United States essentially transformed what would was previously a neutral kind of public utility into a private political tool. The message to the world was clear, your wealth is only yours as long as you have our permission to use it. By March 3rd, 2022, one week after the invasion and the imposition of both sanctions and the halting of access to SWIFT and the segmenting of Russian assets from others, the market had begun to internalize the end of this sort of financial neutrality. We started to see, um, what began as a small drifting away. And very quickly gathered incredible speed and turned into a flight from what we should call permission based assets like bonds, US government bonds into sovereign assets like gold oil and Bitcoin. That shift was underway. To give you an idea of the impact, here's the data on what's happened as those central bankers and high net worth individuals, sovereign wealth funds, et cetera. Once they realized that they could be excluded at a moment's notice, and the very utility itself could be cut off, or their access to it could be removed and cut off this movement into assets that they could own without anybody's permission kicked in. Oil, gold, et cetera. Here's the data. Since that time, one week after the enforcement of this swift disconnect for the Russians, here's what exactly has transpired. US long-term treasuries are down 39%. If you owned bonds in what up until that day, were considered the safest long-term place to park. Money in the world, or even money has collapsed in face value, actual value by almost 40%. Crude oil is up. 10%. Now I'm sharing these stats with you as of the latest fall apart or the latest crumbling of, uh, agreements with Iran and the price of oil. So though we look at it and say, wow, goodness, you know, the price of oil is up. It is still only up 9.6% since that day in March of 2022. Gold is up 155%. Bonds down 38 39. Gold is up 155%. Bitcoin up 72%. The US dollar essentially flat. This is exactly what we could expect to have happen. What's individuals realized that they needed to move to assets that they could own, that they didn't need anybody else's support with? No permission required. Central banks around the world have been gorging themselves on gold and oil. As hard assets. Individuals appear to have done the same with Bitcoin. In order to understand what happened here and why, here we are almost five years later, still dealing with the implications and fallout. We've gotta deconstruct the psychology of betrayal, betrayal response, and betrayal, repair. Rebuilding a trust network isn't a math problem. It's a human behavior problem. I'll use a pretty awful example just to make the point. If you can imagine a husband and wife, couple being together for 20 years, everything has gone fine. They've had their ups and downs, certainly they've had their conflict. But one day, one of the partners, regardless of the agenda, in a conflict, just ups and punches, their spouse in the face never happened before. what follows is the shame. The awful feeling of how they let themselves down. They're so sorry. They commit to going to therapy, to doing whatever they need to do to prove to his or her spouse that this will never happen again. To the extent that the battered spouse in this example agrees and says, I'm not gonna leave you for this. I think we can get through it. no matter how much work both parties do, no matter how well intended, how committed they are to the work, how hardworking and disciplined and consistent they are with the changes, there is no version of their future where when a fight escalates that previously battered spouse is not going to make sure they're just a little out of reach. Just a little flinchy and it will be like that for the rest of their days. Once trust networks are broken, it is next to impossible to repair them. Can the US rebuild this trust? Let's stay at the individual level. Thinking about the psychology of betrayal, because that's what effectively animates all of these responses, just as collective individuals are responding to this. They're just a bunch of individuals that happen to be in a group. Here's the data on infidelity and trust in long-term committed relationships. Clinical research shows that after a major betrayal, it takes two to five years of perfect transparency. And total vulnerability just to reach a baseline of stability. This is from the actual research. These are the terms two to five years of quote unquote perfect transparency and total vulnerability. Just to reach a quote, baseline of stability, while many couples stay together for convenience, like nations staying in, say, the US dollar, because there's no immediate clear alternative. According to the data, only about 15 to 20% of relationships ever, ever regain a high trust, thriving bond After a betrayal for most, most reconciled couples end up living in a state of this kind of guarded flinchy coexistence. The portrayed partner usually keeps kind of an escape plan. Keeps, uh, one foot closer to the door or maybe even, uh, a secret account to fund their escape should they need it. We have all been betrayed by others, and if you're old enough and honest enough, you have probably betrayed someone else, either accidentally, advertently or inadvertently, you know how it feels on both sides. And you know how hard it is to repair. This means that for the United States to regain its role as the most trusted place to do business, there really are only two roots. The first is probably something like an international un mediated charter agreement. Where should anybody get excluded from the SWIFT system, it would require, say, a vote from the UN Security Council or something, which would most likely include one of those nations voting on. So it should make it very difficult to do. We would move what is previously just a collective assumed agreement into a formalized, centrally agreed upon third party mandate of the un. That's one version at the rate things are going with and for the un, with and for the United States. Integration with un. That strikes me as a very low probability. The only other alternative is for essentially. The United States collective administrations over the next 10 years do the same thing. They show up with perfect compliance, never violating the agreement again, holding to their commitments, showing all of the micro commitments that they can satisfy, and so on and so forth, and hope that that is enough to satisfy our allies around the world. We can only hope that that would do it. The US is now the partner who broke the covenant. Even if the US actually behaves perfectly for the next decade, the rest of the world has already started building their escape accounts. As I say, a central bank ownership of gold has skyrocketed. You know, funny enough, I was very early to the gold trend advocating it for my clients to buy and own back in 2003 and 2004. I remember clearly started buying it at about $330 an ounce, and oddly enough, in the managed capital that I was driving and making decisions for with my partner, there was only one way to own it within. A back within a brokerage firm, and it was called the Central Fund of Canada. Uh, the symbol was CEF Charlie Echo Frank. It was the only way. There were no other proxies. There was no G-L-D-S-L-V and all of the thousands of other iterations, and the problem was with gold at the time, trading in the low three hundreds and nobody really wanting to own it. We were moving enough money at the time that we could actually, I could place trades that effectively bid against myself. There were days when I was accumulating positions in CEF to hold gold in our accounts for our clients, where I represented 50% of the entire day's purchases. Those of you that have more trading experience will know exactly what this meant. It took me months and months to build a position that I needed to for clients. It was a beautiful thing. We, uh, owned gold, the miners silver from 330 an ounce all the way up to $1,250 an ounce, and it started looking a little ridiculous. So I sold out only to watch it go to $1,900 over the next year. This always happens. You're either too early or too late. And I would take comfort when clients would say, ah, you missed out. I had to retreat into this. The humility, of course, but uh, the difficulty of saying apparently I did, but more money was made between 330 and 1250 then was made between 1250 and 1900. Needless to say that 1900 peak didn't last very long. Gold plummeted back to the 11 hundreds and we got a chance to buy it again. Anyway, enough of that rabbit hole back to our trust networks. Nations are no longer asking, is the dollar the most liquid? They're asking, is the dollar the most safe from political whimsy? The answer for that was written on February 24th, 2022. Moving from a world of trust, but verify to verify, then diversify. That's what we've done. Of course, what we've also done since then is impose tariffs randomly, sporadically. As of today's date, there have been over 687 changes and tariff announcements. In the last 13 months since their launch over 680. So tariffs aren't gonna do much to help us establish ourselves as the place to do business and the currency to do business in. We've certainly got away with it. The dollar is actually modestly up about 5% since that time. Nothing meaningful, but so long as this continues, the dollar is only going to lose its shine and things like gold and oil, and I'm less convinced Bitcoin will represent a store of value in the future, just as they have for thousands of years in the case of gold and for almost 150 in the case of oil. The US is currently the spouse that's saying, I only did it 'cause you know, it was a moral emergency. We were looking out for the Ukrainians. But to the rest of the world, the motive doesn't matter. The capacity to cheat is what's been proven, and that's the part that really breaks relationships. We're entering the Post Brett Woods Post Swift era. It took 80 years to build a global trust network of the US dollar, but it took just 48 hours to show that the network is no longer neutral. This shift has been sneaky, but by now it's visible to everybody. I think it's in earnest Hemingways. Uh, the sun also rises where when his central characters asked how he went bankrupt, he said slowly at first and then suddenly. What began slowly back in February, March of 2022 is now obviously happening quite suddenly and those of us with the privilege of having assets to Shepherd would do well to recalibrate to this new reality. Just like we are no longer clearly in an environment of falling interest rates so too, are we no longer clearly? The currency or the system that everybody has to do business with, other spinoffs are already emerging. Certainly the crypto space is an example of that, but China has come up with its SIPS program, the Chinese interbank system. Mimicking that of Swift and using its leverage and its incredible explosion of trade agreements since our trade tariffs to deepen and broaden those relationships with their fellow trading partners. This trend break was meaningful and it's going to be lasting, and we can be on the right side or the wrong side of this shift. There's no going back and just promising our trade partners that we'll never do it again. In fact, everything about our choices just in the last 14 months have proven that we will make and change our minds constantly. And your entire fortunes will either be caught up in the system and subject to that whimsy, or you could maybe hedge your bets a little. That's what the smartest, deepest pockets in the world are doing, and you might wanna consider the same, oddly enough. The Chinese renminbi looks like one of the most undervalued currencies on Earth right now. We'll see.

Speaker 2 27:44

That's it for this episode. Thanks for being here. Hey, there's only two things that you have in your life. Your time and your attention that you've given both to me for these few minutes of today means everything. Cheers.