Saudi Arabia Could Damage Dollar

Saudi Arabia Could Damage Dollar

It is a good bet that if something is not in the daily headlines of the major media, then it is probably very important.  Under the radar has been the dramatic, volatile political turmoil in Saudi Arabia.  The country’s strategic relationship with the United States has a significant effect on the price of oil, energy, and the primacy of the dollar in global oil markets.  Upheaval can impact the dollar in significant ways, and dramatic, substantial volatility can risk the reserve currency status of the US greenback.

We have talked about the issue of dollar primacy before.  Once backed by gold, the dollar became the world’s reserve, singular currency of value after World War II (although it was widely in use prior to the war).  When we went off the gold standard in 1971, the dollar remained the world’s reserve currency for the principal reason that no one could challenge our cultural, financial, and military superiority.

Things have changed.  While gradual changes in the global economic landscape were inevitable, from a myriad of factors, it has been the previous 8 years which has radically and fundamentally transformed our leading position in the world.  Lacking the physical dominance on the global landscape, why would other countries feel compelled to use the dollar as a reserve currency?

Nonetheless, replacing the main unit of exchange in over 80% of all global economic transactions was not going to happen easily, or overnight.  Hence, the dollar remains “King Dollar” … for now.

 What could hasten changes in the global foreign exchange markets, and central bank usage of dollars as the primary global currency is a massive upheaval in energy markets.  While the U.S. has become mostly energy independent (thanks to free-market capitalism, innovation, and fracking), and has almost become a net “exporter” of energy in less than a decade, most of the world remains dependent on energy supplies from the Middle East.  Upheaval in those markets can impact pricing and therefore global economics.

And that is what makes the Kingdom of Saudi Arabia’s most recent internal political struggles so important.  Consider these recent events:

 1)            The transfer of power went to a younger, less experienced son as opposed to an older cousin or brother of the current King – King Salman.

2)            His son – Mohammed Bin Salman – is 32 years old and a reformer and is currently titled as the Crown Prince.

3)            For the first time in decades, the power struggle has been public and nasty, with dozens of relatives, brothers, uncles, cousins, etc. arrested for “corruption” … bank accounts seized, wives and children under house arrest … the new leader plans on clearing out all potential threats to his rule.

4)            His expected reforms have riled the conservative Wahhabi’s and Sunni Mosque extremists, splitting the country and the public in two.

The U.S. and Saudi Arabia have been strategic partners for almost a century, and bound the relationship further with not so secret, but off-the-record, agreements between then-President Nixon and King Faisal shortly after the Yom Kipper War and the first OPEC oil embargo – which provided that the U.S. would guarantee Saudi security and oil transport security in the gulf, in exchange for cheap supplies of oil and purchases of U.S. Treasuries.   Oil is traded in dollars – going off the gold standard in 1971, this helped ensure dollar stability as it floated against other currencies.  Liquidity and stability, backed by U.S. military might, kept the dollar as the world’s reserve currency even as it was no longer backed by gold.

Saudi Arabia Could Damage Dollar

The pillar of U.S. military might has been shaken and dollar liquidity was questioned with the 2008 financial crisis. Therefore, more than ever, dollar stability depends in no small part of stable energy markets.

BUT … the “palace intrigue” in Saudi Arabia, on the surface, can have some appeal.  What is the good and the bad of Saudi politics?

What Good Can Come From Saudi Political Intrigue?

  1. Reform and modernization represent a slight shift in values and beliefs. Any change in the treatment of women, in diversifying their economy, and helping to stamp our radicalization in the Muslim faith are welcome and needed changes in Saudi society.  It also makes it easier for the U.S. to do business with the very home of Islam making an effort to modernize their society.  The anti-terrorism effort should get a boost as well.
  2. Reduces stress on Israel. Saudi money and regional influence directly impact the Israeli-Palestinian conflict.  Sensing a greater threat in Iran, the Saudi’s (along with the Egyptians and Jordanians) have moved closer to Israel in regional political and military coordination.  That is a good thing for both Israel’s tactical defenses and U.S. strategic interests.
  3. They are the new bulwark against Iranian hegemony. Iraq was the original barrier to Iranian influence in the Middle East.  When we destroyed Iraq, we were supposed to serve as the guarantor by remaining there.  With Obama’s withdrawal right when we had won the war, Iraq fell apart, leaving Iran as the most powerful and influential player.  Combined with Obama’s Iran deal, giving billions to the mullahs, and not preventing Iran from becoming a nuclear state, our allies in the region rightfully determined we could not be counted on.  However, this has forced the Saudi’s to devise their own strategy in combatting the Iranians, and that is a good thing if they can pull it off without our help.  Less blood and treasure will be spent by the U.S. if the people who actually live there take up their own defense.


What Bad Can Come From Saudi Political Intrigue, and How Could it Impact
Dollar “Reserve Currency” Status?

  1. U.S. withdrawal has moved the Saudi’s closer to Russia and China China from an economic perspective, and Russia from a military perspective.  The Saudi’s were infuriated at Obama’s Iran deal – rightfully knowing it would empower their Shia rivals.  They also had momentum and believed they could topple the brutal Assad regime in Syria.  But that momentum was reversed with Obama’s failure to enforce the “line in the sand” when the Syrians used poison gas on their own population.  This was again rightfully perceived as weakness, and gave the Russians the belief they could intervene without US pushback…. which they did and we did not.  The result has been a multi-year, multi-front war pushing Sunni Saudi Arabia back, and empowering Shia Iran to their detriment.  An Iranian land bridge now reaches all the way to the Mediterranean and further empowers the Hezbollah terror group and threatens Israel.  US foreign policy in the region under Obama has been nothing short of catastrophically bad for everyone, and Saudi Arabia has borne the brunt of the suffering.  No wonder they are seeking new, powerful friends to help secure their defense.  The Russians are on the side of Iran, but more than willing to play the regional security guarantor role that we have given up.  The larger plan for Russia and Iran is the removal of the U.S. from the region, and removal of the dollar as the primary currency in energy trades.
  2. China has the same objective – end dollar primacy. China has the same objective – end the role of the dollar as the global reserve currency.  This gives enormous economic benefit and leverage to the United States, and China believes that role is no longer deserved.  Saudi Arabia fears a powerful enemy in Iran, destabilized borders with Syria and Iraq, and their own potential internal strife with their reform and modernization plans (Iran is funding destabilization efforts in Saudi Arabia as well – seeing an opportunity).  The U.S. is no longer a reliable, stabilizing ally, and therefore – in steps China.  This past year, deals have been signed worth over $65 billion; oil deals between Saudi ARAMCO and China’s state industrial company Norinco have been signed; it was a direct signal to the entire region:  Saudi Arabia was moving away from U.S. dependence.
  3. If Oil trades in other currencies besides the dollar, that is the last pillar of dollar dominance in global markets. All 3 countries – Russia as a regional power with global military reach … China as a global economic power who has nukes but not the ability to forward deploy, yet … and Iran, a regional player seeking regional hegemony and eventually to play on the global stage … ALL THREE want the following: (A) control of energy markets;  (B) removal of the U.S. from the region; and, (C) replace the dollar as the currency used for trading in the energy market, and in turn, drive it from its position as the global reserve currency.   All for different reasons – China wants to rival and eventually surpass the U.S. as the pre-eminent nation on Earth … Russia wants to secure its borders and regain past glory … Iran has ideological beliefs in destroying the Jews and the Great Satan (the U.S.)… to accomplish these tasks, the easiest way is through economic warfare (actual military conflict would result in global destruction and/or US victory, so that is not a current option).  The easiest way to succeed in economic warfare is through downgrading the value of the dollar, eventually replacing it in energy markets, which would be the stepping stone to a new global reserve currency.  Remember – people use the dollar because of its safety …first backed by gold, that protection has been gone for 46 years……then backed by our power, and that’s been eroded the last 8 years.  These efforts start in Saudi Arabia – the kingdom which controls OPEC, controls energy prices, and who feels we have left them hanging alone in a very dangerous part of the world.

 Dramatic changes in our economic way of life may or may not be coming our way, but regardless, the information we do have suggests a protection strategy for your money is a safer way to approach the political and economic unknown. Call now to learn how you can have your money protected from stock market losses and earning a reasonable rate of return! 877-912-1919

Giving Thanks This Holiday Season

Giving Thanks This Holiday Season

Americans always have much to be grateful for each Thanksgiving season.  The annual holiday is best known for turkey, two days off from work, and football.  It is a rich tradition that is practiced in much of North America and throughout the world.

Giving Thanks This Holiday Season - Macy's Thanksgiving Parade

There are many claims to the official start date of the Thanksgiving holiday.  The earliest claim is by the Spanish, who claimed explorers in San Elizario, Texas held a religious service of thanks in 1598.  But the most common claims exist between Virginia and New England.  Virginia has the oldest claim, dating to 1619 and the arrival of 38 English Settlers at the “Berkley Hundred” colony.  Its founding charter as issued by the London Company recognized the day of thanks with this language:  “… that the day of our ships arrival at the place assigned … in the land of Virginia shall be yearly and perpetually kept holy as a day of thanksgiving to Almighty God.”

 While Virginia has the oldest claim, Americans typically refer to the Massachusetts Bay Colony’s Thanksgiving celebration as the one most recognized in tradition and national folklore.  It first occurred in 1621 and included 53 surviving Pilgrims and a number of Indians.  Fifteen pilgrims had already died.  By the time supplies and new colonists arrived in 1623, only 4 adult females remained alive from the original landing.

Giving Thanks This Holiday Season - Pilgrims

Later, as President of the United States George Washington proclaimed the first nationwide thanksgiving celebration in America marking November 26, 1789, “… as a day of public thanksgiving and prayer to be observed by acknowledging with grateful hearts the many and signal favours of Almighty God.”

Giving Thanks This Holiday Season - Family

 Top 5 Things Americans Can Be Thankful For:

 1. Patriotism. Back in 2014, singer Janine Stange decided to perform the National Anthem in all 50 states.  She is the first person known to do so, and when asked about what led her to do this she replied: “For 90 seconds, no matter who we voted for, or what team we want to win – we are as one. When we stand with our hands over our hearts, we are singing ‘our song.’ That is always to be regarded as a privilege, not a formality. I hope this mission brings a renewed awareness, honor and respect for those who have fought and sacrificed their time, wellbeing, families…and lives for our freedom.”   Lost on the so-called anthem/flag protesters in the NFL is that you will not win over an American by disrespecting their flag or their national anthem.  George M. Cohan, known as the father of American musical comedies, the “Man who Owned Broadway” and the composer of famous musical scores such as “Over There”, “Give My Regards to Broadway”, “The Yankee Doodle Boy” and “You’re a Grand Old Flag,” also famously wrote the following:  “Ev’ry heart beats true, ‘neath the Red, White and Blue.”

 2. The opportunity of wealth, prosperity and the pursuit of happiness. As said many times, we enjoy the deepest capital markets, the rule of law, and a historical commitment to liberty that allows each American to pursue their own path in life.  Our markets enjoy an unequal status in innovation, and a diverse pool of talent among the population.  Nothing should be taken for granted, and freedom is only one generation away from being lost if we are not vigilant, but today in 2017, we have much to be thankful for.

3. The melting pot. Legal immigration is something to be thankful forPeople around the world remain desperate for a chance to visit that “Shining City on a Hill” known as America.  While illegal immigration can erode a common culture, and can cause political backlash, legal immigration helps us remain the most diverse and innovative economic engine in the world!

4. Our freedoms. Constitution, rule of law, Bill of Rights, freedom of the press, freedom of speech, to peaceably assemble, free from search and seizure, due process … the list goes on.  No country in human history has enjoyed the breadth of personal freedom and opportunity as we have here in America.  While that personal freedom appears to be fraying, we still should give thanks for the glory that it is to be an American.

5. Our families. Yes, your sister is insufferable … your grandfather keeps telling you that no one could beat the ’27 Yankees … your mother still has a VCR player with the number 12:00 flashing … Dad wants to eat at lunch instead of dinner and the kids do not want to come inside … some have few family members to share with at all. Take the time to give thanks for those that love us and no matter where we are or what we have become, will always stand with you because you are their family.

 Sam Adams was an American patriot, revolutionary, the brother of future President John Adams, and of course the namesake of a famous Boston lager.  He also is quoted often in patriotic literature, and one of his more famous quotes was: “If ever a time should come, when vain and aspiring men shall possess the highest seats in Government, our country will stand in need of its experienced patriots to prevent its ruin.”  Everywhere this Thanksgiving, please be sure to give thanks for American patriots, whose willingness to risk all for this grand experiment gave us a legacy unmatched in human history.

The last thing we should give thanks for, and perhaps most important, is for the men and women of the U.S. military.  Separated from their families, around the globe they keep watch to keep the American people safer than any other global empire in human history.

There is a lot to be thankful for this holiday season.  There are those in need, people you may know who need a helping hand, and we need to help take care of those less fortunate.  But all Americans have reason to give thanks – it starts with knowing that we are … Americans!

Milken, Boesky, and the Demise of Drexel Burnham Lambert

Milken, Boesky, and the Demise of Drexel Burnham Lambert

The rise of our stock market to new highs seemingly every week can be attributed to many factors, many of which were based upon the easy money policies of the previous administration.  Combine that with the expectation of tax reform and pro-growth policies from the current government, and you can see the on-going optimism on Wall Street.

While artificial stimulants and animal spirits can make for bull markets, it reminds you of a great era of corporate titans, corporate raiders, as well as the scandals of the junk bond kings.  Those were the days of Michael Milken, Ivan Boesky, and the investment banking firm of Drexel Burnham Lambert …. grand titans of Wall Street.

Milken, Boesky, and the Demise of Drexel Burnham Lambert

It was a cautionary tale of unrestrained greed, and prosecutorial power driven by political ambition (see:  Rudy Giuliani).  It gave us the infamous line, “Greed is good”, from the Oliver Stone’s movie classic “Wall Street”. Old terms became new to the public such as the “junk bond” and insider trading.  Michael Milken, the king of Wall Street and the head of Drexel Burnham Lambert’s “high-yield” (see:  Junk Bonds) debt department, became the poster boy of 1980s greed and excess.  He was the king of the “junk bond” on Wall Street.  Ivan Boesky was an arbitrageur who became Milken’s client, friend and confidante who gave him up when the feds came calling.

The crimes are now well known:  Boesky became rich as an arbitrager, someone who trades on the stock of companies rumored to be near a takeover.  He often obtained inside information from his close relationship with Michael Milken, and most of his deals by that time were financed by Milken and Drexel.  His dealings with Milken were uncovered when a banker at Drexel, Dennis Levine, was caught trading on inside information with off-shore accounts.  The feds then moved in.

How much do you remember of the late-80s Wall Street Junk-Bond Scandal?

 

10 Fun Facts Regarding Michael Milken, Ivan Boesky, and the Last Days of Drexel Burnham Lambert:

  1. High Yield Debt helps save old companies on hard times. Many established brands such as J. Crew and other smaller but well-known companies have used high yield debt, known as “junk bonds”, to help finance their way out of difficult times.  It does not always work, but investors achieved 5.3% returns on short term “junk bonds” in 2016.  While given a bad name thanks to the Drexel scandals, they do serve a purpose in the marketplace.

 

  1. The hottest party ticket on Wall Street was ‘The Predator’s Ball’. Ironically, the annual gala/convention hosted by Michael Milken and Drexel Burnham Lambert was held in California and brought together the biggest names on Wall Street out to the West Coast.  While many see the titans of high finance as living hedonistic lives, the Predator’s Ball – despite its title – was considered one of the most important deal making conventions in the industry.  Some of the biggest names on Wall Street to include corporate raiders T. Boone Pickens and Henry Kravis were annual attendees.  The name of the event did help contribute to the negative reputation of Milken and his firm.

 

  1. Rudy Giuliani’s pursuit of Drexel could have been politically motivated. Michael Milken, as head of Drexel’s high-yield debt department, was charged primarily under the RICO statute – laws used to bring down the mob.  The investigation into Drexel started from insider trading violations which ensnared Drexel traders and Milken client Ivan Boesky, but Milken himself was declared by the judge that she found no evidence of securities violations, and that he was only guilty of misleading investigators and preventing their lawful attempts at conducting their investigation.  In the end, Judge (Kimba) Wood only found some $300,000.00 in losses in Mr. Milken’s dealings – and those mostly occurred after bad publicity from the initial investigation.  Since the trials (1989-1990), it has been widely discussed that Giuliani pursued Wall Street titans to help augment his resume for the New York City Mayoral race.  While big fans of Mayor Giuliani, politics does often drive prosecutorial decisions.

 

Rudy Giuliani's pursuit of Drexel Burnham Lambert

 

  1. Michael Milken hated being called the junk bond king. He preferred to be called high-yield debt financier.  High-yield debt (meaning greater risk, but greater reward), mezzanine debt, and entire product lines were basically invented, marketed, and sold by Michael Milken.  He was the new genius wunderkind of Wall Street, and the original market-maker for junk bonds.  He was a graduate of University of California at Berkeley, and also received his MBA from the Wharton School of the University of Pennsylvania. While at Berkeley, Milken was influenced by credit studies authored by W. Braddock Hickman, a former president of the Federal Reserve Bank of Cleveland, who noted that a portfolio of non-investment grade bonds offered “risk-adjusted” returns greater than that of an investment grade portfolio.   Milken would eventually be convicted of racketeering and securities fraud due to insider trading, but as stated above, Judge Wood only found him to be guilty of obstructing the investigation.  Most supporters recognized that Milken has helped finance the massive expansion of capitalism and American business success during the 1980s and that the legal system did not know how to handle this new form of debt financing.  As author George Gilder stated in the year 2000:   “Milken was a key source of the organizational changes that have impelled economic growth over the last twenty years. Most striking was the productivity surge in capital, as Milken…and others took the vast sums trapped in old-line businesses and put them back into the markets.”

 

  1. What is the leveraged buyout?.  The Leveraged Buyout (LBO), was the method of choice for many corporate raiders during the 1980s.  As defined by Investopedia, the LBO is – “the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.”  The “junk bond” was often a set of packaged assets from companies in distress, and those company’s assets being collateralized by someone who was seeking to buy the company.  The company would often then be broken up, and each part sold to pay off the debt.  LBO’s financed by Milken, and utilized by Henry Kravis, T. Boone Pickens, and others, rightfully were scorned by those losing jobs in the process.

 

  1. The biggest deals were legendary. RJR Nabisco, Ted Turner and CNN, Creative Artists, Revlon … some of the biggest deals in the history of modern finance were executed by Milken and Drexel Burnham Lambert.  Junk bonds helped finance the economic expansion of the 1980s.

 

  1. They were the ‘Stars of the Junkyard’. As referenced by The Economist magazine, some of the best and the brightest of 1980’s Wall Street are still leading figures in the industry.  Leon Black was a Milken acolyte, now the Head of Apollo Global Management; Mark Attanasio worked in capital markets at Drexel Burnham and who has since founded Crescent Capital and owns the Milwaukee Brewers; Marc Faber ran Drexel’s Hong Kong office, and is now infamous for his “Gloom and Doom” report as the perennial perma-bear; and T. Boone Pickens, one of Milken’s best clients, founded BP Capital Management and is today a well-known billionaire.

 

  1. Dennis Levine – the greed leads to the crime. From Lehman Brothers, to American Express, to Drexel, Dennis Levine had created a network of friends inside the business who regularly traded on inside information – deals about to go through which would affect the stock of companies the broker would represent.  Using the Bank Lieu – an off-shore Swiss bank in the Bahamas – Levine was privy to deals Milken was set to make, and made a tidy sum trading on that information.  Bank Lieu officials spotted the pattern, and began “piggybacking” on Levine’s trades so they could make some money as well.  They then used a Merrill Lynch trader in Chicago – who also noticed how the trades were made right before a deal went through, and who then also piggybacked in his own account.  And that is when the SEC noticed what was happening.  Eventually, U.S. District Attorney Rudy Giuliani was called in, and the investigations commenced.  But for Dennis Levine (and Boesky’s) carelessness and greed, the trail may have never led to Drexel or Michael Milken.

 

  1. Setrag Mooradian, Ivan Boesky, and the uncashed check. Setrag Mooradian was Boesky’s book-keeper, adding to the long list of shady characters involved in the Drexel conspiracy.  He inadvertently left an unrecorded check – in the amount of $5.3 million – on the books that was inspected by the SEC.  In deposition, he indicated the check was meant for Michael Milken, but had no explanation as to what a check for $5.3 million dollars was for.    This was sufficient to get a judge to approve a wiretap and get a wire on Boesky himself for communication with Milken.  At this time, the circle closed in on the junk bond empire.

 

  1. Greed is good. Michael Douglas’ Gordon Gekko character in the movie “Wall Street” was loosely based upon Ivan Boesky.  In the movie, Douglas gives a speech in New York in which he says the famous line – “Greed is good.”  It personified unrestrained market capitalism and to many people what was wrong with American big business at the time … lacking the moral center necessary for market capitalism to survive long term.  Ironically, it wasn’t just a movie line.  Ivan Boesky actually said a related phrase during a commencement speech at Stanford: “I think greed is healthy. You can be greedy and still feel good about yourself”.  Boesky’s father in law famously referred to his daughter’s husband: “He has the hide of a rhinoceros, and the nerve of a burglar.”

 

Boesky, Milken, Levine and dozens more went to jail for the crimes of securities fraud and insider trading.  Rudy Giuliani used the never-before-used RICO statute – previously used for mob crimes – to convince the courts that Milken et al had formed a criminal racket.  From 1986, when the investigations began, to the final court hearings in 1990, Wall Street’s heaviest hitters paid a significant price for trading on information not available to the public.  It was one of the biggest scandals in financial history.

Ivan Boesky - Drexel Burnham Lambert

michael milkin - Drexel Burnham Lambert

Drexel Burnham Lambert was one of the older, elite firms on Wall Street.  Not the heavy player of a Morgan Stanley, JP Morgan, or Merrill Lynch, but was treated as part of elite club of top of the line investment banks going back to its founding in 1935.  Its downfall was complete in 1990 when one of it’s old deals came back to haunt it.  T. Boone Pickens had used Milken junk bond financing to raid and takeover Unocal.  Unocal at the time was managed by Nicholas Brady.  In 1990, with Drexel asking the Feds for a government bailout, it fell on deaf ears.  Nick Brady was now the Treasury Secretary, and he never forgave Drexel for funding the takeover of his company.  Fed officials advised Drexel to file bankruptcy, which they did February 12th, 1990.

While the tale of greed and excess of the Drexel scandals of the late 1980’s is well-told, from books to movies to popular culture, hindsight has also offered an additional perspective.  Milken and “high yield debt” helped finance billions of dollars of projects, and provided a new method for companies in tough times to find financing.  For each company raided and broken up, with the resultant jobs lost, there were just as many companies saved, and employees who kept their livelihoods.  Most financial historians and economists now believe that “junk bonds” are a necessary component of the financial market place, and the “junk bond” market is today ten times larger, and profitable, as it was during the Milken era.

New innovation will always face resistance from the old order.  And combined with the political aspirations of an ambitious prosecutor, high finance will always be in the cross-hairs of its competition.  The Drexel era participants paid for their sins, but they also helped forge an expansion of finance that has benefitted market capitalism to this day.

As those markets go up and down, it’s critical to evaluate your financial situation. Are you taking more risk with your money than you are comfortable with? Call our expert advisors to find out the best way to keep your money safe, protected and growing! 877-912-1919