Visualizing the end of USD

With FOMC, North Korea meeting, G7 trade issues buzzing on the hashtags, I wanted to present a thought experiment:
What would be the actual path/logistics/mechanics of USD ending as the reserve currency?

You may have seen this type of chart here and there (most commonly with Bitcoin being the next bar surpassing USD), with the assumption that Russia or China would be the next bar? If not, who?

In the same way that the end state of capitalism is a single company which absorbs any theoretical competition, there is a kind of macro capitalism where a country/economic system (namely the most liquid/deepest/free-est) has the potential to absorb other systems just based on that liquidity.  A way bigger picture way to think of this is the end state of capitalism anywhere being a single company everywhere, in the sense that private industries/ government entwine to where the line is blurred or indistinguishable.

The first theoretical path is war, external challenge, etc.  I just don't see how true nation vs nation war can exist anymore.  The level of mutually assured destruction/ mutual deterrence must almost cap at some point, and now the entire focus is on diplomatic paths to reducing nukes (except for the US, a coincidence?)  Additionally, with the amount of nukes/ drone strikes, cyber attacks, we have entered the full Pyrrhic victory zone where any war would end the future concept of currency or 'economy'.  In practical terms as we are looking for an investment thesis, no alternative investment would matter anyway in this scenario so its almost something to disregard when comparing ROI on different country exposures, etc.

The next path to consider is the type of internal degeneration that would lead to some currency crisis.  While I agree on every indicator that all assets are garbage, subprime auto loans, etc going back through the roof, household debt, I think the doom and gloom articles disregard how bad the alternatives are.
I think back to the Network scene of "no countries, only corporations," and it is more true everyday how entwined the global economy is.  The current "trade/tariff war" will just cyclically lead back to opening up trade again, probably spurring equities to all time highs.  In this way I really don't think "internal collapse" can be represented in the same way that has come up before with the collapse of past civilizations.  As US "debt" is held by most of the world, and an equal web of debt swaps going the other way, there is a similar mutually assured destruction in the credit sense as the above missile example.  All this means that an "internal collapse" really can't happen in isolation, there is no true "internal" anymore.  The global financial system is "too big to fail," with USD sitting at the top.

Additionally, lets think prophylactic-ally, what is the point of having the most military spending and biggest military stationed the heaviest around the world, if only to let it all go if the USD is challenged?  If such a deployment keeps the USD/ petrodollar supremacy, then it almost transcends the notional price required for it.  Its like a meaningless purchase inside a game going outside its own scope, in a monopoly game "hey I'll give you $100 Monopoly bucks for the game itself."

Anyway, given just these points, how can we even visualize China/Russia taking the reins?
-It would start with an end to the petrodollar, which

• Will be defended to the end by the above military
• Can potentially be replaced by the next mandatory resource (electricity? other element?) with a similar USD agreement

-It would require either system to fully reinvent to allow more liquidity and market depth than US markets, which they haven't even tried (Chinese daily govt intervention in markets, Oligarchic business control in Russia)
If we have learned anything from the crypto show, its that liquidity is the true metric of usage, seeing actual usage shift from BTC to Monero as a response to a need for function was eye opening when compared to the initial thesis of the value proposition of the longest chain.  Even security takes a back seat to liquidity in this sense.


There is probably another hour to go on this (the end of revolutions, no single castle to attack, 100% cashless economy) but the quick takeaway is that the combination of a global digital economy and the technological level of warfare seem to prevent the end of USD, because USD is really across borders, and reflective of the entire global monetary system.

The Short VIX Macro Barometer: The Petrodollar and Beyond

 While stock/etf/options on every underlying trade fairly independently of any "fundamentals," each asset class has some real world metrics that correlate to it, at least in the sense of idiot analyst "reasons" for underlying movement.

Stocks- we have earnings, guidance, CEO tweets...
Bonds- Fed funds rate, corporate bonds
Oil- inventory reports, OPEC news
Metals- combination of mining plus movement in the above assets, policy

So what is the real world underlying concept for volatility as an asset class? I would argue confidence and status quo.  Now lets delve into this magnum opus...

If you aren't already familiar, please read up on the background of the petrodollar.  As a quick summary, in 1971 when the US went off the gold standard, world currencies became free floating, with the exception of an agreement for Saudi Arabia to only sell oil in US dollars in exchange for military support.  This effectively backed the US dollar with oil (previously gold) and gave it a pseudo commodity-currency status.  As long as the dollar has this oil backing, there will be a continued demand for it despite how much is printed out of thin air.

How does this affect short VIX or the individual investor?

My first takeaway here is that I don't want to sound like a gold bug, proving the system is a broken fraud(even though it is).  For many years I shook my fist at the sky, yelling at everyone who would listen about how the whole world economy is based on monopoly money and how it is all rigged.  I still hold all those beliefs dear to my heart, but the difference is that now, when combined with options and liquid markets, we can take any side of a trade.  This is the key step I think gold bugs and doomsday preppers have ignored.  If you see someone profiting from a rigged system, piggyback on that!

Okay okay, are we getting to short VIX yet?

What is the risk for short VIX? As volatility is mean reverting and contango will keep short VIX products going up after corrections, we only need to dodge a tail risk which destroys the modern economy as we know it.  In the mean time, we can experience 25, 50, 90% drawdowns, which we maximize by keeping a large cash position and riding the dollar cost average all the way back up, combined with options reducing our basis.
Lets go back to this undefined tail risk.  My view is that if we have a volatility event so dramatic, much worse than 2008 in the sense that the core of the world economy is called into question (the unlimited debt ceiling that mechanically can't be repaid), then I can't see the rest of the market continuing anyway.  Similarly, if you are only holding onto cash because you want to avoid an almost 100% correction and buy the dip, I'm afraid there won't be much left to buy, or those "dollars" wont be worth much.  I call this "there won't be any home to go back to"

I agree with the sentiment that there could be an absolute global meltdown based on how far from reality any monetary system is, the difference is that in the aftermath, dollars, gold, property won't have any value- probably only bullets a la Mad Max.

So for one of my core assumptions as a small investor- lets assume the system will continue, and in that system we have to trade, and beat holding cash.

Lets delve a little more into why the US dollar and reserve currency will continue, as that can definitely be a distinction from the previous apocalypse scenario.
It wouldn't take you long to find this one chart or 10 new charts that prove we are about to have a 50% correction, in fact I've linked FinViz news in the sidebar to see the daily ZeroHedge articles predicting the last 20 of 0 crashes.  This data isn't new, and has been brewing and stirring since before 2008.  Did every fund, trader, and "the powers that be" not notice this?  The only difference between a monopoly game where one player has sharply expanding debt which is structurally unsalvageable and the US is my original point: confidence. 
Without even mentioning motives, one does have to take a step back and at least in a vacuum have some kind of awe for what central bankers have done in terms of keeping the system afloat.  When confidence is the only thing backing a belief in money and value, there is an incredible space for creativity.  For example, in order to build confidence in money, you can:

1. Make the currency "stronger," improve GDP to debt, "productivity," have it backed by something, thus making people believe in it's strength

or...

2. Alter people's beliefs, have them not care about it or be to stupid to do so, thus bypassing the "strength" of the currency entirely.  If there is an Instagram post to like, who cares about the deficit?  Its almost a cleaner and more elegant solution- brute force can knock down a door, but knowledge is a skeleton key.
To clarify- I'm not even mad or hating on Instagram idiots- a younger me was, but I think I've evolved. Every time you like a post or watch a show or eat fast food, you are contributing to the economy in a profound way that you might not even understand.  Do you hate on bugs for flying around and pollinating or worms composting soil with their excrement?

 If disbelief in fiat money is a virus, then confidence is the vaccine.  If you have only 1 person in a population that doesn't believe money has value, then everything will hum along perfectly.  They have no one to transmit with.  Once there are a few, they can interact with their own form of currency/trade/debt, and the 99+% run into a snag when dealing with these few.  Vaccines fail when a large chunk of the population is susceptible, and the few immunized don't stop the spread of the idea (disbelief).

Coming back to short VIX and the idea of a two sided market- who is supporting short volatility and who is long volatility?  I would argue these central banks and governments are short volatility- they are looking to stabilize risk, avoid massive spikes, and micromanage everything.  Who is long volatility? The gold bugs I mentioned screaming for the next overdo crash. 
 

 If you had to pick a side, which horse would you bet on?  I completely sympathize with everyone calling for the next crash, but when you look at them all together, they are a bunch of guys in front of green screens and hotel room interviews with their only resource being their yelling and BUY GOLD links.

In contrast, lets look at the "short volatility" guys, the ones banking on the status quo.  Central banks, the IMF, the US government, other governments and by extension most of the world military- basically the bad guys (except in real life the bad guys always win).  These are real assets and forces behind short volatility.  In contrast to the youtube and blog personalities talking about the petrodollar, the opposition are basically Bond villains with even greater resources. 

Not only do they have the resources, but they will use them and protect the petrodollar at any cost.  Any Middle East country wants to buy oil in Euros? We'll handle that.  Gaddafi wants to make his own gold-backed money to buy oil? Give him the smack down.

What if the petrodollar fails, what if oil ends?  How will they keep the charade going?

I really think oil or the "petro" part of petrodollar is just a placeholder, that can and will change.  For example, if the planet somehow shifts to all electricity, the only structure that needs to stay in place is that all energy transactions (oil, electricity, nuclear or more) happen in dollars, call it the electrodollar.  Ultimate that will be backed by another 1971 Saudi Arabia style deal,  complements of unquestioned military force.  When I was younger I also questioned why the US spends more on military than every other country combined.  Its all clear in the scope of the petrodollar.  As long as the US has the force to require that the world keeps running on dollars, that is the confidence they need- they only need that structure, then they can print their way out of other problems (corrections, market cycles, sector shifts).  Thus the petrodollar becomes the electrodollar and finally the gundollar, wardollar, nukedollar... what is the catchiest?

As I'm writing this I'm seeing Trump now supporting Yellen, all of our war and structure in the Middle East, and everything pro-petrodollar that he previously ran against.  Its almost like his boss picked up the phone and explained everything clearly.  As investors we have to look at actions and make conclusions.  If Trump was deflected by this Bond villain system, how could any future politician even make a dent?

To sum up-  

What world underlyings correspond to volatility?- confidence and the status quo

Are you tired of seeing a rigged system keep going? You can keep screaming or take the other side

Short volatility, the idea that fear will correct and go lower, is backed by the most powerful resources in the world.  When in doubt, why not bet on those guys?


Almost each of these paragraphs could have an entire separate article and I hope to get to them all.  I hope this wets your whistle as an introduction to the macro case for short volatility, in case you didn't even know what world events correlate to it.