Forecast 2021: The Stock Market

By John Mauldin 


This will be the third part of my 2021 Forecast Series. You can read the first two parts here and here

The general theme has been “On the Gripping Hand.” 

Science fiction writers imagined a three-handed alien race with a left hand, right hand, and a very strong Gripping Hand. 2021 is the year of the Gripping Hand, and COVID-19 is what’s gripping us. Making a forecast without the virus at its center is pointless.

All that being said, today we are going to focus on my stock market expectations. 

As I promised last week, this is a “Generational Call.” For reasons we will go into below, I think we are at a pivot point for stocks, with some clear exceptions I will outline. 

So maybe like generational call* with an asterisk.

On the Gripping Hand, Part 3

Let’s first do a very quick virus update. By the time you read this, the US will likely have administered 20 million vaccinations. Add those who were previously infected, and maybe 40 million people should have some degree of immunity.

The number of new cases is dropping, as you can see in these charts from Justin Stebbing, a professor at Imperial College who sends a detailed daily COVID research summary.


Source: Justin Stebbing


New deaths are thankfully also turning.



Source: Justin Stebbing


That’s the good part, but there’s more that is less comforting. The CDC unfortunately confirmed my alarm (described last week) about the UK (B117) variant strain. They expect it will account for 50% of US cases by March.

This does not mean that the B117 variant will replace 50% of other cases. It means the significantly more contagious B117 will catch up through an exponential rise in the next few weeks.

How serious is this? Hard to say. How seriously will we respond, in terms of social distancing, masks, etc., in a country showing virus fatigue? How much faster can we vaccinate, given that we are already having supply problems? As I said then, I see a 40% chance of a significant uptick in cases, deaths, and lockdowns, which is a nontrivial potential.

Nor is this just a US problem. The simple fact is that the world is in a race with the new B117 variant and how fast we can vaccinate the population, plus maintain safety conditions (like social distancing).

If the CDC is right about that 50% B117 prevalence, the US will face a series of lockdowns at least as intense as last spring. Do you think that is priced into the stock market? Will the stock market look past a serious uptick in cases, hospitalizations, and deaths? Along with new lockdowns? More small businesses lost?

I know that the Biden pandemic relief plan has come under severe fire for being too large. Given the sausage-making process of American politics, it is not clear what will come out of Congress. But there is a real possibility we will need more.

And all that is going to merge with the other valuation/market issues we have today. Now let’s turn to the market forecast.

“Extrapolated Indefinitely”

We all know the stock market was up significantly last year, and even more so around year-end, but you may not know how historically wild this is.

Citi Research has a “Euphoria/Panic” index that combines a bunch of market mood indicators. Since 1987, the market has typically topped out when this index approached the Euphoria line. The two exceptions were in the turn-of-the-century technology boom, when it spent about three years in the euphoric zone, and right now.


Source: Peter Boockvar


You can look at this in different ways. In terms of duration, the precedent suggests the giddiness could last another year or two. But in magnitude, the current euphoria is well above what we saw 20 years ago, and developed a lot faster.

The legendary Jeremy Grantham of GMO recently reviewed the dramatic events he observed over a 50+-year career managing money. He describes the current bubble as one of the “four most significant and gripping investment events of my life.” The others are Japan in 1989, the 2000 tech bubble, and the 2008 housing and mortgage crisis. We are in historic times.

Grantham went on:

The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behavior, especially on the part of individuals. For the first 10 years of this bull market, which is the longest in history, we lacked such wild speculation. But now we have it.

He then described several signs of mania, ranging from Tesla’s valuation to the Buffett Indicator and Robert Shiller’s CAPE. But he comes back to the biggest disconnect.

The strangest feature of this bull market is how unlike every previous great bubble it is in one respect. Previous bubbles have combined accommodative monetary conditions with economic conditions that are perceived at the time, rightly or wrongly, as near perfect, which perfection is extrapolated into the indefinite future. The state of economic excellence of any previous bubble of course did not last long, but if it could have lasted, then the market would justifiably have sold at a huge multiple of book. But today’s wounded economy is totally different: only partly recovered, possibly facing a double-dip, probably facing a slowdown, and certainly facing a very high degree of uncertainty. Yet the market is much higher today than it was last fall [2019] when the economy looked fine and unemployment was at a historic low. Today the P/E ratio of the market is in the top few percent of the historical range and the economy is in the worst few percent. This is completely without precedent and may even be a better measure of speculative intensity than any SPAC.

This time, more than in any previous bubble, investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely. [emphasis mine] This has in theory a similar effect to assuming peak economic performance forever: it can be used to justify much lower yields on all assets and therefore correspondingly higher asset prices. But neither perfect economic conditions nor perfect financial conditions can last forever, and there’s the rub.


“Accommodative monetary conditions and zero real rates extrapolated indefinitely” is a phrase I wish I had coined. It’s the best, most succinct explanation I’ve seen for this euphoria. And, as Grantham says, it’s not going to end well. But the party could continue if current monetary conditions and low rates persist.

That being said, let’s look at not only the Buffett indicator (all-time highs) he mentioned but a few more charts:



Source: Advisor Perspectives


Numerous other indicators are at or close to their historical peaks. Here’s a handy list, courtesy of Doug Kass.


Source: Doug Kass


When we say that price-to-sales is at 100% of its historical percentile, that is a little misleading. It is much higher than that in actuality:


Source: MarketWatch


I could easily show you a dozen more charts, all basically saying the same thing: Valuations are at nosebleed levels. You’ve seen them elsewhere so no need to reproduce them here.

What Were You Thinking?

The brilliant Jesse Felder illustrates the price/sales problem this way, using Tesla.

What were you thinking?” That is the rhetorical question Scott McNealy, CEO of Sun Microsystems, asked of investors paying a “ridiculous” ten times revenues for his stock at the height of the Dotcom Mania. The incredulity in his voice is amplified by the benefit of hindsight as McNealy gave the interview this quote was taken from in the wake of the Dotcom Bust, after his stock price had lost over 90% of its value.

Indeed, what were investors thinking 20 years ago not only paying 10 times revenues for Sun Microsystems but also paying that ridiculous multiple for 44 other stocks in the S&P 500 Index? It’s impossible to know for sure but it’s a good bet they were simply counting on the “greater fool theory” or the idea that someone will come along and pay an even more ridiculous price than they did. At some point, however, the market ran out of fools and the Nasdaq fell 83%.

It’s interesting to note that we seem to have found even more fools today than we did back then. Nearly 60 of the S&P 500 Index components currently trade more than 10 times revenues. There’s no telling when the current market will run out of fools this time but, when it’s all said and done, that last buyer may justly earn the title “greatest fool” of all time. And only with the benefit of hindsight will it really feel like the abject folly it should.


Source: Jesse Felder


On Twitter, Jesse asked rhetorically what the McNealy of 20 years ago would think about Tesla trading at 30 times revenues. McNealy replied, “I want to be Elon Musk.”

Last year the S&P was up 18.4%, the Nasdaq 44%, and an equally weighted portfolio of FAAAM (Facebook, Alphabet, Amazon, Apple, Microsoft) plus Netflix was up 55%. The contribution of that latter group to the S&P 500’s growth was 14.35%. The “S&P 494” gained only 4.05%. (H/T Kevin Malone)

What are the chances the FAAAM+N stocks rise another 55% this year? Especially given the uncertainty and a high probability that earnings estimates will come down significantly?

Yes, the Fed will be extraordinarily accommodative, interest rates will remain low and markets will still try to “extrapolate indefinitely.” 

The significantly smarter-than-me people at Goldman Sachs have a much more optimistic scenario (15%+ this year!):



Source: Goldman Sachs


I will say that such optimism reminds me of the diner scene in “When Harry Met Sally.” Wall Street wishes it could have whatever they are having.


Source: USA Today


Ah, but what about earnings, you say? Think of the pent-up demand that will be unleashed on businesses when all this is over. Two responses:

First, “when all this is over” is a fact not yet in evidence. The virus still has us firmly in its grip which is, if anything, tightening. Maybe it will loosen this year, maybe not.

Second, “pent-up demand” assumes people, once liberated from virus fear, will move the money they didn’t spend during this time into the same things they would have spent it on. That’s a giant assumption. The revenue lost by service businesses is permanently gone. And the propensity to save, if you believe multiple surveys, is increasing.

The simple fact is that this period has scarred a generation, and like the Great Depression generation, they will be more financially conservative. At the very least for a while.

Nonetheless, at some point even zero real rates don’t justify holding stocks unless they produce sufficient earnings. I don’t know where that point is (none of us know the future). But we do know where earnings are. Here’s a chart from Ed Easterling of Crestmont Research.


Source: Crestmont Research

 

Look at the inset chart first. It shows the progression of earnings estimates beginning two years ahead of a year-end. You see they mostly started optimistic and gradually came down (though 2012 and 2018 weren’t far off. Even Wall Street gets it right sometimes).

But look at the orange line labeled “2020F.” It was gently declining like other years, then plunged when COVID hit as analysts sliced estimates. Yet stock prices went the opposite direction, for the aforementioned monetary reasons.

Now look at 2021F. Projected 2021 earnings are almost back where 2020 was, pre-pandemic. That means analysts project US public companies will, less than 12 months from now, have fully recovered from this plague. Possible? Yes, but I think highly unlikely.

But if you believe both a) earnings will recover this year and b) the Fed will keep stimulating, or at least not withdraw what it injected, then today’s stock prices kind of/maybe/sort of/possibly make sense. That’s an ideal, once-in-a-lifetime Goldilocks scenario. Again, I think it’s VERY unlikely, but it isn’t impossible.

Decision Time

So what is an investor to do? As always, it depends on your personal circumstances. A 30-year-old with steady income and little or no debt might ride the wave for a while longer. But I think anyone in or near retirement should think very hard about how aggressive they want to be. I know it’s a tough spot. You certainly won’t make much in bonds or bank savings.

So, let me make an actual market call. With some significant qualifications.

First, anybody over 50 with substantial amounts of money in passive index investing should probably step to the side. Especially if that is your retirement money. Take profits. Go to cash.

I see too many parallels between market valuations and exposure between the year 2000 and today. Note that both in 1999/2000 and in 2006–07 I called the bear markets early. Maybe I’m early again. But I will note that my good friend Doug Kass of Seabreeze Partners issued a bear market warning this week: “My message is simple. Sell Stocks Now.” And he is a much better market timer than I am.

Jeremy Grantham points out, in the report quoted above, how investment professionals have to think not only of market risk, but career and business risk, too. They have strong incentives to stay bullish at all times. If your investment advisor has you in a traditional 60/40 portfolio using passive indexes then you should consider other options. I can’t say it any plainer than that.

Now, let me note the exceptions. If you are young and have time, as in more than 20–30 years, and can deal with the drawdown or small returns for 10 years, then be my guest.

Let’s look at this chart from my friend and business partner Kevin Malone at Greenrock Research. Note that the decade of the “aughts” had a negative (almost -1%) return. (As predicted here at the beginning of that decade, based on historical market returns from extraordinarily high valuations.) Today’s valuations resemble those of the year 2000. Why should we expect different results? The 2010s were an extraordinary bull market. You were more or less rewarded for staying in the market for 20 years, though with the smallest average annual return since 1960.


Source: Kevin Malone


Kevin then shows what a dividend-focused strategy would have returned over the same periods. This uses Jeremy Siegel’s data, taking the 100 highest-paying dividend stocks in the S&P 500 and rebalancing every year.


Source: Kevin Malone


I can show you any number of dividend strategies, both US and foreign, that have significantly outperformed with below-market volatility. (My good friend David Bahnsen wrote a very easy to read primer called The Case for Dividend Growth.)

So, if your advisor has you in a historically proven active strategy, there is no reason to move to the sidelines. Let me go further: There are other active stock market strategies that I would expect to do quite well, just as they did in the first decade. A diversified portfolio of hedge funds significantly outperformed in the first decade. Not so much this last decade. There are two strategies to go into in this letter today. Suffice it to say, I think the 2020s will once again be the decade of active management.

The 2020s are going to be about rifle shots, not the shotgun approach of index funds.

This will be a decade to focus on absolute returns as opposed to relative returns. Passive index investing is a relative return strategy and I think it will be a very poor choice in the coming years. As my dad used to say, every dog has its day. Passive investing had the last decade. Active investing is getting ready to take the lead.

As I said last week, while I’m bearish on passive index funds, my own portfolio is almost fully invested. I own individual stocks, carefully selected with a long time horizon. That’s my choice, but you and your advisor need to do your own due diligence and decision-making.

In my own portfolio, I admit the irony I am somewhat buy-and-hold. I tend to make very specific and targeted investments, and then hold them. Some are for income and some are for growth.

And even as I am saying that I think the stock market is going down, the risk profile and aggressiveness of my own portfolio is probably more than it’s ever been. I find plenty of things to be very optimistic about.

In every bear market, there are individual positions that do well. Time will tell whether my own personal convictions will prove profitable But you cannot look at my personal investment portfolio and call me bearish. I am extraordinarily bullish, just not on passive index funds. In a few weeks, if compliance permits, I’m going to write about my personal investment philosophy and positions. There are plenty of opportunities, though admittedly more for accredited investors than those with less than $1 million, but also some for those still accumulating portfolios.

I don’t know how to be clearer. Take your profits from passive investing. Taking profits is not alarmist. It used to be considered wise advice. Just saying.

As my friend Dennis Gartman used to sign off, “Good Luck and Good Trading.”

Vaccination, Geopolitics, and Uncertainty

My hope is that I will get vaccinated within the next few weeks here in Puerto Rico. I’m excited at the thought of flying again, for both business and pleasure.

I am sure you are aware of the heightened geopolitical concerns (especially China) accompanying the new presidency. Happens every four years, but this time feels a little bit more disconcerting, increasing the need for solid information.

None of us can see the future with 100% clarity, but some come quite close—like my friend George Friedman and his Geopolitical Futures team, who have just released their 20-page report, The World in 2021. As a favor to my readers, George is offering the report plus a one-year subscription to his forecast service at a deeply discounted $49.

I am not certain what “normal” will look like a year from now, but I am pretty sure that it won’t look like December 2019 The recovery, and of course there will be one, will be slower and different from anything we have experienced. Yet more uncertainty.

Which means those things that we can be certain about—family, friends, even trusted business relationships—are going to take an ever-increasing importance in our lives. Just a thought.

In the meantime, have a great week and stay safe!

Your optimistic and targeted bullish analyst,



John Mauldin
Co-Founder, Mauldin Economics

A Major Contraction in Jobs

By: George Friedman


Some 140,000 Americans lost their jobs last month, the largest decline in employment since last April. Yet, the unemployment rate stayed at roughly 6.7 percent. 

The job losses were attributed to restaurants, travel, entertainment, governments and schools, according to the Wall Street Journal. That explains who cut the jobs but not why the unemployment rate remained unchanged. 

One answer is the jobs cut were already factored in, say, if employees were let go in previous months. Another is that workers found new jobs, difficult as that may be. 

The third possibility is that those who lost their jobs dropped out of the workforce, accepting the unlikelihood of finding something new. 


The cuts are unsurprising, given the intensifying lockdown measures originally imposed last year. The first casualties are always the places that cannot be enjoyed while wearing a mask. 

Topping the list are bars and restaurants, whose employees often lack the resources salaried workers have and are less likely to find a similar job in their field. 

In schools, many cuts likely targeted the custodial and lunchroom staff, who are less urgently needed as many schools are closed anyway.

Job losses give us a sense of what will happen once the pandemic is brought under control. I have written before that I regard a recession as a financial event that leaves most of the economic infrastructure intact. 

A depression is an event in which that infrastructure is destroyed. 

Unable to sell to a public without money and unable to pay their lenders, many businesses find their only option is bankruptcy. 

They close their doors and walk away, never to reopen. 

In a true depression, business failures become bank failures as banks fail to recoup their loans. 

That, in turn, makes capital harder to come by. 

A central bank can always print money and recapitalize the banks, but insufficient demand (that is, money) makes it irrational for a business to assume debt. 

Getting out of a depression is hard.

My view last spring was that we had until late fall to deal with COVID-19 and restart the economy without risking depression. We are therefore now in a period of risk. 

The idea that we are at risk of a depression right now may seem preposterous. 

The banking system appears to be robust, the rate of bankruptcies is not surging excessively, and unemployment is relatively low, so demand is intact. 

There are problems in certain sectors, of course, but industries such as airlines appear to have weathered the crisis, and brick and mortar retail trade has demonstrated that there can be life after bankruptcy.

It is reasonable to assume that we have economically routinized the pandemic and that we have room to maneuver until we are vaccinated (or choose not to be). 

But the 140,000 jobs lost in December were decisions businesses made about what they expect to happen in 2021. 

Leaving aside schools and government agencies (and restaurants and bars, which have been the long-running victims of social distancing), there are certainly other businesses, and more than a minority, making job cuts. 

The travel industry has already been cut to the bone, and other businesses can let some but not most employees go if they are to continue functioning.

Those 140,000 cuts were made largely by businesses that have a profound understanding of the business they are in and of the appetite of their customers for what they sell. 

Most businesses have always controlled the number of people they employ – that is, not maintaining a mass of disposable staff. So when they cut jobs, they cut deep, and if they are cutting to the bone they are seeing something unpleasant coming. 

The cuts will not show up in unemployment figures, nor in banking numbers, nor most certainly in the stock markets.

I think these businesses are seeing two uncertainties. 

The first is that the efforts of the government to defer an economic crisis have succeeded, but that deferral is not the same as prevention. Deferment makes it likely that as the pressures build, a crisis is coming sooner rather than later. 

Failures in various economic sectors can emerge suddenly, and those deferrals can sweep into other sectors. When facing a troubling future, the rational move of any business is to cut expenses. 

And since most viable businesses already control costs vigorously, the only defensive move possible is to cut jobs. Cutting staff just before the new year is an indicator that those who know the economy at its detailed best are very worried.

The second uncertainty is the vaccination program. To be sure, vaccinating 330 million people in the United States is a daunting task, but the fact that we do not know when we will return to normal life, with all its predictability, creates a level of uncertainty that requires defensive action. 

Being concerned about when this will be over is gauche to some, but time is the essence of business, and at this point the only timeline for a return to normal I have seen is from Dr. Anthony Fauci, who predicted the latter half of 2021. For all we know, it could be longer.

I am not saying that anyone has failed. We have never been in this situation, so it’s understandable that the end game is unclear. But the businesses that have recently had to cut jobs must make decisions on unclear data. 

They can’t wait patiently for revelation. They don’t know when the government will lose the ability or desire to defer the crisis, nor do they know when the current crisis will end. 

So it seems to me that a lot of businesses, looking into a forest – dark, uncertain and with little light to reveal anything – have chosen to move into a crouch, in order to survive the uncertainty. 

At this point, it is not the virus that scares them; it is the fact that there is no way to grasp the amount of time it will take to get past it. 

And that is the major pressure weighing on the economy.

The surge in job losses can be interpreted in many ways, and the concerns I have expressed may not come to pass. Nevertheless, they can’t be ignored, nor can it be reasonably assumed that the measures being taken to fight COVID-19 won’t have an even longer tail. 

Economic pressures can continue to mount without showing themselves. My argument is that the pressure is mounting but being contained. 

That may not be much comfort, since mounting pressures can explode unexpectedly.

Bitcoin has ambitions for gold’s role

After years of hostility t o cryptocurrencies, central banks will permit them a limited role

Gavyn Davies 

The total stock of gold is estimated to be worth about $17tn in today’s prices, while the latest market value of bitcoin is about $0.6tn © David Gray/Bloomberg


Investors in bitcoin and other cryptocurrencies have enjoyed a phenomenal run, but they are now worried that Janet Yellen’s arrival as US Treasury secretary may herald a new era of hostility from regulators and central banks towards what boosters call “libertarian” forms of digital money.

In her last press conference as chair of the Federal Reserve in 2017, Ms Yellen said bitcoin was a “highly speculative asset” and “not a stable store of value”. 

These dismissive remarks were echoed by many other public officials at the time. Since then, however, the market value of bitcoin has roughly doubled. 

Digital currencies are here to stay.

In the first crypto frenzy of 2017-18, comedian John Oliver described bitcoin as “everything you don’t understand about money combined with everything you don’t understand about computers”. 

The technology aspects, particularly the blockchain network of digital ledgers that are used to record transactions, have not really lived up to the initial hype, but they are beginning to make progress. 

The issuance of $20bn in “initial coin offerings” seemed to contain elements of a speculative bubble, but the funds raised are now being used to launch projects broadly similar to other IT ventures in Silicon Valley.

Jay Clayton’s recent departure from the chair of the US Securities and Exchange Commission may result in less hostile regulatory scrutiny of these activities, especially if Gary Gensler, who teaches about digital currencies, replaces him.

However, resistance to digital currencies as payments and transfer vehicles is likely to remain. Partly because of high transaction costs, bitcoin is not widely used for payments, and its future role seems limited.

The outgoing Treasury secretary Steven Mnuchin has been working on new regulations to increase transparency in bitcoin transfers and reduce the scope for money laundering. Ms Yellen, in conjunction with the Fed, is likely to adopt an even more orthodox approach, treating the payments system as a quintessential public good.

The Fed is collaborating with foreign counterparts in investigating the development of central bank digital currencies. It is almost certain that CBDCs will eventually be issued in the major jurisdictions, following China’s lead. 

However, they will be denominated in national currencies, not crypto.

Private competitors denominated in genuinely new currencies, such as bitcoin, will be heavily regulated or actively discouraged. 

Hybrid stablecoins, such as Facebook’s libra, that are pegged to a single currency or other real assets may be more welcomed by central banks, if they were directly transferable into traditional currencies. 

Furthermore, they may not be powered by blockchain. Each of the major central banks may develop its own distributed ledger technology.

That still leaves a role for crypto as an investment vehicle and store of value. Can bitcoin seriously compete with gold as a safe asset for the largest investors? 

History, regulation and market volatility make that seem improbable, but it is beginning to develop a more important role. 

Many big hedge funds and some conventional asset managers have followed Paul Tudor Jones in adopting bitcoin as a core hedge against inflation. While this may have seemed attractive when central banks were in effect creating money by buying up government debt last year, there are few signs of inflation on the imminent horizon.

Yet bitcoin prices have continued to rise, apparently driven by a narrative that holds that a privately created asset, which in theory has a finite supply, cannot be “printed” like the “legacy” fiat currencies.

According to Gold Hub, gold stocks held above ground amounted to 198,000 tonnes at the end of 2019, with about 57,000 tonnes of proven reserves below ground. 

This total stock would be valued at about $17tn in today’s prices. 

The latest market value of bitcoin is about $0.6tn — bitcoin bulls see this as a gauge of how much further its price could rise.

There seems little reason on monetary policy or financial stability grounds why regulators should be worried about cryptocurrencies competing with gold as a store of value.

The crypto world is currently in a frenzy of short-term speculation. 

However, if investors continue to buy into the dubious narrative that these private currencies are “safer” than those controlled by the central banks, they could rise much further in market value in coming years.

Stranger things have certainly happened in financial markets.


The writer is chairman of Fulcrum Asset Management

The City on a Hill Besieged

The storming of the US Capitol by a mob egged on by President Donald Trump was a violent bid to disrupt the world's oldest democracy. But while it made for a truly dark day in US history, it need not become a defining day.

Ana Palacio



MADRID – In 1940, with Europe gripped by a war from which the United States remained aloof, US President Franklin Delano Roosevelt declared that the country needed to be “the great arsenal of democracy.” 

He meant it literally: he was appealing to Americans to “put every ounce of effort” into producing arms for European democracies, especially the United Kingdom, in their fight against fascism. 

But his words also carried powerful symbolic significance, positioning the US as the world’s leading democratic bulwark.

Fortunately, Joe Biden will assume the US presidency on January 20. 

But, as the shocking events of January 6 showed, it will take more than one person – and more than one presidential term – to overcome America’s longstanding challenges. 

On January 6, that stronghold was breached by a mob of Donald Trump’s supporters. 

Egged on by the president himself, they stormed the US Capitol, desecrating one of the greatest monuments to democracy, and forced Congress to halt the vote to certify President-elect Joe Biden’s Electoral College victory. 

It was the clearest manifestation yet of the malignancy of Trump’s presidency – and the threat its legacy poses to the American democratic experiment.

That experiment’s success has, historically, been based on three qualities, which Alexis de Tocqueville identified some 185 years ago: the vibrancy of its society, its citizens’ trust in and respect for institutions, and a forward-looking perspective that encouraged risk-taking and innovation. 

These qualities were lacking in Europe, which was weighed down by long and fraught history.

The erosion of these pillars of American democracy has been discussed extensively and often, especially since Trump’s election in 2016, to the point that all the attention devoted to it could sometimes seem excessive, even trite. 

But the events of January 6 show just how weak those pillars have become – jeopardizing the entire edifice.

In recent years, a steady stream of lies and misinformation has divided and dulled American society, and weakened respect for institutions. Under Trump, these trends went into overdrive. 

Unlike his predecessors, Trump never sought to inspire hope. Instead, he stoked and exploited people’s frustration and anger (partly driven by legitimate grievances).

With his famous slogan, “Make America Great Again,” Trump conjured a vision of a future that looked much like the past.

By labeling all criticism “fake news” and lying about voter fraud in the recent election, he decimated trust in US institutions, setting the stage for civil unrest.

Today, a stable democracy has become a chaotic and conflicted one, with a significant minority convinced of their exclusive right to govern. 

Members of this group claim to be “patriots” reclaiming a corrupted system. 

As they smashed the Capitol building’s windows, defaced offices, and stole property, they cried, “This is our house.”

But their actions were anything but patriotic. 

They certainly do not represent the forward-looking perspective that has long defined the American spirit. 

The waving of American flags sullied with pro-Trump messages (a violation of America’s “respect for flag” code) and even Confederate flags make that painfully clear.

In reality, the insurgents were seeking to prevent their duly elected representatives from doing their jobs. 

This was not “democracy at work.” 

It was a violent bid to disrupt the world’s oldest democratic republic. 

And it made for a truly dark day in US history. But it need not become a defining day.

After the Capitol was cleared and the mob dispersed, Congress reconvened to resume the certification process. 

When Senate Minority Leader Chuck Schumer took the floor, he recalled FDR’s description of December 7, 1941 – when Japan attacked Pearl Harbor – as a day that would “live in infamy,” adding that, “we can now add January 6, 2021.”

But Pearl Harbor didn’t break the US. 

On the contrary, it galvanized the country, spurring it to engage directly in WWII. 

“No matter how long it may take us to overcome this premeditated invasion,” FDR declared, “the American people in their righteous might will win through to absolute victory.”

The insurrection at the Capitol could be another such galvanizing moment. 

Leaders can no longer ignore the costs and risks of short-term thinking and political cynicism. 

On behalf of – and alongside – the American people, they must protect and fortify democratic institutions from subversive figures like Trump. 

As president, Biden, like FDR, must issue that call and lead the charge.

The US remains a great country – and I don’t mean by Trump’s definition. 

It is rich in ingenuity and admirably resilient. And its society remains committed to progress – and willing to fight for it. 

The latest sign of that came the day before Trump’s failed putsch, with the victory in runoff Senate elections in Georgia – a traditionally conservative state – of two Democrats, Raphael Warnock, an African-American pastor, and Jon Ossoff, a Jew, over Republican incumbents who sought to discredit Biden’s victory.

Restoring faith in democratic institutions must be among Biden’s top priorities, and not only for the sake of the US. Countries worldwide still need the US to act as an arsenal of democracy and a source of inspiration and guidance. 

If Biden embraces that cause, the disgraceful assault on the Capitol could be remembered as a turning point for democracy, rather than a harbinger of its terminal decline.


Ana Palacio, a former minister of foreign affairs of Spain and former senior vice president and general counsel of the World Bank Group, is a visiting lecturer at Georgetown University. 

The Dollar’s Decline in Global Reserves: Fact or Fiction?

Greenback’s share of foreign-exchange reserves has slipped, but there are reasons to believe it will bounce back

By Mike Bird

The real dollar exposure of major central banks is likely higher than it looks. / PHOTO: GARY CAMERON/REUTERS


In the third quarter of 2020, the dollar’s share of global foreign-exchange reserves slipped to its lowest level in almost a quarter of a century. ´

But don’t let the figures fool you: The greenback is as central to the global financial system as it has ever been.

International Monetary Fund data shows the dollar’s share of reported reserves fell to 60.5% in September. 

The drop has been magnified in nominal terms due to the currency’s depreciation over the past year. 

But even accounting for that, the real dollar exposure of major central banks is likely higher than it looks.

What’s more, that exposure likely rose again in the fourth quarter.


After adjusting for currency-market movements, Goldman Sachs notes that dollar holdings actually rose more than euro, Japanese yen, Chinese yuan or British pound holdings in the third quarter.

At 5.9% of global reserves, the share of the yen is high compared with recent decades. But that increase actually disguises dollar demand. 

Many large yen holders are trying to acquire more dollars through currency swaps. 

That popular trade has led to a surge in foreign purchases of short-term Japanese government bonds.


Most central banks don’t break down their holdings in depth, but the unusually transparent Reserve Bank of Australia does. 

It held around $6.8 billion in U.S. dollar-denominated securities as of June, an amount that almost triples when its derivatives exposure is taken into account. 

Its roughly $3.7 billion in yen reserves is cut in half after the same calculus.

Asian central banks were also vacuuming up foreign exchange in the fourth quarter of 2020. 

China’s and South Korea’s reserves rose at the fastest rate in seven and 10 years, respectively. 

Taiwan’s rose at the fastest rate on record in November—and then again in December.

We don’t know exactly how much of that is dollar-denominated, but the greenback will probably be well represented. 

The increase in purchases is likely meant to counteract a rally in their currencies, primarily against the dollar. 

Research by Exante Data shows central banks were already purchasing more dollars than other currencies as the year came to a close.

Narratives suggesting the dollar declined in importance last year after the Federal Reserve’s actions in February and March played the central role in preventing global financial meltdown are suspect. 

The dollar’s share in reserves is likely to recover to reflect that reality.