Zoltan Pozsar, renowned for his expertise in analyzing the complexities of money markets, has made many insightful contributions over the last eight years as a star analyst for Credit Suisse. His report from March last year, concerning the "demise of the petrodollar and the rise of Bretton Woods III," propelled him into the limelight.
On a recent episode of Bloomberg's "Odd Lots" podcast, Pozsar disclosed his professional move after leaving Credit Suisse earlier this year, and presented updates on his "Bretton Woods III" theory. He proposed that the global financial system is undergoing a "monetary divorce" from dollar hegemony and becoming increasingly multipolar.
The "Monetary Divorce"
When asked what he's currently doing, Pozsar said he established his own macroeconomic consulting firm, Ex Uno Plures, which offers research to institutional investors.
Pozsar noted that Ex Uno Plures, translating to "out of one, many" in English, is the opposite of "e pluribus unum" ("out of many, one"), the national motto of the U.S., found on its seal and dollar bills. He explained that the name symbolizes two ideas.
The first idea stems from his decade as a strategist predicting moments of collapse in financing and interest rate markets and standing on the right side of these events. The second idea, he suggested, is that the global macroeconomy has developed as a concept and asset class under the presumption of the uncontested global dominance of the dollar in a unipolar world advancing globalization. Hence, "we are all trading in a global dollar cycle."
Looking ahead, he predicted, "As we discuss under the framework of Bretton Woods III, this will no longer be the case. This is a trend of the times, as more and more countries are trying to disentangle themselves from the Western financial system, much like Western entities are attempting to disentangle themselves from supply chains permeating the East."
He suggested that "We are at the beginning of an era, where at least over the next 5 to 10 years, we will experience this monetary divorce. We are moving from an era of a dominant reserve currency to a world with multiple reserve currencies."
Structural Demand for the Dollar and U.S. Bonds
Pozsar discussed certain developments surrounding dollar hegemony since March of last year, suggesting that the themes of "Bretton Woods III" have become more evident, touching on aspects like de-dollarization, remonetization of gold, and the establishment of a new financial system through central bank digital currencies.
When asked about how these grand narratives would impact practical investments, Pozsar believed that these developments would affect the structural demand for the dollar and U.S. bonds.
He suggested that if we transition into a world where trade is not primarily dollar-denominated, where people don't need to borrow dollars to import goods, and exporters don't only earn dollars, the dollar will cease to be a machine. Shortages of dollars in some regions will disappear, conditions in countries that traditionally generate dollar surpluses will change, and the supply and demand of dollars in the foreign exchange swap market will be reshaped.
As for the demand for U.S. bonds in other parts of the world, Pozsar considers this a major issue. Historically, you needed dollars because you had to import a host of items priced solely in dollars. But if only half the items in the world are priced in dollars, there will be no need to accumulate as many dollar reserves, thus affecting the overall and marginal demand for U.S. bonds.
"We are in the Prelude of Something"
Regarding U.S. government bonds, the host asked about a report Pozsar wrote in January where he suggested that, to some extent, the Federal Reserve would need to intervene and support the bond market again, as traditional bond buyers were pulling out, and the Fed would have to restart QE by this summer.
Responding to this, Pozsar said, "Well, it is summer now. Let's put it this way. I mean, we already have a repo program, which, if I'm not mistaken, has already started...when we ran into problems surrounding SVB and some other banks...I think we're in the prelude of something...We're addressing liquidity shortages via repo. So far, so good...But I still think that this potential issue we're discussing- a possible global split with less demand for U.S. government bonds- will become a problem. As these problems arise, we will deal with them gradually. But I still believe that these liquidity shortages are real and we're addressing them."
"Gold Will Definitely Return as a Theme"
The host then asked whether commodity volatility and vulnerability would permanently or semi-permanently become part of "Bretton Woods III," given that oil prices and European electricity costs have dropped significantly over the past year.
To this, Pozsar responded, "The aspect of commodities that survives in my 'Bretton Woods III' theory is that I think gold will definitely return as a theme." He suggested that more and more countries are avoiding U.S. bonds and dollars and buying gold instead.
Pozsar also pointed out some recent news: Ghana and Russia essentially have an oil-for-gold agreement where Russia supplies oil to Ghana, and Ghana pays with gold. He said that for Ghana, spending precious dollars on oil makes no sense because they can use gold to buy oil, and then they can use their foreign exchange reserves to buy other things, like medicine.
Furthermore, Pozsar revealed that Russia and Iran are establishing a special economic zone along the Caspian Sea, where trade will be settled in digital tokens backed by gold.
Though these developments might not yet be mainstream, Pozsar noted a significant increase in gold purchases by foreign central banks, as reflected in data from the International Monetary Fund and the Gold Association. He added, "Taken individually, they might not mean much. But I think a trend might be found in all these things."
