Financial Contamination (or What Autocracy Does to Your Money)

Hi! How’s everyone? Today we’re going to talk about…

I’m going to teach you something new I’ve been talking about with some of you in sessions. A way to think about money, finance, economics in times like these. Where Donald Trump is slowly melting down your life savings. It’s going to be simple, elegant, and powerful. So you don’t Sink With the Ship.

How should you think about the situation you’re in? Is your money safe in an autocracy? LOL—you and I both know it’s not, and you and I also both know that your financial advisors are giving most of you bullshit advice at the moment, to put it kindly. So here’s reality.

Here’s a little idea that I’m going to call financial contamination.

It means more or less what it sounds like.

The way to correctly judge the health of capital in times like these is this: is it contaminated or not?

By what? I’m coming to that. First, capital means, just so we’re clear, a portfolio, the assets in it, dollars, stocks, bonds, etcetera. It means everything in an economy, from your life savings to the US national debt.

Now. Contamination. Again, it should be pretty intuitive. Is capital contaminated by what? By Donald Trump risk, more or less. By it being eviscerated, melted down, sliced apart, by Macro Risk, which means bang, autocracy sends it to the shredder? Contamination means capital’s at risk by more or less whatever Trump wants to do to it.

Let’s take a few simple examples. Why are American T-bills, aka US government debt, doing so badly? Why is it that they’ve become so risky? So much so that the world’s most sophisticated investors are dumping them? Because they’re contaminated.

T-Bills are contaminated by the risk that Trump will default on the debt, and also by the upcoming “revenge tax,” which is Step 2 of the Mar-a-Lago plan, and it’s OK if you don’t know about that, it just means that Trump is going to try and charge foreigners for holding America’s debt, like a shakedown. That’s contamination. When the world is holding debt Trump probably won’t pay back, or will at least threaten not to, or try not to, those notes are contaminated.

Now let’s think about American stocks. It’s mostly just tech stocks that are hanging in there. Sectors like, for example, retail? They’re down, significantly. Why? Because they’ve become contaminated. By the risk of tariffs and trade wars and uncertainty tanking profitability. This is what happened to the Gap and Lululemon’s shares a few weeks ago. That contamination is spreading across the markets now, dragging down sector after sector (and yes, eventually it’ll happen to tech, too.) This is why there’s the feeling that everything’s balanced on a knife edge.

What about dollars? They’re highly contaminated. The dollar’s plummeted the most and fastest in decades, down 10% in just the first six months of Trump’s Presidency. The world’s running away from it, because it doesn’t trust this America to maintain the value of its currency, to manage its economy, and to pay back its debts.

So the dollar’s become contaminated by Macro Risk, aka, Donald Trump risk. The world’s most sophisticated investors, right down to central banks, no longer have much faith in it, so much so, that they’re making plans to dial down their dollar holdings for years to come.

You know and I know that America’s ceasing to be the world’s center of gravity. Capital flight’s taking hold, and that means that capital is running away from America. Hence, American assets all falling in tandem. Even the vaunted stock market is only really hanging in there because of the usual tech stocks — other sectors are all mostly down. So dollars, bonds, stocks, property — all beginning to fall. This is because of financial contamination.

Now. Financial contamination is a concept that you should use.

You should use it many ways. To test your financial advisors, asking them: do you think my assets are contaminated by the risk above? Do you think America’s assets are contaminated, because the world is fast coming to that conclusion?

You can use it on your own, to judge the health and strength of your portfolio. It’s pretty intuitive, no? And while I could model it for you, there’s no real need. You get the idea, and that’s what’s important. How many of the assets in my portfolio are contaminated now? That’s the kind of question you should be asking.

Let me add a few points.

Contamination is toxic in many ways, just as the name implies.

It means that when an asset is contaminated, it stays contaminated. What would it take to de-contaminate US government debt from the risk that Trump is going to default, for example? It’s almost impossible to say. You’d need a hell of a vaccine, that’s for sure, something like: the Fed stepping in offering to buy every T-bill on planet earth, which it can scarcely do.

What would it take, at this point, to de-contaminate dollars? Again, it’s almost impossible to conceive of. Dollars are now contaminated for a time horizon to come, two to five years at least, because it’s dawning on large investors that they just won’t be as good as they once were, in fundamental ways. To restore faith in a currency? De-contaminating of the risks of autocracy, default, and devaluation? Good luck, and even if you did find a miracle cure, it’s hardly likely to happen, anyways.

Contamination also implies spread. In financial terms, we call that “contagion.” That just means that risk spreads from asset to asset, until it sweeps across an economy, and then we call it a crash, crisis, or even depression. Easy enough to imagine in this case. As the world loses confidence in US debt, that destabilizes the dollar, which in turn begins to shake stock markets. Any number of scenarios are possible, the point is that contamination spreads across an economy where Macro Risk is concerned. Just think ahead a year or two: what’s going to be safe from Donald Trump risk?

That’s a brief intro to financial contamination. (If you’re a nerd, you can think about it technically as a long-standing reduction in the value of financial assets, but not just in a simple way. In a toxic one. Touch this, and you’ll get burned. A contagious devaluation, or a kind of collective tail risk without a boundary condition in time or asset class. If that’s Greek to you, don’t worry about it.)

My advice is: judge carefully how deep financial contamination is already affecting you. Very few of you will have clean portfolios. Some of you were wise enough to follow my advice earlier, you’re up significantly already this year, precisely because my portfolio isn’t contaminated. Contamination is real, in other words, not just abstract. Contaminated assets are going to be worth less. And less.

And discuss it with your financial advisors. If they dismiss it, they’re not very good ones. The entire world’s most sophisticated large investors are now trying to grapple with all this, and financial contamination is the concept they’ll need, and I’ll even teach it to some of them. The idea that a portfolio affected by Donald Trump risk isn’t contaminated, at this point, is foolish. If they know it, then it’s going to affect you, because guess what, they’re the ones with the massive pools of capital, and when they start to offload contaminated assets? Bang. That’s when the fireworks begin.

So far, it’s a slow bleed. But as the world discovers that contamination by Macro Risk, aka Donald Trump risk, is real, the flight away from American assets, dollars, bonds, stocks, etcetera, will only accelerate. In the end, the market for contaminated assets is going to be much smaller than it used to be. You should be ahead of that curve. Or else my guess is that a lot of people are going to be buried by it.

As always, if you need help, just reach out.

Lots of love,

Umair (and Snowy!!)

Tip jar.