Notable
• “Work from home” has morphed into “work from everywhere,” creating swaths of digital nomads who execute full-time work from around the globe. In 2022, 17M Americans identified as digital nomads, up 131 percent from 2019’s figure.
• While it may feel that all stocks are on a tear in 2023, that is not the case. In fact, just twenty stocks account for roughly 90 percent of the S&P 500’s gains this year (see chart below).
• Much has been made about the “banking crisis” of 2023, but it’s important to put what happened into historical context. In the 1980s, 2,027 banks failed (roughly 203 failures/year) and more recently, in the 2010s, at least 360 banks failed (roughly 36 failures/year).
• Mortgage applications plunged in March to the lowest level since 1995, as higher interest rates and expensive home prices suppressed demand. Year over year, mortgage applications were down a whopping 39 percent.
• This winter was one for the Sierra Nevada record books. UC Berkeley’s Central Sierra Snow Laboratory has kept snowfall records since 1946, and this year’s accumulation—722 inches—is the second snowiest. The record? An astounding 812 inches in 1952—that’s nearly 68 feet of snow! Thanks to this year’s historic snowfall, the drought situation in California has improved dramatically (see below).
Company Highlights
• PepsiCo (PEP)
Frito-Lay announced that it will deploy more than 700 electric delivery vehicles by the end of 2023. The deployment of these vehicles is expected to reduce annual greenhouse emissions by 7,052 metric tons (which is roughly equivalent to removing 1,500 passenger cars from the road).
• Alphabet & Microsoft (GOOGL & MSFT)
Welcome to the dance. Following Microsoft’s investment in OpenAI and quick rollout of AI-powered features, Microsoft CEO Satya Nadella presciently commented, “[Alphabet] will definitely want to come out and show that they can dance.” As predicted, Alphabet CEO Sundar Pichai recently announced the company will be rolling out large-language models and more chat-like features to Google Search.
• Waste Connections (WCN)
Waste Connections signed a deal with ALTRA, a leading environmental and water solutions company, to remove “forever chemicals” from landfill-leached water.
• Apple (AAPL)
Apple launched its Apple Card Savings account, which features a 4.15 percent APY—a competitive yield among savings accounts and notably higher than the 3.9 percent offered by Goldman Sachs’s Marcus (which, ironically, is running Apple’s savings program).
• Johnson & Johnson (JNJ)
An abstract inadvertently published in April showed very promising results for JNJ’s CARVYKTI™, a therapy being used to treat relapsed or refractory multiple myeloma. Data from the Phase III clinical trial suggest the BCMA-directed CAR-T therapy cuts the risk of progression or death by as much as 74 percent versus the current standard of care. CARVYKTI™ is expected to become a blockbuster drug, with peak sales potentially topping $5B annually.
On Our Minds
Lately, many mainstream media outlets have been discussing the dollar’s status as a global reserve currency—surprising, since it’s not exactly a riveting topic that generates eye-catching headlines. These analyses are likely fueled as China gains influence in the world and as a backlash against the dollar—from Russia, China, and Saudi Arabia, among others—occurs. Fears about the dollar’s status are not new, though. They have ebbed and flowed since the end of World War II, when the dollar became the world’s dominant currency.
When a currency has the liquidity, stability, and scale to dominate the invoicing of international trade and the denomination of foreign debt securities, it emerges as the reserve currency. A good way to measure a currency’s status is to (1) examine its share of the world’s foreign exchange reserves and (2) confirm its ongoing use as the primary medium of exchange for international transactions. As displayed below, the dollar continues to be the dominant foreign exchange reserve currency.
Source: Bloomberg, quarterly data as of 12/30/2022
Foreign exchange holdings as a percentage of total allocated in U.S. dollars (U.S. Dollar), the euro (Euro), the Japanese yen (Yen), the renminbi/Chinese yuan (RMB), and other reserve currencies, which are the Swiss franc, Canadian dollar, Australian dollar, British pound, and unclassified others (CCFRUSD% Index, CCFREUR% Index, CCFRJPY% Index, CCFRCNYP Index, CCFROTR% Index, CCFRCHF% Index, CCFRCADP Index, CCFRAUDP Index, CCFRGBP% Index).
Although trade and foreign currency reserves remain stable, we have seen more countries experimenting with alternatives to the dollar: Russia’s commodity sales to China, India, and others have been invoiced in rupees and yuan; China and Brazil agreed to use yuan for cross-border transactions; and China and France completed the first LNG trade using yuan. Separately, China and others have explored the use of digital currencies in their central banking systems—a progression which could represent another alternative to the dollar. While these developments are unsettling because they reflect ongoing geopolitical shifts, they are not yet material. A dramatic, immediate shift away from the dollar is not feasible, simply because there is no currency that can readily take the place of the dollar. However, we do think that these alternative movements are the start of a more concerted effort by China and its allies to shift towards a bipolar, or multipolar, system—a system which could lead to the US dollar’s relative decline over the next decade.
The chart below contextualizes the US dollar’s dominant and unwavering use—relative to other currencies’ use—in international transactions over the last 33 years.
Source: BIS triennial study 2022
What do these potential threats to the US dollar’s status mean for the companies in your portfolio? The answer is straightforward: companies operating abroad will have to manage an additional layer of complexity. Just as the pandemic prompted companies to have a renewed focus on supply chain diversification, the dollar’s shifting status will necessitate—for companies with international operations—a more nuanced approach to currency hedging. Unfortunately, instituting complicated currency regimes will likely result in fragmented, opaque, and costly systems for companies, banks, and outside entities alike.
We have confidence that well-managed, international companies will be able to aptly navigate the increasingly complex environment in the coming years. Remember, the US dollar’s dominance was only established after World War II; before then, many companies, including J.P. Morgan, DuPont, and Colgate, were able to grow and succeed without the dollar having reserve currency status. What a weakened dollar’s status means for the US’s immense debt and ability to consistently run a deficit is another topic entirely—one for a future newsletter.