Dollar Milkshake Theory & Specialization

Nate Crosby |
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We didn’t come up with the dollar milkshake theory but it has played out surprisingly well. Brent Johnson of Santiago Capital came up with the theory before the pandemic. It predicts a massive run-up in the dollar and capital flows into the U.S. as other countries are forced to print currency to get dollars to get the things they need. Nate then discusses the question of whether it’s better to be a specialist or a jack of all trades to build wealth. We hope you enjoy the episode.

What exactly is the dollar milkshake theory?

Brent Johnson of Santiago Capital may have hit the nail on the head regarding the economic trends following the pandemic. His dollar milkshake theory started gaining traction in 2019 (pre-pandemic) and is centered around predicting that the next time there was a crisis, the banks would print a lot of money. That action would create a short squeeze in the dollar, leading it to suck up (ala milkshake) liquidity from the global markets. Remember all that money that was poured into the economy from the central banks? While many of you diligently spent the money given to you by the US government, I highly doubt you stopped and wondered what the other side of the coin would be. The liquidity created during COVID played right into Brent’s theory and thus served up a milkshake made of the US dollar. 

If you’re wondering why any of this matters, stick with us! The main outcome of the events is the impact this money had on the rest of the global economy. Remember, the US dollar is the global reserve currency, and therefore the US economy ‘sucking up’ the COVID liquid causes a threat to sovereign debt markets. Other countries buy things from each other using US dollars, even if the US isn’t involved. They also back their foreign currencies with reserves of the US dollar. Global borrowers will tend to borrow less if the US dollar becomes more valuable. 

While Brent’s theory was pretty spot on, what he didn’t account for was the intervention of the Fed. Their approach to trying to manage inflation (thus strengthening the dollar) is in fact crushing other currencies. 

What’s happening with our favorite topic – the stock market

Let’s face it, the news has been gloomy lately. From credit swaps to rumors of a deep depression, many investors are feeling a bit more uneasy in recent weeks. Here’s what we are seeing:

  • Employment is pretty good 
  • People are still traveling and spending money
  • Businesses are spending less

What do we think? The worst may actually be behind us because as you approach the bottom, it’s scarier, but the light is at the end of the tunnel. We need this process in order for the market to correct itself. Hang in there, stay the course, and don’t panic – we’re right there with you on this crazy roller coaster! 

Is it better to know a lot about a lot of things or have specialized information? 

It depends on your goal, of course! Many of the highest earners tend to be more specialized (think of an athlete for example) because as consumers we are willing to pay for specific expertise. Have you read Sherlock Holmes? When Watson meets Sherlock, he is taken aback by the fact that he can’t quite pinpoint the way Sherlock’s mind works. He describes it as; his ignorance was as remarkable as his knowledge. 

Whether a generalist or a specialist, when it comes to investing, we will continue to remind our listeners to let their goals always guide their decisions. Educate yourself or find someone who specializes in the craft.