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📝 Focus

• Shifting BRICS and the Petrodollar

📊 In the Markets

• Prepared to raise

• IPO in your InstaCART

📖 MoneyFitt Explains

🎓 The BRICS

📝 Focus

Shifting BRICS and the Petrodollar

The BRICS🎓 emerging market bloc, consisting of Brazil, Russia, India, China and South Africa, has embarked on its largest expansion ever by inviting Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the UAE to join next year, with further phases to follow. Seen as a natural fit for population size (and oil production), Indonesia declined while Nigeria was rejected. The new BRICS+ or BRICS11 is seen by many as a victory for Chinese President Xi Jin Ping's efforts to reshape the group as a counterbalance to the Western-dominated G7 (USA, Japan, Germany, UK, France, Italy and Canada, with the EU as an observer) and position China as the leader of the developing world and as an economic and geopolitical counterweight to the US. Potential implications, should it succeed, are plenty.

..... ▷ Besides simply increasing its share of global economic output (measured by GDP) from 32% to 37% (and an even larger share of global GDP growth), BRICS+ finance ministers have been tasked with developing measures to reduce reliance on the US dollar in their economies, aligning with a wider global trend toward alternative financial arrangements known as "de-dollarisation." The inclusion of major oil-producing countries Iran, the UAE and Saudi Arabia is significant. This adds 25.5% of global oil exports to Russia's 11.8%, bringing the bloc to almost 40% of exports. In terms of oil reserves, it goes from about 24% to 42%.

..... ▷ In 1971, to control surging inflation (and to win the 1972 election), President Richard Nixon of the US announced wage and price freezes, import tariffs and unilaterally cancelled the convertibility of the US Dollar into gold. (Besides massive military spending, imports into the US -including oil- had been exceeding exports, contributing to a balance of payments deficit, which meant there were by far more US Dollars held overseas than the US had in gold.) This led to the collapse of the Bretton Woods system of 1944 in which other currencies could fluctuate against the Dollar while the Dollar was convertible into gold... leading to the current system where fiat currencies would float freely against one another.

..... ▷ But the USA then struck a deal with Saudi Arabia and other major oil-producing nations to standardise the sale of oil in US Dollars ONLY in return for military protection and support. This was the birth of "the Petrodollar." With oil such a critical commodity, countries needed to hold significant dollar reserves to facilitate international trade. This arrangement created an artificial and constant demand for dollars, cementing the USD's role as the global reserve currency and the dominant currency for trade. The petrodollar was a massive win for the US as it allowed the government to spend and borrow more easily, given the demand by investors and governments for USD-denominated assets such as Treasury bonds. With most transactions settled in USD and most commodities priced in USD, it also reduces its exchange rate risk and transaction costs since it does not need to convert its currency to trade with other countries. And it helps maintain its military and political power since it can use sanctions and other measures to cut off access to the USD system for its adversaries.

..... ▷ Pushback! Having been net sellers for decades, central banks have since 2010 been piling back into gold reserves as a hedge against vulnerabilities from overreliance on the US dollar. Since gold is a tangible asset that isn't tied to a single currency, this can be an attractive diversification strategy. The first half of 2023 saw the largest amount of central bank buying on record. Additionally, countries like Russia and China have been actively reducing their dependence on the dollar for international trade by conducting transactions in their own currencies, a clear focus of the new BRICS+ regime. If they were to agree to trade oil in their own currencies, it would reduce the demand for US dollars and could weaken the petrodollar's dominance. BRICS already has the $100bn Contingent Reserve Arrangement (CRA) to provide liquidity support to members in the event of a balance of payments crisis, so they don't need to turn to the G7-dominated IMF. These trends could lead to a decline in demand for dollars and a shift towards other currencies or assets such as gold, though for now, the US Dollar remains the dominant global currency for trade, as US Treasury Bonds are for global reserves.

Macro Geek Corner: Central banks get reserves through trade with other countries, foreign investments and issuing their own currency. Reserves mainly consist of foreign currencies and assets like gold and are crucial because they help central banks stabilise their currency's value, support international trade and manage economic shocks. Reserves offer a safety net during financial crises, ensuring the country can meet its obligations and maintain confidence in its economy. Central banks can also intervene directly in the foreign exchange market to smooth drastic currency fluctuations.

📊 In the Markets

Prepared to Raise: US Treasury yields and the dollar rose after Federal Reserve chair Jay Powell said the central bank would consider another interest rate rise at the Fed’s economic conference in Jackson Hole, Wyoming, on Friday (below.) Instacart, the US online grocery-delivery firm, has filed for an IPO on Nasdaq, slated for next month. This move is expected to bolster the IPO market's recovery. Alongside Instacart, SoftBank owner chip designer Arm and marketing automation company Klaviyo have also kicked off plans for public listings. This reflects renewed investor sentiment towards tech this year following a rough 2022. But the leading mega-cap (mostly tech) names driving the strength in the market (“The Magnificent Seven”) have lost more than combined market capitalisation over the past four weeks despite almost all of them reporting blowout or at least better-than-expected results. Typically, sogginess in the face of good news suggests a market that is somewhat "priced for perfection."

..... ▷ Jay Powell, the Fed chair, warned that inflation remains too high, and the central bank is prepared to raise rates further if needed. He said the Fed is focused on bringing inflation down to its 2% target and will keep rates elevated until it is confident that inflation is moving sustainably down. Powell also said the Fed is aware of the risks of raising rates too much and will proceed carefully. The Fed is expected to forgo another rate hike in September but could raise rates again in October. The central bank is also facing the difficult task of deciding how long to keep rates elevated before implementing any cuts.

IPO in your InstaCART: Instacart, the online local grocery store gig worker-based delivery and pick-up company, has secured cornerstone investments for its IPO from Norges Bank, Sequoia Capital and others, totalling about $400mn, with a separate private placement of $175mn in preferred convertible stock by PepsiCo in place (and converting into shares at IPO.) Instacart has raised $2.7bn in earlier round funding from investors such as Sequoia Capital, Tiger Global and Khosla Ventures, though at much, much higher levels, including a round valued at $39bn in 2021. Internally, for the purpose of valuing employees’ stock options, Instacart valued itself at $24bn last year and at $12bn in May. DoorDash (DASH) is the closest listed comparison but is losing money and trades at 3.9x its trailing 12-month sales. Currently profitable, Instacart made $2.9bn in revenues over the 12 months to June 30th (page F-5), so $12bn is about there.

..... ▷ The pandemic-induced surge in online grocery shopping led to a 590% revenue increase in 2020. However, growth slowed after the pandemic peaked, along with competition from startups like flat-fee "instant" essentials delivery rival Gopuff and increasingly ultrafast DoorDash adding to the challenge. Despite this, Instacart revealed improved earnings, transitioning from a first-half 2022 net loss of $74 million to a net income of $242 million in H1 2023. Total revenue also grew 31% to $1.48 billion during this period. The company cautioned about its history of losses and uncertain profitability despite its reduced internal valuation of $12 billion. On the other hand, Instacart warned in its filing that it had a history of losses and “may be unable to sustain profitability” despite having racked up five quarters of profits. Instacart first signalled its IPO plans in a filing back in May 2022 but, like many other late-stage start-ups, delayed it due to market conditions. The IPO proceeds are to add to the company's recent growth momentum. (The actual name of the company is Maplebear Inc., founded in 2012 by Canadian ex-Amazon employee Apoorva Mehta.)