It’s one thing to make bold economic predictions, and another to see them materialize. Brent Johnson, the founder of Santiago Capital and the oracle behind the Dollar Milkshake Theory, has managed to do both, and he’s got X buzzing about what’s next.
First introduced in 2018, Johnson’s Dollar Milkshake Theory laid out a roadmap for the global economy and financial markets, with the U.S. dollar at the center of it all. The theory postulated that U.S. interest rates would rise, the world economy would struggle, and this tumult would funnel capital into the United States. Consequently, the dollar index (DXY) would surge, gold prices would go up, U.S. equities would rise, but these gains would be interspersed with heart-stopping drops. Sound familiar? Five years on, this theory has held its ground remarkably well.
It’s easy to get lost in the short-term tumult of tweets, especially in the fast-paced world of financial X (twitter), or Fintwit as it’s commonly known. Tracy (@chigrl) captured this sentiment well, pointing out that “Fintwit is the fast food generation, if a theory does not pan out in the next hour, it is suddenly demonized and ostracized.” However, as Johnson himself remarked, the real irony lies in the fact that critics who argue his theory hasn’t played out are often the same ones who think the U.S. and the dollar are doomed – it’s just that their doom hasn’t materialized yet either.
This brings us to the ominous eighth point in Johnson’s theory: “Will end very very badly for everyone.” This sentiment is intriguing and terrifying in equal measure. When asked to elaborate, Johnson warned of an impending sovereign debt crisis where “Sovereign Bonds, Sovereign currencies, entire countries, and entire economies fail.” It’s the esoteric nature of this final prediction that’s got Fintwit speculating. Ghost (@Econghost) pointed out, “The first 7 are very specific in the call, whereas the last one (still yet to come true) is very obscure and esoteric.”
As we inch closer to the end of 2023, there’s growing speculation about whether we might witness a banking or commercial real estate crisis. Although Johnson doesn’t foresee this happening by year’s end, he isn’t ruling it out either. It’s a sobering thought for all who are riding the seemingly unstoppable wave of U.S. economic strength. Johnson’s theory is a cautionary tale that reminds us of the volatility that lurks in the shadows of booming markets.
The prediction also casts a shadow over the correlation between a strong dollar and U.S. stock markets. As noted by Dan Talmon (@dan_talmon), “Moving forward, Dollar strength might not necessarily mean strong U.S. stock markets.” Johnson concurred, adding that the road ahead could be marred by “terrifying drawdowns.”
So, what does this all mean for the average investor, policymaker, or curious observer? It means caution, and lots of it. Johnson himself admits that he’s “not smart enough to know exactly how it ends,” but it’s certain that when it does, it won’t be pretty.
In a world of immediate gratification and an incessant quest for the next viral theory, Brent Johnson’s Dollar Milkshake Theory stands out as a multi-layered, meticulously crafted prediction that, so far, has passed the test of time. Yet the final chapter remains unwritten, and as we look ahead, one can’t help but ponder what that ‘very bad’ finale might entail.
