Secure Your Wealth: Portfolio Strategies for a Post-Dollar Era

Alliance Bernstein strategist Inigo Fraser Jenkins explains why multiple structural trends are converging to challenge dollar dominance and how investors should position for a higher inflation, lower growth future.

Key Takeaways

• Multiple 30-40 year structural trends are simultaneously reversing: globalization to deglobalization, population growth to decline, deflation to inflation
• The dollar is becoming less of a safe haven asset, showing increased correlation with risky assets rather than serving as portfolio insurance
• G7 debt-to-GDP ratios have returned to World War II levels, with US debt service costs now exceeding defense spending for the first time
• Demographics alone will undo much of the global worker pool expansion that drove growth since the 1980s
• Investors must shift focus from maximizing return-per-unit-risk to preserving real purchasing power in a higher inflation environment
• Gold maintains zero correlation with equities across different inflation levels, making it crucial for portfolio diversification
• Climate change and AI represent unprecedented forecast uncertainty that requires more radical diversification strategies
• The transition away from dollar dominance will be slow due to lack of viable alternatives, but the direction is clear
• Real assets including global equities, floating-rate debt, real estate, and farmland become essential portfolio components

Timeline Overview

• Current Period (2025) — Multiple structural trends converging simultaneously, dollar showing episodes of risk-asset correlation rather than safe haven behavior, attacks on Fed independence creating trust concerns
• 5-10 Year Horizon — Strategic demographic and deglobalization forces expected to meaningfully impact growth rates, debt sustainability concerns intensifying, gradual dollar diversification accelerating
• Historical Context — Past 30-40 years represented unique period of globalization, demographic dividends, and falling inflation/interest rates that are now reversing
• Long-term Implications — Working age populations shrinking in Europe (-0.5% annually) and China (-1% annually) while US maintains slight growth (+0.2% annually)

The Great Reversal: When 40-Year Trends Flip

• Multiple structural trends that defined the past four decades are simultaneously reversing, creating unprecedented challenges for investors accustomed to globalization, demographic tailwinds, and falling inflation expectations.
• Deglobalization is unwinding the massive expansion of the global worker pool that occurred since the 1980s, when globalization brought billions of additional workers into the same economic arena.
• Population demographics alone represent a massive shift, with the UN projecting US working age population growth of just 0.2% annually compared to historical norms, while Europe faces -0.5% annual decline and China -1% annual shrinkage.
• The confluence of demographic decline, globalization reversal, and reduced female workforce participation eliminates the three pillars that supported decades of abundant labor supply and low inflation pressures.
• Interest rates and inflation are moving from a 30-year environment of declining rates and benign price pressures to one of higher, more volatile inflation that challenges traditional portfolio construction approaches.
• These changes operate over 5-10 year strategic time horizons rather than immediate tactical concerns, but their convergence makes longer-term issues suddenly relevant for near-term investment decisions.

Dollar Decline: Reading the Warning Signs

• The dollar is exhibiting episodes where it declines during risk-off environments rather than serving as the traditional safe haven, particularly visible when dollar weakness coincides with rising bond yields.
• Increased negative correlation between dollar and gold suggests markets are pricing the dollar as less of a safe haven asset, with gold serving as the alternative store of value during uncertainty.
• Rising correlation between gold, silver, platinum, and Bitcoin indicates investors are seeking alternative zero-duration assets that share characteristics as potential dollar alternatives during crisis periods.
• The critical threshold to watch involves large institutional flows out of US bonds, which would represent a meaningful shift from talk to actual action regarding dollar diversification.
• Three distinct risks point toward reduced dollar trust: fiscal sustainability concerns, geopolitical imperatives for rivals to dedollarize, and specific investor concerns about potential taxes on foreign US asset holders.
• Despite these warning signs, the lack of viable alternatives means outflows will be gradual rather than sudden, creating a "drip feed" story that unfolds over many years.

Debt Crisis: When Interest Costs Exceed Defense Spending

• G7 net debt-to-GDP ratios have returned to World War II levels after rising consistently for 30 years, but this time without the benefit of falling interest rates to manage service costs.
• The US crossed a critical historical threshold in 2024 when debt service costs exceeded defense spending for the first time, a pattern that has historically preceded the decline of great powers.
• Nile Ferguson's research on previous great powers shows this debt service/defense spending crossover led to reduced hard power projection capability for the UK (1920), Ottoman Empire, and Hapsburgs throughout history.
• The UK managed to reverse this situation in the 20th century but only through inflation, currency depreciation, and loss of reserve currency status - precisely the scenario investors now fear for the dollar.
• Market attempts to price sovereign risk have been "utterly swamped" by investor demand for liquid safe assets, creating tension between fundamental concerns and technical flow dynamics.
• The sustainability question cannot be answered with precise timing, but the directional implications point toward the dollar becoming a riskier rather than safer asset over strategic investment horizons.

Portfolio Revolution: From Risk-Adjusted Returns to Real Purchasing Power

• Traditional portfolio construction focused on maximizing return per unit of risk becomes inadequate when the primary challenge shifts to preserving purchasing power against higher, more volatile inflation.
• The fundamental question for investors changes from "what is my expected portfolio volatility?" to "what is my risk of purchasing power loss?" - requiring a complete reframing of portfolio objectives.
• Higher expected inflation and reduced correlation benefits between stocks and bonds mean achieving specific real return targets becomes dramatically more difficult using traditional balanced approaches.
• Investors may need to accept higher portfolio volatility to achieve necessary real returns, representing a painful but necessary adjustment to new economic realities where risk-free real returns disappear.
• The shift in investor governance requires explicit decisions about liquidity needs, time horizons, and risk tolerance rather than relying on historical correlations and return patterns that may no longer apply.
• This represents the most fundamental change in investment approach since the 1970s, when high inflation and market crashes destroyed the "Nifty Fifty" buy-and-hold strategies that had worked for decades.

Real Assets: The New Portfolio Foundation

• Global equities remain the primary real asset for liquid portfolios, providing positive real returns as long as inflation stays moderate rather than extreme, with strong historical evidence supporting equities as inflation hedges.
• Private assets including floating-rate debt offer real asset characteristics while providing portfolio diversification, particularly valuable when traditional bond-equity correlations break down in inflationary environments.
• Physical real assets including real estate and farmland provide direct inflation protection, though liquidity constraints limit their role in most investor portfolios compared to liquid alternatives.
• Gold's 200-year real return of approximately 0.2% annually makes it unattractive as a return generator but valuable as a diversifier that maintains zero correlation with equities across different inflation regimes.
• The key attraction of gold lies not in return generation but in risk diversification when traditional portfolio insurance through bonds becomes unreliable in higher inflation environments.
• Central bank gold purchasing for geopolitical reasons provides potential upward price support, though quantifying this effect remains impossible and shouldn't drive allocation decisions beyond diversification benefits.

Climate and AI: Unprecedented Forecast Uncertainty

• Climate change represents a structural risk factor with error bars far wider than traditional economic forecasting, with academic studies showing huge disagreement about temperature-growth relationships but consensus on negative direction.
• Net zero by 2050 appears "highly unlikely" due to social and political resistance to rapid behavior change combined with explosive AI-driven power demand that will equal Japan's total consumption by next year.
• The combination of social change difficulty and AI power requirements suggests global warming above 2 degrees becomes probable, with potential GDP impacts ranging from -0.2% to -0.6% annually over 10-year horizons.
• AI productivity gains remain highly uncertain despite street consensus about benefits, with historical evidence showing technology impact forecasting has been consistently poor across all previous innovations.
• The risk of AI-driven job displacement may differ from historical automation because threatened jobs are primarily in non-unionized white-collar sectors rather than traditional manufacturing where displacement effects have been absorbed.
• Both climate and AI introduce "radical forecast error" that dwarfs traditional uncertainty around demographics, corporate profitability, and other economic variables, requiring more radical diversification approaches.

The End of Systematic Investing Dominance

• Systematic investing based on backtesting historical relationships faces fundamental challenges when the economic environment that generated 30-40 years of data undergoes structural reversal.
• Shorter-term systematic processes continue to work because they don't rely on these slow-moving structural forces, but longer-term strategic allocation models lose reliability when underlying assumptions change.
• The advance of AI tools paradoxically makes rejecting systematic approaches "almost absurd," creating tension between recognition of changed structural conditions and improved analytical capabilities.
• Deep governance questions about risk measurement and portfolio objectives lie outside systematic processes, requiring human judgment about whether volatility or purchasing power loss represents the true risk to manage.
• The most important client conversations now focus on fundamental governance issues rather than tactical allocation decisions, representing a shift back toward human judgment on strategic questions.
• This doesn't eliminate systematic approaches but relegates them to supporting roles while human analysis addresses the unprecedented confluence of structural changes affecting markets.

Geopolitical Dollar Alternatives: The Slow Diversification

• Countries seeking dollar alternatives face the fundamental problem of no viable substitutes, making diversification efforts necessarily gradual and focused on partial rather than complete replacement.
• Central bank gold purchases represent the most visible dedollarization effort, but gold's historical role suggests it serves as crisis insurance rather than functional currency alternative.
• Geopolitical imperatives for dollar rivals remain strong and persistent, creating ongoing pressure for alternative systems even when economic logic favors continued dollar use for efficiency reasons.
• Episodes like proposed taxes on foreign US asset holders create trust concerns that linger even when specific policies are withdrawn, contributing to gradual confidence erosion.
• The dollar retains advantages through superior US growth prospects and lack of alternatives, but these benefits must be weighed against increasing political and fiscal sustainability concerns.
• This creates a "drip feed" diversification story extending over many years rather than sudden currency crises, requiring patient observation of gradual flow shifts rather than dramatic market events.

Investment Implications: Navigating the New Reality

• Asset allocation must prioritize real return preservation over traditional risk-adjusted optimization, accepting higher volatility to maintain purchasing power in an inflationary environment.
• Geographic equity diversification becomes more important as US exceptionalism faces challenges, though near-term data still supports US market leadership relative to other developed markets.
• Fixed income allocation shifts toward floating-rate instruments and inflation-protected securities rather than traditional duration risk that becomes portfolio liability during inflation episodes.
• Alternative assets including real estate, infrastructure, and commodities gain importance as inflation hedges, though liquidity and complexity considerations limit accessibility for many investors.
• Gold allocation provides portfolio insurance function when traditional bond diversification breaks down, justifying 5-10% allocations despite zero expected real returns over long periods.
• Currency diversification through international assets helps reduce dollar concentration risk, though implementation requires careful consideration of underlying economic fundamentals rather than just currency exposure.

Preparing for Financial System Evolution

The convergence of demographic decline, deglobalization, fiscal unsustainability, and geopolitical tensions creates unprecedented challenges for dollar-centric portfolios. While the transition away from dollar dominance will unfold gradually over years rather than months, the direction appears increasingly clear. Investors must fundamentally rethink portfolio construction, shifting from optimizing risk-adjusted returns to preserving real purchasing power in a world of higher inflation and lower growth. This requires embracing higher portfolio volatility, diversifying into real assets, and accepting that the investment strategies that worked for four decades may no longer be sufficient for the structural changes ahead.

Practical Portfolio Positioning Strategies

• Increase real asset allocation to 70-80% of portfolio - emphasize global equities, floating-rate debt, real estate, and infrastructure to maintain purchasing power protection
• Add 5-10% gold allocation for diversification - provides zero correlation with equities across inflation regimes while serving as portfolio insurance when bonds fail
• Reduce traditional fixed income duration risk - shift from long-term bonds to floating-rate instruments and inflation-protected securities
• Diversify currency exposure through international assets - reduce dollar concentration while focusing on economies with superior demographic and fiscal profiles
• Prepare for higher portfolio volatility - accept increased short-term fluctuation as necessary cost of maintaining real returns in inflationary environment
• Monitor debt service/defense spending ratios globally - track fiscal sustainability indicators that have historically preceded reserve currency transitions
• Watch for institutional flow shifts from US bonds - distinguish between political rhetoric and actual investment behavior changes
• Plan for 5-10 year strategic horizons - recognize that structural changes unfold gradually but require positioning before they become obvious
• Embrace radical diversification approaches - acknowledge unprecedented forecast uncertainty from climate and AI requires broader risk management
• Focus on governance over tactics - prioritize fundamental decisions about risk measurement and portfolio objectives rather than short-term allocation adjustments

The post-dollar world may emerge slowly, but preparation requires action today. Investors who wait for obvious signals will find themselves repositioning after the most attractive entry points have passed.