Yes, another day and the markets had to try to understand the significance of Cyprus. The newswires were filled with analysts claiming this was a “tempest in a teapot” and that the doomsayers were blowing the Cypriot problem into a pseudo crisis. Again, a world that is highly leveraged is subject to a “single spark starting a prairie fire” and the fear of contagion and an electronic bank run are very real if the major policy makers don’t invoke the trust of the electorate and investors. The perceived actions by IMF Director Lagarde (the joker) and the liquidationist mentality being thrust from Berlin and Chancellor Merkel (the thief) have created a situation where European bank depositors are nervous, especially so in the peripheral banks. THE MAIN COMPONENT OF THIS UNCERTAINTY WAS THE MOVE IN THE FRONT MONTH EURIBOR CONTRACTS,AS THE JUNE 2013 FELL 10 TICKS ON A DAY WHEN OTHER INTEREST RATES WERE LOWER. NOTHING SAYS BANK FEARS THEN A COUNTER MOVE IN THE EURIBOR AND LIBOR MARKETS. An increase in bank yields with equity markets falling is a sign about the fear in the bank deposits market. It seems that the policy makers that are leading the previously “revered” TROIKA (IMF,European Commission and ECB) have initiated fear for a mere pittance.
Archive for the ‘Russia’ Category
This week brings the Moscow circus to the world stage. The world’s major economies meet in Moscow as the Russians are presently in the leadership position of the G-20′s rotating presidency. It used to be the G-7 nations that crafted an economic blueprint for the World Bank and IMF to somewhat adhere, but as much of the global economic growth is now in the BRICS and the other emerging economies, the world’s former colonial powers have had to make room for the rising economic nations. Most of the time the G-7 and G-20 meetings have been photo-ops for world leaders, but every once in a great while something constructive actually makes its way into global policy. The immediate global consensus after the Lehman debacle helped stem the global credit markets from total collapse. This G-20 meeting will not be one of the constructive outcomes as the G-20 members are nowhere near any type of consensus.
Last week we covered a great deal of ground on the economic front as the world’s central banks, from Beijing to Washington were busy generating versus types of stimulus programs. The Chinese government aided the cause by announcing an infrastructure program of $157 billion in an effort to generate even more stimulus to a slowing economy. As the Chinese authorities begin on a path of shifting the export model to a more domestic consumption type growth plan, there is a great deal of excess Chinese capital development that needs to be utilized and the slowdown in global economic growth mandates a shift in priorities for the POLITBURO.
Notes is going to REPOST an old piece just to remind our readers and the financial world that the games surrounding the GREEK DEBT situation has turned into a marathon of concern and an Ironman competition of lies and deceit. The European policy makers are attempting to delay what the markets have deemed to be inevitable and pretend that a Greek restructuring will not take place. The fact that the market has driven two-year GREEK RATES to more than 25% is of no consequence to the EUROCRATS of Brussels for, as usual, the political elite will continue the facade of “ALL CLEAR” as the PIIGS move from crisis to crisis.
Moody’s, the major seers of economic events, has done it again. The Greek sovereign debt rating was lowered and rates on 2-year Greek notes increased to more than 15 percent. Rates on Greek 10-year debt rose to more than 12 percent, yet this is not an inverted curve that one would wish to buy. The group at Moody’s is awakening to the coming dreadful effects of the “NEGATIVE FEEDBACK LOOP.” The more the economy is squeezed, the less tax revenue is collected and that results in a further deterioration of the GREEK BUDGET. The Greek government is going to have to go back to the EU/IMF bailout gurus and ask for further assistance in preventing the next round of financing from causing a greater drain on Greek Government coffers. Imagine the deleterious effects of the Greek polity having to refinance its DEBT at current market rates rather than the considerable lower rates offered through the European Financial Stability Facility (EFSF).
Notes From Underground: The World Awaits the State of the Union but it is Sarkozy in Search of A BalconyJanuary 24, 2011
First and foremost: My thoughts and prayers go out to the Russian people as the nihilistic elements of global terrorism crafted its senseless actions on the Moscow Airport. It is not my bullish view on Russia that provokes my thoughts, but rather the ugliness of NIHILISM. Random terrorist acts are to be opposed wherever and whenever they raise its spectre of wanton destructiveness. The Russians will of course respond with a heavy hand for Putin et al care very little about public relations. Brutality will beget brutality. Political expediency will trump all rationality for neither Medvedev nor Putin will want to be perceived as weak in the eyes of a resurgent nationalistic populace.
Some housekeeping weekend news: British Petroleum returned to the Russian market as it announced that it was swapping $16 billion shares of its stock for an equivalent amount of ROSNEFT, rendering the Kremlin the largest BP shareholder. BP management has determined that its future is better off in developing large Russian oil reserves than depending on the capriciousness of U.S. ENERGY POLICY. This is not an easy issue as some previous aggrieved parties are going to slow this agreement down until they receive compensation for past illegal moves by the PUTIN clique. More importantly, it says that serious business people are beginning to see a change in Russia and want to be part of the early movers into the “great potential.’
No major stories this New Year’s weekend. Dilma Rousseff was sworn in as the new president of Brazil and spoke to the need to continue the policies of LULA. She said her influence will be on battling inflation but the markets will watch her cabinet’s actions as she has also voiced concern about the rapid appreciation of the REAL, as the Brazilian currency has appreciated 39 percent during the last two years. The strong REAL has begun to hamper the Brazilian equity markets as it was up a mere 1.25 percent in a year that global commodities were the star performer. Brazilian debt markets are anticipating rates to rise this year so our eyes will be on the Brazilian central bank and watching to see how aggressive it is in stemming inflationary pressures.
Allow me, readers, to journey down the rabbit hole. I believe a major theme in 2011 is that many of the high correlative trades are going to break apart and fundamentals will prevail over mere mathematical permutations (hence NOTES FROM UNDERGROUND WHERE 2+2=5 is also a beautiful thing). One of the areas of decoupling will be in the area of DEVELOPING MARKETS where all nations are not equal. Russia is one of those nations that I believe will outperform, as the rising middle class will continue to push for more development that is not just natural-resource based. Now I am not naïve and certainly understand the pernicious nature of Putin and his kleptogarchs and the failure of the rule of law. One of Yra’s laws is the MONEY IS FASCIST, by which I mean that money in search of a high return will tolerate autocratic rule. History certainly bears this out, especially when we are in a greed cycle rather than fear.
When I scour the landscape for possible investments, Russia keeps popping up. Medvedev, the current president, has stated that he would like to sell off some state-owned industries next year. Of course the question is: Sold or Stolen? The lack of a free press is problematic but if that were a major criterion many countries would be non-investable. William Browder’s treatment by Putin is also problematic as is the continued imprisonment of Khardovsky, but if you can accept the premise that money is fascist then the rest is easy.
Looking back to 1998, the Russian ruble was trading around 5.5 to 6 rubles to the DOLLAR when the Russian economy collapsed. The RUBLE was devalued as it went to 27 RUBLES to the DOLLAR a year later. Throughout 1998, the ruble price of a barrel of oil was roughly 150-180 rubles. Today, the same barrel of oil with a much more efficient production process yields almost 2500 hundred rubles. In measuring Russian inflation during the same 12-year period we find the annual rates to be:
As you can see, the inflation rate has stabilized and although still too high is not confiscatory. In addition, Russia is also a major producer and exporter of natural gas and many other needed raw materials. If commodity price inflation holds, Russia is a natural hedge. Furthermore, Russia is taking advantage of the U.S. weakness to pursue its own interests in Europe and Asia. Long-term energy contracts have been signed with China and of course Germany buys 45 percent of all its energy from Russia. While the G-20 meeting starts tomorrow, President Medvedev is in Seoul, South Korea making deals with the LEEgovernment.
In a Bloomberg story, it was reported that Russia/South Korea trade has grown more than 20 percent from last year and more deals are forthcoming. South Korea is providing key technologies to aid Russian modernization in exchange for natural gas supplies. The Brazilian real and other developing nations have seen their currencies rally back to levels close to massive devaluations, not so with Russia. Currency manipulation may be a Chinese syndrome but it appears that Russia has proven even more adept. It will be a story to watch going forward into the new year.
The markets were busy today on the heels of yesterday’s increased volatility. The EURO was under selling pressure as the turmoil in the EURO DEBTmarket continued and the Irish and Portuguese 10-year BONDS widened further against the benchmark BUND. The EURO will lag until these rate differentials begin to narrow. The British pound was the strongest currency as BOE governor said in his report government that recovery will continue and there was a balanced chance of inflation being either too high or too low. The BOE said it would keep its GILT buying program at 200 POUNDS. In his statement Mervyn King said, “The U.K. recovery is expected to continue, supported by expansionary monetary policy, further growth in global demand andTHE PAST DEPRECIATION OF STERLING.” (emphasis mine)
The fact that the BOE governor is making a positive of STERLING DEPRECIATION is one of the major obstacles for the Irish economy. When a respected central banker is cheering the depreciation of its currency is there any wonder why there is and will be so much acrimony among the G-20 nations. Tomorrow will bring the onset of the now spotlighted G-20. Will it be a LONG MARCH, a GREAT LEAP or a CULTURAL REVOLUTION for global economy.
A few stories from Russia today. First, the Russian Judicial System rendered a totalitarian decision as the oligarch Khodorkovsky was again found guilty of some type of misappropriation of funds when he controlled YUKOS, the Russian energy giant. This is another black eye for the RULE OF LAW in Russia as the verdict appeared to be predetermined with the heavy influence of Prime Minister Putin. I don’t doubt for a moment the tragic shortage of justice in Russia, but the question is: Do the markets truly care, or as I continually remind, is MONEY FASCIST? Global investors will set aside criticism of a nation’s societal and legal injustices if the investment returns are high enough and the government is stable.