Notes From Underground: REISSUE

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:

Russian Inflation is on the decline
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.

 

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