Notes From Underground: The Hiatus Interruptus, or No Rest For the Weary

Last Sunday I warned in a blog post that the Ukraine situation would heat up after the Olympics as Vladimir Putin would not wish to draw attention away from his beloved event as he did during the Beijing Olympics by maneuvering against Georgia. Right on cue the Russians moved against the Crimea in an effort to protect its geographic and strategic interests. The Crimea has been extremely important to the Russians for 300 years as the tsars desired a warm-water port to allow Russian commerce and imperial designs to proceed even when the Northern waters were frozen during the winter months. The Russians will defend their interests just like any other world power and it is in their immediate backyard. The Europeans and U.S. can threaten sanctions and other such nonsense but as Churchill noted long ago, “I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.” (October 1939)

If those pundits who rely on CNN for their facts fail to read history, all financial action will be determined by the model builders and number crunchers. But I warn that investors and traders need to be armed with the knowledge of politics so as to measure the risk they face on a daily basis. The attitudes of the European policy makers and the Obama administration are based on making headlines and devoid of any meaning. Secretary of State John Kerry has warned about sanctions being imposed on Russia for their aggressive actions in the Ukraine but these threats are empty. Do policy makers believe that Germany would approve sanctions against Russia while 45% of Berlin’s energy needs are met by Russian supplies?

If the Western leaders want to break up the EU and drive Germany to closer ties with Russia, apply economic sanctions and watch the “games begin.” German chemical corporations are heavily dependent upon Russian gas as the feedstock for so much of its business. Besides, most fossil fuel is fungible and Asian demand would surely absorb a great deal of Russian supply. The EU has no military ability to support any threats as the U.S. had to supply France in its military engagement with Libya. The European leaders want to become recognized as a significant player but that ended at Dien Bien Phu and the Suez in 1956. The talking heads assume that it is Putin who has overextended himself and is looking for a way out of the Crimean invasion, but it is Europe and the U.S. that have overreached. The Ukraine is not a member of NATO so the West will be hard-pressed to have motives. A Europe on the verge of a deflationary spiral can’t afford to push the world’s financial markets to a possible renewed slowdown due to political uncertainty.

In a wonderful weekend Financial Times piece by John Authers, “Ziggy Stardust Fears Haunt Investors’ Psyche,” he cites a Bank of New York Mellon study that said large institutions have upgraded their risk management abilities and are therefore more comfortable with their risk profiles. The BoNY survey found that the greatest perceived risks are due to Fed and other central banks interest rate actions. “But it is alarming that investors show no great concern about politics. More than a third said they did not measure political risk at all. Political risk is imponderable and markets are collectively unable to measure it.” The readers of NOTES FROM UNDERGROUND may not have sophisticated measures of risk but we are aware of the impact of FEAR on the pricing of assets and we tend to rely on charts and other technical indicators to make rational choices during times of chaos.

***A note to European and American leaders: Before you start throwing Molotov cocktails at the Russians over their actions in the Crimea, you might want to question the Monroe Doctrine and its implied design on the U.S. and its efforts to define its national self-interest. Then, the New York Times and other periodicals may want to raise the current issue of Guantanamo Bay. I don’t mean the issue of GITMO and the retention of its facilities, but the entire issue of the U.S. maintaining a naval base on the island of an enemy it has failed to recognize for more than 50 years. In 1903 the U.S. forced Cuba to lease Guantanamo Bay to the U.S. “for as long as necessary” for a measly rate of $2000 in GOLD COIN annually. The U.S. has been sending Castro checks, which have gone uncashed for 50-plus years. Before pointing the finger at Russia over Crimea, the U.S. may wish to examine its own behavior in maintaining the colonial status of a sovereign nation. Yes, 2+2=5. In the world of high risk, you do the math.

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13 Responses to “Notes From Underground: The Hiatus Interruptus, or No Rest For the Weary”

  1. Mark Spector Says:

    What’s up

    Sent from my iPhone


  2. joe Says:


    To bring up the Monroe Doctrine in light of our renewed “cold war” threats, is so appropriate, I’m at a loss for words. I just wish the CURRENT and past THREE presidents had acted like they recognized or even knew of its existence.

    With challenges in our own western hemisphere, (Mexico, potential Central American terror states, and South American trade interests, Arctic resource defense) maybe a couple of adults will materialize within this administration and rediscover the Monroe Doctrine.

    Your post hits on several solid points critical to successful diplomacy and necessary to keep the children in charge from turning this in to a grade school gym brawl with real lives at stake. Which does bring to mind former PM Anthony Eden…. “Suez in 1956”

    Did you lecture a credit eligible 20th Century Non-Western History class? This blog post could provide a basis for several. I can only imagine the blank stares from the recent crop of nominees for ambassadorships if they were required to attend same.

  3. Chicken Says:

    Good call! Push came to shove, didn’t it?

  4. Arthur Says:

    Bravo, excellent!

  5. Dave B. Says:

    Keep an eye on the eastern 1/4 of Moldova, called the Transnistria. This is a breakaway area within the Republic of Moldova and is considered key military terrain. Once you get across the River Dniester it’s flat open land all the way to Moscow, hence the river has historically been heavily defended by Russia in its various forms over the years. (To invert the route and invade Europe would require navigating the Carpathians, hence the area is not considered a vulnerability by most European countries– with apologies to Romania.)

    The Russians have maintained their 59th Guards Motor Rifle Division and an anti-aircraft rocket regiment in Transnistria despite the fall of the Soviet Union, although the units are majority composed of Moldovans not Russians.

    Moldova is part of the old Bessarabia, which was taken by the Soviets under the Molotov-Ribbentrop Pact. What makes it interesting is that this breakaway regions sits to the west of Ukraine. So you have Eastern Ukraine, with an ethnic Russian presence and influence, Western Ukraine with its pro-European outlook and aspirations, Transnistria which has Russian troops on the ground and is culturally aligned with Russia, then Moldova proper (which is a mess).

    Putin spent his 50th birthday in Moldova, visiting the 120 km of underground wine cellars in Cricova (amongst other things). The area is known for making cabernet sauvignon according to the champagne method, and was perceived to be of high quality in the years preceding WW1. But I digress. Just keep an eye on the area if the temperature in the Ukraine remains above normal.

  6. yra Says:

    Dave–my family left from there in 1923.thanks for making this important point–and bringing an important geo-political element to the fore

  7. Mario D Says:

    Well spoken words….Agree on several instances

  8. Chicken Says:

    Perhaps Putin’s moves will assist fast tracking immigration reform?
    “”US based @@@@ employs around 2,600 engineers in Ukraine and another 1,300 in Russian cities, out of a global workforce of 9,3000. The company posted revenue growth of 28 percent in 2013 to $555.1 million earlier this month.””

  9. yra Says:

    The posts to the blog while I have been on a brief hiatus have been great–thanks to all.In a quick note,Thursday will have the ECB and the BOE isue their rate announcements.There will no change in the rates but look for Mario Draghi’s press conference beginning at 7:30 a.m. [central time] bring some fire works over the issue of the sterilization of the previous SMP cash.The Bundesbank has agreed that the ending of sterilization will bring a short term increase in central bank liquidity but this is already in the market.Second,President Draghi will be asked about his “new ideas” on rebuilding the Aseet Backed Security[ABS] program in which the ECB will be able to absorb a great deal of the stale assets sitting on the balance sheets of European commercial banks.This is a very touchy issue and in my opinion is an attempt by Draghi to have the ECB become a massive recipient of sub-par loans .The European market has had a history of allowing COVERED BONDS which is a much more conservative form of Asset Backed Security,in which the coupon clippers could follow a simplistic trail of interest rate payments.Allowing a more aggressive form of ABS will take the ECB and Europe into a form of the subprime debt that caused the crisis in the global financial markets.The Germans will be the ultimate backer of the ABS bonds so it will be interesting to hear from Bundesbank President ,Jens Weidmann ,for his reaction to Draghi’s new effort to circumvent the German courts and create a synthetic EURO-BOND.

  10. Chicken Says:

    Kissinger’s explanation concerning Sevastapol makes me think (aside from perhaps some degree of rhetoric ending with a murder trial) the severity of this particular subject has peaked.

  11. Chicken Says:

    In fact, considering Germany’s dependence on Russian feedstocks it might even be possible the subject is levered in such a way as to persuade Germany into reversing their opposition towards future ECB programs?

    Throw in some level of collusion on behalf of global financial special interest groups with their ability to distort meaningful indicies such as LIBOR at will, the better half of public companies trading on Wall Street could simply take themselves. or be taken, private?

  12. wordthirster Says:

    Reblogged this on The Quern.

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