Notes From Underground: A Quick Hit On the State of Chaos

First, our hearts go out to all suffering in the world of insanity brought on by senseless wars that diplomacy OUGHT to have been able to prevent. The world always returns to the insanity that brought us to World War I when nobody could stop the trains once set in motion. As Phil Ochs sang, “It’s always the old who lead us off to war, it’s always to fall, look at all we won with the saber and the gun, tell me is it worth it all?” But here we are and as always the world continues to focus on the minutiae of life, including the financial outcomes responding to the high-speed headlines driven by algorithmic speed machines. There is no context to any news just manufactured volatility fabricators of the latest musings of some “news” outlets’ favorite expert. But as Hyman Roth said so clearly: “Michael this is the profession we have chosen.”

The most critical variable confronting the world now is the ramping up of sanctions against all facets of the Russian CENTRAL BANK and against those individuals and companies with direct ties to Putin’s inner circle. Those who continue to tighten the noose around Putin’s neck must be very careful about the collateral damage done to the emerging market countries who are suffering a TRIPLE WHAMMY: The rise in the price of OIL, which many emerging markets depend on as imports; Russia/Ukraine is a major exporter of wheat and various other foodstuffs so the rapid rise in prices can have serious negative repercussions as we saw during the 2011 Arab Spring in 2011; and the rapid rise in the U.S. DOLLAR is compounding the deleterious effects of the previous two as all the world’s commodities are priced in DOLLARS.

A bigger problem, though, is that the emerging markets are already saddled with massive DOLLAR-denominated debts because of the Fed and ECB’s QE policies, as well as some of the lesser banks. Currently, there is still massive liquidity in the U.S. system to meet any immediate DOLLAR shortages but with the FED on an anti-inflation mission raising interest rates combined with a rapid shrinking of its balance sheet could cause a decline in the financial health of many global institutions as the Russian invasion continues to cause an escalation in sanctions. Debt is cheap to finance now but with a rising DOLLAR and OIL at $125 a barrel and WHEAT at more than $13 the emerging markets are being pushed to the wall.

This was the exact situation in the late 1970s that caused financial collapses as DEVELOPED WORLD BANKS overextended to LESS DEVELOPED COUNTRIES (now known as emerging market economies) for loans made to pay for petro imports as oil prices rose dramatically. Yes, interest rates were far higher in the early 1980s but developing countries were carrying a smaller debt load than they are now.

Last week the EUROPEAN banks took a beating. Since the onset of Putin’s war, the financial institutions are down 40% as fear grows about exposure to Russian financials. Be on the lookout for ECB President Christine Lagarde extending the use of TLTRO. The third program is expected to expire in June but with all of the stress in the EU banks, Lagarde will be under duress to extend the program. The ECB could go even further and decide not to end the PEPP purchases. The SANCTIONS ARE CAUSING A GREAT DEAL OF STRESS TO THE EUROPEAN FINANCIAL SYSTEM, inflation be damned!

The best things going right now for the global financial system are the FED‘s dollar swap lines to many banks and the Foreign International and Monetary Authorities Repo Facility, which the G-30 pushed Chair Jerome Powell to make permanent. This provides generous backstop for foreign institutions, which is important because something is definitely ROTTEN in DEMARK, FRANCE, GERMANY, ITALY, et al. What it is I don’t know but at this point, watch the European system. All acts of war and the sanctions will deliver unintended consequences. Be patient and let the false headlines be played by those relying on the newest expert to fill the airwaves. And also, let’s see where the FED goes in response to political systemic risk.

We’re only just beginning to evaluate and assess but the longer this goes on the more damage will be done as FOOD becomes scarce as countries are forced to protect their populations and four million barrels of Russian OIL go searching for buyers. Upon listening to the Chair of the House Agricultural Committee David Scott at Powell’s testimony last week I wouldn’t be surprised to see the Biden White House move to limit U.S. ag exports if prices continue to push higher and worries of scarcity arise. The optics of headline inflation are harming the Dems’ chances in November. As always in politics, OPTICS provide an incentive when policy is failing.

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17 Responses to “Notes From Underground: A Quick Hit On the State of Chaos”

  1. Leslie Philipp Says:

    Thank you for taking the time to point out what’s top of mind with you right now. Always good to hear a calm voice amidst the fray.

    All the best everyone.

  2. Asherz Says:

    The choice will be roaring inflation or crashing deflation. The “tightening” is a joke. .25 or .50? Compare to Volcker 20% to break the back of inflation . I will be shocked if there is real balance sheet shrinking and seriously higher rates. With global debt over &300 T the picture is very different than 1981.

    • David Richards Says:

      Exactly. The always-brilliant, straight shooter Marc Faber, the former Swiss National Team skiier and Investment Banking executive, said the same thing and more, 3-4 days ago in a 2-part interview in the Wealthion channel on utube, in which he also discussed several concepts such as reserve assets, currency, investments, rule of law, “wealth”, and personal freedom (hint: it’s fast disappearing but not in some perhaps-surprising places) in this new, post-pandemic, “ukrainian invasion” world in which much has suddenly changed and much more could change.

  3. Pierre Says:

    Thanks for posting Yra. I’m always amazed how you sum up so much information in a couple of paragraphs.

    • David Richards Says:

      Pierre, just a follow-up to you. I always remember your tremendous post here for me umpteen months ago about your covid care observations and thoughts. So insightful and also now proven spot-on in hindsight, TQ.

      • Pierre Says:

        Thank you for the kind comment David. If you care for an update, we are down to 3 cases from highs of over 150 in just several months. What a roller-coaster!
        I’m still here reading the blog and comments, trying to absorb as much information as I can from everyone who posts. =)

  4. Arthur Says:


    • Yra Says:

      Arthur—I always take to the kindness of strangers—-but seriously.As Kevin M. can attest this analysis is born out of hours of discussion late at night Rocky Roccocos Pizza in Madison ,Wisc as we discoursed over the fine mind bending that we experienced from Professors who taught us to think.It was the Marxist and Austrian analysis that introduced us to looking at debt and its impact from a different perspective –it may not prove correct but it does allow one to escape the popular narrative that Ben Hunt tries to get finance people to escape—Arthur thanks for all of your input

  5. Chris D Says:

    Yra, if the U.S. did limit their ag exports in fears of scarcity – what kind of repercussions do you potentially see coming out of that?

    • Yra Says:

      Chris–good question –my first thoughts is the harm it would do to exporters and the markets that have been developed over hte last sixty years—beyond that I don’t know but will wait to hear from those with more knowledge of the ag markets

  6. Michael Temple Says:

    If US curbs grain exports, similar to what some countries are already doing, the post WW2 construct of liberal globalization comes apart. Huge new regional trading blocs will arise around the new political axes being formed.

    All of this is HUGELY disinflationary as the law of comparative advantages will collapse .

    Supply chains globally will retract like a turtle back into its safe shell. Every key manufacturer item will be inspected not just for it’s economic ROE, but on its national security quotient.

    The post WW2 world order was characterized by the spirit of the Marshall Plan and the creation of such Supra national bodies such as the IMF and World Bank to help fund Global growth that otherwise might have been provided by the US as Europe smoldered in its ruins…

    The USD is in the 9th inning of its dominance on the world scene. After the SWIFT sanctions and neutron bombing of the Russian CB, the cost to foreigners of holding USD is now not just economic, but existential. Watch as Russian economy implodes, even if China provides some cushion

    • David Richards Says:

      Hi Michael. Perceptive as usual. But (for the benefit of other readers) I think you meant inflationary instead of “disinflationary” (typo).

      I’d add that the European economy is also probably set to implode in the absence of commodities and energy security dependent on Russia that cannot be effectively substituted for years.

      If what we read is true (who knows nowadays?), most of Russia’s frozen assets are in Europe, as Russia had already largely de-dollarized and liquidated US positions due to existing or anticipated US sanctions. Plus Russia has the world’s most nuclear weapons, some now on alert aimed at militarily weak Europe (plus several world-class nuclear attack subs that can/are tactically positioned offshore the US to neutralize US-NATO with a credible threat to destroy the US should the US strike or retaliate if Russia nukes Europe), as Putin has already officially threatened – twice lately (not an empty bluff as Putin’s long record shows he never bluffs).

      My point is that, rationally, both the unelected EU technocrats and Russian leadership have economic incentives to reconcile (and an existential motivation in the case of EU, given Russia’s position that sanctions and theft are acts of war and we’ll nuke you over it). Alarmingly, history shows that major wars follow major theft between nations.

      Some cooler, rational heads must prevail. Alas, so far rationality has been lacking. I’m a rank amateur with no expertise in geopolitics nor many other topics for that matter. Nevertheless I suspect we’re in the early innings and that posturing today will eventually be replaced with serious negotiations tomorrow leading to some constructive compromises. So hopefully things blow over like in another crisis 60 years ago, but the international political leadership today is nowhere near the caliber that it was back then.

      Otherwise, tho it’d be the least of our problems, WW3 mightn’t be very investable. Shaking my head at those saying, “War is good for the economy”.

  7. David Richards Says:


    Great summary, presented eloquently as usual. I salute your honest, objective assessments that are lacking in most media today.

    They can’t really all be so diplomatically incompetent, can they? Therefore, it must be intentional. Maybe acting on instructions?

    Pepper spray Davos, indeed. Big tech, too.

  8. The Bigman Says:

    O wise one, First I will not, as promised previously, get into the political weeds, but rather make the observation, having lived through the Cuban Missile Crisis, that Biden and Putin are no John Kennedy and Nikita Khrushchev both men who first hand knew the horror of war. No, I am writing to laud both you and Marc Faber for your great call on platinum/palladium In the month since your interview SPPP (Sprott physical white metals fund) is up 32%!!!!!! Kudos x3 Giving credit where due- proving you can take the trader out of Chicago but not the trader out of the trader. FWIW TBM

  9. Pierre Says:

    Higher food and energy prices predicted to last for longer.
    Any feedback on the article would welcomed. =)

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