Russia - it seems I'm not alone

http://www.telegraph.co.uk/finance/economics/11297770/Russia-risks-Soviet-style-collapse-as-rouble-defence-fails.html

BUY BUY BUY

How I wish I had more funds to go longer everything and anything. Falling oil is sparking market panic with equities falling, credit spreads widening and government bonds rallying. It's quite possible that markets go significantly lower than they already are, but in the long run low oil means more cash in consumers pockets, and nonexistent inflation pressure - a perfect combo for central banks of rising consumption with no upward pressure on prices which will allow them to keep rates lower for longer. In the long run credit and equities (as long as you avoid obvious sectors such as Russian, Venezuelan and Indonesian credits)  are both good buys. There might be some short term mark to market pain, but if you can adopt the Buffett approach and put the certificates in a drawer and forget about them for a year or 2 you'll be a winner.

Russia

And so begins the inevitable downward spiral. A rate hike to 17% from 10.5% at midnight last night initially clears out a few of the less committed shorts leading to an 8% rise in the ruble, and then the bears come back in force unwinding all the gains. At a fundamental level, a rate hike like that signals panic.  At best it can only provide a short term boost to the currency. In the longer term - and that's not very long in a country which is already facing budget disaster and economic sanctions - before it adds yet more pain to the economic mess and restarts the inevitable fall in the currency. The only way they can prop the currency up if they really want to is to intervene heavily in the FX markets, but that will run down reserves at an amazing speed. And a lower currency also cushions the budget against falling oil prices and gives the economy some breathing room - it might import inflation of course but frankly I'd have thought that wa a risk worth taking.

It reminds me of Sterling being kicked out of the ERM - in the space of one day rates went from 10% to 12% to 15% and then back to 12% once the rate rises had failed to work. Do these panic hikes ever work? I can't think of an instance when they have.

Russia is screwed and only getting out of Ukraine and having sanctions lifted can save them - and even then It may be too late. Putin is going to have the whole USSR experience condensed into a few short years.

I'm just happy I'm not long USD debt issued by a Russian borrower - they have no chance of being able to refinance.

Still Turning Japanese

Nice to see the rest of the world is finally catching up to the obvious on Japan - http://www.telegraph.co.uk/finance/economics/11293109/HSBC-fears-horrible-end-to-Japans-QE-blitz-as-Abe-wins-landslide.html

It was always going to end in tears. A huge fiscal bust on private debt leading to huge government debt as the public sector bails the banks out, entrenched interests preventing reform, ageing population, stagnant economic growth, deflation and falling corporate investment. Japan won't go bust in the technical sense as they can just print money to pay off debt (as some could argue they already are doing) but they could easily up with a worthless currency and a huge depression. 

The bigger concern for the rest of the world though is that this is exactly the same situation as Europe finds itself in at the moment, and Europe can't just print to pay debts as no single country controls the Euro. More sovereign defaults are a real possibility. 

I've been saying for years that in economic terms Europe is Japan writ large. I just hope I'm wrong. 

Turning Japanese

A great article in the FT with which I agree 100% - http://on.ft.com/1xrPK4T . In short, the current QE34 (I think.mi may have lost count somewhere along the way) in Japan is doomed to fail, like all the previous QEs, because the problem in Japan is not inflation vs deflation, but demographics. 

You can't fight demographics.

QE in an economy with an aging population simply adds ever more debt to an ever smaller working tax base. In GDP per capita terms Japan is growing well. It is only in GDP total that it is struggling.

The same will soon apply to lots of Europe.

If you enter into this phase of an economy's Developemnt with high levels of government and/or personal debt then it's a road to ruin. The trick is to have strong finances with high savings than an aging population can draw down on to finance their retirement and healthcare.

Politicians mistake is to look at total or outright GDP,not HDp per capita. The latter is what makes people feel rich and consume, the former is what gives politicians bragging rights at G7 or G20 love-ins. They are focussed on the wrong measure.

From Russia With Love

I said in my last post on Russia that it was all getting a bit Cold War. Now it seems they're back in space and developing the capacity to take out enemy satellites - http://on.ft.com/1xf4h3N 

Hard to get much more Cold War than that. Fortunately history teaches us that these sort of acts - unsustainable spending by a paranoid state - are often the final hurrah before the state concerned collapses. Just as long as they don't decide to fire off a few nukes before they implode I think we can safely ignore them.

Chinese Whispers

China is, and pretty much always has been, a huge house of cards. A giant Ponzi built on the assumption of ever faster growth and ever higher property values.

It was always going to end in tears. The only question was when. Seems it may be sooner rather than later. Anyone who believes differently should read this at the FT - http://on.ft.com/11mpTyh Sums it up superbly.

And if China goes.......  Anyone else here old enough to remember the last Asia crisis? Stay out of asian emerging markets.

Russia.

What a mess. Rates hiked to 9.5% from 8%, inflation at 8% and rising, currency plunging despite the rise in rates reflecting a fundamental lack of confidence in the economy. And possible worst of all -
Oil price falling to what is widely believed to be a level which makes the Russian budget unsustainable.

Sanctions take time to bite - it looks like they are finally hitting home. The Black Swan for the next 12 months could be the implosion of the Russian economy. That's make a few high end hoteliers and yacht charterers in Southern France wince.

Putin wanted to recreate the USSR. Looks like he's succeeded - complete with the inevitable collapse.

To QE, or not to QE, that is the question

So the Fed is winding down QE3 and it has universally been declared a great success. Meanwhile in Japan the BoJ has shocked markets by announcing yet more QE - the world has lost count of how many rounds of QE that makes in Japan. It has clearly not been a great success there.

Why the difference?

I would suggest that the recoveries in the UK and US have much more to do with a swiftly recapitalised banking system then any effect from QE. QE may have helped, but non-zombie banks I would suggest are more crucial. Japan can keep on QEing as much as it wants, but until it sorts out its banks nothing will change. Except maybe the country going bust. 

Plus ca change....

It's been a while but  it's time to restart offering a few thoughts. But where to start? Sometimes it's depressing being right. Anyone who knows me knows that I've been saying for at least 5 years that Europe is Japan writ large. A failure to recapitalise the banks and hope they could muddle through has simply led to stagnation. It's finally coming home to roost.

The U.S. and the U.K. bit the bullet early, took the pain upfront and and are now benefitting from that. Europe has just gone nowhere, hoping that US growth would pull them up with it. It's not going to happen. The recent ECB stress tests seem more realistic than previous efforts but I think the markets are weary of the ECBs efforts to talk things up. They want to see some action. Of course the ECb can promise and threaten lots of things but it is hobbled by its council and the overarching reach of the Bundesbank behind the scenes. Anything that does happen is likely to be smaller in size and slower to arrive than markets hope and the economies need. 

European woes seem set for the long term

The calm after the storm

while an overnight bounce after my psoting yesterday is nice to see, I doubt the volatility will die down that quickly. But i think it does show that the underlying fundamentals in many of the world's major economies are strong enough to sustain this recovery. And the Central Banks won't be inactive - particularly in the US were the new Fed Chairman is a known dove. Rates will stay low long after tapering is done, and until the Fed raises, none of the other major central banks can - hence I remain very long GBP bonds and have a few equities thrown in for variety.

The Central Bank raises in some EM countries, however, are more worrying. Growth was already slowly in many developing countries, and rising rates will hurt them further. I fear they have given a short-term boost to their currencies at the expense of long-term economic pain - which will also be bad for their currencies further out. What most of them need is a weaker currency, but arrived at in an orderly fashion.

Other thoughts....?

Italy - looking like a basket case - it's likely to replace Spain as the major worry in Europe.
France - going to grind along the bottom until the lunatics in charge see sense. Doubt it will go into a tailspin though.
The Euro - as ever, it'll survive, because the ruling elites in Europe want it to. Nothing to do with economics or logic.
China - complete ponzi scheme but they have enough money to bail it all out when it starts to go pear-shaped. When the bust comes it will be a drag on the world's economy but I doubt the disaster everyone fears. Unless you're the Chinese Communist Party. A recession and a few investor haircuts could easily spell the end of their rein.

But for all the doom and gloom out there, somehow the world always seems to manage to bounce back - it has before and I expect it will again.

Here we go again...

Well 2013's feelgood factor didn't last long. So far in 2014 equity markets are well down and bond markets are well up - pretty much the 100% opposite of what every economist was forecasting. Why do banks pay fortunes for these guys - they're best used as a reverse indicator.

But my gut feel is this will pass. Yes there are potentially huge financial problems coming in China, Indonesia is wobbling, Thailand is shooting itself in the foot, India is going nowhere and Brazil is reporting record trade deficits. But, for all the talk of the importance of these places, 50% of the world economy is Europe and the US. Those areas are showing enough signs of recovery to think that there will be a global slowdown, but not a meltdown.

The Fed may or may not continue to reduce its stimulus, but for all the talk of tightening it is in fact still pumping $65bn a month into the US economy, and can increase that again if necessary. The ECB can and will cut rates to 0% if needed, and the Bank of Japan is still printing Yen like it's going out of fashion.

The current wobbles are an over-correction from excessive optimism late last year to excessive pessimism now, made worse by terrible weather in Europe and the US, and Lunar New Year slowdowns in Asia.

Hang tight - it'll come good.