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.