My best friend from high school is in many ways the polar opposite of me. My ambition was always to sit in one spot and make a living doing the thing I love most – trading. He was more interested in seeing the world and experiencing all life has to offer. Over the years he has run a variety of different divisions of world class companies all over the world. For a while there, every time he used to phone it seemed to come from a new country code. Eventually he married a Swedish girl, and after settling in Canada for a little while when their first chid was born, he went on a sabbatical so that they could all return together to live in Sweden for a while. But my pal being who is, couldn’t help himself, and took a job trying to develop the international business for an up and coming consumer product company.
I am lucky to have my pal for many reasons, but lately the fact that he is selling to so many different markets, I have found his reports from all over the globe especially useful. One of the markets that his firm currently sells into is Russia. My buddy figures that since I refuse to explore the world like him, he is at least going to educate me one photo at time. For example, I now know that Russians love Bruce Willis and that his photo is plastered all over Moscow.
But what is especially helpful is my pal’s reports about the state of the actual business on the ground. About a month ago, when the Ruble was around 47 to the US dollar, he sent me an update about his Russian business:
They had bad sales this summer (partially due to the weather) and now have extra stock over the winter. When I visited in August, they signalled that 2015 purchases would be lower than 2014 (first down year in 7 or 8 year history with us). Here’s the forecast for 2015 now:
“I would like to confirm the Dmitry’ comments made in August. Our today’s stock is enough for the 2015 season. And I think that we won’t need the additional purchasing from USA. So we purchase none. The $ and euro rating increased in 15% for last 3 days. People stopped to buy anything. We do not understand what to wait. May be everything will be ok for our country, for our business, may be not. We hope for the best!”
Since my buddy has sent that email, the Ruble has fallen another 15% and the price of crude oil has collapsed!
It is easy for us to sit in front of our trading screens and watch as the Russian financial markets collapse. But it is important to remember that there are real consequences to these moves.
The Russian economy is quickly plunging into the abyss. My suspicion is that it is actually worse than it appears. This last $10 plunge in the price of oil has not yet made its way through the system.
Between the EU/US sanctions, and the collapsing commodity prices, Russia is being starved of revenue.
I am not going to bother debating whether those sanctions are justified or not. As I have said in the past a million times, our jobs as traders is not to decide what should be, but to make money from what is.
The pressure on Putin has been cranked to a level that something big is going to happen. Maybe Obama will get lucky and Putin is going to cry uncle from all the sanctions and the orchestrated lowering of the oil price.
Then again, maybe Santa Claus is real and going to grant me my wish that the stock market start to be priced on fundamentals instead of Central Bank flows.
The chances of Putin folding on Ukraine are quite low. I don’t know how this is going to resolve itself, but my guess is that it isn’t going to be harmoniously.
I think it is best summed up by Eurasia Group’s Ian Bremner who tweeted the following:
Ian Bremmer: Crumbling oil makes Putin more dangerous (Yes, Japan bombed Pearl Harbor over our oil embargo against them)
Lately the Russians seem to be testing our limits militarily. Every day it seems to be there is another report of somewhat aggressive Russian military maneuvers. Earlier this week the WSJ reported that a Russian MiG–31 recently made contact with a Norwegian F–16 plane.
Norwegian Armed Forces spokesman Brynjar Stordal declined to say when the incident occurred, but said close calls such as this are rare. “We could have had a collision between the aircraft,” he said. “The pilot has a spontaneous reaction in the video, and both his comment and the evasive maneuver indicate that this is unwanted … We don’t know if this was a mistake by the Russian pilot, or a sign of a more aggressive behavior by the Russians.”
Well, this was no mistake as it is happening with increasing frequency. Whether it is Russian submarines straying into sovereign waters, or planes constantly testing the Western countries’ response, the Russians are purposely escalating the situation.
Again, I am not judging who is right. Who cares? It is what it is. And what it is, is dangerous. You have a country run by a pseudo dictator that is increasingly getting squeezed economically through the actions of the Western countries. It wouldn’t take much for there to be an accident that quickly escalates.
These are not normal times. The market is underestimating the chances of either a military conflict, trade skirmish or even a true financial war. I continue to believe that everyone should think long and hard about owning a little more gold, and a little less stocks in here.
US Fed Term Deposit update
Yesterday I wrote about how we should be watching the US Federal Reserve’s term deposit program increase for a sign about whether the Fed is on auto-pilot in their attempts to withdraw the excess liquidity from the system.
Well, here’s your answer:
Yesterday the Fed withdrew the largest amount from the system since the program was introduced! It is no wonder that the US dollar broke out to new highs yesterday.
I will repeat it again, the Fed is tightening, and it is only a matter of time before something big breaks.