As We Anticipated, Russia Is Collapsing.
From time to time you've seen me repost points from prior remarks made over the years. Many of my posts leading up to this unfolding environment were anticipated outcomes developed from my quantitative work. Therefore, some topics were seemingly irrelevant at the time. Now these themes are developing into major realities as this cycle enters its down turn. So far all of our themes are developing quite nicely. Obviously, not nicely from a quality of life standpoint but from a quantitative standpoint.
I have to laugh at those on Wall Street who are now remarking that emerging markets represent great risk. Of course, master-of-the-obvious is an easy game to play after witnessing the greatest global equity market collapse in history. Where were those voices with actionable research in advance of emerging market implosions? Well, of course, they were telling us to buy, buy, buy. It was all a lie, lie, lie.
Just as with the Chinese economy and banking system repost, we first started singling out Russia as source of crisis early in the life of this blog. Here are quotes from two of my prior posts put up when the media and Wall Street were gleefully extolling the virtues of the global economic boom and Russia's new economic leadership role:
"The latest potential catastrophe is now building in Russia. And, it appears to be gaining momentum. Let me stick my foot in my mouth and say I would put the potential for a blow up in Russia near the top of a "next" shoe to drop list. If this comes to pass, isn't it ironic that Time magazine just named Putin "Person of the Year"? What does that make Time magazine?".
And, then a few months later I wrote:
With very significant inflation in the Russian economy, it is imperative Russian bankers continue to extend credit or risk a significant economic meltdown and deflation. Guess where those Russian foreign exchange reserves are going before this is all said and done? Now what are Russians going to be voraciously attempting to acquire? Maybe dollars? As we've said time and again, most simply do not understand the gravity of what has developed over the last business cycle. I just cringe when I hear statements like what are you buying today in anticipation of a Fed rate cut. The financial world has become a casino. Those telling us to buy the dips or that stocks are cheap have no concept of risk. Let alone rudimentary skills on how to manage it.
It appears I can take my foot out of my mouth because the environment is unfolding exactly as we thought it could. And even earlier concerns about the Russian banking system all now appear to be coming to the center stage.
Since the above remarks, made at the peak of the Russian stock market ascent, the Russian stock market has completely collapsed, the market has seen single day declines of twenty percent and the Russian government has shut down their stock exchange half a dozen times due to its disorderly implosion. I believe they actually shut down the exchange three times in one particular day due to an inability to restore order. Finally, they simply shut the market until further notice. I haven't checked to see if that decree was lifted but I would suppose it has been.
There was an interesting article earlier this month that Russian oligarchs had lost $230 billion due to the collapse of their stock exchange. Now, if they had only followed my blog, they could have saved themselves $230 billion. And, if I had charged typical hedge fund fees for that advice, I would be the second richest person on earth. Literally. What's the point? Russian oligarchs didn't gain all of that wealth because they were brilliant or because of hard work. They did so because they were ruthless and well connected to the power elite. Does that sound vaguely familiar to other circumstances around the globe?
I saw a Moscow Times article a few weeks ago that said their stock market problem was all about oil. No, it's all about your economy. And, might I add, the situation continues to worsen. Russia's banking system is in shambles and its crisis will very likely dwarf that of the U.S. comparatively. And just as we discussed with China, the Russians will need access to capital Likely U.S. capital. Don't expect them to be able to generate it from their economy. Say bye bye to those accumulated dollars held as foreign exchange reserves. (Again, as I wrote with China, there is a substantial probability Russia too will no longer be able to fund U.S. Treasury purchases. I would anticipate a first outcome to be many countries following the banks by hoarding cash as they begin to realize the scope of their domestic crises.)
How ironic Moody's just upgraded Russian sovereign debt a handful of months ago. Actually, they upgraded Russia's debt at the very peak of its stock market bubble. Now Russia plunges untold sums into its banking system to deal with its crisis. I wonder what Moody's would say now? How about nostrovia! Have another vodka. You'll need it. In fact, just a week or so ago, S&P downgraded Russia. Is there any end to the ratings agency incompetence? How does a global ratings agency with all of the resources imaginable make a major mistake of upgrading Russian sovereign ratings when some hick in the middle of nowhere (me) was writing at the same time that Russia could be the next global crisis? This is truly a mad, mad, mad world of systemic incompetence.
As it pertains to Russia, China and other emerging markets, it is time for a short rant. A friend sent me a commentary about a month ago by a well known fund of funds advisor (A career path that is soon to be kaput. I mean that literally. The demise of this position is almost a surety.) that this crisis will soon pass and the world will be a better place for most people. I'd like to know what this is based on? Happy talk? There is absolutely no quantitative data that supports such a perspective. As I wrote with regards to Friedman's The World Is Flat, fairy tales are better left to children and writers of fiction. A position that the world will soon be a better place for most people is a fairy tale based on rationalizations of the hopeful mind. If you have been with me since this blog started, you know that I expect to see the vast majority of the world suffer significant economic consequences in the outcome of this cycle. I've said time and again I am long term bullish on the U.S. and nothing has changed in that perspective. It's emotionally healthy to be optimistic but it's even more emotionally healthy to pragmatically embrace reality. In fact, that is exactly what the U.S. is adjusting to as I write this. And, just like everything else, the U.S. is leading the world in the adoption of this emotionally healthy state. Or put another way, while Rome burns, the world fiddles. Do you know why? There are many reasons but here are two - the rest of the world (a) has no idea what is going on and (b) their leadership is so used to the U.S. solving everyone else's problems that they have no idea what to do in a crisis.
Finally, I'll leave you with a timely remark I made on here back in late 2006.
"Anyone who bought Russian equities in 2000 has a lot of moxie. I'd like to shake your hand. Right after you buy me a yacht because you made a killing of a life time. Anyone who is buying Russian equities today? Well, I might be buying you lunch at the poor house."
Would you like fries with your Happy Meal?