That's the conventional wisdom BillT. But I have my doubts. I think Russia might run out of cash sooner than expected. It's certainly interesting to speculate.
RE: "Russian Economy" Bloomberg: Goldman Sachs Group Inc. and Credit Suisse Group AG both suggest buying Russian bonds. "Russia bonds are both cyclically and structurally underpriced." Please Register or Log in to view the hidden image! Meanwhile in the USSA where The Great Recovery is in full stride: U.S. economy still sucks, expect more McLowPaying McJobs at just under the number of hours so as not to get stuck footing O-blah-ma-couldn't-Care. Thank the Gods we pay a tax on our hourly labor so that our lovely State can regulate every single aspect of our lives and keep us safe from one anther, because once, one time, in the late 1800s, someone in New York bought some slow-cooked off-cuts of pig snout, tail, feet, bone, hair and skin that were washed in boiling ammonia mixed with fillers, colored pink-slime and sold as human edible 'food' AND (unlike today) hadn't received a "USDA Choice" gold-star once every two-year inspection by a "Regulatory" Agent of the State. You know, because with out those inspections every two years by a functionally incompetent State Agent we'd all die of food poisoning - just as we did for 1000s of years prior. Yup, gotta keep those "Free-Markets" super-teeny-tiny so as to keep the competition for functionally illiterate Government labor-cogs at rock bottom low prices..... oh, and keep us 'safe' from one another. "Great" Society indeed. Looks like the State-bot economists got the Russian Economy wrong too, at least according to Goldman Sux who put Russian Bonds at "Buy" earlier in the week.
What do you think that means Michael? What does “structurally underpriced” mean Michael? This is where a little knowledge is helpful. The article in Bloomberg the Goldman Sachs’s recommendation wasn’t a ringing endorsement of Russian debt. It was an interest rate play and a very risky one at that. But it could pay off handsomely. This isn’t something your average investor would or should do. A few months ago the Russian central bank raised interest rates to 17% in order to defend the Russian ruble. Russian interest rates went from 10% to 17% overnight. It caused significant disruption in the Russian economy. So the Russian central bank has been forced, for political reasons, to immediately reduce the interest rate. Goldman Sachs is betting the Russian central bank will continue to reduce Russian interest rates in an attempt to mitigate the economic damage the Russian economy has incurred. That means the ruble will fall much more and Russia’s inflation problem will surge in the coming months. So Goldman Sach’s recommendation only works with Russian debt denominated in major currencies like the dollar or euro and only for short periods. The falling ruble which will be the result of this interest rate reduction will make it exponentially more difficult for Russia to pay off its foreign currency debts. When interest rates fall, the price of debt rises, when interest rates rise the price of debt falls. I won’t explain the mechanics further. But that is a very simple fact of finance. So Goldman Sachs’s recommendation makes sense. This isn’t for the faint of heart. Significant default risk still remains. But as a short term trade or a derivate trade, it makes sense. Goldman Sachs’s is betting the Russian central bank will be forced to continue its rate reductions in order to mitigate the damage which has been inflicted on its economy. But in doing so, it is increasing the odds of a Russian debt default. So the fix (i.e. interest rate reduction) is only a temporary fix. But there is an opportunity to make some nice profits here if the Russain central bank continues to lower interest rates as Goldman Sachs expects. This has nothing to do with your machinations of pig snouts, Mac Jobs, the American economy and statism, etc. The "state bot" economists didn't get the Russian economy wrong. You didn't understand the material you referenced. The Russian economy sucks and its going to get worse. I have shorted the Russian economy and quintuple my investment, a 500% return ain't bad. And it's not over.
General Motors announced today that is shutting down production in Russia by the end of the year. GM will not continue to throw good money after bad. That's a smart decision. General Motors isn't the only company that will shut down Russian production this year. This means there will be many more unemployed Russians. Russian government economic forecasts are known for your political bent and are always overly optimistic. This year the Russian central bank is forecasting a economic shrinkage of 3% and from and in subsequent years it forecasts a recovery. Most analysts are expecting a 5% contraction this year. I expect it will be at least 5% this year. But I am not seeing much relief down the road for Mother Russia. Russia's hope for relief rests entirely on some improvement in the oil markets. Given, there will likely be a peace agreement with Iran which will eventually result in a million barrels more oil on the market every day, I don't think relief will be coming anytime soon. The great unknown here is the demand oil. If oil demand exceeds expectations and there is no new oil supply, Russia can realistically expect some relief, but not enough to pull it out of the sorry state in which it finds itself. Russia needs $100+ per barrel oil. And even the most optimistic oil forecasts are not predicting $100 per barrel oil anytime soon. Here is sucker punch waiting in the wings, when the Federal Reserve begins raising interest rates BRIC countries are going to be hit hard as money leaves BRIC countries for the US. That giant sucking sound you will hear will be cash leaving those countries and interest rates rising in those countries. And that is why BRIC countries want to invent some currency other than the dollar. They are going to be left holding the short end of the stick and they know it. As if things were not bad enough for Mother Russia, just wait till the Fed begins raising interest rates in the second half of this year.
Being a one horse economy and that one horse being oil, Russia is indeed in a dire straight. US oil inventories are rising. Instead of selling all of their oil at reduced prices, oil producers are storing a good portion of their production which is all well and good as long as there is sufficient capacity to store oil. However, that storage capacity is rapidly dwindling. At current rates, storage capacity will be reached in 4 months or less. Now there are some mitigating factors at work. The first being refinery shut downs. In March refiners begin to shut down refinery operations for maintenance and retooling. So from now until the end of April demand for crude will be lower than normal, refinery maintenance may be increasing the rate at which oil is being stored. So within a month or two, the demand for crude will increase. Additionally, cheaper oil will likely cause some increase in demand. How much demand for oil these lower oil prices will create remains unclear. One must factor in increased gas mileages and competing technologies. Oil bulls are betting lower oil prices will lead to a significant increase in demand. In the past, that worked, now, I am not so certain. And then there is the prospect of a settlement with Iran. A settlement with Iran could potentially bring an additional million barrels per day on the market. But it would take months if not a year or more to bring that additional oil to market. Iran’s infrastructure has suffered from neglect. Iran thinks it can bring its oil production back on line in two or three months. That optimism isn’t shared by most folks outside the Iranian government. So where does oil go from here? I don’t know. But I am more of a bear than a bull on oil’s near term prospects. My guess is oil trades between $30 and $40 per barrel for most of this year. Next year we might see $50 per barrel. I think it will be a very long before we see $100 per barrel oil, if ever. Newer technologies like carbon batteries and longer range electric cars will become more competitive with oil. Oil’s future is not like its past. Back in the day, oil was a guaranteed success, no matter what. You didn’t’ have to be bright. You didn’t have to talented; you just had to own oil. Those days are numbered as times are a changing. So I would play oil with long term derivative bets (e.g. long term puts on oil producers).
It's kind of funny BillyT. After years of you complaining about the "weak" dollar, it's more than a bit ironic to hear you complain about the strength of the dollar. For years you predicted the dollar would collapse on Halloween of 2014. Obviously that didn't happen. Yes the strong dollar hurts American companies who do business overseas by making US produced goods and services more expensive in those markets and it hurt those companies when their foreign earnings are converted (i.e. translated) into US Dollars as those foreign currencies buy fewer dollars. Conversely, a weak dollar makes foreign produced goods and services cheaper for US consumers. A strong dollar is a problem for the US, but it is also a big benefit for the US consumer. It means cheaper goods and services for the US consumer. However, I don't see how a strong dollar benefits Russia. What we appear to be seeing in Russia is a dead cat bounce. After falling so much and so fast last year, it shouldn't be a surprise to see a short term uptick in Russian equity. And as previously explained, the Russian central bank is lowering interest rates in order to avoid further damage to its economy. And when interest rates fall, bond prices rise. That isn't a good reason to buy Russian foreign currency bonds for the long term. It's a good trade, but not a good investment. In the end, Russian fundamentals haven't changed. Russian fundamentals remain weak. Inflation remains problematic and the moves by the Russian central bank to cut interest rates will only exacerbate its inflationary problems over time. Companies like General Motors are closing plants, which will lead to further unemployment. NO rational investor outside Putin's sphere of influence would invest money in Russia now. Russia is too unstable. Putin is too unstable. If Putin continues to escalate geopolitical unrest, Russia could find itself outside the international payments system and that would crush what remains of the Russian economy. Putin's sanctions have created mini-monopolies inside the Russian economy and those mini-monopolies are doing well compared to the chaos of last year. They are beneficiaries of the sanctions. Putin has eliminated their competition. But those companies cannot do well forever. Without further illegal land grabs (e.g. Georgia & Ukraine), Russia's population is shrinking. Low birth rates and high mortality rates are not cutting it for Mother Russia. Russia cannot survive as an isolate pariah state without suffering continued and significant economic setbacks.
Being a one horse economy and that horse being oil, Russia's economy is to a large degree intertwined with the fate of oil prices. If oil prices rise, Russia's economic pain will be eased somewhat. But if oil prices fall as they did in 2014, Russia's economy will suffer in spades. And at this point, no one knows where oil prices are headed. No one knows how much oil will be produced and brought to market or when it will be brought to market by Iran. No one knows with certitude how much oil demand will rise given China's economy and the developing world economy is slowing. And without knowing supply and demand changes, how can one know oil pricing? Russia is hoping for tight oil supplies. Russia needs $100 plus oil in a $40 to $50 oil world. And Russia isn't likely to get the $100 per barrel oil for a very long time - if ever. One more thing to think about, developing countries have benefited from the Federal Reserve's cheap money policies. The Fed's cheap money policies has lowered the cost of money for developing economics like Brazil, Russia, India, and China. When the Fed begins to increase US interest rates, the opposite will occur. Money will become more expensive for developing nations like Brazil, Russia, India, and China as money leaves those countries for the US. "Secondly, with globalisation and increased interconnections in the financial markets, the Russian economy will be influenced by the policies pursued by foreign central banks. While the Bank of Japan continues to ‘print money’ on a large scale, a heated debate rages inside the ECB as to whether to resume bond buying, with Germany in strong opposition. Further, the US process of removing “excess” liquidity from the market is under way and is gaining further traction. This is likely to result in a further weakening of the yen and the euro against the dollar. Given that most export commodities are traded in dollars, this may put further pressure on commodity prices, something Mr Putin is hoping to avoid." http://themarketmogul.com/russias-fate-in-2015-2/
The latest on Russia from the IMF: "So, you have all these effects. You have to add to this a number of country-specific developments. I will cite two: Russia, which clearly there is serious economic trouble, and Brazil, where there is, again, a serious slowdown QUESTIONNER: My question is on Russia and Ukraine. Basically, the biggest mistake in the forecasts that were made by the IMF was after the 1998 crisis, when you did not expect a rapid resumption of growth in Russia. So, the question is, are you maybe selling Russia short a little bit in your new forecast, and alternatively, how confident are you that growth will resume in Ukraine in 2016? MR. BLANCHARD: So, your point is exactly right, the IMF and others actually got it wrong in 1998, and the Russian economy did much better than had been forecast. The question is, why? I think retrospectively what happened is that the effect of the depreciation of the ruble had much more of an effect on exports than had been anticipated, and that helped. The question is will this happen again, given that there has been a large depreciation of the ruble? We are very skeptical and that shows in our forecast because we think that the Russian economy is subject to many other problems than just that. We think that the business climate is not good. We think that the price of oil has major adverse effects. So, this is why we are forecasting a recession." http://www.imf.org/external/np/tr/2015/tr041415.htm
