The “dip-buying” narrative made a comeback on Wednesday, suggesting media outlets aren’t yet ready to abandon fruitless attempts to ascribe causality to price action driven by everything except fundamentals and discretionary investors.
Just a day ago, Bloomberg conceded that dealer hedging and systematic flows alongside the mechanistic trading of headlines was largely responsible for the roller coaster ride in equities, but by Wednesday, they were back to describing carnivalesque moves in European stocks as evidence of “dip buyers wager[ing] the global economic impact of escalating sanctions on Russia is already reflected in market prices.”
German shares rose a cartoonish 5.4%, at one point (figure below), a wholly exaggerated move which, let’s face it, tells us precisely nothing other than that stocks remain untradable.
Other European benchmarks were similarly buoyant. Expect the gyrations to persist.
There’s talk of demand destruction in commodities on the heels of this year’s breathtaking rally. Stagflation is poised to set in, and some are now skeptical of consumers’ capacity to pay up. European benchmark gas futures dropped sharply, but again, attempting to “snapshot” the situation is an exercise in futility. The market’s broken. In at least one high profile case, literally.
French Finance Minister Bruno Le Maire said Wednesday the EU needs to get on the same page and respond to spiraling energy prices. “It will now be necessary to build European coordination in response to this explosion because it will be all the more effective if it is coordinated between countries,” he told a conference in Paris. The bloc is considering joint bond sales (again), only this time to bankroll energy and defense expenditures.
I’m continually reminded of my own remarks from last year regarding the parallels between waiting too long to reform capitalism and the eleventh hour push to make an energy transition that should’ve been phased in over decades. To wit, from a December piece:
I am, of course, squarely in the camp that believes the implementation of a Progressive economic agenda is the only way to prevent inequality from spiraling so far out of control in America that the country ends up experiencing acute societal breakdown. Similarly, I think it’s fairly obvious that absent a rapid about-face on energy policy, the biome is doomed.
That said, procrastination has consequences, my unblemished collegiate track record of penning publication-ready papers the night before they were due while finding my way to the bottom of a Hennessy bottle notwithstanding.
Decades of procrastination on climate initiatives likely means the world will experience “significant energy storms [with] prices much higher at times, and prone to turbulence pretty much all of the time,” as SocGen put it. Decades spent pursuing supply-side “reforms” and instituting an unbridled version of capitalism free from common sense guardrails left America to rewrite the rules virtually overnight when the pandemic hit, with predictable results. Haphazard policymaking begets suboptimal outcomes even when (and, in many cases, especially when) the policy shift is well-meaning.
Fast forward a few months and the cost of procrastination on fossil fuels is even higher. Now, the paranoid war whims of an aging autocrat have forced the world to choose between making an already haphazard approach to energy switching even more so (with unfathomable ramifications for prices), or else letting the Kremlin turn Europe into a game of Risk.
Speaking of Russia, the ruble resumed trading in Moscow Wednesday. The charts are meaningless. There’s no market for it. It’s down 40% in 2022 and at this point, it may as well be the bolívar. Russia is probably going to default, the central bank can’t defend the currency and now, tit-for-tat trade escalations could conceivably see Putin Plaxico himself by deliberately curtailing his last remaining source of hard currency.
Fitch downgraded Russia again. “A sovereign default is imminent,” the ratings agency said, flatly.
“The ruble looks undervalued by almost 50%, more than at any point in the last two decades, but conventional metrics at this point are not really applicable given that they are based on external balances,” Goldman’s Dominic Wilson and Kamakshya Trivedi remarked (see the figure, below).
In case this isn’t obvious (and it should be, because I’ve been over it more times than I care to count), the reason “conventional metrics” don’t apply is because, as Goldman went on to patiently explain, “the FX flows resulting from Russia’s current account surplus are sanctioned” and the country’s inflation trajectory and output potential “are likely to move in a discontinuous fashion in the coming months.” “Discontinuous” is a wonderful euphemism for… well, for less euphemistic adjectives.
From here, it’d be a mistake to assume we’ve seen the last of the current crisis. The commodities spiral will almost surely reverberate, with unknowable consequences for market participants and consumers alike, and a Russian default isn’t going to happen in a vacuum, even if it does turn out to be largely contained.
Remember: The event that started the subprime meltdown happened long before the events we commonly associate with the financial crisis. BNP Paribas froze a trio of ABS funds on August 9, 2007.
That day, investors in the Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia funds learned they’d be unable to invest more money and, more frighteningly, unable to access the money they’d already invested. In a statement, the bank blamed “the complete evaporation of liquidity in the US securitization market” for its inability to publish what it deemed to be fair net asset values.
It took another 13 months before the world ended.
The world didn’t actually end then. But this time it might. At least A world might end . . . the world we’ve more or less gotten used to since the end of WWII. This could end up being a real Downton Abbey moment in which the entire world order gets upended. I’m not thinking nuclear war or anything that drastic, but it’s quite conceivable that enough rattling and restructuring goes on in politics, economics, and—especially—the energy sphere. Unlike the past two years with COVID, and am not expecting a return to anything like ‘normal.’
I agree, this ain’t over yet, it’s just getting started. China hasn’t made its play yet. Commodities are going to hit manufacturing which is going to hit the global economy. Energy is going to hit everything else. It certainly seems like humans require dark times in order to appreciate peace and prosperity. For all the prosperity we’ve seen the past few decades, there sure has been a lot of discontent. WW3 will force everyone to re-evaluate their priorities.
I am optimistic that autocracy, nativism, and isolationism is going to be put away for awhile in the USA as a result of this event. It will take a few more years of suffering first. Past that we are definitely going through our third upheaval in 15 years (GFC, pandemic, Russia/Ukraine). If you are investing stay flexible and don’t be too sure of yourself.
Although we’re only about two weeks into this crisis, the bellicose posturing of the three amigos, Russia, China and India, isn’t Earth shattering or grounded in reality.
The evolving nature if the amigos alliance seems more rooted in madness than AI genius and hopefully will play out as a miscalculated, poorly thought out exercise in stupidity
The amigos alliance seems held together by the glue of fantasy and illusions, not unlike a series of Fox news distractions and distortions, that obviously connect to deadly aggression and nuclear threats.
However, the threats and propaganda to bring about instability by the amigos are uniting global partners instead of creating division. The critical importance of that solidarity is powered by the realization that capitalism and democracy are essential to the entire world, versus the three amigos version of hell.
Like it or not, this crisis comes down to the naked realities of money and trade. Apparently, in the twisted mindset of the amigos, they can pretend to engage in the illusion of supporting each other by exchanging commodities and using hybrid exchange functions.
The insanity of that is predicated on a premises that the ruble, rupee and yuan can be pegged to some unified exchange rate that has a notional value that makes their fantasy terrorist currency into a stable trading mechanism, which apparently will need to be adopted by all the generals, police, prison guards, surveillance people, professionals, vendors and the other billion poor souls that inhabit those slave based societies.
The adoption of those fantasy coins will take time, but obviously, as the real world spins on, watching in horror as war crimes unfold, the people of Russia and India will experience greater real world inflation and the lives they’ve been living will grow increasingly challenging because of this madness. The cops and army people that need paid in rubles and rupees will be increasingly questioning how loyal they’ll be as their lives unravel, pondering how they’ll live. I think they’ll be an inflection point where they’ll be forced to walk away from Putin’s death trap.
In many ways, our lives in the west depend on the objectivity of the suppressed populations of the three amigo countries. Do those people want a future or will they bend to madness?
There will be two ends to the world. The first will be figurative, in the form of the end of our financial world as we know it, partially because all the steps we took in the last week were undertaken without any serious analysis of the long-term consequences for all of us. Since Roman times we have referred to what took place this past week as a “Pyrrhic Victory.” The operation was a success but the patient will surely perish.
The second end to the world, some time this century, is rooted the the destruction of the culture of shared interest that used to prevail (at least on the surface) until recently. The meteoric rise in the self-interested culture of entitlement, not just in the US, but throughout the world will doom society. The two hundred plus sovereign nations of the earth can’t survive unless they get to share equally in its resource riches and we all work together to keep our environment from being destroyed (which I think is already inevitable). More than half the world is ruled by autocrats, none of which is especially enlightened, and who are supported by refuseniks who can’t accept any limits to their demands or their behavior. It was reported today that the reason our last president revered Putin, besides the fact that no one says no to him, is that he can order any of his enemies to be killed any time he likes. Trump apparently thought that was really cool and we know he has a list. Suffice it to say, I’m glad I’m old and have no bucket list.
Like the Plaxico reference, Walt.
Mini nuclear reactors offer promise of cheaper, clean power. There is a lot of development going on in this area of power generation.
Renewables are a step in the right direction but not a perfect answer.
Abundant and clean energy will be the end to many of the world’s horrible autocratic leaders.
Plaxico didn’t even realize he had shot himself, until he saw the wet substance (blood) on his pants. He had been scanning the room to make sure he had not shot anyone just prior to that