We begin today with news out of Russia. The ruble is "getting beat up pretty bad," comments our partner-in-crime Pete Coyne. Bloomberg puts it, more stolidly, this way: "In a surprise announcement just before 1 a.m. in Moscow, the Russian central bank said it would raise its key interest rate to 17%, from 10.5%, effective today. The move was the largest single increase since 1998, when Russian rates soared past 100% and the government defaulted on debt."
And yet the ruble still lost 2.5% against the dollar by noon today, wiping out an early gain prompted by the rate hike.
Can you imagine interest rates at 17% in the U.S. today? You would have had to have been trying to buy your first home when Blondie was a Playboy Bunny to know what that would feel like.
The U.S. hasn't seen rates above a heart-stopping 8% since October 1990. In fact, it's been six years to the month since the Fed adopted its zero interest rate policy, or ZIRP, as it's affectionately known. In the U.S., money remains free, at least for bankers. Not so much in overseas.
In Russia today, the images are more reminiscent of the currency meltdown in 1998.
In Russia today, the images are more reminiscent of the currency meltdown in 1998. Bloomberg tells the story of people running to exchange counters before their rubles lose more value before lunchtime.
"All of these comparisons to 1998 are making me nostalgic," confessed our own Jim Rickards by email this morning.
He already had two interviews lined up before 10:00 a.m. -- one on Bloomberg at 3:00 and another on RT at 4:30. The last time Russia had a meltdown, Jim's net worth crashed 92% as he was thrust into the trenches with the Federal Reserve, the Treasury and Wall Street's largest banks to negotiate LTCM's rescue.
"That makes me their 'go-to guy' on market meltdowns," he says, with only a tinge of irony.
Back in 1998, the S&P dropped over 60 points, or 10%, in the two weeks following Russia's financial crisis. But today, the real drama is behind the scenes in Russia's bid to acquire gold:
Rickards Chart
"Global growth is already threatened by divergence in the policies of major economies," writes Rickards, "But things could get worse quickly depending on the behavior of certain countries like Russia."
Mohamed El-Erian from Allianz calls them "wild card" countries.
"'Wild card' countries," El-Erian wrote for Project Syndicate recently, are those "whose size and connectivity have important systemic implications. The most notable example is Russia." Mr. El-Erian continues:
"Faced with a deepening economic recession, a collapsing currency, capital flight, and shortages caused by contracting imports, President Vladimir Putin will need to decide whether to change his approach to Ukraine, re-engage with the West to allow for the lifting of sanctions and build a more sustainable, diversified economy.
"The alternative would be to attempt to divert popular discontent at home by expanding Russia's intervention in Ukraine. This approach would most likely result in a new round of sanctions and counter-sanctions, tipping Russia into an even deeper recession -- and perhaps even triggering political instability or more foreign-policy risk-taking -- while exacerbating Europe's economic malaise."
Fact is, global finance now looks like a war game straight out the post-colonial era.
"Putin gives a speech and the ruble falls," Paul Mason observes in this morning's Guardian. "Europe's central bank boss gives a speech and the stock markets fall. OPEC meets in Vienna and the oil price plummets. Japan's prime minister calls a snap election and the yen's slide against the dollar accelerates.
"All these things in the last six weeks of an already fractious year," Mason points out. "There are suddenly multiple conflicts being played out in the global markets, conflicts the global game's usual rules are not built to handle."
“Nearly every currency in the world is down a lot against the U.S. dollar, except the Chinese renminbi.”
"Whether it's an intentional war or an accidental war or side effect," our friend Jim Rogers commented to Wall St. Daily yesterday, "I don't know, but it's certainly happening. You just look around... you see that nearly every currency in the world is down a lot against the U.S. dollar, except the Chinese renminbi...
"I don't know if it's somebody sat around and plotted and said, 'Let's have a currency war.' They just said, 'What we need to do is print a lot of money,' without realizing it's going to cause currency fluctuations."
That's pushing investors into dollars, including Rogers, despite the fact that he has "no confidence in the U.S. dollar long term."
It's also how relatively tame financial wars turn into hot shooting wars. We remember suggesting as much on a radio program a few years ago and getting laughed at on air. The stakes, apparently, weren't perceived to be as high then. Today, the prospect doesn't seem so funny.
A top adviser to President Putin said yesterday if the U.S. kicks Russia out of the global payments system, it will be an act of war and the Russian ambassador should be recalled to Moscow immediately.
Seems like a good time to have a CIA financial strategist in your corner.
Bonne chance,
Addison Wiggin
The Daily Reckoning
P.S. "All this talk of the 'weak' ruble really means a strong dollar," Jim tweeted this morning, "which is deflationary when the Fed wants inflation. So how does that work out?"
Poster Comment:
Looks as if things could be heating up in Siberia. ;)
