Comment of the Day
Please note - variable hours in late May and early June
I am flying to Ireland on May 25th ahead of The Chart Seminar in London on June 6th and 7th. I’m looking forward to taking some time off since it feels like a long time since I’ve had more than a couple of days break in a row. Between those dates updates will be sporadic but I aim to post regular audio/video updates.
Video commentary for May 24th 2022
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: flight to safety underway as bonds, the Yen and gold rebound, oil pauses at the upper side of the short-term range. stock markets continue to weaken on rising growth concerns,
Email of the day on what it is like living in Russia today
In Friday analysis, you mentioned situation on the Russian market. I would like to share with you some thoughts that can be interesting to the Collective.
The problem is, you view rouble as a market instrument. It used to be, but no longer. It was a convertible currency, but now it is not. There are several reasons for its impressive rebound and all of them have nothing to do with the market forces. First, all Russian markets were stopped in late February. Then, exporters were forced to sell 80% of foreign exchange revenues. To stop the bank run, the central bank did everything to kill demand for foreign currencies. I will not give all the measures but among them: almost all transfers abroad were banned. Foreign companies and residents could not withdraw money from Russia, Russian residents were allowed to transfer abroad only $5,000 a month. Banks were banned to sell currencies to individuals. 12% commission was introduced to buy dollars and euros on the Moscow exchange. Foreign investors were banned from transactions and withdrawing their money. Some of those restrictions were later withdrawn or reduced BUT: there is one more huge factor, and this is collapse of imports.
In April, US commerce secretary said that US exports to Russia fell 90% due to sanctions. German exports fell 60%. Even Chinese ones fell from $8 bn a month in January and February to $3.8 in March and April. Even if foreign companies are ready to sell something, it is impossible to transport products to Russia (The Wall Street Journal has a nice piece on this - https://www.wsj.com/articles/how-russian-businesses-are-skirting-sanctions-11652828497 ) At the same time, Russian exports are large due to high energy prices. So, Russia has a huge current account surplus, almost no outflow on capital account and no demand for forex on the local market. That is the reason for the rouble strength.
The Kremlin presents exchange rates as a victory over sanctions. But Robin Brooks, the Institute of International Finance chief economist, calls this an “illusion.” The economy is going to have the worst recession since the early 1990s (after the crash of the Soviet economy), GDP can fall by 10% or more. Russian analysts also call rouble strength, paradoxically, the sign of the economy weakness.
The same is with the dollar denominated RTS stock index. It rose simply because rouble rose. If you look at the rouble denominated Moscow Exchange index (IMOEX), you’ll see no growth at all. Today it is even lower than when trading resumed after a one-month pause. (I attach the IMOEX chart, the one in the Chart Library stopped renewing in 2018.)
Let me also say a couple of words on the state of the Russian economy. For example, car sales crashed 78% in April. Car sales and after sales sector employs about 2 mln people. What these people are going to do? Foreign car companies, not just western but also Korean (they were market leaders in Russia), and Japanese stopped sending spare parts. Parts prices have spiked but soon they will also come to an end.
Nothing illustrates the situation better than news headlines (Russian, not foreign ones). Here are just some from one day last week:
Government allowed to produce cars without airbags
Mercury discharge rate into Baikal lake to increase 13-fold
Russia will start importing used cellular communications equipment (By the way, Russian mobile communications are one of the best and cheapest in the world. In 2017, while in London, I bought a local SIM-card and found out that there was no mobile connection in the London tube, let alone Internet connection. Moscow metro had had free Wi-Fi for several years already. I paid $20, on the pre-war rate, a month for a family of four with unlimited calls, unlimited mobile internet, unlimited home internet, and digital TV. Mobile communications were built from scratch in the 1990s, and not by oligarchs but by genuine entrepreneurs. It was always an example, what Russian business can achieve without government interference.)
Russian airports warn of reverting to manual security screening (this is due to lack of spare parts for screening equipment)
Moscow will revive Moskvich car production (this is an awful Soviet car; Renault decided to leave Russia and the Moscow government took over its local plant; actually, the “new” car will be some Chinese)
Today’s news:
Government purchases of vaccines are in jeopardy
Imports of button phones rose 43% (because Apple and Samsung stopped selling smartphones, and Chinese producers also reduced imports significantly)
New home sales in Russian regions ground to a halt
China will leave the largest LNG project in Russia without equipment, because of sanctions
Russian clinical labs are running out of chemical reagents for tests
Aeroflot will begin to take planes to pieces, because of sanctions
Putin’s foundation will leave children with cystic fibrosis without life-saving medicine.
Hope, this helps to understand current situation in Russia.
My view - Thank you for this generous account which I’m sure will be of value to the Collective. The pain being inflicted on regular Russian citizens is probably going to intensify. The OECD is attempting to squeeze Russia by withholding manufactured goods and technological widgets from the economy. In doing so they hope to drive living standards so low that Russia will be forced to relent.
In Gold We Trust May 2022
Thanks to a subscriber for this book-sized report from the team at Incrementum. Here is a section comparing the USA to Rome.
The Roman experience looks eerily similar to the present US economic situation. Just like ancient Rome, the USA enjoys the privilege and shoulders the burden of enforcing its “Washington Consensus” on the world, but like late-stage Rome, the US cannot fund its army and welfare state through taxation alone.
As Rome had to resort to currency debasement to pay for its welfare/warfare state, the US finds itself increasingly unable to fund current expenditures through taxation. For each downcycle the US relies ever more on a complex process of bond issuance, covert, and more recently, overt inflationary policies to ensure the once mighty Empire can pay its bills.
Although the US saw expenditures soar during the world wars, large subsequent surpluses allowed the Federal fiscal house to remain in order. When the last vestiges of the old Gold Standard were abandoned in the 1970s, the spending dynamic changed as the Empire no longer needed to adhere to a sound fiscal policy. Funding was secured via the central bank. The modern-day Empire felt entitled to take full advantage of its ‘exorbitant privilege’ to keep its soldiers and plebs content, docile and obedient.
During the Global Financial Crisis (GFC), taxes covered less than 60% of outlays, down from an average of ~90% in preceding decades. In the course of the Covid-19 shutdowns the US government funded less than 50% of its outlays from taxation.
Rome found itself equally tied down by a Gordian knot. The ancient Empire had to fund its army above all else. Imperator Severus famously advised his sons Caracalla and Geta to “Be harmonious, enrich the soldiers, scorn all others” 61 to remain in power.
Similarly, the US has to placate its industrial military complex, but even more important to modern day ‘Imperators’ is to mollify the ~60% of its population who are either on state welfare or directly employed by the government.
My view - A link to the full report is posted in the Subscriber's Area.
The investment community has been conditioned to believe technological innovation will continue to provide sufficiently large benefits and productivity gains to compensate for rising debt levels. A powerful secular bull market delivers big gains and changes how people perceive risk and react to downdrafts. That helps to explain the rush to buy the dips at every initial sign of a relief rally taking hold.
Artificial Intelligence, robotics, synthetic biology, autonomous vehicles and nuclear fusion are being discussed as near-term realizable solutions. I don’t think investors are prepared for the possibility the timeline for these kinds of advances might stretch to a decade or more. The fact Elon Musk’s latest pronouncement that full self-driving is less than a year away fell flat is a sign enthusiasm for inevitable imminent technological disruption is waning.
Lula Says Replacing Petrobras (NYSE:PBR) Head Won't Lower Fuel Prices
This article from Bloomberg may be of interest to subscribers. Here is a section:
“It’s useless to replace the head of Petrobras, Bolsonaro needs to change his ways,” Lula said at an interview with a local radio. “He could call a meeting of the energy policy council, bring Petrobras to the table and decide that prices won’t be dollarized anymore.”
Bolsonaro sacked the third chief executive officer he had appointed to lead Petrobras, piling pressure on the company to stop raising fuel prices as inflation running above 12% becomes a major campaign issue ahead of October’s general election. Pushing Petrobras to absorb higher crude prices instead of passing them to consumers is a rare point of coincidence between Bolsonaro and Lula as they vie for the presidency.
My view - Inflation is going to be a major election issue everywhere this year. The most successful politicians are likely to be those who make big promises like increasing wages, taxing the rich, implementing price controls on commodities and/or boosting domestic supply.
The Chart Seminar June 6th & 7th in London sold out
Now in its 53rd year, the first venue for The Chart Seminar in the post pandemic era will be in London on June 6th and 7th at the Army & Navy Club.
This event is sold out. A waitlist has now begun.
To reserve your place please contact Sarah@fullertreacymoney.com.
Delegate Rates:
Full fee: £1799
Each additional delegate: £850
Fuller Treacy Money Subscriber rate: £850
Prices exclude VAT where applicable