Hide and Seek with Vlad

Sometimes the only thing you can do is have fun with something that is potentially horribly scary. Vladimir Putin has not been seen in public for over a week now. 

Why could this be potentially very frightening. Recently, the top NATO commander warned that Russia could easily be provoked into more aggressive actions. The U.S. announced a couple days ago, and was known before that, to be sending a convoy of Stryker vehicles through Europe on an 1100 mile journey to show support of NATO allies and Ukraine.

Over on the tin foil hat sites there are rumors that Russian Embassy officials, including military personnel, have been leaving the United Kingdom. If this were true, when combined with Vlad lying low, it could foreshadow the escalation of Russian military actions in eastern Europe. 

I sure hope none of that’s now true. I think it is even money Vlad just caught the flu after wrestling a bear in a nearly frozen river, hurt his back during that tussle, that he was simply recharging his batteries after meeting with Italian Prime Minister Renzi ten days ago, is busy shutting down the Russian Prostitute Pipeline or on a bender with said hookers.

Okay, I know this isn’t all fun and games. But putting Vladimir Putin and hookers in my website does drive up SEO. I really am legitimately concerned about instability in Russia.

One of the three scenarios I pointed out on MarketWatch back in December that could drive oil prices higher was this:

“There is a war or military event. This outcome is obviously horrible, however, it does not mean there will necessarily be a war with Russia. There could be a war within Russia or an overthrow. Billionaires can buy a lot of things, including generals. We could also see actions against Iran.”

If there is something more going on in Russia than we have been accustomed to the past year or two, then that would at a minimum be a driver for volatility in the markets. Possibly it could be much worse. There is also the possibility of course that a change in power towards more moderate oligarchs could be going on. 

We do know that when oil prices hit extremes, that significant economic and/or geopolitical events often occur. By now we should also know what I pointed out months ago is true, that low oil prices are largely being used to put pressure on Russia and Iran. We might be seeing a reaction.

In Russia they are coming to grips with what their economic situation is with oil prices so low. The 2015 Russian budget had been based upon oil prices being $100/barrel. The Russian cabinet has been in discussions about revising that estimate. I am positive that at least one person has come up with the idea of trying to drive oil prices back up. 

I suggest reading Stratfor’s latest Editor’s picks including: When Oil Prices Drop, Some Countries Lose

Where could Russia inflict another conflict in order to drive oil prices up? I think the most likely way for Russia to drive oil prices up is to instigate in the middle east. It is not unfeasible that Russia, via Iran, could damage pipelines and oil fields in Iraq while blaming ISIS. 

Enough Russia speculation. Let’s assume that Vlad is sick in bed with bear flu until further notice.

In looking at markets the past several months, it should be getting more clear to folks that the underlying fundamentals of global economics are unsound as nations around the globe are relying on money printing and super low interest rates to stay afloat short-term in a desperate hope that there will be a magical demographic fix complete with lots of young people and fewer old people and a mysterious disappearance of accumulate debt. With such a game plan, is it any wonder that I have become increasingly bearish in recent months.

Does the farce of money printing by non-reserve currency nations not jump out at you when put in the context of the real problem, namely, lower aggregate demand due to demographic factors complicated by massive debts? It should. Put debt on top of bad demographics and things can not get better quickly. What we are seeing is group desperation by power elite. What most of the world ought to be doing frankly is following a road map similar to what Thomas Piketty has suggested – soaking the uber-rich (puny millionaires need not apply)- more on that next week, but in thinking about what I just said, don’t just think taxes, think massive write-downs of debt by strategic default.

If you listened to my investor call on Saturday, which I did try to record but the service did a crummy job, you’ll have heard me talk about inflation targeting and its major flaw – it can really only be applied effectively by the reserve currency nation or only a few nations at a time. If have read Ben Bernanke’s book on inflation targeting – I know there’s at least one masochist – then you should have asked a few questions about the ideas, namely, if everybody prints money, does it help anybody?

For inflation targeting to be successful, if more than a few nations do it at a time, and right now there are dozens, the reserve currency has to be very strong. That is one core reason that Janet Yellen will raise interest rates. If she doesn’t, there is a huge risk of a massive global recession. Then again, if she does, there is a huge risk of a global derivatives collapse followed by a massive global recession. Then again, maybe a massive debt restructuring where the global wealthy take it on the chin is just what the economic doctor ordered – oh wait, I said next week for that. Okay, that’s a teaser.

Anyway, as the dollar continues to strengthen, even as many think it must turn downward – which could happen for a week or two, but probably not longer – keep an eye on oil prices once again. That will once again make us wonder about Russia and what their actions could be. There are a lot of moving parts in the economy, more now than ever, and I for one, am happy to be hedged and holding a lot of cash. We live in interesting times once again.

Kirk Spano

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