Rouble To Rubble?

This is how warfare is conducted in the 21st century; there are no soldiers, tanks, or fighter jets involved, yet the damaged inflicted can be so spectacular that a nation can be totally destroyed, its currency turned to rubble, its economy smouldering and its people left destitute. Then a legitimisation crisis ensues and in a bizarre twist the people of the conquered nation become the soldiers of the victors, they turn on their once beloved leader.

The battle field is digital with central bankers acting as modern day Generals and speculators with massive amounts of capital attacking the foe’s currency. Behind the curtain deals conducted by men in dark suits (“economic hit men”) is also part of the arsenal of this type of modern day warfare.

It is a battle where the Empire conquers without itself firing a shot. The existing leader is ousted from power by the people either peacefully, or in an armed struggle (military coup), then a puppet leader is put in place and the Empire grows…

'What is happening is a nightmare that we could not even have imagined a year ago,' said a Russian central bank official.

Indeed, it would be a nightmare scenario for any central bank to manage a full blown currency

collapse. The rouble is in an apparently unstoppable free fall. It has now lost 40 percent of its value since the “engineered” collapse in oil prices and western sanctions. Russian defences have not been holding up well. Despite the recent 6.5 percent hike in base rates, the rouble rallied for about one and a half hours but it then went into a brutal free-fall.

Central bank is burning through billions of US dollars of reserve currency, buying the rouble and selling US dollars and euros with the aim of holding back the currency’s fall, but it’s been to no avail. Not even the heavy artillery fire-power of interest rate hikes had any lasting impact. Speculators are still on the attack, probably well shielded behind ally central banks (tanks).

The Russian central bank has used up its ammunition and is running out of fire-power.

Every trader knows that when the trend is against you, it is unstoppable, any resistance is futile.

Not even a central bank can go against the trend and win.

History proves that. George Soros put that to the test and won. In 1992, George Soros brought the Bank of England to its knees. In the process, he pocketed over a billion dollars doing so and demolishing the monetary system of the UK in a single day by betting against its currency.

It was dubbed the greatest financial bet of the 20th century and it demonstrates to traders that survival in this game means getting out of the way of the trend, or going with it.

How is Mr Soros playing the rouble crisis today, might you ask?

He is shorting the rouble, confident in the knowledge that central bank cannot win against the trend.

There is no doubt that those people exposed to dollar denominated debts must be suffocating from the collapsing rouble. At some point this must be costing Putin political capital. The young generation of Russians that are used to traveling, buying consumer electronics and aspirational brands are likely to grow weary of this new harsh economic environment.

It is interesting to note that when the public is indifferent towards politics, it’s usually due to good times, but when the public start becoming political, it is usually because of their plunging standards of living.

I wouldn’t be surprised if we start hearing more stories of disenchantment coming out of Russia soon.

It is after all a nightmare scenario for Russia. The 17 percent hike in base rates must be hurting business badly and is probably impossible for most businesses to service debts in the long term with such high rates. Moreover, the likelihood of a sharp economic contraction in the Russian economy going forward now looks inevitable.

Meanwhile, the fallout is being felt beyond.

Stock markets in Dubai and Saudi Arabia both lost 7.3 percent, continuing a plunge that has ravaged the Gulf this month

“It’s a correlated sell-off of emerging market assets,” said Christian Keller, head of economics research at Barclays.

A lack of liquidity as well as technical factors contributed to the rout, he added, with investors that track indices offloading more liquid assets to cut overall emerging markets exposure.

“You end up selling markets that you may not think are really in the eye of the storm but are close enough by association,” Mr Keller said.

Then there’s the fear that the Fed might raise rates to choke off capital inflows into Russia. With Russian base rates at 17 percent, that might be attracting hot money into the rouble. Could we end up in a scenario where central banks compete with each other in the interest rate rising game?

Just the thought about Fed rate hikes has sent emerging market currencies into a tailspin. The Fed is now expected to drop its pledge to hold interest rates at low levels for a “considerable time”, signalling a hike in the coming months. The prospect of an imminent US rates hike means more hot money flowing into the US dollar, which is likely to put pressure on emerging market currencies.

So, in these uncertain times, we are going to see a flight to safety. Premium sovereign bonds are likely to see record low yields going forward with gold and silver, probably holding well their support price levels.

The relentless fall in oil is likely to continue, as I predicted, until Russia is done or capitulates, then by magic the Saudis will probably cut supplies and the black gold will move up again. But that is likely to take some time, probably at the point when Russia is at or near bankruptcy. Then, with a new puppet leader installed the economic hit men will go to work, picking off trophy assets, offering IMF rescue loans and the Empire keeps rockin’.