“May you live in interesting times!”
— Old Chinese curse (alas, mythical — though someone surely should have said it!)
“Insanity is doing the same thing — over and over again — and expecting a different outcome.”
— Attributed to virtually everyone
Like life itself, history evolves in non-linear time. Long dead-periods are followed by sudden, breath-taking accelerations. Reminiscent of Minsky’s observations on economic cycles, long phases of political quasi-stability — known to be unsustainable only in retrospect — culminate in sudden acceleration and discontinuous, “catastrophic” change.
We are now experiencing such a singularity.
Just a year ago, no sane person would have predicted Brexit, Clintexit, or Trump’s frontal assault upon the US intelligence establishment and corporate media. The news from across the pond verges upon the surreal. Had you, dear reader, expected to live to see the President-elect of the United States essentially calling the CIA a pack of incompetent liars, or CNN a false-news outlet? At the risk of stating the obvious — this is not politics-as-usual.
Political alternatives are increasingly negatives rather than positives — sharing an angry rejection of the status quo while offering little more than a desire to return to an idealised past. The established parties are fossilised — fundamentally irrelevant — a job-creation scheme for bureaucracies which function by cooption. As the Russian political philosopher Alexandre Dugin has put it, the fault line is no longer between left and right — it is between the centre and the periphery, both within individual countries and globally; yet even Dugin confesses to being unable to predict what will ultimately take the place of the venerable political ideologies now collapsing all around us. [If you Google “The One Russian Linking Putin, Erdogan and Trump”, you will be directed to a very interesting Bloomberg article about Dugin — ed. note.]
Nothing illustrates the death of the old model better than the meteoric rise of the alternative/fringe parties of the West: from Donald Trump (initially incarnating the rebellion of the increasingly alienated Republican masses against the self-serving oligarchy at its helm, but now widening into a multi-pronged attack upon the Washington Elites) to the parties of the European radical Right — in particular, France’s Front National (a popular rebellion rejecting the death wish of the European elites, coupled with a touching desire to recreate a mythical past). The stagnation of the middle-classes has destroyed the convenient illusion retailed by the tame corporate media that universal prosperity would be guaranteed by free-market orthodoxy — the puerile, vapid “Ayn Rand doctrine”. Meanwhile, the dismal failure of the Soviet system and the Capitalist transformation of China have thoroughly discredited classical Marxist orthodoxy.
As noted previously, the West spends increasing time looking into the mirror — and clearly does not like what it sees: a world seemingly drifting into madness and mayhem, absent any single unifying theme. Into the mix go the oft-abused term “terrorism”, religious fanaticism (whether Moslem, Hindu or Christian), the radical curtailment of basic civil liberties facilitated by technology, the loss of credibility of institutions (in particular, governments and the mainstream media), the rise of non-traditional political parties of the left and the right, armed conflicts in the Middle-East, Eastern Europe and the South China Sea, massive migrations of peoples, and increasing ecological and climatologic havoc. Threatened by encroachment upon its erstwhile unchallenged hegemony, the key player — the “Exceptional Power” — has become increasingly militarized, aggressive and assertive — but now, with its domestic political consensus destroyed and its reputation for even minimal diplomatic competence in tatters.
Meanwhile, Europe shows signs of being afflicted with a death-wish, a prisoner to the tragically outmoded 19th-century liberal ideology, as the “conflict of civilizations” smolders along its periphery. Having lost all self-confidence, Brussels has allowed EU foreign policy to be hijacked by Washington with disastrous consequences: a pointless, counterproductive split with Russia, its largest and most powerful neighbour, greatest potential export market and main energy supplier. Worse, it now faces a truly existential threat as millions of desperate refugees flood in — largely pastoralists without even the minimal skills required to function in an industrialized economy where demand for unskilled workers is negligible. Needless to say, this massive migration of young males, reminiscent of the opening of the Roman imperial Rhine Frontier to the Goths, was at least in part triggered by the ignorant, arrogant US/EU policy of Middle-East regime-change-without-obvious-alternative; far worse than a crime — a mistake.
The Old Order
In 1945, a triumphant United States accounted for just under 50% of global GDP. Russia and Europe were devastated, China a peasant backwater; the postwar global financial and political architecture — now becoming dangerously ossified — reflected the then-current realities. Seventy years later, China is the world’s largest economy (in real terms), the world’s largest trading nation, with a rapidly expanding military reach and a manifest desire to right perceived historical slights; Russia, rebounding from the catastrophic collapse of the USSR (the “catastrophe” was not — of course — that it collapsed per se, but rather, the manner in which this collapse occurred) has become a geopolitical force very much to be reckoned with.
What is new is the widespread rebellion of the Western masses against their political elites. Reminiscent of the great revolutionary periods of 1848 and 1871 — and despite the puerile conspiracy theories pawned off by corporate media dangerously threatened by this uprising — the ideas driving this rebellion have spread spontaneously throughout the West, although now very much assisted by the social media, the modern equivalent to the 19th-century pamphleteers. While the US political establishment, grasping at straws in total disarray and desperate to deflect from themselves any hint of blame for the serial political earthquakes endured, has sought to blame an apparently-omniscient Russian President, this is laughable. While Russian global diplomacy has shown admirable progress under F.M. Sergei Lavrov, at the operational level it remains at best a work-in-progress — no sane adult not employed by the mainstream media could take seriously the notion that the US political process could be hijacked by a country which has proved signally incapable of controlling the politics in its own backyard (Ukraine, Georgia, Belarus, the Baltics, to some extent the “-Stans”) — where it enjoys a far deeper understanding of the local politics, and with which it shares language, history, and a substantial ethnic diaspora.
European dissident political movements are, of course, increasingly favourable to Russia — essentially a function of their wholesale rejection of American imperial over-reach and of the incompetent Brussels elite, rather than any deep spiritual affinity for Slavic culture. A front du refus is being formed; however, a convergence of interests does not indicate conspiracy.
US policy has indeed been hijacked — not of course by Russian hackers but by domestic corporate interests (dba the Military-Industrial Complex): lobbyists, shadowy think tanks and NGOs, a self-serving political elite beholden to wealthy donors, a grotesquely over-funded Pentagon, as well as an intelligence establishment which apparently enjoys a frightening degree of autonomy. To imagine that Russia could match their immense financial fire-power — not to mention the political acumen and infrastructure carefully built up over decades — is laughable; that anyone has been willing to seriously entertain the notion demonstrates the subservience and corruption of the media. Instead, increasing violence on the streets — not seen since the Vietnam War, and the raw hatred paralyzing governance in Washington (not seen since the Civil War) suggest both a purely domestic origin and a very unpredictable outcome.
Periods of historical transition are by far the most dangerous; as in plate tectonics, as two of the plates forming the earth’s crust push slowly past each other they form earthquake zones; tectonic movement is blocked, pressures build silently below the surface — then catastrophically explode. The decline of the agrarian, feudal order and the rise of the bourgeoisie led to the events of 1789; the old European order fell with the Bastille; the rise of the liberal bourgeoisie triggered the firestorms of 1848 and 1871; the apogee of nationalism and millennialist ideologies led to the breakup of the multinational empires and the catastrophic ideological and imperial struggles of 1848–1945 as the German plate collided with the rest of the European continent, causing hitherto unimaginable devastation.
By 1945 the two European moieties had essentially nullified each other, leaving a vacuum to be filled by the bipolar US/Soviet world-order. At present (and in no particular order) the collapse of the USSR, the increasing economic distress in the Arab crescent (driven largely by uncontrolled demographic growth), the gradual decline of Europe into irrelevance, and the inexorable rise of a powerfully capitalistic China as the global center of economic gravity are shaping a new world order in ways at which we can only guess. Whether current political institutions can manage this handover without another round of major upheavals remains very much an open question. The danger arises not from intent but from accident — essentially none of the major players in 1913 believed that a cataclysmic outcome would actually occur, all the while doing everything in their power to render it inevitable.
The political preeminence of Europe and its colonial outgrowths was never meant to be a permanent phenomenon. Our historic perspective is a function of a man’s lifespan — we easily enough forget that 15th-century China was the world’s leading power in terms of economics, demographics, urbanization and technology. Civilizations are cyclical, and China saw a long period of decline, culminating in the calamities of the 19th century. The assertion that China — now either the world’s largest (in PPP terms) or second-largest (nominal GDP) economy — is resurgent will probably not constitute a revelation; however, the complacent Western mindset has only vaguely begun to assimilate the profound consequences of this shift. Mankind has moved East.
Having failed to respond rationally to a very real threat to Western hegemony (e.g. the spectacular insanity of needlessly antagonizing Russia, driving her towards a political, economic and military alliance with China), the Obama administration, dragging along a docile and disoriented EU, sought to circle its wagons against the rising great power to the East. Comically mismanaged (the TPP and TIPP were stillborn, the “Pivot to Asia” has been politely forgotten), their policy is now being undermined from within. President Trump’s open disparagement of NATO was only the most recent sign of this shift. The European elites — endowed with an unquestioning Atlanticist and globalist faith — are dangerously divorced from their populace. The Establishment Inc. has not won many elections of late — nor does it seem likely to do so in the foreseeable future.
Historically, monopolar models of dominance have invariably proved unsustainable, concentrating the attacks of those outside the circle, while breeding arrogance and complacency in the metropole. While American exceptionalists argue that US dominion constitutes an absolute historical outlier — a uniquely beneficent empire — similar exceptions were claimed equally by all previous empires; history has certainly not been kind to such claims.
Meanwhile, the US political discourse has crossed the line from the merely colourful to the truly grotesque. Having been abused by the media for far too long, the definition of “truth” itself has become highly subjective. The political Establishment, for the first time under real threat, has reacted to the Trump wave with barely-disguised panic; the most recent iterations of the Trump–Russia dossier — fabrications paid for by people close to the Clinton campaign aimed at smearing her opponent and created by an ex-British spy who has now gone into hiding, faithfully transcribed by the stenographers of the corporate media — smack of desperation.
Battle lines have been drawn; over the past decade, formerly moderate mainstream media — the FT, NYT, the BBC — have deteriorated into little more than propaganda organs for their respective governments or political factions, abandoning even the most rudimentary journalistic standards of fairness and balance. [As the author David McGowan said, “an increasingly authoritarian agenda has been sold to the American people by a massive, multi-tentacled media machine that has become, for all intents and purposes, a propaganda organ of the state” — ed. note.]
From a Russian perspective this was particularly egregious: having fawned over Boris Yeltsin at a time when Russia was engaged in a refined form of collective suicide, the Western media turned savagely critical as soon as Vladimir Putin charted a new course, less friendly to Washington, more focused on Russian national aspirations. Their coverage of the Georgia and Ukraine wars was transparently fraudulent. Having been repeatedly lied to by erstwhile trusted sources, the reader comes to assume that he is being lied to systematically; recently, the press coverage of the US presidential election or the Brexit campaign was openly scorned by people who would not previously have broken ranks with the mainstream; the term “presstitutes” is now current outside of traditionally left-leaning circles.
To what extent can the internet and, in particular, social media be credited with the shift? The present author is old enough to have witnessed the final throes of the Vietnam War. Each day, we opened the newspapers to find another pack of egregious lies; the difference was that the mainstream media then enjoyed the luxury of having the field to themselves — in France, we read essentially what the political establishment wished for us to read; in the UK, only very marginal publications aimed at a small circle of dissidents reported the horrors of the American war; the US had three television networks, a handful of wire-services, and a couple of newspapers “of record”. (One, the New York Times, now proudly recollects its heroic publication of the Pentagon Papers hastening the end of the ground war, conveniently forgetting its repeated failure to challenge the obvious lies over the preceding seven years of slaughter, beginning with the Gulf of Tonkin incident.) In short, at the time there was simply no means of answering back; other than marginal left-leaning publications, self-referential and with tiny circulations, there was no alternative narrative available to the man in the streets. Now, of course, thanks to the internet, Everyman is exposed to a cacophony of competing views — albeit of widely divergent degrees of accuracy. By attacking marginal, insignificant “false-news” click-bait sites, the Democratic Party establishment unwittingly opened a can of worms; their tame media are susceptible to attack on those same grounds, a point certainly not lost upon Mr Trump.
Like the great revolutionary movements of 1848 and 1871, the current uprising is almost entirely confined to Western Europe, recently joined by the US, begging the question of “why now?” — again, we are reduced to guessing.
One standard response is that the triumph of (neo-) liberal capitalism has led to an inevitable push-back. Well — perhaps, but the 1950s saw far worse poverty and at least as much inequality in the West, with nary a hint of rebellion. With the exception of a handful of peripheral crisis-countries, while the G7 middle classes have indeed suffered some measure of stagnation, they have simply not experienced the sort of precipitous decline in living standards which historically triggered revolutions.
Sociological factors no doubt play a role. Initially intended to promote diversity and tolerance, the official politically-correct discourse in the Anglo-Saxon world has reached grotesque proportions which have finally triggered a fierce push-back. This ossified narrative had become Orwellian — rigidly intolerant, dictating down to the smallest details what one could and could not think, casting anathema on any who would dissent; shades of Joseph McCarthy. At the same time, the globalising orthodoxy of the European elites was never truly shared by their masses, who are now demanding a return to traditional national values. The barely-disguised contempt with which the self-satisfied European elites have treated the dissenters has won them precious little sympathy. The Euro — introduced in a back-door attempt to force political unification upon an unwilling Europe — now constitutes an existential threat to the long-term viability of the EU itself, as well as being in large part responsible for the economic depression creating a lost generation along the southern periphery. The full consequences of Mrs Merkel’s suicidal immigration policies — not readily explainable except by a dangerous misinterpretation of historical precedent — have not yet been felt.
Yet perhaps the worst failing of the EU has been the total abandonment of foreign policy to Washington. Putting aside for a moment the question of the competence of recent US policy, it should be obvious that the EU has vastly different interests, in particular as regards Russia. The sanctions were an obvious own-goal — seriously inconveniencing Russia but prompting resolute measures to eliminate any future threat of Western financial blackmail. Indeed, with a history of wasting the good times, then responding with steely determination to foreign incursions, Russia has developed self-sufficiency in agriculture, basic goods and capital markets, while undertaking a fundamental realignment toward the East; we would assert that the sanctions have been net-net beneficial to Russia, at least over the medium term. The countries which imposed the sanctions are now faced with the delicate task of discarding them without having extracted anything in return — an admission of defeat which can only further discredit them in the eyes of a restive populace.
A Couple of Lean Years
Russia indeed suffered a brief financial crisis, followed by two years of economic stagnation which is only now ending. While given that the sanctions were introduced contemporaneously with the collapse in oil prices, it is difficult to tease out the exact contribution of each; the global commodity rout was clearly the preponderant factor behind the economic weakness.
The main impact of the sanctions was on capital flows — while Russian sovereign debt levels were already trivial, the private sector was dangerously dependent upon foreign capital; with the support of the Central Bank the corporate sector was able to pay down the bulk of its debt to Western financial institutions without significant defaults. The Russian agricultural countersanctions implemented in response to Western sanctions led to the rapid growth of the domestic agricultural and food-production sectors. (Whilst the Soviet Union was the world’s largest grain importer, Russia is now one of the world’s top grain exporters, and is largely self-sufficient in dairy and animal protein.) The dangerous dependency of the Russian banking system on Western capital markets has been curtailed, although at the price of a sharp decline in investment; fortunately, and after some delay, Chinese capital is now replacing inflows from the West. Sanctions on export of high-tech and oil-extraction equipment proved a failure, simply allowing Asian suppliers to seize market share; Russian oil extraction reached an all-time high in 2015. (Whether or not increasing production despite the global glut was a wise policy is another matter altogether.) Finally, the sanctions have greatly accelerated Russia’s turn towards Asia, with China having ignored Washington’s attempts to force compliance with its sanctions regime.
As of this writing it appears only a matter of time before the sanctions are wound down — the problem being for the Western countries to find a face-saving way of doing so. To his credit, President Trump has clearly recognized the folly of targeting Russia rather than China as the main threat to US hegemony; despite the dire warnings in the Western press that Russia would become subservient to China, in fact, President Putin shall soon enough find himself in the delightful position of being actively courted by the world’s two largest economies — his bargaining position is greatly enhanced.
Two Cheers for the Bear
Russia survived a massive terms-of-trade shock with limited damage thanks to the extraordinary competence of the Central Bank; that the rouble could devalue by nearly 60% without an inflationary explosion is little short of miraculous. While substantial progress has been made, in particular under Central Bank chairwoman Elvira Nebuillina, the Russian financial system remains frankly inadequate for a modern industrial economy. Although the fixed income market functions remarkably well, the equity market is almost useless as a source of investment capital, in large part due to serial corporate governance abuses. The banking sector has been rescued after a decade of culpable neglect; some very real progress has been made; however, bank lending to the real economy remains limited. Real rates are highly restrictive, and will remain high for as long as necessary to finally squeeze inflation below 4%.
Significantly, Mrs Nebuillina ordered the closure of literally hundreds of dodgy, undercapitalised, and/or criminal banks, forcing major improvements in capitalization, compliance, and business practices at the remainder. With the strong support of President Putin, the supreme political arbitor, she was able to see off fierce political opposition, hiking rates and allowing the rouble to find its own level, declining in line with crude oil; this adjustment cushioned both the federal budget and the profitability of the vital mineral extraction sector. It can be hoped that the ongoing recovery in commodity prices will allow some increase in credit to the productive sector; however, a root-and-branch reform of corporate governance in the non-financial sector is imperative before a functioning equity market can be created.
In short, given the overwhelming political popularity of Vladimir Putin, and Russians’ instinctive response to regroup under foreign assault, the massive terms-of-trade shock from collapsing commodity prices was absorbed by the currency, preserving a remarkable degree of macroeconomic stability at the expense of popular consumption. (Those doubting this assertion should note that five-year Russian sovereign debt now trades only about 150bp wide to UST, the rouble is strengthening daily, while the Russian equity index is now again one of the world’s top performers, having nearly doubled over the past year — albeit following a grizzly 2015.)
The New Cold War — Bipolar Disorder
The tragedy of Western diplomacy is the failure to recognize the obvious fact that the erstwhile uncontested hegemony of the US and its offshoots is threatened by one nation — and by one nation only; that nation is certainly not Russia, a major regional power with substantial but relatively modest global aspirations, and which aspires to reclaim a seat at the top table —not to overturn that table.1
Dangerously caught up in their own rhetoric, and instinctively demanding absolute subservience to their particular set of values, the bone-headed diplomacy of the Obama administration, seemingly aimed solely at driving Russia into the welcoming embrace of China, was a blunder of major proportions, one that will be endlessly discussed by generations of future historians — assuming, that is, that as a species we survive long enough.
The great diplomats — the Metternichs, the von Bismarcks, even H. Kissinger (not in the same league — but relevant to the present discussion) — aimed above all to divide their adversaries. The nightmare for Bismarck would have been an alliance between France and Russia encircling Prussia; Britain sought to prevent continental unification which would have threatened her “splendid isolation”. Reversing decades of US policy, Henry Kissinger — faced with the perceived threat from a powerful and heavily-armed Soviet Union — embarked upon his famed trip to China, aimed at deepening the rift between the USSR and China; in the event, he succeeded in critically weakening the former.
It is still something of a mystery how that moiety of the Washington establishment which has correctly focused upon the growing threat of an ascendant China, urging an accommodation with Russia in order to keep her out of the Chinese camp, was obliterated by the troglodytic, bipartisan anti-Russian faction, seemingly motivated by little more than an instinctive hatred for the Bear, as well as a nostalgia for the simplicities of the cold war. The advent of Mr Trump suggests at least a real hope for a sharp realignment in US policy, to the fury of Senator McCain and his coven.
Alongside reflexive militarization, Obama’s response to the rise of China was an attempt to create a web of global anti-Chinese alliances — the TTP, the TTIP, the “Pivot to Asia” — all of which were stillborn, as well as a (more successful) push for the remilitarization of Japan. Attempts to federate the ASEAN countries — in particular, those bordering on the South China Sea — against the Dragon were always doomed to failure given their overwhelming economic dependency upon China. While Vietnam or the Philippines may express outrage at Chinese territorial claims, their economies would collapse overnight were China to close her borders; this economic integration will only grow stronger over the coming years.
Aware of the changing balance of power, Philippine President Duterte has recently pivoted towards both Russia and China; Malaysia is doing much the same; Vietnam, instinctively distrustful of the Dragon, is seeking to hedge her bets.
Another Day in the Death of Ukraine
Returning briefly to the subject of our last submission to Marc’s opus — the US-sponsored coup d’état in Ukraine is working out very much as we predicted: depression, deindustrialization, default and political paralysis — along with a few thousand dead civilians scattered about the devastated cities of Eastern Ukraine. The Kiev regime is headed by the same clutch of vicious, corrupt oligarchs who were key players in every previous failed Ukrainian government, but now prisoners to small, heavily-armed and openly Fascist militias (i.e. Banderites — the term “Fascist” is here used advisedly). What could possibly go wrong?
Whilst the catastrophe does not quite attain the magnitude of those following upon similar “liberations” in the Middle-East, it is equally intractable. A political accommodation appears most unlikely. Poroshenko cannot possibly comply with the terms of the Minsk agreement without finding himself hanging from a lamppost in Kiev; the nationalist would never accept the degree of federalism required. The Obama administration could not have abandoned him without intolerable loss of face; Germany cannot force compliance; the ball is now again in Washington’s court.
The issue of Crimea has been effectively resolved — though certainly not in Kiev’s favour. Crimea was never properly Ukrainian — having been handed over in 1954 to the Ukrainian Soviet, a constituent republic of the USSR, by a slightly tipsy Khrushchev as literally a birthday gift; needless to say, this was done without the formality of ratification or even consultation with an ethnically Russian Crimean populace which overwhelmingly welcomed the 2014 reunification with Russia (~90% favourable, both by the results of the referendum and by repeated opinion polls since that time). This has become a political fait accompli, recognized at least tacitly by all.
The fate of the Eastern provinces — Donbas and Lugansk — is more complex. These regions were hastily incorporated into the composite, multi-national post-Soviet Ukrainian state following the breakup of the USSR. Russian in language and culture and largely apolitical, the people of East Ukraine had family and economic ties with Moscow at least as strong as those with Kiev; it was the votes of this borderland population which brought Viktor Yanukovich to the presidency in the 2010 election, widely reported as free and fair. While no less corrupt than his US-appointed successor Poroshenko, to his credit Yanukovich refused to open fire upon his own people — both during the 2004 Orange Revolution (which removed him from power following a stolen election) and again, during the replay at Maidan, where a legitimately-elected government was overthrown in what began as a popular protest movement, before gradually coming under the control of heavily armed right-wing militias, openly funded and sponsored from abroad.
The coup, as per usual, was clearly engineered from Washington (under the oversight of V. Nuland, she of the famed “Fuck the EU” remark, captured on tape in an intercepted telephone conversation in which she baldly informed her interlocutor whom the US had chosen as the next “democratically-elected” leader of Ukraine). Although to her credit Mrs Merkel flew to Washington to try to forestall an extreme outcome which she realized would terminally antagonize Russia, she was coolly rebuffed by an Obama administration determined to secure a clean victory in a conflict they could not possibly understand.
(Foreign policy only; we lack expertise as regards US domestic policy.)
• TTP/TTIP — the former intended to further the economic interests of the US corporate sector providing extra-judicial relief; the second to hog-tie China. Both dead on arrival.
• “The Pivot Towards Asia” — a total failure (see Duterte, Japan–Russia summit, etc.), this policy has been politely forgotten.
• Shoring up the EU/preventing Brexit — Would the last to leave turn out the lights and leave the key under the mat?
• Pumping up NATO — a success until now, but the new POTUS is somewhat less enthusiastic. Expect a roll-back.
• Russian sanctions — painful, but ultimately strengthening Russia (agriculture, deleveraging, diversification of funding/technology sources) while cementing the Russo-Chinese entente.
• Isolating Russia — never successful outside of G7; now crumbling, both in the US and in Europe.
• Regime change in Syria — Obama is gone, Hillary hung out to dry; Assad remains very much in place.
• Ending the wars/disengaging from Afghanistan, Iraq; regime change in Libya after murdering Qaddafi) — Wash — rinse — repeat.
• Supporting Turkish EU accession (see entry for “Titanic”). Erdogan now aligned with Russia, China, seeking entry into SCO.
• Ukraine — shoring up the Kiev Regime. Creating conditions of reunification, and economic viability (see above reference to shipping).
• Enhancing America’s brand/soft-power (perhaps Trump just might…)
Beyond Left and Right
For the past several hundred years, the main political division has been between Left and Right, terms originally used to describe the seating arrangements in the revolutionary French National Assembly. As argued by Alexander Dugin, these terms may be outmoded, with the division shifting to Centre vs Periphery. Brexit was clearly not a Left–Right conflict — the referendum turned on national values: legislative sovereignty, control of borders, and a rejection of a globalist ideology. It is possible that this vote will be only the first stone in an avalanche, transforming the EU into a far narrower and more focused entity.
But it is perhaps the US where the transformation of the political landscape has been most striking, leaving foreign observers frankly bewildered. The US Democratic Party — traditionally “Left” (besides the classical socioeconomic aspects: support for workers’ rights, unions, redistribution, social welfare, etc., its foreign policy was slightly less inclined to overt militarism, imperial overreach, and Russia-bating) has now become the Party of Empire. Indeed, we have witnessed the extraordinary spectacle of a Republican presidential candidate defeating a fiercely militaristic Democrat, strongly supported by the military–industrial complex, the intelligence agencies, the mainstream press, and the most reactionary elements of the foreign policy establishment. Do not be misled — the outbreak of peace poses an existential danger to many — from NATO generals and cold-warriors, to manufacturers of trillion-dollar fighter planes (which do everything but fly). These are the people who keep alive the most absurd narratives — that Russian tanks are just about to roll into Stockholm or Riga; that US presidential elections are now decided in Moscow; they now feel threatened by Trump’s friendly overtures towards Vladimir Putin, and will fight tooth and nail against those who would wind down the dangerous rhetoric seeking to find areas for cooperation and the rebuilding of trust.
Donald Trump appeals to an historical tradition of isolationism, asking why the US should become involved in military conflicts thousands of miles away, of which it understands little; his opponent echoed Obama’s claim of American “exceptionalism”; i.e. that convenient belief that the US — “The Indispensable Nation” — is God’s elect, and therefore exempt from the rules of conduct applicable to other countries. This singular creed (as well as the failure to comprehend the fact that it might not be universally shared) — traditionally the appanage of the hard-right (i.e. the old Republican Party, as personified by the insane McCain) — goes a long way towards explaining the failure of Obama’s foreign policy.
How to Trade it
“I hate to advocate drugs, alcohol, violence, or insanity to anyone … but they’ve always worked for me.”
— Hunter S. Thompson
I cannot assert that for a successful career in Emerging Markets Finance it is sufficient to read the mainstream quality press (FT, The Economist, WSJ), then do the precise opposite of what is implicitly advised (that would be alas too easy); nevertheless, a high degree of skepticism regarding the corporate media is a vital weapon in any successful portfolio manager’s armamentarium … and yes, it has always worked for me!
Leaving our native Paris in 1997 to join what was then billed as the ultimate gold mine — Yeltsin’s Moscow — we arrived just in time to realize that it was in fact a disaster in the making, and quickly liquidated our own modest PA portfolio. The unwind, when it came, was fierce. Russia quickly spiraled into existential crisis — default, depression, at least a hypothetical threat of disaggregation of the state — as the financial bubble burst.
Perhaps resentful of having been made fools of, Western media extracted their revenge; coverage suddenly went from the fawning to the unrelentingly negative, cautioning against any and all Russian assets — just in time for the equally-spectacular recovery.… Russia never defaulted on her foreign debt, the rouble dropped to a reasonable valuation but failed to collapse, while the equity market rose some 50-fold trough-to-peak. Needless to say, from a trading perspective, the 1998 collapse, and the historic rebound which ensued, provided a once-in-a-lifetime opportunity for men brave enough to disregard the consensus, and both willing and able to endure professional and social isolation.
Our approach is not merely the reflection of an adolescent urge to needle figures of authority. Especially in the emerging markets (where emotion tends to run high), the real money is to be made trading against bias, misinformation, ignorance, and stubborn ideological positioning; major asset mispricings ultimately reverse as economic logic reasserts itself, providing rich pickings.
The sheer magnitude of the disinformation regarding Russia has been a wonder to behold. How many times over the past few years, dear reader, have you read dire predictions of the imminent demise of Russia? The rouble set to collapse, the entire banking system to go bankrupt, the reserve funds to be depleted as Russia’s Forex reserves melt like snow in the afternoon sun? The State was set to nationalize everything, leaving investors penniless, Russians never repaid anyone and never would, and similar contrafactual tripe? More times than you can count, you’ve been authoritatively informed that Mr Putin was about to be swept from office by an angry tide of hungry Russians whose political leadership was anxious to regain the favour of Washington.… Oddly enough, the Russian President seems to be still very much in place.
In fact, at ~$380 bn, Russian reserves are substantially in excess of needs; only one of the two reserve funds has been partially depleted. (It was designed for that purpose — to buffer volatility in oil prices — and is now being reconstituted.) None of the major banks with Eurobonds outstanding have defaulted (albeit, the rather dodgy RUSB did come perilously close); both the (initially overvalued) rouble and the RTS equity index took serious hits (both are now recovering — with the rouble becoming a bit too strong); and, especially, President Putin remains overwhelmingly popular, having seen off his Western adversaries one after the other. (Only Mrs Merkel remains standing.…)
We too have made our share of bad calls — the difference being that we are quite willing to acknowledge them, and hopefully learn from our mistakes, a vital skill for fund-managers. Apparently, being a journalist means never having to say “I’m sorry.”
How to Trade it — and How We Did
Last year, writing for Marc Faber, we made a certain number of predictions. How did we do?
We were rather too cautious on global equity markets in general, assuming that at some point the ability of central banks to continue to prop up markets would become exhausted. Thus far, it has not been; as of this writing, the S&P is up by some 15%. Similarly, we began 2016 fairly cautious on both the then-depressed Russian equity markets, as well as the very cheap rouble, noting that a rebound of at least 50% was to be expected, but only once oil prices formed a convincing bottom and began to recover. Perhaps even more than cheap ($35) oil, the then-widespread fear of sub-$20 crude had a chilling effect upon Russian markets. In the event, the rebound in the massively oversold commodity complex began midyear, sparking the expected bull-market, and we shifted to a more aggressive stance. The RTS has surged some 80% Y-o-Y, with the rouble up from 84/$ to just inside of 59/$ as of this writing.
As regards the treasury curve, we correctly cautioned investors to keep durations short; we reiterate our caution. There are strange goings-on in global fixed income; anyone buying German bonds at negative yields, or Mexican 100-year bonds at low single-digit yields, should probably be institutionalized (and we do not mean as an institutional asset manager…).
Once again, our strongest call — selected Emerging Markets fixed Income, in particular the Russian second-tier bank subordinated debt, and more generally, Russian corporate bonds, along with side-pockets including Kazakh banks, the Belarusian sovereign, Chinese property and high-beta Latam — performed brilliantly.
Unfortunately, unlike equity, fixed income has a hard ceiling limiting its upside, and with most of the Russian subordinated bank debt either already matured or trading with YTMs inside of 6%, we find it difficult to remain excited. While there remain a couple of illiquid outliers — RCCF 2019, and VTB 9 ½ Perps, in particular, given the global hunt for yield, Russian high-yield is now something of an endangered species.
In Latam, our daring call on PdVSA outperformed our wildest expectations; after an outstanding year, yields in the middle of the curve (2022) are still above 20%. It was, is and shall remain highly speculative; we believe that for PdVSA to default would be counterproductive, and that China (and, latterly, Russia) remain committed to providing the necessary support; this is a statement of opinion, not of fact.
We took profits a bit too early in Argentina in the belief that the policy of taking on huge new liabilities in the Eurobond market in order to pay-off the hold-out “vultures” was criminally insane. The GDP warrants have already plunged in price; the sovereign bonds are a decent long-term short, but one must be careful of the timing — negative carry is daunting, and a catalyst would be necessary before the market reprices in anticipation of the next default. Finally, our preferred Kazakh bank bonds — in particular, KKB — are continuing to provide some of the best yields in the market, and thus far, all maturities have been met. It should, of course, be borne in mind that these institutions are essentially bankrupt (though this has been the case for nearly a decade), so this is a moral hazard trade writ large. Caveat emptor!
Our worst call of the year was for Rolta — an Indian IT company which defaulted on its bonds in early 2016, yet has continued to operate as previously, happily ignoring its creditors. India apparently has its own set of rules regarding corporate solvency and creditor rights — we shall steer clear in the future.
While chairing a conference in 2015 we wrangled with a rambunctious Texas hedge-fund manager who has long insisted that China was set to implode, going the way of the Ottoman Empire. We laughed — we still do. China has shown an extraordinary talent for making monkeys of the bears, and we would expect this to continue. There IS a credit bubble, and a very difficult transformation of the low-cost export-oriented economy into a global leader — the Chinese leadership is at least as cognizant of these facts as is any hedgie, and unlike the latter, has an enviable track record of dodging bullets. Unfortunately, and as we concluded last year, it is tricky for outside investors to actually make money in Chinese financial markets. Our overweight on the B/BB Chinese property bonds played out nicely, but again, with yields now seeing 5-handles, and almost all of the issues having near-term puts, we see nothing compelling. If we had to take the over/under on the Chinese equity index, we’d take the over … but that is frankly nothing more than an educated guess.
This all begs the question: “Having done quite nicely last year, what are you doing this year?”
How to Trade it — Slim Pickins … as of February 8, 2017
The uncertainties are daunting. It should be obvious that there is a political earthquake underway, and perhaps earthquake season is not the best time to be looking for real-estate. We would expect 2017 to be an “interesting” year — with some sort of financial crises more likely than at any time since 2008. Preservation of capital is a respectable goal.
Which crisis? We think the most likely burst-point is the southern periphery of the EU. The Italian, Portuguese, and Greek debt montages are nothing more than Ponzi schemes. These countries have been strangled by the Euro, and despite every attempt to put still more lipstick on the pig, some day it will go “oink” — panic will ensue, as investors are faced with the prospect of a wave of defaults by EU countries. (Exit from the Euro would quickly put their entire debt structures into default.) Other pressure points are: the possibility of a rapid rise in US rates (the consensus calls for three Fed hikes this year — just occasionally, the consensus can be right); an improvement in the US current account balance under President Trump, starving global markets of dollars; as well as the simple fact that the equity valuations are highly stretched this late in the cycle, based on nothing more than great optimism for an expansionary US fiscal policy — which is anything but assured.
From the macro standpoint, we are very cautious of the consensus trades: long dollar, short treasuries. As regards the third leg of this consensus, long global equities, we are reasonably bullish if none of the above risks eventuates; given the uncertainties, we would again be in no great hurry to position.
In the global fixed income markets, we would continue to keep treasury duration reasonably short, given the lack of clarity on US fiscal/monetary policy. We continue to overweight emerging corporate debt, given the lack of compelling alternatives. We would be long the Russian RTS via index futures (or ETFs). As regards individual Russian stocks, we prefer the domestic stories — a rising rouble will negatively impact the commodity exporters.
We like industrial commodities and are less averse than usual to precious metals (gold, but the PGM group, in particular); we are bullish on the energy complex — at some point, the trillion-dollar global cut in petroleum exploration budgets is going to have an impact and we would expect oil to break above $60; the timing is speculative. The real question here is regarding the US shale boom — whether the shale producers are merely drilling out the last few remaining sweet spots, after which productivity declines sharply, or whether there is infinite easy oil yet to come. Thus far, we have been too bearish on the prospects for sustainability — as always, the long term lies before u.…
Selected emerging currencies look reasonably compelling, but we would prefer to position via options. The vol is fairly cheap, but the timing tricky. We like TRY, RUB (of course), MYR, ZAR, and even MXN might be worth a shot in the event of dollar weakness.
Russian fixed income has rallied to the point where, having grown accustomed to two-digit yields, we have some difficulty getting excited; for those with more modest goals, there is a lot of quality clustering in the 5–6% yield bucket. There are still a few high-yielding outliers among the corporate issues, but unlike the Russian bank subs which last year we considered to offer the unusual case of all reward/no risk (and so, in retrospect, they did), the remaining high-yielders require at least a moderate leap of faith.
Exercise caution in all things, especially with those closest to you … and good luck!