3 Minute Gold News
A Quick Read for Busy People
Oil Prices Falling
Is This a Crisis?
Russian Ruble Collapsing
Russian Interest Rates at 17%
December 16, 2014 interview
Starts at 14:20
OIL PRICES FALLING
We had a near meltdown of the international monetary system in 1998 and another one in 2008.
If we have another meltdown we may not recover so easily — there are a lot of unforeseen consequences and losses.
Oil has come down 40% in a matter of months. That’s one of the three largest, fastest declines in the price of oil ever. It’s very significant.
Lower gas prices saves money at the gas pump but it’s a zero sum game — for every winner there’s a loser. There have been trillions of dollars in junk bonds issued by oil companies and oil exploration companies since 2009.
The bonds were priced on the assumption that oil would be between $80 – $100 per barrel. With oil at or below $60 some of those bonds are going to default.
Where are those bonds?
They might be in American’s 401Ks or the banks. That’s the problem.
It’s going to cascade through the system and could easily spin out of control.
IS THIS A CRISIS?
It looks like the beginning of a crisis. It has a familiar feel to it.
In 1998 Russia melted down, devaluing the ruble and defaulting on sovereign debt. It ended up in Jim’s lap. Jim was general counsel for Long-Term Capital Management, which was caught in the eye of the storm and had to be rescued by a Fed sponsored Wall Street bail out.
Jim negotiated that bail out, and for him this feels like deja vu.
The Russian crisis in January of 1998 actually started in Thailand in June of 1997. It spread from Thailand to Indonesia, then Korea, then Russia, then it was expected to go to Brazil.
A crisis can take a year to play out and it can pop up in unexpected places.
Today we’re seeing a meltdown in oil and Russian rubles, but don’t be so sure of where it’s going to end up.
What happens is that people run for liquidity. They say there’s going to be big losses out there somewhere, but they don’t know where. So they get out of stocks and bonds, and they get cash and keep it on the sidelines.
That’s what starts a liquidity crisis. Jim doesn’t want to sound melodramatic, but that how they start and this could be a big one.
China’s growth rate is going to decline for a lot of reasons. Oil has a little to do with it — China is slowing down so there’s less demand for oil. There’s less demand from China, and also from Japan and Europe.
Meanwhile supply is going up because of fracking and technology, and OPEC not cutting their supply to support the price. Less demand and more supply means a lower price.
There’s also behind-the-scenes geopolitics.
Does Saudi Arabia want to hurt Iran because of their nuclear program? Does Saudi Arabia want to hurt Russia because of their support of Assad and Syria?
China has been slowing down anyways. A significant amount, maybe half, of their reported GDP is wasted. If you adjust for the waste then their growth is maybe 4 1/2% and it may slow down further.
Japan hit a wall this year and Europe is in recession. The US could be very close to recession, and that’s why Jim doesn’t expect the Fed to raise interest rates in 2015.
The whole world is slowing down.
You see it in oil, in Russia, and it a lot of places right now.
RUSSIAN RUBLE COLLAPSING
The Russian ruble is collapsing. There was a headline this morning that said, “Russian Ruble in Trouble”.
Currency can’t be in trouble. It’s just a currency — it’s not a stock and it’s not a bond or a borrower.
So where is the trouble?
Russia doesn’t have much US dollar denominated debt and they have more than enough to cover their external debt. So, the government is not in trouble.
Some of the Russian corporations have US dollar denominated debt and they earn money in US dollars. If a company borrows dollars and sells, say oil, in dollars then they may not be in trouble.
The real loser is a Russian corporations who borrowed in dollars, but makes money in rubles. For example, a large auto dealer in Moscow, who has to borrow dollars to buy their inventory, but then sells in rubles. Those companies may be in trouble.
But where are those corporate bonds? They are actually in American 401Ks.
There are some Americans rooting for all this Russian distress. Politically, the American government is using financial warfare to attack Russia because of their actions in the Ukraine. But be careful what you wish for.
The Russian denominated corporate debt could be in American 401Ks.
This is a good example of the world’s interconnection today.
Jim’s advice to investors is to look in their 401Ks, look out for unintended consequences, and be careful what you wish for.
INTEREST RATES IN RUSSIA AT 17%
Right now there’s a run on the bank in Russia, because people want to get out of the ruble and they want dollars. Russia did an interest rate increase to 17% so people would keep their money in rubles.
They may have to raise it again. A 17% interest rate is not unusual. In 1998 the interest rate was 100%, and in 1980 the American interest rate was 20%. So a 17% interest rate is not unusual.
Jim believes that Russia has a competent set of Central Bank officials and that they’ll stay on top of the situation.
When there’s a run on the bank you either shut the door or you raise interest rates. Raising rates was a smart policy move.
Wag the Dog (Drums of War and Back Room Banker Passes)
words and music Elaine Diane Taylor
© 2014 Intelligentsia Media Inc. All rights reserved.
from the album Preparing for the Fall
Another Week on Wall Street
words and music Elaine Diane Taylor
© 2013 Intelligentsia Media Inc. All rights reserved.
from the album Coins and Crowns