Collateral Damage
The great global energy crunch, buying dollars for pennies and magnificently miss-priced assets...
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Bill Bonner, reckoning today from San Martin, Argentina...
Like bombs and missiles, sanctions – supposedly ‘precision targeted’ – tend to blow up more than they were aiming for. Today, we look at some of the body parts littering the ground… including the cheapest stocks in the world.
One unfortunate victim: world energy prices
And while we’re looking at tweets, here’s James Bianco:
(Chart source: Refinitiv Datastream; Pictet Asset Management)
Yes, most likely, higher prices and a recession will make millions of ordinary people poorer. Perhaps some Americans will feel good about this. They’ll be happy to pay more for gasoline. They’ll feel proud even as they have less money to spend. After all, they’re fighting a holy war against the Russkies!
As in any war, many of the victims are unarmed and had nothing to do with the invasion of Ukraine. Bloomberg reports:
Sanctions are targeting Russia’s largest banks, biggest companies and richest people, in the wake of the country’s invasion of Ukraine. They’re also having a knock-on effect further afield by squeezing everyday Russians living abroad.
These expats don’t have private jets or wealth managers. But they are accustomed to easy online banking, cheap currency conversions and a steady flow of goods and services between their current outposts and home. With new sanctions — as well as sudden policy changes by Russia and the breakneck drop in value of the ruble — those links have broken down in just days.
New York Times columnist, Thomas Friedman, refers to the Bloomberg report:
Marina Gretskaya, a 32-year-old Russian living in London who moved last year to work in communications. She kept a ruble savings account in an online Russian bank, Tinkoff. Two weeks ago, her assets there were worth $7,400. On Monday, the ruble plummeted more than 30 percent against the dollar. That evaporated more than $2,000 from her savings. “It’s a month’s salary,” she said.
New and Dangerous
Years ago, we enjoyed mocking Friedman. His “The World Is Flat” (suggesting that the ‘liberal’ world order – globalization, financialization, technocratization – had irrevocably triumphed) was laughably shallow. His support of the ‘War against Terror’ was just embarrassingly dumb. Then, he seemed to drop from view. But he’s back. And he raises a good point in his latest New York Times column. The way the US wages war is new and dangerous. Predictably, Friedman misunderstands everything; we’ll take a closer look, tomorrow.
What is not new about this Russia-Ukraine conflict is the way the private sector rallies to the Great Cause. Do-gooders all want to appear to be doing good, without any of them knowing what good they might actually be doing. Is it really a good idea to arm Ukrainian civilians, so they can be killed by professional Russian troops? Is it really a good idea to send money to the Ukraine, encouraging more bloodshed and property damage? Why all of a sudden, is the ‘liberal world order’ so keen to protect Mr. Zelensky’s government; how does it know that another leader wouldn’t be better?
But there is no point in asking questions. Americans think they have a dog in this fight; they want to see him tear the other animal apart. And consumers – US, European or Russian – who are in no way responsible for the war, pay the price.
Collateral Damage
Nor are investors to blame. Those who owned stock in the big-box store, Magnit, for example, are losing big-time. The stock was down from $15 last month to as low as one cent.
The Russian bank, Sberbank, had assets worth nearly half a trillion dollars. What they are worth today, we don’t know. But it is almost surely more than the $244 million the company was valued at when trading on the stock ceased in London last week. An investor who could buy it today would be buying dollars for pennies.
Or, Lukoil. It had assets of $83 billion in 2020 – mostly oil reserves (which are probably worth a lot more today). On Friday, the company was reportedly worth about $500 million, or only 6 tenths of 1% of its previous value. Another great speculative opportunity.
Whether out of solidarity or plain stupidity, westerners are selling low… when they can sell… and taking huge losses. BP, for example, says it will lose about $25 billion unloading its Russian assets. Yet, rarely does an ill-wind blow no one good. Who has the wind to his back? Who gains?
Well, imagine that you could buy a house worth $300,000 for only $3,000. Imagine that you could buy a company with $10 million in the bank for only $100,000. Who wins? The buyer or the seller? Who’s getting billions of dollars’ worth of real value for almost nothing?
In other words, Western investors take the losses… Russian oligarchs (who are, most likely, on the other side of the trade) get even wealthier. Among the collateral damage, over the long term, will probably be the US-dominated financial system… including the ‘exorbitant privilege’ of having the world’s reserve currency, the dollar. Sanctions push Russia, Iran, China, and others closer together and encourage them to find alternatives. Few people will want to keep their savings in a currency that can be sanctioned away whenever the rulers of the ‘liberal’ world order choose.
And finally, dollar inflation weakens the American economy, makes its people poorer, and encourages them to look for alternatives too. Gold is selling over $2,000 an ounce this morning. At the beginning of this sad century it was only $290. That is the measure of America’s decline so far. With reckless wars, uninhibited money-printing, and sanctions that blow up in our faces… it is bound to sink further.
Regards,
Bill Bonner
Ed. Note: Echoing Dan’s sentiments in yesterday’s missive, BPR Investment Director Tom Dyson is sounding the recession alarm. And if his research is right, it could be much worse than most people think…
“I don’t know what more I can do or say to convince subscribers that we are in the initial stages of a bear market and recession,” he cautioned BPR readers in yesterday’s mid-week investor update (available to paid readers).
“I should add that we’re expecting this bear market to be far worse than most investors are prepared for or expect. I don’t believe most investors expect anything more than a temporary set back. And that it’ll be over in a year or so. That’s not what we’re expecting.”
Remember “transitory” inflation? Yeah, neither do we. Continues Tom…
“When you suddenly excise the world’s largest commodity exporting region from a hyper-leveraged, hyper-connected, hyper-financialized economic system like we have with Russia, you will cause defaults. And probably a system-wide contagion.”
Turbulent times, indeed. That’s why Tom’s enacted “Maximum Safety Mode” for his family portfolio, stockpiling precious metals - mostly gold; some silver - and sitting on a healthy amount of cash, “dry powder” to be deployed when miss-priced investment opportunities present themselves… as they will for the patient investor.
If you’d like to begin receiving Tom and Dan’s private research, including their portfolio allocation strategy and the specific companies they’re tracking, you can join us here…
Bill seems to think that since Russia has a big, powerful, professional army and the willingness to use it that everyone should just give Putin whatever he wants without a fight. Where does that inevitably lead us Bill? Putin’s behavior is totally unacceptable in the modern world. It must lead to his death, one way or another.
Must say I'm rather appalled at Bill's callous indifference to Russia's brutal invasion of Ukraine. There he is, sitting high up in the stands with a butt full of splinters, bloviating from a safe distance over what he sees taking place on the field. As a former Army soldier, I sure would not have wanted Bill as a foxhole buddy in the event bullets started flying. And I'm not sorry that Bill's Russia investments have blown up in his face - a speedy recovery for those poor victims is not in the offing. In the meantime, sit back, kick your feet up and enjoy those Argentine steaks and wines.