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The wisdom of a Russian grandmother: today’s financial bubbles are trouble

With financial uncertainty ahead, good financial advice can come from the unlikeliest of places

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Last February I wrote about an elderly Russian “Znakhar”, which in English would be a person who is a blend of a seer, witch and healer. I run across her in my Moscow neighborhood from time to time and we mostly limit our chats to polite hellos, as metaphysics is not something I hold in high regard. Last year however, she paused and approached me.

“You are that foreigner, no?” I nodded smilingly. “Be ready for very big changes to begin as we approach the middle of this coming March. It is just as well you now live here with us in Russia, you would not want to live elsewhere for a long time to come”.

Curious, I asked what makes her believe that the world outside of Russia will stress out, and why tell me. Not answering directly, she went on to say, “Better you get rid of your “valyuta” (US$/Euros) and turn them into rubles or better still, gold St. George coins. Very big changes are now destined to happen and much will turn upside down, so be ready”. I thanked her for her pithy global commentary and bid her a good day as she shuffled off into the nearby church.

This incident got me thinking a year ago, first why she chose to speak with me and not simply nodded a hello as usual. Secondly, why she chose to deliver her somewhat disturbing opinion to me, “that foreigner”. Since equity and commodity markets are areas where from time to time I am engaged, the first thing that came to mind then was market bubbles… could this uneducated old lady now be analyzing the economic rhythms of the western world, and making her prognosis to me? Furthermore, what elements could be gathering steam now that might prove to be so calamitous? Then thinking… I must be nuts to even dwell on her ramblings.

Since then I have run into her in the local farmers market or simply walking near my home. Today I stopped and chatted since a year had passed since she laid her initial “foreigner” prognosis on me. I asked her “do you still think the world is going to hell in a handbasket?”

She simply looked me in the eye and answered “Most assuredly. The ways of this world are not like a train schedule, nor should you expect them to be. There is no doubt that last winter when we spoke, the changes have begun, and they have been gathering strength. One morning we shall wake up, no doubt surprised that so much has happened and we did not notice the process until it has passed us and we eat its dust”. I thanked her for the wise words and proceeded on my way to the Metro station and my office.

The Russian folklore witch, Baba Yaga

One thing I acknowledge the “Znakhar” does well is that she puts me in a mood to reflect. Undoubtedly we now live in a time when a number of “unquestioned” components of the economic and geopolitical world are under intense re-evaluation; politicians, fake vs. real, the dollar, Euro, central banks, Federal Reserve, QE, ZIRP’s, NIRP’s, Crypto’s, and historically unprecedented debt of all types. Unquestionably a nervous time, and in many ways engendering a Stockholm-like syndrome of denial…. shall we go on as before, what can really happen?

Well, just last week we witnessed rather sudden and sharp global market spasms starting in the US, which may be a prelude to what is likely to repeat. We see interest rates largely rising throughout the world whereas the business culture has grown used to ‘cheap money’ as this past decade’s new normal. Much has been built up on the back of cheap funds and the prospect of paying double or more to settle credits taken is a dismal undertaking. Looking back at rates these past 10+ years, today the downtrend line(s) have been broken, suggesting long-term trend changes.

What has changed in market perception? Following the money is usually a good place to start. One item that sticks out is the interbank lending among US and western banks. Towards the end of 2017 interbank lending sharply dropped. In fact, it dropped to pre-1974 recession levels of approximately $12.7 billion. Since 2008/09 the amount of interbank lending has steadily decreased with the strong possibility that the players were acutely aware of their own, hence their counter-party’s remarkably weak balance sheets.

Whatever the case, the reasons for interbank lending to collapse has two likely reasons, either there is no longer a need for credit, or there is an absence of trust in the interbank lending world. It would seem to me that a lack of trust is the more probable. Remember, the bedrock of fiat currencies is trust.

A further factor to consider is velocity of money. If the markets believe inflation therefore rates are going higher it generates fear or as we used to say “the anxiety quotient”. Fear that financial instruments will be worth less because they are “discounted” against interest rates. There is also the very real anxiety of losses due to bankruptcies whether by an issuer or counterparty. Higher rates also means no more easy ability to refinance or to “roll over” debt”.

It is worth keeping in mind that all fiat currencies are debt based, so the fear factor will be seen expressed not only in the sale of bonds but the underlying currency, be it the US Dollar, Euro, Yen or similar. The velocity of these currencies will turn markedly higher as market participants finally “spend” them to get free of the denominated equities or debt instruments trap.

The markets have changed, and if last week was any indication of things to come it may be only the appetizer. I think most would agree that 2017 and the first month of 2018 were abnormal for equities. Stocks as an asset class were never meant to go straight up without even a smidge of a pullback. That is exactly what happened for an entire year.

What has been the case in the past decade is that the central banks have openly played an unprecedented interventionist role in supporting the commercial markets, some even call this the CB’s ‘Plunge Protection Team’. In the real world, in open markets, when a sell off is in process no investor has the gall, or deep enough pockets to flood markets with buy orders except the central banks, which they quietly did just one week ago. I even heard the term ‘QP’ for Quantitative Propping, no doubt the stepsister of ‘QE’.

Never in history has so much money been magically created in so short a time. The money exists and the corresponding debts are in place which seem to indicate a fertile field for inflation. In simpler financial times when money was linked to gold, we could expect at some point in these current circumstances a massive deflation.

Today however, when gold has been replaced by debt and fiat currencies, the result will again be a deflation but of a different sort. The deflation will be in currencies and credit versus gold. To those holding currencies and debt, it will feel like acute hyperinflation. Assets that derived their value from investors borrowing to purchase will deflate against gold; while quite probably still inflate against struggling fiat currencies.

In closing, I tip my hat to the “Znakhar” if for no other reason than the fact that she got me thinking on the truly interesting times we are living in, and wondering when the much touted inflection point may arrive. She may have the “crystal ball”, but I can do one better by trudging to my local Sberbank (savings bank) branch here and place a ruble order for a gold St. George coin or two, maybe that will help.

Paul Goncharoff is an American business executive working in Russia.

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Photos of swastika on Ukrainian mall stairway creates a stir [Video]

Ukrainian nationalist press in damage-control mode to explain away the Nazi sign, but they forgot the name of the street the mall is on.

Seraphim Hanisch

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One of the aspects of news about Ukraine that does not make it past the gatekeepers of the American and Western news media is how a significant contingent of Ukrainian nationalists have espoused a sense of reverence for Nazis. The idea that this could even happen anywhere in the world in an open manner makes the claim seem too absurd to be taken seriously. Gone are the days when the Nazi swastika adorned streets and buildings in Europe. Right?

Well, maybe, wrong.

This was seen in Kyiv’s Gorodok (or Horodok, if you insist) Gallery, a shopping center in that city, located on Bandera Avenue.

The pro-nationalist news service UNIAN wasted no time going to press with their explanation of this incident, which admittedly may be accurate:

Children and teenagers who participated in the All-Ukrainian break dance festival held in the Kyiv-based Gorodok Gallery shopping mall were shocked to see a swastika image projected onto an LED staircase.

The mall administration apologized to visitors, explaining saying that their computer system had apparently been hacked.

“The administration and staff have no relation to whatever was projected onto the LED-staircase, and in no way does it support such [an] act. Now we are actively searching for those involved in the attack,” it said in a statement.

According to Gorodok Gallery’s administrative office, it was not the first time a cyber breach took place.

As reported earlier, Ukraine is believed to be a testing ground for cyberattacks, many of which are launched from Russia. Hackers have earlier targeted critical energy infrastructure, state institutions, banks, and large businesses.

This time, it appears, hackers aimed to feed the Kremlin’s narrative of “Nazis in power in Ukraine” and create a relevant hype-driving viral story for Russian media to spread it worldwide.

The Gorodok Gallery also apologized on its Facebook page and said that this was a result of hacking.

But what about the street that the mall is on? From the self-same Facebook page, this is what we see:


To translate, for those who do not read Ukrainian or Russian, the address says the following:

23 Steven Bandera Prospekt, Kyiv, Ukraine 04073

This street was formerly called “Moscow Avenue.” Big change, as we shall see.

Steven Bandera got his birthday designated as a national holiday in Ukraine last December. He is known in Ukraine’s history for one thing. According to the Jerusalem Post:

The street where the shopping mall is located is named for Stepan Bandera, a Ukrainian nationalist who briefly collaborated with Nazi Germany in its fight against Russia.

His troops are believed to have killed thousands of Jews.

Several Israeli papers picked this bit of news up, and of course, the reasons are understandable. However, for the West, it appears possible that this news event will largely go unnoticed, even by that great nation that is often called “Israel’s proxy”, the United States.

This is probably because for certain people in the US, there is a sense of desperation to mask the nature of events that are happening in Ukraine.

The usual fare of mainstream news for the West probably consists of things like “Putin’s military seizes innocent Ukrainian sailors in Kerch incident” or, “Ukraine’s Orthodox Church declared fully independent by Patriarch of Constantinople” (not that too many Americans know what a Constantinople even is, anyway), but the overriding narrative for the American people about this country is “Ukraine are the good guys, and Russia are the bad guys,” and this will not be pushed aside, even to accommodate the logical grievance of Israel to this incident.

If this article gets to Western papers at all, it will be the UNIAN line they adhere to, that evil pro-Russia hackers caused this stairway to have a swastika to provoke the idea that Ukraine somehow supports Naziism.

But UNIAN neglected to mention that the street name was recently changed to Stephan Bandera (in 2016), and no one appears to have hacked this. Nor does UNIAN talk about the Azov fighters that openly espoused much of the Nazi ideology. For nationalist Ukrainians, this is all for the greater good of getting rid of all things Russia.

A further sad fact about this is the near impossibility of getting assuredly honest and neutral information about this and other similar happenings. Both Ukrainian nationalists and Russian media agencies have dogs in the race, so to speak. They are both personally connected to these events. However, the Russian media cannot be discounted here, because they do offer a witness and perspective, probably the closest to any objective look at what is going on in Ukraine. We include a video of a “torchlight march” that took place in 2017 that featured such hypernationalist activity, which is not reported in the West.

More such reports are available, but this one seemed the best one to summarize the character of what is going on in the country.

While we do not know the motive and identities of whoever programmed the swastika, it cannot really be stated that this was just a random publicity stunt in a country that has no relationship with Nazi veneration.

The street the mall is on bears witness to that.

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Putin: If mid-range missiles deployed in Europe, Russia will station arms to strike decision centers

Putin: If US deploys mid-range missiles in Europe, Russia will be forced to respond.

RT

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Via RT…


If the US deploys intermediate-range missiles in Europe, Moscow will respond by stationing weapons aimed not only against missiles themselves, but also at command and control centers, from which a launch order would come.

The warning came from President Vladimir Putin, who announced Russia’s planned actions after the US withdraws from the INF Treaty – a Cold War-era agreement between Washington and Moscow which banned both sides form having ground-based cruise and ballistic missiles and developing relevant technology.

The US is set to unilaterally withdraw from the treaty in six months, which opens the possibility of once again deploying these missiles in Europe. Russia would see that as a major threat and respond with its own deployments, Putin said.

Intermediate-range missiles were banned and removed from Europe because they would leave a very short window of opportunity for the other side to decide whether to fire in retaliation after detecting a launch – mere minutes. This poses the threat of an accidental nuclear exchange triggered by a false launch warning, with the officer in charge having no time to double check.

“Russia will be forced to create and deploy weapon systems, which can be used not only against the territories from which this direct threat would be projected, but also against those territories where decision centers are located, from which an order to use those weapons against us may come.” The Russian president, who was delivering a keynote address to the Russian parliament on Wednesday, did not elaborate on whether any counter-deployment would only target US command-and-control sites in Europe or would also include targets on American soil.

He did say the Russian weapon system in terms of flight times and other specifications would “correspond” to those targeting Russia.

“We know how to do it and we will implement those plans without a delay once the relevant threats against us materialize,”he said.

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Russia’s Lukoil Halts Oil Swaps In Venezuela After U.S. Sanctions

Under the new wide-ranging U.S. sanctions, Venezuela will not be able to import U.S. naphtha which it has typically used to dilute its heavy crude grades.

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Via Oilprice.com


Litasco, the international trading arm of Russia’s second-biggest oil producer Lukoil, stopped its oil swaps deals with Venezuela immediately after the U.S. imposed sanctions on Venezuela’s oil industry and state oil firm PDVSA, Lukoil’s chief executive Vagit Alekperov said at an investment forum in Russia.

Russia, which stands by Nicolas Maduro in the ongoing Venezuelan political crisis, has vowed to defend its interests in Venezuela—including oil interests—within the international law using “all mechanisms available to us.”

Because of Moscow’s support for Maduro, the international community and market analysts are closely watching the relationship of Russian oil companies with Venezuela.

“Litasco does not work with Venezuela. Before the restrictions were imposed, Litasco had operations to deliver oil products and to sell oil. There were swap operations. Today there are none, since the sanctions were imposed,” Lukoil’s Alekperov said at the Russian Investment Forum in the Black Sea resort of Sochi.

Another Russian oil producer, Gazprom Neft, however, does not see major risks for its oil business in Venezuela, the company’s chief executive officer Alexander Dyukov said at the same event.

Gazprom Neft has not supplied and does not supply oil products to Venezuela needed to dilute the thick heavy Venezuelan oil, Dyukov said, noting that the Latin American country hadn’t approached Gazprom Neft for possible supply of oil products for diluents.

Under the new wide-ranging U.S. sanctions, Venezuela will not be able to import U.S. naphtha which it has typically used to dilute its heavy crude grades. Analysts expect that a shortage of diluents could accelerate beginning this month the already steadily declining Venezuelan oil production and exports.

Venezuela’s crude oil production plunged by another 59,000 bpd from December 2018 to stand at just 1.106 million bpd in January 2019, OPEC’s secondary sources figures showed in the cartel’s closely watched Monthly Oil Market Report (MOMR) this week.

By Tsvetana Paraskova for Oilprice.com

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