Friday, December 5, 2014

NATO-U.S.-Ukraine-Russia: 'An Incredibly Dangerous Tinderbox'

A quote from this article seemed a more fitting title: 

I hadn’t written a single piece on the U.S.-Ukraine-Russia quagmire for the entirety of 2014, until Monday when I published: Tensions Between the U.S. and Russia Are Worse Than You Realize – Remarks by Foreign Minister Sergey Lavrov. Now I can hardly think of anything else.

The reason the geopolitical hot zone has so captured my attention is because I think we are much closer to a serious escalation than most people want to admit. I hope I’m wrong, but when I take a step back and look at what is being said and done under the surface, an incredibly dangerous tinderbox is now firmly in place and ready to be lit. We know from history that relatively minor catalysts can lead to unimaginable horrors. I fear the stage is set for some real nastiness, and hope cooler heads can prevail on both sides.

Claims that the new government in Ukraine is nothing more than a Western puppet Parliament have been swirling around consistently since February. Nevertheless, I think it’s very significant that the takeover is now overt, undeniable and completely out in the open. Nothing proves this fact more clearly than the recent and sudden granting of citizenship to three foreigners so that they can take top posts in the government.

At the top of the list is American, Natalie Jaresko, who runs private equity fund Horizon Capital. She will now be Ukraine’s Finance Minister, and I highly doubt she will be forced to pay the IRS Expatriation Tax (one set of laws for the rich and powerful, another set of laws for the peasants). For Economy Minister, a Lithuanian investment banker, Aivaras Abromavicius, will take the reigns. Health Minister will be Alexander Kvitashvili of Georgia.

Ukraine’s parliament appointed a new, pro-Western government that includes a U.S.-born finance minister to take on the job of staving off financial collapse, overhauling the shrinking economy and ending the armed conflict in the country’s east.

The new cabinet includes Finance Minister Natalie Jaresko, the chief executive of a private-equity fund and a former U.S. diplomat, as well as two other nonnatives: Economy Minister Aivaras Abromavicius, a former investment banker from Lithuania; and Health Minister Alexander Kvitashvili, who held a similar post in Georgia.

Ukraine is dependent on the International Monetary Fund for financing, and officials and analysts say it will need more than the current $17-billion program from the lender.

Some analysts praised the inclusion of outsiders in the government as a way to tap foreign experience, insulate against corruption and help push through unpopular economic overhauls. But opposition lawmakers slammed the decision.
“We don’t understand why from 300 coalition members and 40 million people [in the country], 10 minister candidates couldn’t be found who’d be Ukrainian citizens or at least ethnic Ukrainians,” said Yuriy Boiko, head of the Opposition Bloc and a former energy minister.

Washington and its allies are pursuing a regime change policy towards Russia, deliberately introducing sanctions and attacking the ruble through manipulation of world oil prices, the head of Russia's external intelligence agency has said.
Mikhail Fradkov, the head of the Foreign Intelligence Service (SVR), warned that Moscow is aware of US moves to oust Putin from power.
“Such a desire has been noticed, it’s a small secret,” Fradkov - a former prime minister - told Bloombergon Thursday. “No one wants to see a strong and independent Russia.”

He also attributed the more than 30 percent drop in oil price partly to US actions. Lower prices on one of Russia's main exports placed immense pressure on the ruble, which is also suffering from sanctions. The ruble has lost 39 percent of its value against the dollar so far this year.
Foreign investment funds are “taking part” in ruble speculation via intermediaries, Fradkov said. “Any speculation has specific schemes and the schemes have a number of participants.”

Earlier on Thursday, Russian president Vladimir Putin in his address to the Federal Assembly said that the government knows exactly who is profiting from speculation against the Russian ruble, and that the government and central bank have tools to punish them.
"The government knows who these profiteers are. It is time to do something about them," Vladimir Putin said during his 11th state of the nation address in the Kremlin’s St. George’s Hall in Moscow.
The political and economic tensions can only be halted once the West learns to respect Moscow's interests, but for now Russia will focus on solving domestic issues.

Russian president Vladimir Putin has accused the West of seeking to destroy his country to punish it for its growing strength.
In his annual state of the union address to parliament, Mr Putin expressed no regrets for annexing the Crimea peninsula and accused Western governments of "pure cynicism" over the Ukraine crisis.
The Kremlin leader praised the Russian people for their strength and said sanctions against Russia must drive the country to develop its own economy.
Russia's "enemies of yesterday" wished on it the same fate as Yugoslavia in the 1990s, he said in the speech.
"There is no doubt they would have loved to see the Yugoslavia scenario of collapse and dismemberment for us - with all the tragic consequences it would have for the peoples of Russia.

"This has not happened. We did not allow it."
So determined was the West to destroy Russia, he said, that sanctions would have been imposed even without the crisis in Ukraine.
"I am certain that if all this did not take place ... they would come up with another reason to contain Russia's growing capabilities.
"Whenever anyone thinks Russia has become strong, they resort to this instrument."
Even when he pledged to keep Russia open to the world, he adopted an aggressive posture: "We will never pursue the path of self-isolation, xenophobia, suspicion and search for enemies. All this is a manifestation of weakness, while we are strong and self-confident."

Mr Putin promised an amnesty for capital repatriated to the country, saying that Russians who chose to bring money back would face no questions over how they earned it. Money from a national wealth fund would be used to support domestic banks.
His popularity ratings remain high and he has not faced any big protests over the economic decline, but questions are being asked about whether he has a plan to pull the $1.4 trillion economy out of crisis.

US president Barack Obama has said the tough economic situation could eventually help change Mr Putin's course in other areas.
Mr Putin has instead diverted attention from the economy by whipping up patriotism, including by annexing the Crimea peninsula, and blaming the United States and the European Union for many of Russia's problems as well as the crisis in Ukraine.

China conducted the third flight test of a new hypersonic missile this week as part of its strategic nuclear program and efforts to develop delivery vehicles capable of defeating U.S. countermeasures, defense officials said.
The flight test of the developmental Wu-14 hypersonic glide vehicle was monitored by U.S. intelligence agencies Tuesday during a flight test in western China.
The latest flight test followed earlier tests of the Wu-14 on Jan. 9 and Aug. 7. The three tests indicate that China’s development of a strike vehicle capable of traveling up to eight times the speed of sound is a high-priority element in China’s large-scale military buildup.

The annual report of the congressional U.S.-China Economic and Security Review Commission, made public Nov. 20, reveals China’s hypersonic weapons program is a major development effort.
The report said the People’s Liberation Army “is developing hypersonic glide vehicles as a core component of its next-generation precision strike capability.”
“Hypersonic glide vehicles could render existing U.S. missile defense systems less effective and potentially obsolete,” the report said.
The report said once deployed the Wu-14 “could enable China to conduct kinetic strikes anywhere in the world within minutes to hours.”
China plans to deploy its high-speed glide vehicle by 2020 and a scramjet powered hypersonic vehicle by 2025.

Are we about to see U.S. stocks take a significant tumble?  If you are looking for a “canary in the coal mine” for the U.S. stock market, just look at high yield bonds.  In recent years, almost every single time junk bonds have declined substantially there has been a notable stock market correction as well.  And right now high yield bonds are steadily moving lower.  The biggest reason for this is falling oil prices. 

As I wrote about the other day, energy companies now account for about 20 percent of the high yield bond market.  As the price of oil falls, investors are understandably becoming concerned about the future prospects of those companies and are dumping their bonds.  What is happening cannot be described as a “crash” just yet, but there has been a pretty sizable decline for junk bonds over the past month.  And as I noted above, junk bonds and stocks usually move in tandem.  In fact, junk bonds usually start falling before stocks do.  So does the decline in high yield bonds that we are witnessing at the moment indicate that we are on the verge of a significant stock market correction?

Personally, I am convinced that this correlation between junk bonds and stocks is very significant.
Let’s just go back and look at what happened during the financial crash of 2008 for a moment.
In the chart posted below, you can see that high yield bonds began crashing in the middle of September that year…
But U.S. stocks did not crash at the same time.  In fact, the chart below shows that they did not really begin crashing until early October…

That is why analysts often refer to junk bonds as a “leading indicator”.  What happens to high yield debt is often a really good indicator of what is about to happen to stocks.
Now let’s take a look at what is happening today.
Since the beginning of November, junk bonds have been falling steadily…

This is not a state of affairs that can persist indefinitely.  Either junk bonds will rebound or U.S. stocks will start falling.
If the U.S. economy was on solid footing, you could perhaps argue that it could go either way.
Unfortunately, that is not the case.  At this point, the stock market has become completely divorced from economic fundamentals.  Price to earnings ratios are at absurd levels, margin debt is hovering near record highs, and the “real economy” continues to fall apart.  We are enjoying a massively inflated standard of living which is being propped up by the largest mountain of debt in world history, and it is only a matter of time before reality starts catching up with us.

Meanwhile, some of the most iconic companies in the United States continue to struggle deeply.  For instance, Sears has just announced that the number of store closings for this year is going to reach a total of 235 and that the company lost more than half a billion dollars during the third quarter of 2014 alone…
And of course what is happening to Sears is just part of the broader “retail apocalypse” that I keep writing about.  In order for retailers to thrive they need healthy consumers, and consumers are not financially healthy because the real economy is a disaster zone.
But these days so many people are in denial.  The stock market has been soaring for so long that many skeptics are now proclaiming that another 2008-style crash will never happen.  Even though the fact that we are in the midst of an absolutely insane financial bubble should be glaringly obvious to anyone with half a brain, these skeptics have convinced themselves that the current state of affairs can persist indefinitely.
Sadly, it looks like what is about to hit us in 2015 is going to serve as a very rude wake up call for them and for the millions of other Americans that currently have their heads in the sand.

Also see:

No comments: