by Bill Bonner
Keeping Up With the Debt
More analysis from Chris on the situation in the Crimean Peninsula below. This is a fast-moving situation with big implications for our favorite emerging market, Russia. (Hint: We still think it’s a bargain.)
What we know for sure is that the news out of the region gave the markets a serious case of the heebie-jeebies. The Dow ended Monday's session down 153 (back from a 250-point sell-off). Gold rose by $28 an ounce.
We also know that the Fed’s zero-interest-rate policy … and its $4.1 trillion balance sheet are a standing invitation for trouble. What form that trouble takes will be determined later. Meanwhile, Washington’s mountain of debt gets bigger and bigger – aiming for $20 trillion of official debt by 2020. As it gets bigger it weighs on the economy. Several studies have shown debt slows down economic growth.
The reason is fairly easy to see. Remember that hamburger you ate in 2007? You enjoyed it then. The hamburger joint made money. The cook made money. And the economy registered a boost to GDP.
But if you paid for it with a credit card, the transaction may still be incomplete. You may still be paying interest on that burger. That means less money for you to spend … and less for others to earn. And this drag on the economy won’t go away until you’ve paid off the debt.
In monetary terms, the money supply expands when a credit-card loan is made. It contracts when it is repaid. Banks create money ex nihilo when they make loans. When repaid, the loan goes back whence it came.
As economies slow down it becomes harder and harder to keep up with the debt. More and more of current output must be used to satisfy past consumption. By way of comparison, the US government has 10 times as much debt-to-GDP as Russia. In this sense, the US has 10 times as much trouble in store, should it find itself in a debt squeeze.
But again, we await developments …
Escape from Aiken
We spent all day yesterday driving back home to Baltimore from Aiken, South Carolina.
“You’re not going to try to drive back,” said the clerk at the Willcox Hotel. “There’s a huge snowstorm coming. The whole East Coast is going to get hit hard. You won’t be able to make it. Better stay here another day.”
But we were getting a little restless … not that Aiken isn’t delightful and charming. But we had been there a week. Wife Elizabeth had won her blue and yellow ribbons for horse-riding. It was time to move on – snow or no snow. So we set off early in the morning … keeping an eye on the weather via our shiny new iPhone. It was sunny and warm in South Carolina; it was hard for us to believe the weather could be so much worse up the coast.
We dallied, taking small roads over to Columbia to get a better idea of the countryside. What we discovered was that it was poor. The earth was poor; in some areas there was barely any topsoil covering the white sand. People were poor too; many of them lived in dilapidated trailers or rustic shacks. Often, there were the husks of automobiles and trucks decorating their yards and gardens.
Almost as soon as we got on the highway the foul weather caught up to us: first a light rain… then a heavy rain… then a freezing rain… then, as we entered North Carolina, sleet … and finally snow. We kept up a tolerable pace. Our plan was to continue driving north as long as possible. If the snow became too heavy or the road too icy we would put in at a motel in Greensboro … or Durham … or, if we made it that far, Richmond.
The thing that bothered us was the geography of the route. There is a vast pine forest that envelopes Route 85 as it goes through North Carolina and Virginia. If the storm were to hit us hard there, we might not find a port to put into. Signs were warning travelers. Cars and trucks were returning home. The roads were becoming quieter and quieter.
A Strange Liberty
Still in a light snow, we set out from Durham hoping at least to reach Petersburg or Richmond before we got walloped. Our wheels (on a Ford F-150) do not have much traction unless the truck is loaded. Normally, it slips and slides readily. But the longer we kept chugging along, the more ice clung to the chassis and the heavier it got. Soon, the road was covered in snow and ice; but we just kept moving along without much trouble.
By the time we got to Richmond, it looked as though we had reached the end of our travels for that day. Traffic was still thin, but there were many accidents. Several cars had hit the guard rails … a few more had slid off the road … and one tractor-trailer, pulling what looked like a gasoline tank in tow, had jackknifed just south of the city.
But just when we began looking for a Super 8 motel, or a Sleepy Time Inn, the sky brightened enough to give us hope. Besides, our iPhone reported that the snow had stopped in Washington, DC. If we could just get clear of Richmond, we reasoned, it might be smooth sailing.
As it turned out, getting clear of Richmond was a long, slow slog … but it eventually worked out more or less as we had hoped. We arrived at the Washington Beltway at rush hour. But there was no rush. Federal employees had deserted their posts at the first snowflake. The Beltway was as empty as we’d ever seen it.
And with the cops busy with so many accidents in the area, we felt a strange liberty. What should we do? Rob a liquor store or just break the speed limit?
In the event, we hastened home …
Market Insight: Russia Remains a Bargain – Despite Fears of War
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
The Russian stock market is a bargain for long-term investors at 5.7 times reported earnings and a dividend yield of 3.4%. But not everyone sees it that way. Many see the political risk associated with Vladimir Putin’s leadership as simply too high, no matter how steep the discount on Russian stocks.
As Kim Iskyan, editor of Stansberry & Associates’ new Global Contrarian letter, put it:
“Putin has just proven wrong anyone who held out hope that the discount of Russian shares to the rest of the world might narrow. He just confirmed all the concerns about the high levels of political risk in Russia. If Putin can invade Ukraine, he can do pretty much anything … in any realm of the economy or markets or the government. He has just proven everyone’s worst nightmare.”
The thinking is that the Russian economy is in for dark times as a result of Putin’s incursion into Ukraine. We respectfully disagree…
First, Putin is de-escalating tensions with Ukraine. Reuters reports that he has ended the amassment of troops along Ukraine’s border. So, it’s by no means clear that Russia’s bloodless incursion into Crimea will turn into a shooting war.
Putin sent troops into South Ossetia, in the former Georgian Soviet Socialist Republic, six years ago. Those troops remain there today. No all-out war followed – although this was widely feared at the time.
And like in South Ossetia, it’s unlikely that Putin’s ambitions stretch farther than Crimea – where Russia has a large naval base… strong ethnic and historic ties… and where the newly appointed head of the local parliament had appealed to Moscow for protection following the regime change in Kiev.
Meanwhile, fears of sanctions against Russia… and its effects on the country’s energy exports … don’t stack up. Rob Marstrand, the chief investment strategist at Bill’s family wealth investment advisory, Bonner & Partners Family Office, recently got off a call with some of his contacts in Russia.
They reckon the risk of major economic sanctions is low. The US may try to impose sanctions if tensions continue to escalate. But the EU is unlikely to follow suit.
About one-third of the EU’s oil and gas supply comes from Russia. And Brussels knows that any sanctions would provoke serious retaliation from the Kremlin – something an already weak Europe can ill afford. In fact, Russia could benefit from tensions, as the price of oil rises…
If you already own shares in Russian companies, keep in mind that panic selling in a crisis is nearly always a bad idea. Russia remains a huge exporter of natural resources … has growing corporate profits … and much lower debt-to-GDP than most developed nations.
Its stock market remains one of the biggest bargains in the world today. Of course, you need to have a lot of physiological strength to buy when others around you are panicking. But that’s always the case when the stock market presents real bargains …
Russia's RTS Index, weekly. The recent events have led to a decline below lateral support (blue line), but the weekly candle shows a big rebound from the lows and what appears to be somewhat more dubious trendline support (in red) - click to enlarge.
A close-up, showing the daily chart of the RTS index. On November 21 last year, the protests in Kiev began. Obviously the Ukrainian upheaval has not been good for Russian stocks. The big red candle put in on Monday and Tuesday's large rebound are both tied to the situation in the Crimea – click to enlarge.
No comments:
Post a Comment