Tuesday, March 4, 2014

Political Gamesmanship Allows the Stock Market to Morph

By: Anthony_Cherniawski

A political chess game is being played between Putin and the West. Of course, this has sent the futures soaring, but not to new highs…yet. Of course nothing has changed on the ground in the Ukraine.

This gamesmanship has the ability to change the pattern of the markets, as well. Not everyone is confident that the Russians are really backing down. If the market fails to make a new high, then the pattern on the chart will be the correct one.

However, if the SPX makes a new high, then [y]-[x]-[z] becomes [y]. Yesterday’s low becomes [x] and there will be a new zigzag Wave [z]. That’s the nature of a zigzag. It can replicate itself again.

Today and tomorrow are both Pivot days, so it suggests that a new zigzag may be done by tomorrow.

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Kyrgyzstan: The Next Ukraine?

by Tyler Durden

Submitted by Baktybek Beshimov and Ryskeldi Satke via The Diplomat,

Kyrgyzstan was once known for its Tulip Revolution, a name the followed the trend of color-coded revolutions in Georgia and Ukraine. The ouster of the corrupt regime of President Askar Akayev in 2005 gave those Kyrgyz aspiring for a better future cause for hope, but expectations were quickly dampened. Akayev’s successor Kurmanbek Bakiyev suffered the same fate, with his removal from office in 2010.

The Kyrgyz Republic subsequently became the first ever parliamentarian state in Central Asia, normally a bastion of post-Soviet dictatorships. In this part of the world, presidents and their loyalists control politics, along with economic and financial assets. For Kyrgyzstan, the hope was that following two failed regimes in a decade, this novel rule by parliament and the peaceful transfer of power would break the ice of autocracy in Central Asia. Certainly the new leader of the republic—first as prime minister and then as fourth president—Almazbek Atambayev has spared no effort to convey his commitment to democracy.

Yet, like his predecessors, Atambayev has sought to extend his political power, strengthening control over lucrative businesses and persecuting his opponents. Overcoming the old authoritarian traditions has proven challenging. Today, factional infighting for power among the provincial clans and political regionalism continue to set the agenda for this small nation.

Mayoral elections in two major cities in Kyrgyzstan on January 15 have intensified the political divisions in the provinces, with evident hostility from the South toward the central authorities in Bishkek. Atambayev’s protégé stood as the only candidate for mayor of Kyrgyzstan’s capital Bishkek. Suspect elections in the southern city of Osh, where incumbent Melis Myrzakmatov lost despite being the strong frontrunner, only reignited brewing anger at a president who was widely believed to have been involved in hijacking the popular vote. Myrzakmatov’s supporters took to the streets of the city the same day to condemn the outcome. According to local reports, up to ten thousand people attended a demonstration in Osh on January 15. The ousted mayor called for restraint at the protest, urging his electorate base to prepare to use civil disobedience to protest the government. In a country known for electoral fraud, the elections have kicked off another round of political confrontation between the clans. Kyrgyz political factions often mobilize ordinary citizens to undermine government, in what Scott Radnitz called “weapons of the wealthy.”

Indeed, the North-South political divide has only widened in the years since the overthrow of the Bakiyev regime. The fractured nature of the Kyrgyz political field was one of the subjects of Atambayev’s speech in December 2011, when the Kyrgyz leader pledged to bridge the differences. Yet the dubious outcome of the Osh elections suggested he has made little progress on that front.

Protests in Kyrgyzstan are commonplace, with 782 in 2013 alone, a staggering number for a tiny republic. But the most volatile part of the country remains the South, where large-scale ethnic conflict exploded in the summer of 2010. In contrast to the North, the poverty-stricken provinces of Osh, Jalal-Abad and Batken are highly dependent on the cross-border trade with neighboring Uzbekistan and Tajikistan. One of the biggest markets in Central Asia is the Kara-Suu bazaar located near the city of Osh, in the Ferghana Valley. According to an OSCE report from 2011, trade between these southern provinces and neighboring states including China plays a major role in the social and economic development of the volatile Ferghana Valley region. Nonetheless, Kyrgyz Ministry of Labor, Migration and Youth statistics for 2012 show that unemployment in Kyrgyzstan is highest in the South. The central authorities in Bishkek and Atambayev have played little role in the politics or social development of the region, where disregard for central government is widespread.

Nevertheless, it would be inaccurate to blame the country’s struggles entirely on old Kyrgyz political traditions. The current political chaos is also an outcome of the Kyrgyz leadership’s policies. Atambayev is the most pro-Kremlin figure among Central Asia’s leaders today. At his personal initiative, Russia has monopolized the Kyrgyz Republic’s energy, defense and transportation industries. The entire national gas supply system (admittedly debt burdened) was sold to Russia’s giant Gazprom for $1 dollar. RusHydro took the lion’s share of the Kyrgyz hydro energy company, and Rosneft is in the process of acquiring more than fifty percent of Manas International Airport, which had been leased by the U.S. and NATO member states after 9/11. Atambayev took a step further when he extended the Russian military airbase presence, hoping to rearm Kyrgyzstan’s military with the help of Russian President Vladimir Putin. This appeared to be more an act of despair than a carefully defined strategy. Consequently, Kyrgyzstan failed to reform its judiciary system, where anti-corruption campaigns mired in constant controversy add to government dysfunction. The Kyrgyz Republic’s desperate economy has low export capacity, lacks foreign investment and depends on remittances from migrant labor working in Russia. With bleak economic prospects, Atambayev has accelerated Kyrgyzstan’s shift towards Russia to secure his own political future. This has left him walking a fine line between the sovereign interests of Kyrgyzstan and the neo-imperial policy of the Kremlin.

Ultimately,  the Kyrgyz Republic’s transformation into a Russian client state and military bulwark is bad news for Uzbekistan and Kazakhstan. Not surprisingly, Kazakh leader Nursultan Nazarbayev has openly expressed his opposition to Kyrgyzstan’s joining the Customs Union, with its special privileges and concessions. The Uzbek president added that the unequal distribution of the water resources of Central Asia could spark conflict, specifically over Russian joint hydro energy projects planned in upstream states, Kyrgyzstan and Tajikistan.

Naturally, all these external grudges have engendered domestic discontent. What has taken place in the Ukraine may perhaps embolden factions of the Kyrgyz opposition to move against Atambayev and what they see as his excessively pro-Russia policy. However, given Moscow’s extensive historical influence in Kyrgyzstan and the large presence of Kyrgyz laborers in Russia, support for a shift away from Russia does not seem widespread. More likely, the next regime change in Kyrgyzstan will be the result of a factional split and regional divisions.

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It Begins: Gazprom Warns European Gas "Supply Disruptions" Possible

by Tyler Durden

We had previously warned that Putin's "trump card" had yet to be played and with Obama (and a quickly dropping list of allies) preparing economic sanctions (given their limited escalation options otherwise), it was only a matter of time before the pressure was once again applied from the Russian side. As ITAR-TASS reports, Russia's Gazprom warned that not only could it cancel its "supply discount" as Ukraine's overdue payments reached $1.5 billion but that "simmering political tensions in Ukraine, that are aggravated by inadequate economic conditions, may cause disruptions of gas supplies to Europe." And with that one sentence, Europe will awaken to grave concerns over Russia's next steps should sanctions be applied.

It would appear this is the most important map in Europe once again...

Some recent history...

In late January, Ukraine asked Russia for deferral of payments for gas supplied in 2013 and in early 2014. President Vladimir Putin said Ukraine’s debt totalled $2.7 billion then.

and then...

On March 1, Gazprom’s spokesperson Sergai Kupriyanov said the gas holding could cancel its gas supply discount for Ukraine as its overdue debt for gas reached $1.5 billion. This figure includes debts not only for last year’s supplies, but also for the current deliveries.

"The situation with payments is worrying," said Andrei Kruglov, Gazprom's chief financial officer.

"Ukraine is paying but not as well as we would like it to. We are still thinking about whether to extend the pricing contract into the next quarter based on current prices."

And now today...

Russia’s gas giant Gazprom said on Monday it did not rule out possible disruptions of gas supplies to Europe over Ukraine’s political situation.

Simmering political tensions in Ukraine, that are aggravated by inadequate economic conditions, may cause disruptions of gas supplies to Europe,” the monopoly said in its materials, adding that it would do its utmost to reduce export risks.

“We will further invest into other export-oriented projects such as South Stream and will enhance our LNG (liquefied natural gas) production and export capacity. We also increase our access to underground gas storage facilities in Europe.”

Andrei Kruglov, Gazprom’s chief financial officer, said at the moment Russia had been supplying gas to Ukraine according to schedule, although the latter failed to fulfil its debt obligations.

With that last sentence providing exactly the 'real world' cover Gazprom needs to cut its supplies "through" Ukraine and thus to Europe...

And, as The Guardian notes, this would...

not the first time Russia has used gas exports to put pressure on its neighbour – and "gas wars" between the two countries tend to be felt far beyond their borders. Russia, after all, still supplies around 30% of Europe's gas.

In late 2005, Gazprom said it planned to hike the price it charged Ukraine for natural gas from $50 per 1,000 cubic metres, to $230. The company, so important to Russia that it used to be a ministry and was once headed by the former president (and current prime minister) Dmitry Medvedev, said it simply wanted a fair market price; the move had nothing to do with Ukraine's increasingly strong ties with the European Union and Nato. Kiev, unsurprisingly, said it would not pay, and on 1 January 2006 – the two countries having spectacularly failed to reach an agreement – Gazprom turned off the taps.

The impact was immediate – and not just in Ukraine. The country is crossed by a network of Soviet-era pipelines that carry Russian natural gas to many European Union member states and beyond; more than a quarter of the EU's total gas needs were met by Russian gas, and some 80% of it came via Ukrainian pipelines. Austria, France, Germany, Hungary, Italy and Poland soon reported gas pressure in their own pipelines was down by as much as 30%.

Short of an actual war, the consensus appeared to be, Europe's gas supplies are unlikely to be seriously threatened (since Putin relies on those revenues)... that is clearly about to change with Gazprom's comments.

As the following image from Agence France Presse (created at the end of last year) indicates, things are about to get a lot more problemati for Germany, France, and Italy...

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Is crude waving the white flag?

By Gregor Horvat

OIL Elliott Wave Analysis: Crude OIL

Crude oil reversed sharply to the downside at the end of 2013, clearly in impulsive fashion from $112 so we think it represents first leg within wave (C). As such, crude oil should continue lower this year, but after a completed sub-wave 2) that is still unfolding. A break of the trendline from $77 should be a catalyst for acceleration down to the $ 65 to $70 area.

OIL Weekly Elliott Wave Analysis

Crude Oil Daily

Crude oil has reversed nicely to the upside in the last couple of weeks from the $91 low, clearly in an impulsive fashion so we suspect that prices are in a corrective reversal of wave 2). As such, current rally is temporary, but needs to be made in three legs, ideally with a three wave retracement for 61.8% compared to previous five waves down. We see prices now at the end of wave A with so be aware of a wave B pullback in the second part of February.

OIL Daily Elliott Wave Analysis

Crude Oil Four-hour

As expected, crude oil broke to a new high above $101 after recent slow and sideways price action, which we think was wave (iv) as highlighted last week. As such, current move higher is most likely wave (v), final leg within wave A that may be looking for a top in this week around $105.00. With that said, traders should now be aware of approaching corrective reversal.

OIL four-hour Elliott Wave Analysis

Crude Oil One-hour

Crude Oil reached a new high, so we have to be aware of a possible reversal in price as rally from $101 can be counted in five waves, so wave (v) can be near completion. Move beneath 103.68 will confirm a reversal.

OIL one-hour Elliott Wave Analysis

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Ukraine: Follow the Energy

by Charles Hugh Smith

Scrape away the media sensationalism and geopolitical posturing and it boils down to a simple dynamic: follow the energy.

Though many seem to believe that internal politics and geopolitical posturing in Ukraine are definitive dynamics, I tend to think the one that really counts is energy: not only who has it and who needs it, but where the consumers can get it from.
Let's cut to the chase and declare a partition along long-standing linguistic and loyalty lines a done deal. Let's also dispense with any notions that either side can impose a military solution in the other's territory.
Media reports on the weakness of Ukrainian military forces abound (for example, Ukraine Finds Its Forces Are Ill Equipped to Take Crimea Back From Russia), but Russia's ability to project power and hold territory isn't so hot, either.
A knowledgeable correspondent submitted these observations:

RE: Russian Army. Effective draft evasion is running 80%. Morale is low, training is very poor and poorly funded. The Russian army has also gone through 22 years of near continuous contraction.
And this standing army has heavy commitments in the Caucasus and Far East Siberia. Moreover, at least half of these Russian ground troops are short term 12 month conscripts. I don't think these kids will produce many usable and motivated troops. The low morale recently seen in the Ukrainian Berkut and other police will be multiplied by at least 10x.
Russian speaking Ukrainian bands are rumored to already be crossing the borders into Russia territory. They're to be ready to sabotage bridges and infrastructure and generally retaliate. Fluent Russian speakers with many years experience of living in Russia. Who can say for sure if this has already happened or is just being threatened? We can say this is a very real danger. These people look just like "Russians."
And we can also say this threat will seriously complicate Russian rear area security and logistics. And speaking of logistics, the distances in south Ossetia and Abkhazia were very short and the populations were entirely friendly. Neither condition prevails in the Ukraine outside the Crimea.
Supplying moving armored units over hundreds of miles of occupied country is very difficult logistically. The logistics for air assault helicopter units are just as bad. These helo units look mobile but they're a lot like a yoyo being twirled around your head on the string. They only go fast within a fixed radius anchored by logistics that are about as heavy to move as an armored division's supply columns. That is years in the 101st Airborne Division talking. The fuel consumption rates are immense. Stuff starts breaking down fast.
Conclusion: a de facto partition is already baked in because neither side can force a re-unification. Various jockeying and posturing will undoubtedly continue for some time, but the basic end-game is already visible: de facto partition.
Let's move on to correspondent A.C.'s observations about energy.
This map rounds out the European energy Rosetta Stone. When they hear that Italian fighter jets are over Tripoli, or that the French Foreign Legion has returned to the deep Sahara Desert, they can can better understand the reasons and real objectives of such operations.

Many have noted that the Russia economy is critically dependent on oil and gas exports to the EU. It should be noted that the converse is less true every day about EU dependence on Russian oil and gas. The Wall Street Journaleven had a line about an EU proposal to push natural gas EAST to the Ukraine. It's hard to understand that passage or where the natural gas could come from unless one understands the North Africa to southern Europe gas pipelines.
The factors bringing the conflict in Ukraine to a head are:
1. The natural gas discoveries in eastern Poland and western Ukraine played the largest role.
2. The reduced importance of the gas pipeline running through the Ukraine to Europe as compared to 2009. Since that time the Nordstream lines have been finished and Gazprom acquired commercial control of the Belarus pipeline. The South Stream lines are well along in development.
3. Fast developing liquid natural gas (LNG) seaport terminal infrastructure.
Events in Libya, Mali and Algeria are not hermetically isolated from this. They are part of a comprehensive energy policy problem being dealt with by the same leaderships. It increasingly looks like a series of peripheral Energy Wars that are being fought out for control of Europe.
LNG exports are going to become a weapon in the struggle for geopolitical influence and control.
This highlights another problem for Russia/Gazprom. Its present natural gas advantage in Europe now rests mainly on its pipeline infrastructure. This advantage is fading due to the current and proposed pipeline projects running through Turkey to Europe, plus LPG terminal & ship developments, plus the five trans-Mediterranean pipelines from Libya, Algeria and Morocco to southern Europe, plus local shale gas plays...
The Ukraine is not the only country becoming less systemically important to Europe for natural gas supply. So is Russia. Current events will only accelerate everyone's efforts to diversify away from such an unstable and apparently dangerous supplier.
I think the long-term fallout from the Ukrainian Crisis will be similar to China's attempt to exploit its temporary low price monopoly position in rare earth metals a few years ago. The result is rare earth metals are becoming less rare by the day as alternate mines outside China are opened and reopened.

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Corn, wheat, soybean markets reach to tension in Ukraine

By Allendale Inc.

Corn: Corn continued to rally Monday, supported by the ongoing conflict in the Ukraine. The May contract settled at 470-1/2, up 7 cents. Russia continued to flex its muscles, threatening to seize Ukraine’s warships in Crimea. They later claimed to make no such threat. It seems evident that this is more a media driven political event that, when all is said and done, will not result in a major military conflict.

Ukraine has shipped 14.2 million tonnes of corn out of USDA’s estimated 18.5 million total exports through the end of February. Any talk of port delays due to this conflict seems unfounded at this point. We will continue monitor events as they unfold.

It should be noted that we have hit our target price for the upside in corn and have now turned to a neutral to bearish bias. At this point, making sales or getting more price protection in place is not to be discouraged…Scott Donarski

Soybeans: The bean markets had another volatile day to begin the week’s trading. Three of the last four Sunday/Monday nights have been launching pads to the upside and after Sunday night, you could say four out of five of the last Sunday/Monday have been launching pads for the bulls.

With the events in the Ukraine taking a turn for the worse over the weekend, shorts in the market ran for cover when the market opened Sunday night. Later in the day session, the bean rally faded and eventually went negative on the day. Trade action suggests that funds were liquidating their soybean and meal position and buying corn and wheat.

With the Ukraine being the number three world corn exporter and the number six wheat exporter, it seems someone wanted to book bean and meal profits and put money on wheat and corn to go higher. For the day, funds bought an estimated 20,000 contracts of corn, 18,000 contracts of wheat and sold 5,000 contacts of beans…Jim McCormick

Wheat: Wheat finished the day higher but well off the highs we saw earlier in the trading session. We mentioned the Ukraine unrest as a reason to see some shorts cover their wheat positions, but with the recent escalation of the situation in Crimea we would have to suspect additional short covering may be seen.

The Ukrainian government only has about 2.7 million tonnes of additional wheat to export as part of this year’s export program. There may be a concern about wheat acres in the ground but right now it doesn’t appear that Russia is going to advance much beyond their current hold of the Crimea Peninsula.

The major rejection from the highs we saw today on big volume could actually spell trouble for the markets as we are also looking at a gap on the chart below this most recent move. The Ukrainian government has also announced they are going to continue moving wheat even with this recent confrontation with Russia. With a new government in place and with little available money in the country, the best way to generate some capital is with exports so this may actually promote additional sales. It doesn’t appear this situation is going to slow down the Russian export of wheat through the Black Sea either…Cordon Sroka

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A Century of Policy Mistakes

By Niels Jensen

There are four types of countries: the developed, the underdeveloped, Japan and Argentina.”

- Simon Kuznets, Nobel Laureate

When Archduke Franz Ferdinand and his wife Sophie were assassinated in June 1914 whilst visiting the city of Sarajevo, little did the people of Argentina realise what would follow. Not only did it mean four years of death and devastation in Europe but, for the good people of the Pampas and beyond, it would also mark the beginning of a very long slide from riches to rags.

It is not my intention to pick on Argentina; however it represents a unique opportunity to analyse and understand the long-term consequences of policy mistakes. In the case of Argentina, the fact that the ruling classes were kleptocrats didn’t exactly make the situation any better.

Don’t cry for me Argentina

Now, before you accuse me of having converted to the philosophy of Karl Marx, consider the following: A century ago Argentina ranked as one of the wealthiest countries in world, behind the United States, the United Kingdom and Australia but ahead of countries such as France, Germany and Italy. Its per capita income was 92% of the G16 average; it is 43% today. Life in Argentina was good. It enjoyed the benefits of one of the highest growth rates in the world and attracted immigrants left, right and centre. Boom times galore.

Argentina’s wealth was based on agriculture, but also on its strong ties with the UK, the pre-World War I global powerhouse. Equally importantly, it understood the importance of free trade and took advantage of the relatively open markets which prevailed in the years leading to the Great War. Most importantly, though, it benefitted from, but also relied upon, enormous inflows of capital from the rest of the world. All of this is well documented in a recent piece in The Economist which you can find here.

However, World War I changed all of that. The British Empire began to lose its gloss during the period that followed. The depression of the early 1930s effectively put an end to the free trade system which Argentina relied so much on and, critically, foreign investments dried up. These factors alone do not fully explain Argentina’s demise, though. The misery was amplified by a series of policy mistakes. At the most basic level, it failed to educate its children. For a country of such wealth, it is an embarrassing fact that it had a much lower literacy rate than its peers. The land owners provided primary education but little or nothing beyond that. They had no real interest in doing so, and the government did nothing to change it.

In the post war years, as the rest of the world reduced its reliance on commodities and became more and more industrialised, Argentina got stuck in the old system. Having failed miserably to use its wealth to develop other industries, its over-reliance on commodities eventually caught up with them. Furthermore, post-World War II, as the rest of the world began to open its borders again, under the leadership of Peron, Argentina chose to go the other way and became more and more closed. A succession of military coups beginning in 1930 didn’t really help its course either.

More recently, decisions seemingly designed to please the uninformed, but having the effect of peeing off the rest of the world (such as the decision to boot Repsol out of the country), haven’t exactly done their standing in the international community any good either. All in all a fairly capacious catalogue of policy mistakes. No wonder foreign investors are not lining up to invest in the country today.

Enough about Argentina. After all, I will be going there for the very first time a few short weeks from now, and I don’t want to be turned away at the border!  Sitting here in the relatively cosy surroundings of Southern England (if it weren’t for the flooding), it is tempting to conclude that we are smart enough to avoid the sorts of problems that have dragged Argentina down over the past century. At the same time, that is probably the most uneducated, and certainly the most dangerous, conclusion to reach. Time and again we have seen our political leaders demonstrate that they have spines no stronger than that of boiled spaghetti. Business partner and good friend John Mauldin often jokes that politicians are like teenagers. They opt for the easy solutions until there is no other way out. Only when their backs are firmly nailed against the wall, will they make the difficult choices. Sadly he is spot on.

The challenges facing Europe

Here in Europe we face at least two massive challenges over the next decade or two, and how they are handled will probably determine the welfare path in our part of the world for many, many years to come. At the moment our political leaders largely ignore both of them.

At the most basic level, economic growth is driven by population growth and improvements in productivity – i.e. how many people are there in the workforce and how much can they produce? Simple as that. Whilst productivity can, and does, vary modestly, the size of the workforce can be predicted many years out with only limited uncertainty. It is therefore possible to establish relatively precise long-term growth expectations based on demographic models. That is precisely what our friends at Research Affiliates have done (chart 1).

The picture is worrying to say the least. Most countries will be facing significant headwinds from demographic forces in the decades to come. Now, as many people ask me when I bring up this issue, why is economic growth so important? Couldn’t we all live happily in a low – even zero – growth environment? After all, isn’t Switzerland a prime example that you don’t need much economic growth to stay rich? (Switzerland has enjoyed one of the lowest growth rates in the world over the past couple of decades, yet it is one of the most prosperous.)

I have several problems with that argument, the first one being how expectations are managed by the political leadership. Precisely because the political establishment is a profession dominated by moral pygmies and mental midgets (Bertrand Russell’s words, not mine), policy makers won’t have the nerve to tell the truth, meaning that the current climate of debt financed consumption – whether in the private or public sector – could quite conceivably continue until it collapses under its own weight. As pointed out in a somewhat more diplomatic tone by the authors of the Research Affiliates paper:

“If we expect our policy elite to deliver implausible growth, in an environment in which a demographic tailwind has become a demographic headwind, they will deliver temporary outsized “growth” with debt-financed consumption (deficit spending). If we resist the necessary policy changes that can moderate these headwinds, we risk magnifying their impact.”

Chart 1:  Forecasts of Economic Growth Based on Demographic Forces


Source: Research Affiliates, Mind the (Expectations) Gap, June 2013.

The second issue I have with the Switzerland argument has to do with the absolute level of debt which continues to rise despite all the talk about austerity. In simple terms, the higher the overall level of debt, the more economic growth one needs to service that debt. The debt trajectory in some of the largest countries in the world is nothing short of frightening, yet we continue to pile on more debt (chart 2). The projections provided by the Bank for International Settlements are quite obviously meant as a stark warning to politicians around the world. Do nothing and this is what will happen. You should be aware that the projected rise is a function of changing demographics; more specifically the result of the entitlement programmes that are currently in place. An end to the crisis environment we have been in since 2008 will not change the path, only the steepness of the curve.

Chart 2:  Long-Term Sovereign Debt Projections


Source: Bank for International Settlements

It is pretty obvious that something will have to give. Otherwise we will end up in a situation where only a modest rise in interest rates could destroy entire countries. So, when Switzerland has been able to maintain its high living standards despite it sub-par growth path, it is at least partly down to the fact that the country, unlike most, is not heavily indebted.

The third reason Switzerland is a poor proxy for the rest Europe is the massive difference in youth unemployment. Whereas in Switzerland it is hovering around 8%, youth unemployment in the Eurozone is now 25%. Even though I have some issues with how the EU calculates youth unemployment (they back out students from the overall youth population which has the effect of dramatically reducing the denominator) there is no denying that Europe is facing an unemployment crisis of gigantic proportions.

We are at great risk of losing an entire generation of people to permanent unemployment which is nothing short of tragic. Rapid economic growth (in the range of 3-5% per annum) over an extended period of time would probably be required to bring most of these people back into the workforce but, for the reasons outlined earlier, it simply isn’t going to happen; however, that should never be used as an excuse to do nothing.

There are solutions

The single most potent pro-growth policy tool is deregulation. Deregulation of labour markets first and foremost but also of products markets, in particular across borders. Policy makers in North Carolina removed long-term unemployment benefits last summer. Since then the rate of unemployment has plummeted from over 11% to less than 7% (chart 3). Obviously the downward path has benefitted from an overall decline in U.S. unemployment and probably also from many people dropping out of the workforce altogether as a consequence of the loss of benefits, but the effect has been significant nevertheless.

Chart 3:  Unemployment in North Carolina less National Average


Source: http://www.businessinsider.com/north-carolina-unemployment-rate-2014-1

Infrastructure spending is another powerful tool and one which I have written about in the past. If we accept that we cannot eliminate public deficits from one day to the next without creating a deep recession, we should at least aim to spend the money on infrastructure projects where the return on invested capital is measured in future economic growth and not in number of votes at the next parliamentary elections.

At the moment, policy makers seem to have forgotten that there is more than one knob to turn on the control panel. To quote the brilliant Woody Brock who is kind enough to share his insights with us and our clients:

“Monetary policy on its own will not and cannot achieve these long-overdue goals. Repeat: Fed Watchers go jump in the lake!”


This month’s Absolute Return Letter is a short one by my standards. I have delivered the key message. No reason to go on for much longer. Unless serious action is taken, Europe in particular (but the U.S. is not far behind) is at risk of falling into a very deep hole from which it may be extraordinarily difficult to dig itself out of. Once in, it will prove ever so hard to get out again. That is one of the key lessons learned from Argentina, even if the nature of Europe’s problems is different from those of Argentina.

Let me round this month’s letter off with a couple of investment implications:

There appears to be a widespread belief amongst investors that wealth creation (here measured as GDP growth per capita) and equity returns are highly correlated. In other words, invest in those countries with the highest GDP per capita growth, and you will achieve the most attractive returns. After all, it would be a perfectly logical conclusion to arrive at. In reality, nothing could be further from the truth. Over the long term the two have actually been negatively correlated (chart 4). It could therefore prove to be a costly mistake to exclude Europe from a global equity portfolio just because you have (valid) reasons to believe that growth – and thus wealth – will stagnate in the years to come.

Chart 4:  Real Equity Returns & Per Capital GDP, 1900-2013


Source: Credit Suisse, Global Investment Returns Yearbook 2014

Secondly, when it comes to managing a debt crisis of sorts, currency issuers have a significant advantage over currency users. The latter have to go outside their own country to fund their deficit, hence the risk of default if they can’t access international markets (usually the result of mis-management). Currency issuers, on the other hand, can issue unlimited amounts of IOUs in their own currency and may, as a result, avoid overt default in perpetuity. This distinction is highly significant, given the elevated levels of debt at present.

As sovereign debt continues to grow in many countries, should interest rates begin to rise, servicing the debt would take a bigger and bigger toll on public budgets. It is therefore reasonable to expect governments to collude with central banks to try and keep interest rates under control in the years to come. Now, investors are not stupid. They will look to get paid for the added risk they take, either explicitly or implicitly. If interest rates are perceived to be grossly manipulated, market mechanisms will ensure that investors will instead turn their attention to exchange rates to seek the necessary adjustments. Consequently, we expect currency markets to take the brunt of the adjustments that will have to happen over the next several years as it becomes increasingly clear who is in the ‘deep hole’ and who is not.

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High soybean prices may be storing up trouble

by Agrimoney.com

The soybean market may be storing up trouble for itself.

Agrimoney.com cautioned investors two weeks ago, as soybean prices were falling, against expecting weakness to continue.

Now, as prices hit multi-month highs, the website is warning investors to avoid believing that high prices will stick around for ever either.

Paranagua roulette

This feeling of vertigo does not surround so much the front contracts which are making the biggest waves.

The best-traded May contract, which set a seven-month high on Thursday, is certainly looking expensive, up more than 12% for February.

But that could be warranted given the resilience of US exports in the face of cheaper South American supplies.

It looks like buyers are importers to pay a premium for certainty of deliveries from the US rather than the playing Paranagua roulette – taking a risk on whether competitively-priced Brazilian supplies will negotiate the pitfalls and potholes of the country's transport system to arrive in time.

The rally may extend until imports become a realistic option, encouraged by the east coast US livestock producers which have rarely been shy of publicising large discounts in foreign supplies.

Sowing signals

The real discomfort is the height at which new crop soybeans are trading.

November 2014 soybean futures are up nearly 7% this month, hitting a five-month high on Thursday, sending a strong signal to US producers to sow the oilseed this spring.

Indeed, at a historically-high ratio of 2.53: 1 compared with the price of December corn futures, they are telling farmers to ditch the grain in favour of soybeans.

But when it comes to harvest this autumn, the market could look very different from today's.

Not going away…

Sure, Brazil's soybean supplies may not be currently proving as popular as investors had thought.

And there may not be quite as many of them as the 90m tonnes or so investors had thought. Current estimates are some 3m-5m tonnes less, after damage to crops from too much rain, or too little.

But they will hit the market some time. Brazil will still leave some 40m tonnes to sell - even if that means getting them to port before signing up buyers, and leaving deals until later in the calendar year.

Furthermore, Argentine farmers may start selling up later this year too. They have hoarded stacks of soybeans from last year, perhaps 7m tonnes, as a dollar-denominated hedge against a falling peso. The US Department of Agriculture sees overall Argentine soybean stocks rising 37% over 2013-14.

Hoarded crops are going to make quite a splash when they do make it to market, on top of the 53m-54m tonnes Argentine growers are seen as about to harvest.

Upside vs downside

It is not obvious that the need for US soybeans is as strong as the market is suggesting.

Producers would be wise to price some crop.

Sure, the return of front Chicago futures contracts above $14 a bushel highlights the upside to values from the $11.78 a bushel that November futures are trading at.

But the US Department of Agriculture's projection of prices averaging $9.65 a bushel next year highlights the downside too.

See the original article >>

Funds, stocks 'surprise' may give sugar extra lift

by Agrimoney.com

The rally in sugar prices, spurred by Brazil's drought, could gain some further support from hedge fund buying, and the discovery that inventories are not as large as had been thought.

Raw sugar futures on Monday rebounded from pre-weekend selling, closing up 0.8% at 17.80 cents a pound in New York for May delivery.

The gains came as Sucden Financial said that, given the fears over the extent of damage to the cane crop in Brazil's Centre South from drought, hedge funds may yet continue the bullish swing in positioning which has turned them net long on raw sugar for the first time since before Christmas.

Last month, managed money turned from a net short position in raw sugar futures and options of 58,657 contracts to a net long of 21,818 lots, data from the Commodity Futures Trading Commission, the US regulator, show.

Given "uncertain" weather prospects in Brazil's Centre South, responsible for some 90% of domestic output, "and the expected reworking of cane figures for the up-coming harvest, and a potential delay to the start of crushing activity, it could be argued that the speculative community has more buying to come", Sucden said.

Hedge funds held a net long in raw sugar of more than 200,000 contracts as recently as October.

'Don't trust consumption estimates'

Separately, London broker Marex Spectron raised the prospect that ideas of huge inventories of sugar, which had been weighing down prices until concerns over Brazil's dryness kicked in in earnest a month ago, may prove to have been exaggerated.

"If the world has produced more than it has consumed, that extra sugar goes to stock somewhere," the broker said.

"But since we don't trust consumption estimates, we do not trust stock levels."

After four years of production surplus, there has been "plenty of time" for "unintended" sugar stocks "to begin to melt away", Marex said, adding that this may be occurring in India, which will, after encouraging exports, "probably will not have excessive stocks at the end of this season".

'Stuck for longer'

The conclusion from this view was that "world consumption has been underestimated to some extent", with supplies also sapped by an increase of supplies in the so-called "pipeline".

"International trade has grown substantially in the last decades. Therefore more sugar is stuck for longer than in the past."

Observations that investors may have underestimated consumption have also been made by the likes of Czarnikow, the London-based sugar merchant.

However, Marex acknowledged that there were still "plenty of sugar stocks" in the likes of China, the European Union and the US, on paper "more than sufficient to compensate for any foreseeable production problem in Centre South Brazil.

"But some of these stocks will only become available if prices, and/or spreads [between near and more distant futures contracts], rise considerably."

The conclusion for prices was to "trust the range - but that range has moved up a notch".

See the original article >>

Soymeal, China drive DDGs to record premium over corn

by Agrimoney.com

A twin boost from elevated prices of soymeal and a quirk of Chinese import levies is driving prices of distillers' grains to record premia above corn.

Distillers' dried grains, or DDGs, are selling for March in US Gulf export market at $325 a tonne, the highest in the spot market in nearly a year, according to the US Grains Council.

The increase contrasts with a sharp drop, of nearly one-quarter, in corn export prices over the last 12 months to $220.17 a tonne for March.

The dynamics have turned a feed ingredient regarded initially as a little-regarded byproduct of making corn from ethanol, sold originally to livestock farmers at bargain prices, into a key part of biofuel production margins.

DDGs vs soymeal

The relative resilience in prices of DDGs reflects in part its status as a substitute protein source in feed to soymeal.

"It is not the greatest protein source in the world," at 20-25%, compared with levels above 40% for soymeal, said Jerry Gidel, chief feed grains analyst at Chicago-based Rice Dairy.

"But it is certainly not a bad one, and worth considering in these kind of markets," which have in the last two years seen spot soymeal futures make only fleeting forays below $400 a short ton ($441 a tonne).

"Given its high nutritional value and often competitive pricing, feeding of DDG can sometimes result in significant cost savings for livestock producers," the International Grains Council said, flagging its use in particular by dairy and beef farms, which account for as much as 85% of consumption.

Container factor

Demand is being further boosted by Chinese buyers, who use it largely as an alternative to corn, in hog and poultry feed, rather than for ruminants, thanks to pricing benefits afforded by a relatively low import taxation rate.

DDGs, while subject to a 5% import tariff, are exempt from the 13% VAT applied to both corn and soymeal buy-ins, and are not regulated either by a tariff rate quota system.

"Even for Chinese buyers who can get import quota for corn, it is given only in small amounts, meaning a lot of buyers have to band together to get a cargo's worth," IGC economist Nathan Kemp told Agrimoney.com.

Indeed, an extra advantage of DDGs is that it is backhauled to Asia in shipping containers empty after being used to carry exports to the US, so cutting transport costs.

"I have tried and failed to find out how much is carried in containers, but I'll bet it is over 90%," Mr Gidel said.

'Relatively little disruption'

Furthermore, "being in containers mean you can easily get it to the small guy away from port," he said, adding that it may be an advantage in bypassing China's restrictions on imports of crops containing traces of genetically modified varieties.

China on Friday issued a reminder of these by estimating at 887,000 tonnes it rejections of corn since November.

"It is that much more difficult to test DDGs in containers which may be scattered all over the place than a single boat in the docks," Mr Gidel said.

The IGC said: "While China's authorities have rejected a few cargoes due to the presence of an unauthorised GM trait, there has been relatively little disruption to DDG trade, with customs data showing an acceleration of imports in January."

'Potentially less desirable'

Exports of DDGs from the US, by far the biggest producer and exporter, to China reached 2.20m tonnes in the September-to-December period, up 325% year on year, and more than shipments to the rest of the world put together.

However, while this is all good news for ethanol plants – for which the grains offer not just a financial lift but a political benefit, in boosting their case as suppliers to the food chain as well as the biofuels industry – there is a risk that they might try to exploit their unexpected DDG windfall a bit too much.

"Almost all US ethanol producers are now extracting non-food grade maize oil, mostly for use in biodiesel production," from corn residues left over after making ethanol, the IGC said.

However, the oil extraction process "changes the feeding characteristics" of these leftovers, cutting the energy content in the resultant DDGs.

"While studies have shown that low-oil DDG remains a useful ingredient, some buyers have expressed concerns that its lower fat content makes it potentially less desirable for feeding monogastrics, such as hogs and poultry."

See the original article >>

Russia and the Crimea

by Pater Tenebrarum

Newly Appointed Chief of Ukrainian Navy and Other Military Leaders Defect to Crimea

The new government in Kiev quickly disbanded the former riot police Berkut, as well as firing all top Ukrainian military commanders in an attempt to install commanders held to be more likely to obey its orders. In an ironic twist, the new commander-in-chief of the Ukrainian navy, rear admiral Denis Berezovsky – appointed by interim president Turchynov only on Saturday in order to replace Yuri Ilyin – decided to defect to the autonomous Republic of Crimea a mere two days after his appointment. A good chunk of the Ukrainian navy seems to have defected with him. Precise figures are not available, but European TV stations reported on Tuesday morning that only two vessels in Crimean ports still declared their allegiance to Kiev.

According to press reports:

“Admiral Berezovsky appeared in Sevastopol before cameras alongside Sergiy Aksyonov, the pro-Russian politician elected by Crimea's regional parliament as local prime minister.

Mr Aksyonov announced he had given orders to Ukrainian naval forces on the peninsula to disregard any orders from the "self-proclaimed" authorities in Kiev.

Sunday, he said, would go down in history as the birthday of the "navy of the autonomous republic of Crimea". The admiral then pledged to "strictly obey the orders of the supreme commander of the autonomous republic of Crimea" and "defend the lives and freedom" of Crimea's people.

Admiral Berezovsky was later sacked by interim Ukrainian Defence Minister Ihor Tenyukh and a treason case launched against him.”

(emphasis added)

Later on it became known that numerous high-ranking officers and leaders of security forces in the Crimea followed Berezovsky's lead and defected as well, along with most of the Ukrainian soldiers stationed in the Crimea. The prominent defectors aside from Berezovsky were the head of the Security Service of Crimea Petyor Zima, Chief of Department of Internal Affairs in the Crimea Sergey Abisov, the head of Service for Emergency Situations Sergei Shakhov and acting Chief of the Border Guards of Crimea Victor Melnichenko, all of whom took an oath in the Crimean Council of Ministers chamber, swearing allegiance to the government of the Crimea.

Here is an excerpt from a Russian press report about the defection of common troops:

Today the majority of the Ukrainian armed forces deployed in Crimea passed to the side of the authorities of the Crimean autonomous region. The transition was absolutely peaceful, without a single shot fired either by the military or by the forces of self-defense,” an unnamed source told RIA Novosti news agency.”

(emphasis added)

If you are under the impression that the people in the Crimea are unhappy about the new leadership in Kiev, you are correct. They certainly are. From Russia's point of view the bone of contention is Sevastopol, the port harboring its Black Sea fleet. Russia first annexed the Crimea in the late 18th century in the course of its many wars against the Ottoman Empire (there were 13 such wars beginning with the conquest of the Astrakhan Khanate by Ivan the Terrible in 1556. As a friend of ours pointed out, Russia was always seen as the protector of Slavs against the Ottomans, and that was indeed a major motive of its many wars with the expansionist Ottoman Empire – note that Ottoman leaders regarded it as their sacred duty to expand the empire).

Still image taken from video shows Ukrainian navy chief Berezovsky swearing allegiance to the pro-Russian regional leaders of Crimea in Sevastopol

Rear admiral Berezovsky pledging allegiance to the Crimea two days after having been nominated commander-in-chief of the Ukrainian navy.

(Photo via Reuters / Author unknown)

Crimean History

The Crimea only became a Ukrainian region in 1954. The reason why Khrushchev (himself an Ukrainian by the way) incorporated the Crimea into the Ukraine was reportedly that there was a large public works program underway that was held to be simpler to administer under a single provincial authority (nevertheless, the incorporation of the Crimean Oblast into the Ukraine actually seems to have violated the constitutional provisions of the RSFSR). At the time, it was all part of the Soviet Union, an entity that eschewed and suppressed regional nationalism. Certainly no-one thought in 1954 that there would one day be an independent Ukraine.

With regards to the Crimea, there is a long history of the region trying to gain independence from the Ukraine.

Here is a summary of this history by Justin Raimondo:

“While Western headline-writers are telling us Russian troops are moving into Ukraine, in reality they are moving into Crimea – which is not the same thing. While Crimea is officially an autonomous region formally within Ukraine, it has its own Parliament  and, up until 1995, its own President. The majority of Crimeans are Russian-speakers, and they have voted repeatedly for close relations with Russia.

Crimea’s post-Soviet history is a rocky one. Unilaterally handed over to Ukraine by Nikita Khrushchev in 1954 – in a move of dubious legality  – Crimea was caught between Russia and Ukraine as the old USSR collapsed. In 1991, the Movement for a Republic of Crimea gathered 180,000 signatures on a petition calling for a popular referendum on Crimean independence, an informal "opinion poll" was held in which the modified demand for close relations with Russia passed overwhelmingly , and the elected Parliament adopted a resolution declaring Crimean sovereignty.

Kiev responded to this with the threat of force, and at that point the bargaining began. The Crimeans, for their part, used the separatist threat to gain some leverage in the negotiations with Kiev: what they wanted – and got – was control over local resources, which were about to be "privatized" by the crooks in Kiev and looted by various Western Ukrainian oligarchs. The local oligarchs took exception to this, and in the end they won out: Kiev basically caved and the resulting compromise kept Crimea within Ukraine, albeit with full economic and political autonomy.

The compromise, however, didn’t last long: in 1993, as the Ukrainian economy collapsed, the Ukrainian currency approached worthlessness, and the social fabric of what was essentially an administrative unit of the old Soviet Union rather than an actual nation came apart at the seams, a national movement for Crimean independence gained traction. The presidential and parliamentary elections of 1994 gave Yuri Meshkov, a Russian nationalist, a big majority and a subsequent referendum on closer ties with Russian won nearly 80 percent  of the vote. Kiev went ballistic, and Meshkov appealed to the Russians for protection, but President Yeltsin was more interested in appeasing the West and the Crimeans were ultimately left to fend for themselves. The Crimean presidency was abolished by unilateral decree of the Ukrainian Rada, and troops from Western Ukraine were sent in.

That same year, Yeltsin signed a tripartite agreement with Ukraine and the US, in which the Ukrainians agreed to give up their nuclear weapons – left over from the old Soviet days – with the secret protocols  (never made public to this day) widely believed to guarantee Western support for Ukraine in the event of a threat to its arbitrarily-defined borders.

Yet the Crimean desire to be free of the Ukrainian yoke did not abate: in 2008, the Crimean Parliament voted to recognize Abhkazia and Ossetia, two former Soviet autonomous regions that had been arbitrarily handed over to Georgia and subsequently voted to rejoin Russia. That same year, one million Crimeans signed a petition demanding the Russian fleet be allowed to retain its presence in Sevastopol.

In spite of threats of force, and a series of heavy-handed administrative measures, Crimean separatism has continuously bubbled just beneath the surface, and polls show the majority of Russian-speakers and Ukrainian-speakers favor separation.”

As Raimondo concludes, the real story is evidently a bit more complicated than the “little morality play now being staged by the mainstream Western media”. The story that is being told in the Western media sounds as though Russia had invaded a prostrate Crimea that is unhappy about the intervention (it's more of a case of welcoming Russia with wide open arms actually). There were already thousands of Russian soldiers stationed there, given that the Black Sea fleet lies in the port of Sevastopol. Moreover, in light of the history of the Crimea's frequent attempts to gain independence, one cannot really assert that Russia is trying to 'snatch the Crimea away'.

As far as we can tell, Russia is mainly interested in retaining control of its port. Note that the previous 'Orange Revolution' government continually threatened to revoke the right of Russia's fleet to remain in Sevastopol, mainly in order to push the rental payments up. Russia is not going to give this port up and likely fears that it will eventually be pushed out unless it takes pro-active steps. The inhabitants and political leaders of the Crimea on the other hand evidently regard the situation as an excellent opportunity to finally gain the independence they have been unable to obtain in more than 20 years of trying.

Sergey Aksenov, who was elected prime minister of the Crimea in an emergency session of the Simferopol parliament on February 27. Alexander Turchynov, himself just nominated interim president of the Ukraine in the wake of a revolution (or putsch, depending on one's viewpoint), complained that Aksenov's election was unconstitutional.

(Photo via Wikimedia Commons / Author unknown)


A map showing the Ukrainian regions in white and the Crimea in red. In case you're wondering, Yalta is at the southernmost tip. The region in white (to the West of Yalta) consists of the five 'raions' making up Sevastopol and its immediate surroundings, which enjoy special status. Note that both the Russian Black See Fleet and the Ukrainian navy are headquartered there – click to enlarge.

(Map via Wikimedia Commons)

Fleeing Ukrainians, Right Wing Threats, NATO, and A Divided West

The Russian press also reports that 675,000 Ukrainians have fled the Ukraine for Russia in January and February alone. 143,000 asylum requests were reportedly received by Russian authorities in the space of two weeks and the Russians apparently fear that the numbers will swell further. There are already 1.9 million Ukrainians in Russia, mainly for economic reasons.

Why would Ukrainians flee? We would guess they are mostly scared of Svoboda, Pravy Sector and other extreme nationalists, which have attained considerable political power in the Ukraine. A prominent leader of Pravy Sektor, a paramilitary organization affiliated with other fascist groups in the Ukraine (and the group that provided the Molotov cocktail throwers and snipers on the side of the revolution), Dimitri Yarosh, just called on Chechen terrorists to step up their terror campaigns in Russia. Yarosh and Pravy Sektor apparently feel they are now in charge of 'security' in the Ukraine (see below). One wonders if American and EU politicians are fully aware who some of their new friends are?

According to the RT:

“A leader of the Ukrainian radical group Pravy Sektor (Right Sector), Dmitry Yarosh, has called on Russia’s most wanted terrorist Doku Umarov to act against Russia in an address posted on Right Sector’s page in VKontakte social network.

The statement points out that many Ukrainians with arms in the hands” supported Chechen militants in their fight against Russians and it is time to support Ukraine now.”

The message, signed leader of Right Sector Dmitry Yarosh” then calls on Umarov to activate his fight” and take a unique chance to win” over Russia.

Yarosh, who is a self-proclaimed deputy secretary of the National Security and Defense Council of Ukraine, leads the far-right militant Right Sector group. He used to be a leader of radical nationalist group Trident, which became the core of the Right Sector.

Yarosh attended the February 21st political gathering at the renamed Independence Square shortly after the signing of the deal that returned the country to the 2004 constitution. He shared the stage with virtually all of Ukraine’s prominent opposition politicians, including former superstar boxer and leader of the Democratic Alliance for Reform, Vitaliy Klitschko. In the following video, surrounded by masked units from his far-right following, he declares victory and vows to continue fighting, as the crowd cheers in a military fashion.

(emphasis added)

The video of his strident sounding speech can be seen here:

Dimitri Yarosh addresses the crowd, surrounded by lads wearing the typical uniforms of  defenders of democratic values.

The above linked BBC article about the defection of Berezovsky contained this telling tidbit:

“Meanwhile, Nato chief Anders Fogh Rasmussen has asked Russia to withdraw its forces to its bases.

"We call on Russia to de-escalate tensions… to withdraw its forces to its bases and to refrain from any interference elsewhere in Ukraine," he said, speaking in Brussels.

Ukraine was a "valued partner" for Nato and should be allowed to determine its own future, he said.”

(emphasis added)

Again, the impression one gets is that they are 'free to determine' as long as their determining results in another step forward in the plan of encircling Russia with NATO outposts. This is rarely discussed in the Western media, but the eastward expansion of NATO has been raising neck hairs across Moscow for years already. To be fair, the press is not entirely silent on this point. Readers interested in additional background information can e.g. take a look at this article from Washington's Blog on the topic, which contains a collection of excerpts from and links to relevant commentary in the press.

Meanwhile, although there is a lot of tough talk, the reality is that imposing truly painful sanctions on Russia is something most European governments probably don't want to do. Not even the UK is eager to come down too hard on Putin, in spite of foreign minister William Hague uttering various threats:

“A British government document caught by a photographer's lens suggests that officials there are against imposing economic sanctions on Russia, a position which could complicate any U.S. effort to isolate Moscow over its military advances on Ukraine.

The document, captured by a photographer outside the British prime minister's Downing Street office as it was carried in by an adviser, says Britain "should not support for now trade sanctions or close London's financial center to Russians," according to the BBC, which first reported the blooper Monday.

It's not clear whether the document presents a settled U.K. position or just the view of one set of officials within government. Britain's views on sanctions are important in part because London is a key hub for Russian investment. Downing Street had no immediate comment.”

(emphasis added)

In Germany, various industry groups are warning that any disruption of economic  ties with Russia could cause considerable economic problems and not only because the gas deliveries would be endangered. It should be noted though that the same thing holds for Russia: it too cannot really afford an economic war with Europe. It is far easier though for Obama to play the tough guy , but it is unlikely to be easy for him to get others to agree with his stance:

For all Obama’s hopes of creating an economic threat, there are relatively few trade or productive diplomatic ties between the United States and Russia. He’s largely dependent on being listened to by the world’s leaders, populations, businesses and international organizations, from the European Union to the World Trade Organization.


The morning after Secretary of State John Kerry began floating the idea of kicking Putin out of the G-8, the German finance minister told a German news service Monday that he wasn’t sure this was a good idea.”

In other words, he has to convince those who do in fact have intensive economic relations with Russia to join a putative sanctions regime. That idea is highly unlikely to fly. At most we think there will be a few symbolic gestures on the part of the EU, accompanied by a lot of pompous rhetoric.

Putin's Problems and the Dangers

It must be kept in mind that Putin can hardly allow Sevastopol to slip away. There is no way the Moscow ruling elites would ever agree with such a development. Recall also that the revolution in Kiev began right after Putin persuaded Yanukovich not to sign an agreement with the EU but to agree to a financially more enticing deal offered by Russia instead. Looking back at the sequence of events now, it appears to us that Yanukovich was only negotiating with the EU in order to drive up the price Russia would be prepared to pay, which eventually turned out to be quite a miscalculation.

Why was Russia so eager to offer billions in aid to the corrupt and thieving government of the perennially financially wobbly Ukraine? The only reason we can think of is the fact that the EU agreement contained security agreements, i.e., from Moscow's point of view, it would have opened the door for an eventual NATO enlargement. Readers may recall that similar thinking informed the conflict over Georgia, which incidentally also involved regions that wanted to secede (and which have in fact seceded for all practical purposes, although they are not recognized as independent). As an aside, you can be sure that as soon as someone in Russia sees John McCain cavorting with politicians in countries at Russia's door step, alarm bells go off all over the Kremlin.

The port is not the only problem though – the other is that the large Russian-speaking majority in several Eastern Ukrainian regions is hoping (and asking) for protection from Moscow. These people have been galvanized into action as soon as the law repudiating the use of Russian as a second official language was promulgated. The fact that the new government in Kiev regarded this as the most urgent step of its agenda is indicative of the strong influence right wing nationalists apparently wield.

Frankly, we don't believe Putin or anyone else in Moscow is overly happy that  Russian flags are hoisted in Donetsk and Kharkiv. Although there are without a doubt many in Russia that would like at least the Crimea to return to the fold,  we don't believe this to be a primary goal of Putin's policy, and his interest in annexing of any other Ukrainian regions is probably completely non-existent. Why would he want to burden Russia with an economic basket case?

All that he probably wants to make sure of is that access to the port remains intact. A fully independent, or even just a somewhat more autonomous Crimea would likely be seen as sufficient for that purpose. Does Putin want to intervene militarily if other regions predominantly inhabited by Russian speakers come crying for help? We believe that to be extremely unlikely, but the danger is of course that a situation could develop that basically forces events along a course nobody really wanted to pursue. It wouldn't be the first time this has happened, and ironically, it also wouldn't be the first time when Slav nationalists had a hand in starting a major conflict. After all, from a game-theoretical standpoint, there is at least one group in the Ukraine that may well believe that it would benefit from drawing Russian into a more extensive conflict: the above mentioned extreme nationalists. It would be a huge gamble on their part, but these are not people known for their caution (the gamble being that the West will then also be drawn into the conflict).

We think Russia has actually a fairly relaxed relationship with the other Western Ukrainian political factions, and would likely be able to come to an agreement with e.g. the leadership of the 'Fatherland' party on its own. Remember that the party mainly consists of the former Tymoschenko Block and Russia had no problem making deals with Tymoschenko.


It seems likely to us that the situation in the Ukraine and the Crimea will eventually be resolved in a not overly dramatic manner. However, until it actually is resolved, it certainly harbors the potential for further escalation. The main problem is that the port of Sevastopol is not the only thing that could draw Russia  further into the conflict in the Ukraine: the main problem remains the political polarization between Eastern and Western Ukraine. Russian politicians may at some point feel compelled to intervene in other Ukrainian regions as well, although that seems a rather unlikely prospect from today's vantage point. While the Western Ukraine wants to get closer to Europe and the Eastern Ukraine closer to Russia, the truth is that anyone getting too close to either of them will have to extend support to what is right now an economic basket case. This is not really  affordable, nor is it an easy sell to voters already hostile to such aid schemes.

Regarding the Crimea, there can be no harm in either granting it greater autonomy or even independence. It is extremely likely that it will continue to be open for business, both tourism-wise and by providing a port for both the Ukrainian and Russian navies (although Kiev probably wouldn't get the rental payment anymore).

Addendum, Currencies:

Hopes for money from the IMF have led to a marked strengthening of the hryvnia on Friday last week. It has since weakened a bit again, but in the main it is simply extremely volatile, only instead of only going lower, it is now volatile in both directions.

The ruble has weakened further, but not by a lot. A greater effect was seen in the Russian stock market, where bank stocks were especially weak (recall that Russian banks have some $28 bn. in exposure in the Ukraine). Also, Russia's central bank hiked its reference rate by 150 basis points, quite a big move evidently designed to stem the slide of the ruble (and bad news for the funding costs of Russian banks).

hryvnia, daily

The hryvnia recovered quite a bit on Friday after an IMF/EU support package appeared to become a slightly more imminent prospect – click to enlarge.

ruble, daily

The ruble has weakened a bit more, but Russia's central bank has raised interest rates sharply to stem the decline – click to enlarge.

See the original article >>

Should investors trust Putin or the Power of the Pattern right now?

by Chris Kimble


Russia spent a few years and a few Dollars building the Olympic village and getting ready to host the games. Did Putin blow all that goodwill in a few days, after the closing ceremony? I will leave that up to others to debate.

The above chart reflects that the Russia ETF (RSX) was near falling resistance and started acting weak, before the games and before the movement of troops started. RSX is down almost 50% in the past three years and is now hitting the 61% Fib level of the financial crisis; for the second time in two years.

Should traders trust Putin or the Power of the Pattern at this point? Potential double support is at hand. Taking a bigger view of the pattern, a descending triangle is in place suggesting that if support is taken out, the declines in Russia are far from over with!

See the original article >>

The Potential in the Transports in 3 Concepts

by Greg Harmon

As the month closes it is often a good time to step back and take a broader perspective on the markets. If you do that with the Dow Jones Transportation Average Index ($TRAN) there are three simple guiding characteristics that you need to watch to stay on the right side of the market in transportation stocks. Everyone is familiar with the Head and Shoulders Pattern and there is one in the Transports, it is just upside down. The monthly chart below shows this, with the Neckline at about the 5600 level. What is important to know about this technical pattern is that it looks for a move up to 9050 at least (you get there from measuring the distance from the tip of the Head to the Neckline and adding it to the Neckline higher). That is still a long way to go to the upside. The second thing is what is called a Measured Move. This is Technical Analyst jargon to describe that the move in the Transports on the blue arrow added again to the consolidation over the last few


months would target a level of 10050 were it to happen again, and these types of symmetrical moves do happen often. This would be in play on a move above the consolidation zone, over 7500. The third concept to understand is that the first two are not guarantees. That means that the Transports may not reach those levels, but it also means that it could reverse and move lower. That is the more interesting scenario. And a move below the red consolidation zone, below 7000 is a signal to reverse course and look lower. That would give two immediate targets: 6250 and then the Neckline at 5650. Clean and simple. Use it as a guide for the transportation ETF, $IYT, or for your transportation stocks.

See the original article >>

Struggling US wheat may yet deteriorate further

by Agrimoney.com

The condition of US winter wheat seedlings may yet worsen still after declining again last month thanks to unusually cold weather, commentators including US agriculture big shot Joseph Glauber said.

The US Department of Agriculture overnight revealed further deterioration in domestic winter wheat, including in the top producing state, Kansas, where the proportion of crop rated "good" or "excellent" eased one point month on month to 34%.

While above the 23% figure at the end of February last year, and representing a sharp slowdown from the decline reported for January, the reading is below the average of 41% for the five years to 2013.

"Average temperatures were colder than normal [last month], with most areas averaging 6-10 degrees colder than normal," USDA scouts in Kansas said.

'Desperate need of precipitation'

In Nebraska, where temperatures were 6-9 degrees below normal in February, winter wheat was rated 43% good or excellent, down three points on a month before.

And further south, deterioration was greater, given the worse drought conditions, in part thanks to patchy snowfall which has left many fields without sufficient cover to protect seedlings from frost.

In Oklahoma, of which 62% was in drought as of February 25, up 15 points week on week, the proportion of winter wheat rated good or excellent fell five points during February to 31%.

"Producers in Roger Mills County were in desperate need of precipitation," USDA scouts said, in a briefing entitled "drought conditions worsen".

"During the latter part of the month, high winds and worsening drought conditions contributed the extreme fire danger and the overall damage to crops and topsoil moisture.

Some canola - of which only 20% was rated good or excellent, down from 33% at the end of January – "was lost to winter kill".

In Texas, of which 68% is in drought, up 10 points week on week, the crop was rated 15 points good or excellent, down four points for the month.

'Significant concern'

And the condition data could yet decline further, given cold temperatures this week which have closed schools, shut down Washington and forced the cancellation of nearly 3,000 flights.

"The storm over last weekend failed to provide enough snow as expected, thus leaving certain portions of the US Plains at risk of a cold snap," Vanessa Tan at broker Phillip Futures said, adding that she was "bullish on US wheat" prices.

In Minneapolis, Jonathan Watters at Benson Quinn Commodities said that "southern Plains weather concerns are slowly building as we head toward spring".

While a weekend storm bought 0.25-0.5 inches of snow "to a significant portion of Kansas/Oklahoma, but the panhandle region was short-changed.

"Cold temperatures remain a significant concern, with temperatures in central Kansas below zero on Monday morning."

'Main concerns'

Separately, Joseph Glauber – as chief economist at the US Department of Agriculture, one of the most important figures in world farming – also cautioned over of a "main concern" over the dearth of precipitation in the southern states.

"We still have a lot of dryness in the southern Plains," he told a conference in Australia, adding that a continuation of the unusually cold US weather could prove an issue too.

"We have had snow cover over a lot of the regions and to a degree that has protected things, but the concern is that when you have a bit of warm weather and wheat popping out of dormancy," he said.

"The persistence of winter has been a problem."

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