by Justice Litle
"In much the same condition as the Aral Sea, the former Soviet Union is a
disaster that is about to spiral into a catastrophe."
— Jim Rogers, Adventure Capitalist
The Dec. 16 edition of The Economist has a mocking send up of Vladimir Putin
on the cover. The Russian president's head is pasted on the body of a
Prohibition-era gangster, complete with white fedora hat and zoot suit. In
shades of Al Capone, Putin aims a gas pump nozzle as if it were a Tommy gun.
The text reads, "Don't Mess With Russia."
Inside, the lead article closes with a bland flourish of hope: "Russia is
one of the few countries that could produce more oil — if only Mr. Putin
changed his thuggish ways."
This cloying sentiment brings to mind a crusty old nugget of bartender
wisdom: "If ifs were a fifth, we'd all be drunk."
Is there any chance Mr. Putin will soon reform and make nice? Not really. It
is far more likely that the
opposite is true. Russia may well be gearing up for
an ugly — and possibly brutal — confrontation with
the West.
The American Heritage Dictionary defines empathy as "identification with and
understanding of another's situation, feelings and motives." In terms of
understanding markets — and cagey petrocrats — empathy can be a powerful
investigative tool. Western journalists have little perspective to add to
the debate because, for the most part, they are not seeing the world through
Mr. Putin's eyes. What's worse, they are not even trying to.
We have no inside access to the Kremlin. (If it did, your humble editor
would probably be eating caviar in Sardinia right now, rather than pushing
hard to meet a
deadline.) But we can still make productive use of empathy by imagining the
world as others see it. As a literary device, the rest of the piece will be
written as if Putin's thoughts are known, in an attempt to
answer the question, "What might Russia's president
be thinking?"
To begin, when Mr. Putin hears righteous pleas from the likes of The
Economist to "give up his thuggish ways,"
he is no more moved than you or I would be upon urging from animal rights
activists to give up beef. The Western protests, and the airy-fairy
motivations behind them, are simply not taken seriously by a man with
serious business to do.
What's worse, Putin sees the West as densely populated by hypocrites. He
perceives our love affair with democratic ideals to be merely a thin
veneer... a fiction we are gullible enough to believe (except at the higher
levels) and wealthy enough to maintain. (And in fact, a case can be made for
this view.) On top of all this, Mr. Putin has no time for glib Westerners in
the first place. He is a man with a desperate mission — and that mission is
saving Mother Russia from oblivion.
Flush with oil and gas revenues as it may be, Russia is a country on the
brink. For all his faults, Putin is a man who dearly loves his country. He
does not want collapse to happen, and seeks to prevent it at all costs.
Thanks to Russia's unique set of problems, this
means taking some "unconventional" measures, to say
the least.
Thanks to all the petrodollars flowing in, Russia can scratch finances off
the emergency list. (The ruble has strengthened so much, in fact, that it
has replaced the greenback as currency of choice in a number of regional
transactions.) But three additional problems continue to weigh on Mr. Putin
like riders of doom. These
problems are criminal, demographic and geographic
in nature.
First, the criminal problem. As we have noted previously, the real power in
Russia is largely invisible. The Kremlin must frequently succumb to the
hidden hand of the siloviki, or "strong men," and also somewhat to the
oligarchs, fleet-footed players who siphoned off illicit billions in the
Yeltsin years.
Some Russians cast the siloviki as patriots — brutal men with hearts in the
right place — and the oligarchs as self-serving scum out for only
themselves. But the
divide is not quite that simple. (In Russia, few
things are.)
The upshot is that Russia's criminal element wields great power over great
distances — far too much for one leader to control. In his interaction with
this powerful netherworld, Mr. Putin is a bit like a mafia don trying to
keep his capos and consiglieres in check.
It's a tired cliché, but the Kremlin must keep its friends close and its
enemies closer. To stay on top, Putin must make productive alliances with
the strong, while punishing insubordination from the weak. He must keep tabs
on who is rising and who is falling in the ranks — lest he insult the wrong
player or back the wrong horse. And he must switch private allegiances
with the subtlety and finesse of a chess player all
the while.
We in the West see none of this — and we are far too naïve, from Mr. Putin's
point of view, to see that he has no choice but to play the game. If Putin
were to have a gallant Hollywood moment, so to speak, and declare it time
for a new broom to sweep clean, he would likely be dead within days. Perhaps
hours.
Putin's real objective in managing the criminal element (we speculate) is
putting Mother Russia first — with a long-lived retirement the second goal.
Putin must strike a balance between allowing free reign of that which cannot
be controlled, while reining in rogue interests deemed a legitimate danger
to the state. A great and abiding fear is that Putin's successor will get
the balancing act wrong. If the balance is lost, Mother Russia itself could
be lost... sacked by looters as the barbarians sacked Rome.
If Putin's criminal problem is akin to Tyrannosaurus rex, his demographic
problem is on par with Godzilla.
(A T-rex is at least theoretically manageable.) In 1994, The New York Times
published an article titled, "Climb in Russia's Death Rate Sets off
Population Implosion." In 2006, the Los Angeles Times published a similar
piece titled, "A Dying Population."
What is remarkable is that the two articles are 12 years apart, yet the news
is almost exactly the same:
widespread alcohol poisoning, rampant drunkenness, blatant self-abuse,
wretched medical conditions; everywhere there is despair. Only the fallen
faces in the anecdotes have changed.
If the birthrate in Russia does not pick up smartly, the country will
eventually disappear — or be overrun by outsiders. The demographic issue is
so huge and intractable — money is no help in the face of such a wretchedly
broken system — that it is not clear what Mr. Putin can do. He may not be
able to do much at all, other than tinker at the margins... and channel his
frustration into other dealings.
Putin's demographic problem feeds directly into his geographic problem.
Russia is an awesomely huge and sprawling country, spanning 11 time zones.
Its lands are chockablock with coveted natural resources. In addition to oil
and gas, there is timber, metal, fertile soil and other treasures galore.
Huge swathes of these resources are yet untapped, waiting for active hands
to exploit them.
Logistically speaking, China would get far more mileage from invading
resource-rich Russia than trying to take over, say, the tiny but
well-defended and well- connected Taiwan. Putin knows this. He also knows
that, as the Russian population recedes, it only makes sense to let others
in. If there are too few Russians, then other warm bodies should get a
chance at the job.
China is all too happy to provide those warm bodies.
North of the Russia-Mongolia border, for example, industrious migrants are
anxious to till Russian lands that would otherwise lie barren. The private
owners of these lands are happy to see the Chinese come, as locals have
proven unable or unwilling to do the work.
Unfortunately, The Wall Street Journal reports, Russian locals see the
newcomers as a "landing force." This is a widespread sentiment that runs to
the top of the ladder. For patriotic Russians, the horns of the dilemma are
these: Stubbornly cling to poverty... or embrace a Trojan horse. This
schizophrenic calculus colors all dealings between the Bear and the Dragon.
These are the Mission Impossible-type challenges that keep Mr. Putin up at
night. As you can imagine, snarky criticisms from Western journalists barely
register.
While he may look and act like a ruthless bully, Putin is, in reality,
something of a cornered fighter with few options at his disposal. This makes
him all the more dangerous. A determined opponent will wield his last weapon
with all the strength he has.
That last and most formidable weapon, of course,
is energy.
From the Kremlin's perspective — remember, this is conjecture — China is
strong, while Europe and America are weak. This is a psychological and
strategic judgment, not an economic or military one. Because Europe and
America are weak, they can safely be ignored... and insulted... and
manipulated. All this nastiness is a byproduct of Putin's driving goal:
consolidating as much power as possible — energy power, that is — in the
hands of the state.
From a Western perspective, this is a horrible, awful, not-nice goal. From
the Kremlin's perspective, it is necessary for ensuring Russia's long-term
survival.
When confrontation hits, from the south or west or wherever it comes, Putin
must have all the levers of power at hand. No one else can be trusted with
them. No one else — except maybe his handpicked successor — will
have what it takes to shepherd Russia through these
dangerous waters. Better to be as strong as possible when the gloves come
off.
How and where, then, might the next shoe drop? As weak as Europe is, it is
slowly awakening to the menace that is Gazprom. It is probably just a matter
of time before the E.U. draws a line in the sand, demanding that Gazprom
succumb to fair market practices in its delivery of European gas. Meanwhile,
Gazprom (i.e., the
Kremlin) is in a race to consolidate as much pipeline leverage as possible
before that fateful day.
In a nutshell, there will come a day when Europe says in squeaky unison:
"Mr. Putin! This infernal 'thuggishness' has to stop!" To which Putin might
coolly reply: "Da, what was that? You want all deliveries to stop, citizens
to revolt, markets to implode? I did not think so. Perhaps now you will take
Russia's interests more seriously..."
Regards
Justice Litle
for The Daily Reckoning
Bill Bonner in London:
"Housing nightmare tarnishes the American dream," says a report from
Reuters.
Meanwhile, the Financial Times quotes Martin Eakes – chief economist at
Self-Help, who estimates that
2.2 million Americans could lose their homes to foreclosure.
That's the general narrative. But now for the plot twist.
What we will soon hear more about is the way the pain of all this falls
disproportionately on Blacks and Hispanics. These two groups already tend to
be poorer than white people, which means they tend to suffer more from the
slings and arrows that drop down to the bottom of the wealth pyramid. They
die younger. They take fewer vacations. And they pay more for credit. The
reason is obvious. A member Federal Reserve bank pays the prime rate for
overnight funds, so there is little risk that the money won't be paid back.
But a janitor with an old truck and a new girlfriend is a credit risk and
lenders protect themselves by charging high rates of interest.
Mr. Eakes even tells us that this will become "the largest loss of
African-American wealth in American history."
Indeed, figures out last week showed Blacks nearly four times as likely to
get stuck with a "high cost" home loans. More than half the loans made to
black people in
2005 were sub-prime. And 80% of them were "exploding"
ARMS – adjustable rate mortgages with much higher monthly payments after the
initial teaser rate period expired.
Just ask a good lender in a bad neighbourhood. He will charge as much as 50%
or 100% on a one-month I.O.U. And if you don't pay on time, he might double
the interest...or smash your face.
Sub-prime mortgage lenders typically enticed customers with low initial
rates. But after adjustment, the rates often shot up to 10% or more. These
were the '2 and 28'
mortgages, where the monthly payment was put up sharply after the first 2
years. This not only put the borrower in a squeeze, it practically
guaranteed the lender more fees when the customer came back to refinance.
Still, there is a funny side to this story. For many decades, meddlers have
been urging the credit industry to provide more loans and encourage home
ownership among poor people. Now they have got what they wanted.
In the last few years, after lenders figured out how to make a buck at it by
laying the risk onto other investors, they complied. The poor got home
ownership in spades. Bad credit? No problem. Low income? Who asked? No
savings? Don't worry about it.
But now that the industry has done as it was bid, do you think it will get
any thanks? Not likely. Instead, the busybodies are likely to come around
with a subpoena in their hands...if not a rope.
We have no doubt that a lot of people are going to whine and moan about it.
Nor do we doubt that the fools in Congress will rush in with promises of
mortgage abatement and other subsidies.
Corrections involve pain and Americans hate pain. They count on their
elected representatives to protect them from it. But not all pain is a bad
thing. Suffering the pain of a small correction now, for example, can help
prevent the pain of a larger one, down the line.
But who really will suffer from the sub-prime crisis remains to be seen.
People with neither money nor savings to begin with may complain when the
houses they couldn't afford - and never should have afforded - are taken
away from them. But they are wiser, and probably not really too much poorer.
The real pain will be felt elsewhere...where the lesson will be that much
more expensive.
More news:
-------------------------
Rob Mackrill:
- In the UK this week the Budget looms large. The Chancellor, Gordon Brown
is expected 'to hit gas guzzlers hard' according to a BBC report. A move
that would enjoy strong public support (69%) according to accountants Grant
Thornton, where those of us that can't afford a Sports Utility Vehicles
(SUVs) are quite happy to see those that can, pay for it...and all in a good
cause too. Guilt-free schadenfreude.
Stamp duty is another possible target given a runaway property market immune
to interest rate rises. Home purchases under £125,000 are currently free of
stamp duty but rise to 4% over £500,000.
In another slice of the tax pie, Ernst & Young don't expect too much action
on corporation tax in spite of increasing concerns that the UK is becoming a
fiscally uncompetitive place to do business. A mood that Shadow Chancellor,
George Osborne, has caught today. He's declared a Tory government would cut
corporation tax by 3% funded via a phasing out of other corporate tax
breaks says the FT.
- Looking for a new start? A report from US internet security company,
Symantec, says you can get a new identity online from as little as $14 (£7).
It comes with a bank account, credit card, government identity number and
date of birth. Dean Turner, senior researcher for Symantec on the project,
speaking to the FT said there were hundreds if not thousands of websites
where trades could be made.
- The Children's Investment Fund may conjure warm fuzzy feelings in the
uninitiated but don't be deceived. It is an 'activist' hedge fund that owns
1% of Dutch bank ABN Amro. It is agitating for change at the bank to unlock
the group's 'undervalued assets'. City AM reports this morning it is
supporting an 'informal' bid approach from Barclays about an £80bn tie-up.
'Is no one immune to the lure of the transformational deal"?'
asks a sceptical FT Lex column, though it's got the market excited. ABN
Amro's shares traded up almost 10% this morning.
- The Chinese have announced they're going to build aeroplanes. In a
government announcement, they stated their intention to build big passenger
jets to rival Boeing and Airbus. It could take decades to reach their goal
but as one of their own once memorably said, a journey of 1,000 miles begins
with a single step.
- When will the current bout of market turbulence end?
Look to the stars for you answer says Henry Weingarten of the New York-based
Astrologer's Fund. In addition to economic and statistical analysis, this
fund uses astrological charts to help make its investment bets.
"We have a real estate recession that astrologically is similar to 1989.
Some people are saying it's over. It's not over. It hasn't even started
yet," he tells Reuters. Regular Daily Reckoning readers will know there are
clues aplenty in the real estate market that keep appearing without the need
for a horoscope.
Weingarten also discloses a couple of areas he is bullish on that meet his
current criteria – Brazil and Germany.
---------------------
And more views from Bill:
*** The best bet for long-term profits, argues Mark McLornan, is grain.
"When incomes rise, so does meat consumption – growth in beef and chicken
consumption in China is running at 20% a year. It takes nine kilograms of
grain to produce one of beef. Already, 67% of global grains are used as
animal feed, so this surge in demand will have a huge impact on the grains
market. Demand for biofuels is making matters worse. Corn used in fuel
production in America is set to rise from 6.4% of US corn production in 2001
to 30% by 2007/2008."
McLornan says that stocks of corn and wheat, the main global grains, are at
record low levels. And as demand rises, it is getting harder and harder to
expand supplies. Fertilizers have added to output greatly in the last 50
years, but additional inputs of fertilizers now produce diminishing returns.
Nor is it easy to put new land into production. While land is available,
water is scarce. And as a populations and human development increases,
agriculture has to compete for water with other uses.
"I believe the fundamentals make grains a once-in-a- decade opportunity,"
says McLornan.
*** "Mass demonstration to bring back the franc," says a poster along the
road in Paris.
Not everyone is happy with the European money. Many French people think it
is just a devious means of raising prices. The cost of living has clearly
gone up in France. How much, if any, of it is attributable to the
introduction of the euro, we don't know.
But dissatisfaction with Europe runs deeper than just the new currency. A
poll taken across the continent showed that most people thought life had
gotten worse, not better, since the European Union was established.
And a large minority of respondents said they thought that the major thing
the EU had provided was more bureaucracy.
This Sunday marks the EU's 50th anniversary. The papers are bound to be full
of retrospectives, introspectives, and other babble. The EU is one of a long
list of things about which your editor has no opinion. Is it a good thing or
a bad one? How would he know?
But it has clearly made a change. It has got people on the move. London is
full of Frenchmen. Provence is full of Englishmen. The Swedes and Danes fill
the beaches of Spain...while Spanish fruits and vegetables appear on plates
all over Europe as commonly as California avocados make it to New York. In
some ways it is easier to move around Europe than the US. The airports are
more relaxed and, often, more efficient. The distances are shorter. And in
the last few years, a whole group of discount airlines has taken to the
skies. They offer flights from Manchester to Marseilles for as little as
29 euros. And if you prefer to stay on terra firma, the trains are much
better than in the US.
All this movement has brought prosperity – especially to the periphery of
Europe. Ireland and Spain are the big winners. The heartland countries –
France and Germany – have a tougher time of it. They've had to deal with new
competitors and a more fluid
labour market.
*** Our office moved too, but we miss our old neighbourhood. Our office in
Paris used to be over near the "Marais" – the old Jewish quarter, which had
been a swamp. Now, we are in a fancier part of down, near the American
embassy, between the Place de la Concorde and the Madeleine. Across the
street is a shop that is all white. The floor is white, the walls are
white...the two women who work in the shop are dressed all in white...and
the clothes the shop sells are all white too. We don't know what the point
of it is, but at least it is clean.
There are a couple of bars catering to a professional class. Last week, we
went over for a cup of tea. While we were sitting there, we suddenly noticed
that all the other customers were weirdoes. There was a young man whose head
and back...down to his feet...seemed to run in a straight line as if he were
carved out of a solid block of wood. Strange. And there was another man,
short and round, with eye-glasses as thick as coke bottles, who muttered to
himself constantly while standing at the bar drinking a café. He was clearly
mad. Another pair were shopkeepers whom we have seen quite often - a couple
in their late 70s, who look fairly good from a distance. But get closer and
you realise that they must have mortgaged their business to buy surgery and
cosmetics. The pair are so done up they look as they if had just climbed out
of their coffins and need to have stakes driven through their hearts.
Besides that one place, however, this neighbourhood is too 'normal' for us.
It is full of office workers.
Merchants. Tourists. In short, it is boring.
It must have been a coincidence that such odd-looking people had gathered in
the bar at the same time. But it reminded us of our old digs across the
Paradis bar.
What a pleasure it was to go to work there. The two geriatric prostitutes
were always amusing to see – one with her shiny black raincoat and tiny
white dog...the other with her huge cavalier boots and very short skirt.
Neither one of them could have been mistaken for young or attractive – even
on a very dark night.
But what they lacked in boudoir appeal they made up in bonhomie.
And there was the Japanese drunk who sang at the top of his lungs and then
collapsed on the steps of St.
Merry's church, next to the Paradis. One morning they found him there...as
dead and cold as the stone steps themselves.
And who can forget the man who lived in the cardboard box, with his long,
flowing beard and his enigmatic responses...
For all we know he is still there muttering in his box.
We'll have to go by and sell hello to all of them again sometime.
No comments:
Post a Comment