Wednesday, 17 September 2008

Russia Economical War

"Russia poured $44 billion into its three biggest banks and halted stock trading for a second day in a bid to halt the biggest financial crisis since its devaluation and debt default a decade ago."

It seems that a new cold war has started or should I call it a eWar.

The foreign exchange, the stock market and the bond market are all under heavy pressure.

In fact "pressure" is a pretty weak word to describe what is currently happening in those front.

The stock market has lost about 60% in 3 months. It is currently in free fall. The trading has been halted two days in a row as the panic is holding.

So that was one of the risk I highlighted for the Finnish economy. Should the Baltics and Russia falters, then economical tsunami will abate whatever actions some politicans will do.

The US might enter into depression while the UK and Germany are entering a recession. China is cutting rate in order to cool, not the market, but the social tension that will rise in the quarter to come.

I will be some point...but to be positive now, it's like playing Russian roulette, you might be fine or might not be, for the moment it's luck.

But I promise you will be the first to hear when time become more positive - it's a deal.


Andrew said...

US treasuries are in such hot demand that yields are the lowest they have been since 1954 on the three month.

And the difference between dollar libor and treasuries is now at 2.84 which is way past its worst point in this crisis.

I suppose the good news is that US treasuries remain a sought after method of protecting wealth.

HousingFinland said...

Indeed if people think the crisis could unfold like in 1929 where deflation were raging and banks falling one after the others.

To be franck, I think it's much more complex as it has global ramifications and is dealing with instruments that people don't really control, undestand and most of them are flawed...

I think the volume of "greed" is as well bigger today than during that time...

The tsunami has started, what I see is only the sea retreating, so it looks ok...for the moment.

HousingFinland said...

That is called "fligh to quality" or high risk aversion. The risk is taken out of the table.

My guess is that Banks are repatriating their investment. So they are taking their money out of any , any emerging market.

You will see that dollar will start to gain against major currency. The yen will strenthen as well agains the Euro as japanese take their money out of the Euro Zone.

I think this could persist for months, and the consequence could disastrous for multinational that relied on them to increase their market share or profit.

The longer it persists, the bigger threat of a depression increase. So next will be intervention of central baks around the world to provide liquidity : they will all cut rate, and very fast...The UK first then the ECB next...

With the Euro falling, should some geo political event unfold that push petrol price higher...then you have the recipe of disaster, something even worse that 1990.

andrew said...

yes but my arguement so far is that the feds are already doing everything they can to prevent the tsunami arriving. So we will see this inflation we see and we will see these higher interest rates we are seeing.

People are now saying the treasuring is bailing out the fed to enable it to lend out even more money. Dont forget the fed is lending at very low interest rates at a time when the actual cost of money should be much higher.

Even so flight to quality and flight back home could for now easily make the dollar rise as you say even if today the price of gold leapt over 10%

HousingFinland said...

10% increase in Gold
3 Month TBills at 0.02%

That clearly shows you risk aversion.

In fact, it is what I thought and highlighted as a deleveraging process. Central bank are monitoring the situation but this deleveraging has got to happen otherwise you will be in a japanese style trap...

I didn't think that the correction will be that violent in fact.

Remember 1929, it was deflation... people not buying and excess capacity created during an exceptional and abnormal boom that we witnessed in the past 3 years (or some are syaing in the past 25 years...)

People got to wake up to the new reality which means take debt to the level you afford and add to that risk management.

I suppose risk management will come from banks as there are talks about banks unilaterally increasing the "interest rate" at least on the margin...which I think will rule out lots of people from the mortgage market that will ultimately see price correcting even more than I was 'crystal ball' guessing...

- So less buyer , more seller the balance is broken... -