[foodnotlawns]

I like www.exile.ru very much, it is a highly entertaining webzine of American expats in Moscow. I thought the Peak Oilers would like this piece of eXile Doomerosity: You can write to this guy, Mark Ames, and he probably won't reply, but he'll reply next issue on his letters page and insult you.

http://www.exile.ru/2006-June-16/why_youre_fucked.html

Why You're Fucked

Financial Crisis II: Another Sequel
By Mark Ames ( editor@exile.ru )

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Could we be on the verge of another financial catastrophe? I'll admit it: I'm hopeful. First, because I'm poor and spiteful, and secondly, because one of the nice things about financial collapses (like military disasters) is that all the ugly, corrupt realities underpinning a so-called economic boom are revealed, and the worst in humanity is laid bare, and everyone everywhere gets pissed off, cynical, and hopeless. That's the kind of thing that boosts my mood, not to mention my sexual drive. Financial panics are to me what endangered mammal horns are to Chinese men: pure Viagra placebo.

In the wake of the recent panic sell-offs in the Russian markets and abroad, no one is ready yet to compare 2006 to 1998, the year of the financial crisis. The circumstances are so much different -- in today's Russia there's real growth, real wealth, real investment. The economy isn't built on a flimsy IMF-backed Ponzi scheme headed by a corrupt clique of neo-liberals and Russian Reformers. Instead, it's built on high global commodity prices, managed by a corrupt yet soft-authoritarian regime which makes sure that not too much bad news gets out.

But if the circumstances are so different between 98 and today, why am I getting a weird sense of deja vu? Maybe it's the eerie similarity in the choice of words, quotes and excuses. Just consider these two Moscow Times articles, nearly 10 years apart:

November 4, 1997: "Hong Kong crashed, New York plunged and Russia went into a tailspin. The past week's white-knuckle roller-coaster ride on world markets has taken many financial capitals by surprise, but perhaps none more so than Moscow.

"... Predicting an eventual recovery, government officials and market analysts were quick to point out that the week's market stir had little to do with Russia's economic fundamentals.

"'The fundamentals are still there,' said Gavin Rankin, head of research at the Troika Dialog brokerage. 'I don't expect the start of a bear market. This is a checking of the bull.'" ("The Great Hiccup Of '97")

Now fast forward to...

June 14, 2006: "The Russian Trading System index plummeted 9.4 percent Tuesday...The drop was part of a widespread decline in emerging markets, which have been hammered in recent weeks and, on Tuesday, fell to a six-month low on fears of a global downturn.

"'One fundamental point has changed,' said Roland Nash, chief strategist at Renaissance Capital in Moscow. 'That's the fear that there will be a global downturn and that commodity prices will fall.

"'That small change has had enormous consequences for the Russian market. But here nothing has changed, for better or worse. The fundamentals are the same.'" ("Stocks Plummet 9.4 % in 'Overcorrection'")

Creepy? Yes, and the similarity is everywhere you look. Again, read this October 29, 1997 MT editorial: "The exodus has nothing to do with a change in fundamentals in the Russian market. In fact, the boom that saw Russia become the world's best-performing market over the last year was never about fundamentals; it was about sentiment." ("Adding Up The Slide In Russia")

Now read this excerpt from a May 23, 2006 article: "'We're having a massive panic globally after a fabulously strong market,' said Al Breach, chief strategist at UBS. 'This is nothing to do with the fundamentals.'" ("Stock Market Loses 9% of Value")

The words are so similar because the fact is there are a lot of fundamental similarities between 1997-8 and today, not the least of which is the sense of complete surprise (sentiment) and the deluded sense that none of this is Russia's fault, that Russia is somehow a victim to other countries' problems.

When the 1997 sell-off started, then-Central Banker Sergei Dubinin tried to look at the bright side of things by noting, "The Russian economy fully felt itself to be a part of the world economic system." Not surprisingly, Economics and Trade Minister German Gref this week said the recent market collapse was, "the price we pay for integration in world markets."

In other words, as the skinhead says in Repo Man, "I blame...society..."

This kind of unrealistic delusional thinking is crucial in making sure that an eventual panic hits. It happened last time, and it seems to be developing again.

Which brings me to the next most obvious similarity: both Russian collapses begin with a worldwide selloff in emerging markets assets. Then, as now, Russia's stock market is largely controlled by short-term speculators -- mostly foreign hedge funds as well as local day traders and corrupt inside traders. Not a lot's changed in 10 years, except for volumes.

"The rapid rise of domestic stocks in the last year and a half has been due to major inflows of funds from abroad -- money from foreign banks, pension funds, and life insurance funds, [financial markets watchdog Oleg] Vyugin said." (2006)

Now those funds are fleeing. Which is exactly what happened the last time around. Never mind whether Russia "deserves" it; if the market is controlled by speculators, and a worldwide panic causes the speculators to pull out, the market will tank. That's all the fundamentals you need.

In retrospect, the financial crises that ripped through emerging markets in the late 1990s appear inevitable and obvious. So does the bursting of the NASDAQ/dot-com bubble in 2000. But right up to the day of the Asian/Russian collapses, no one expected them, and no one understood them, because the circumstances, and in particular the terminology, had not yet been incorporated into popular financial-crisis discourse.

So what is happening globally this time? What's the word that everyone's going to "get" this time around, just as the last time around words like "debt burden" went from being vague economics terms to obvious explanations for why those markets collapsed.

Last time it was a debt bubble. This time it's a credit bubble. What that means is that since 2000-1, when the US markets crashed and the economy headed into a recession, the US Central Bank pumped shitloads of money (liquidity) via ridiculously low interest rates. This meant that people had not so much "more money" as "easy-to-access" money which they used to buy houses. All that easy money meant housing prices soared for five years straight, to levels unprecedented when compared to the average Joe's stagnating income. However, all the Joes who owned houses saw their asset prices soar, much like those who held NASDAQ stocks in the 90s saw their stock portfolios soar, and that meant more money to spend on everything from plasma TVs to hybrid SUVs, liposuctions surgeries and everything else sold on credit. The US government worked the same voodoo on its budget -- massively increasing spending while at the same time cutting tax revenues. In other words, offering easy, free money to itself.

This easy money, and easy credit, is even easier in other parts of the world. China has seen its money supply grow 20% over the last year, and credit growth has soared 30% in India. The same has been happening in Europe, Japan, and of course Russia, where Russians are offered easy loans to "purchase" everything from vacations in Turkey to crap apartments in podmoskovie.

While in the last crisis, emerging market economies like Russia were forced to issue bonds at increasingly high interest rates in order to finance other high-interest-rate bonds they couldn't pay off, this time around, thanks to all the easy money and the weak dollar, yields on emerging market bonds are illogically low, approaching developed economy bond yields. Meantime, junk bonds issuance is at its highest rate since the 1999 speculative peak. Mergers and acquisitions are bursting all records. Much of this is financed by debt, and all kinds of popular, profitable debt schemes like repos, credit swaps, and all sorts of "esoteric" debt products and instruments.

Central bank reserves in Russia are approaching an insane $240 billion, while China's $880 billion now exceeds Japan's. More and more money is being pumped, inflating prices on any piece of crap asset, from Brazilian bonds to partly-built Moscow panel apartment blocks.

Just as record low interest rates in the US led to unprecedented rises in housing prices, year after year, all this easy money is leading to massive price rises in commodities. Copper has doubled just this year alone. Oil -- everyone here knows what's happened. In Moscow and elsewhere in Russia, housing prices have soared every year since 1999, including 45% in Moscow just this year alone. The stock market also boomed 50% before falling.

This is the bubble. Easy credit swells prices to ridiculous heights. The credit-issuance bubble is untenable. And now it's starting to pop. And what's making it pop is an ever-so-slight pullback from five years of reckless easy money in the US, where it all started -- in the form of today's higher US Federal Reserve interest rates. Even though they've raised rates 16 times, they're set to continue raising rates because inflation is still rising, and the dollar is still weak. The catch is that inflation is rising because of the easy credit. If the credit's cut off, inflation will slow, but the bubble will pop and take the whole thing crashing down. If credit remains easy, inflation will continue to spin out of control, requiring even more credit tightening later and an even bigger bubble burst.

Recent signals that the Fed planned to continue raising rates were the catalyst for this past month's credit-bubble pop -- and why Russia's stock market is tanking. That's because the US still controls, to an incredible degree, international finance. If US rates keep going up, that means money gets less and less easy. No one in the financial markets world wants to be the last to the gate. So they pull out of the speculative markets first -- like Russia -- and as the bubble burst grows, money retreats to safe places, such as US bonds, which are now returning rates not all that different from Brazilian bonds. Panic sets in -- money follows money, and just as asset inflation becomes irrational, so does asset deflation.

The bottom line is this: the global economy is experiencing one of those insane, untenable imbalances, all emanating from New York and Washington, just like the last time around, most of the effects of which will be felt in Mumbai, Istanbul and Moscow.

As the easy credit dries up in the US, assets that inflated most wildly -- like American houses and Russian stocks -- are the first to fall. And both already are.

What's happening with emerging market stocks is just a snapshot of what's to come. In just the last month, the stock market selloffs have wiped out $2 trillion in wealth around the globe. That's scary, and that means that more money's going to be leaving places like Russia. And just like last time, first it's the stocks and bonds that get hit, and eventually, property prices get creamed as more and more money leaves.

How far everything will fall, and for how long, is anyone's guess. All one can do is hope. And my hope is that the whole fucking house of cards comes crashing down, to the point where in a couple of years from now, humanoids will be roaming barren cities in packs, competing with crows and stray dogs for carcass bones. Because when that happens, everything, even a nifty three-room apartment in Kitai Gorod, or a humble condo at Zuma Beach in Malibu, will be affordable to a lifelong fuckup like me.

So keep the easy credit rolling, ye greedy finance goons...the higher it rises, the harder it will fall. And the more for me.

[Atlantean_Relic]

You know at some level I agree with Oscar the Grouch there.