Here It Comes (Russian Default)

  • Ukraine: Primed for diplomacy?
  • Rough outlines of a settlement come into view
  • The financial blowback from the conflict (only the beginning)
  • Russia on the brink
  • Cryptos rally hard (Hmm)
  • More preposterous potato virtue signaling
  • Readers on parallels to Pearl Harbor… “More confidence in JFK than… in Uncle Joe”… And more!

Could the war be nearly over after only two weeks?

In retrospect, the hints had been coming for days.

“Regarding NATO, I have cooled down regarding this question long ago after we understood that NATO is not prepared to accept Ukraine,” Ukraine’s President Volodymyr Zelenskyy told ABC News two nights ago. “The alliance is afraid of controversial things and confrontation with Russia.”

In other words, for all the chest-beating of Western elites, maybe they’ve decided Ukraine really isn’t worth World War III after all.

“NATO is not party to the conflict,” said NATO Secretary General Jens Stoltenberg last Friday.

“NATO is a defensive alliance… We don’t seek war, conflict with Russia.”

The U.S. president has “a responsibility to not get us into a direct conflict, a direct war with Russia, a nuclear power, and risk a war that expands even beyond Ukraine to Europe,” said Secretary of State Antony Blinken on Sunday.

For the markets, the dam broke this morning: “Ukraine Ready for Diplomacy,” per Bloomberg — which interviewed a top Zelenskyy aide on the record.

So the rough outlines of a settlement are coming into view — an amendment to Ukraine’s constitution forbidding entry into NATO, a de-militarization of Ukraine’s eastern half, independence for the Russian-speaking Donbass region on Russia’s border.

In other words, what could have been had two weeks ago were it not for months of brinkmanship by Western leaders. But hey, #StandWithUkraine sure made everyone forget about that virus thingy in a hurry. Mission accomplished?

Granted, a settlement like this isn’t a sure thing. There are deep-state elements in the Beltway — to say nothing of Ukraine’s sundry neo-Nazi factions — who might prefer to drag out the conflict as long as possible.

And in any event, the financial hangover from the conflict is only beginning.

In the space of two weeks, Russia has become the target of Western sanctions far exceeding those targeting pariah states like Venezuela, Iran or even North Korea.

Thus, Russian government debt is teetering this morning on the edge of default, per the Fitch bond-rating agency.

“The further ratcheting up of sanctions, and proposals that could limit trade in energy, increase the probability of a policy response by Russia that includes at least selective non-payment of its sovereign debt obligations,” says Fitch.

Reminder: The last time Russia defaulted on its debt, in 1998, it damn near took down the global financial system.

Russia’s default triggered the collapse of the hedge fund Long Term Capital Management — which made a “can’t lose” bet tied to Russian debt. LTCM’s failure threatened to take down 14 major banks in turn.

Our own Jim Rickards didn’t just have a front-row seat; he was on the playing field. As LTCM’s top lawyer, he negotiated a rescue with the Federal Reserve and those 14 banks. LTCM was able to cover its losses and prevent a domino effect among the banks’ derivatives trades. (No taxpayers were harmed in that bailout.)

“Wall Street wasn’t bailing out a hedge fund in 1998,” he explains; “they were bailing out themselves since they stood on the other side of the LTCM trades.”

Which brings us back to a point Jim’s been making for the last two weeks: Whatever damage sanctions do to Russia will have a wicked blowback effect here at home — far beyond soaring energy prices.

“Every payment, every trade has two sides,” he reminds us. “When you blow up one side (Russia) you also blow up the other side (world banking system).”

Maybe you’ve seen the headlines about the blowup in the market for nickel. About 10% of global nickel production comes from Russia, and nickel is, ummm, rather essential to the promised “green” future of electric vehicles.

Thus, the price of nickel soared 250% in two days. Yesterday morning, “the London Metal Exchange halted trading in its nickel market,” Bloomberg reports, “after an unprecedented price spike left brokers struggling to pay margin calls against deeply unprofitable short positions.”

Even more extraordinary is this: The LME gave a grace period to a Chinese bank to meet its margin call — a step that suggests there would have been a truly ugly domino effect if the exchange actually enforced its rules of the game.

And all of this is occurring at a time when even without the financial fallout from Ukraine… we’d be heading into a financial crisis, a recession or both.

That’s Jim Rickards’ conclusion after studying a century’s worth of financial history… and with a keen observation of present events. More about that tomorrow…

In the meantime, however, the prospect of a settlement has put markets in risk-on mode.

After a crazy-volatile day yesterday that ultimately ended in the red, the major U.S. stock indexes are all up 2% or better — the Dow easily back above 33,000, the S&P 500 back to 4,255 and the Nasdaq comfortably above 13,000.

Still more companies are making news by joining the list of firms suspending either their operations or investments in Russia — today it’s pizza chain Papa John’s and tobacco giant Philip Morris.

jimmy tweet

Crude, meanwhile, has backed off 4% to $118.70.

Precious metals? Ugh, gold is down $50 and clinging to the $2,000 level by its fingernails. And silver is only a nickel above $26.

Cryptos are rallying hard — and we’re not sure the mainstream explanation adds up.

The mainstream explanation is that it’s a relief rally… after the president finally issued his long-expected executive order governing crypto.

The order “calls on federal agencies to take a unified approach to regulation and oversight of digital assets,” per CNBC. All jawboning, no action. Buy!

But no one expected any action if they know anything about how Washington works. This is the sort of thing presidents do all the time — appoint study groups, blue-ribbon panels and whatnot to come up with recommendations months in the future. An out-of-the-blue crackdown on cryptocurrencies? That would come only in the context of an “emergency” — and we’re not there now.

We daresay cryptos are rallying today because — at least for the time being — institutional investors still see them as risk assets and not as stores of value: Cryptos have risen and fallen in tandem with pricey tech stocks for four months now.

Whatever the “reasons,” Bitcoin is up more than $3,000 to $42,370 and Ethereum is back to nearly $2,750.

Now for our daily entry in the “preposterous virtue signaling” contest…

The Guardian

In the first place, The Guardian goes a little too far to call poutine “a French-Canadian delicacy of potato fries, cheese curds and gravy… The name of the dish is widely believed to come from a French-Canadian pronunciation of the English word ‘pudding’ to describe the mushy medley.” [Emphasis ours.]

Anyway, “Poutine, the famous dish, shares its name — in French — with the maligned Russian president. And as Putin becomes the target of protest, so too has one restaurant that sells the dish. Maison de la Poutine, with restaurants in both Paris and Toulouse, said it has received insults and threats following Russia’s invasion of Ukraine.

Meanwhile, the eatery in Quebec that claims to be the birthplace of poutine is also distancing itself: “Tonight the Jucep team decided to temporarily retire the word P**tine from its trademark in order to express, in its own way, its profound dismay over the situation in Ukraine,” said a Facebook post that was later pulled with no explanation.

So that’s two major wars in 20 years in which some form of french-fried potatoes has been renamed for the sake of feeding the perpetual outrage machine. Oy…

“The risk of escalating sanctions cannot be understated,” a reader writes after yesterday’s episode of The 5.

“America responded to Japan’s invasion of China with a crippling oil embargo. At the time, America supplied roughly 80% of Japan’s oil.

“The day after Pearl Harbor, Hirohito justified his attack by pointing to America’s and Britain’s sanctions, saying ‘They have intensified the economic and political pressure to compel thereby Our Empire to submission’.”

The 5: We too have been struck by parallels to Pearl Harbor in recent days. In both cases, the attack seemed utterly “irrational” — the act of a “madman.”

More like the desperate act of a cornered animal. Imperial Japan had no chance of “winning” in any conventional sense, but its leaders felt they had no other choice than to go for broke.

So yes, even if the conflict of the last two weeks is about to wind down — and that’s not at all guaranteed — Washington’s economic warfare may yet prompt a further “irrational” reaction. Jim Rickards will help us tease that out tomorrow…

“Although I was young at the time, I recall the Cuban Missile Crisis,” a reader writes, adding to our extensive — and sobering — reader dialogue in yesterday’s edition.

[Your managing editor took the day off and didn’t read it until this morning. Chilling stuff…]

“My father was in the Army National Guard at the time and we were in the Texas Panhandle, so it was a common topic.

“People seemed to pay a LOT more attention to the likely consequences, but also (good or bad) seemed to have more confidence in JFK than they do in Uncle Joe: Perhaps because JFK was smart and sharp and came across as dedicated to what we then had as far as freedom. Oh, and he was a combat veteran and knew about what war really meant.

“And of course, there were millions of veterans, including many wounded, who had seen combat in Africa, Europe, the Pacific, CBI and of course Korea. They understood what war meant.”

“I was 13 and didn’t pay much attention to the news, but this one made all of us sit up and take notice,” writes another.

“It was the Cold War, we had occasional drills crawling under our desks to protect ourselves from the Bomb (!) and WWIII seemed a very real possibility. Fallout shelter signs were everywhere. Nowadays, if they are still around I don’t notice them.

“Of course, it was presented as the Soviets getting aggressive and JFK making them stand down. Which as you know is not what happened.

“It was only recently that I learned about our missiles in Turkey and Italy that triggered the thing. I also didn’t learn until many years later that we missed WWIII by a whisker, that a Soviet submarine commander had given the order to launch his nukes but was countermanded by a superior officer who only happened to be on board.

“I wonder if any of this was in alternative news sources at the time? I.F. Stone, for instance?

“Khrushchev was depicted negatively, especially when he made his We Will Bury You speech and banged his shoe. But no comparison to the non-stop demonizing of Putin. The way photos are selected that are intended to depict him as sinister and sly.

“Always appreciate your terrific work!”

The 5: Thank you… and thanks to everyone who contributed their reflections comparing then and now.

Still too soon to say sanity has prevailed again. But with the White House’s continued refusal to impose a no-fly zone despite protests in large Western cities blithely demanding CLOSE THE SKY… it does seem the adults are in charge, relatively speaking.

It’s mostly young faces in those crowds, it seems — those who have no memory of the Cuban Missile Crisis or of the 1980s nuclear fright. Anyone born after the Berlin Wall fell and the prospect of nuclear holocaust receded? The oldest are already in their early 30s now.

We give the last word to the lefty Australian blogger and media critic Caitlin Johnstone…

Caitlin Tweet

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. If the fighting is about to die down in Ukraine, the censorship in the United States is not.

Citing its “violent or graphic content policy” (yeah, right), YouTube just took down the documentary Ukraine on Fire mentioned here last week — the one with Oliver Stone as executive producer and interviewer. Director Igor Lopatonok has posted it on Vimeo instead.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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