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Todd Harrison: Mother Russia May Yet Say Nyet!


Vladimir Putin holds an economic wild card that is being overlooked by the masses.

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time.

Michael Sedacca and I were at dinner last night and somehow stumbled upon the subject of the scarcity of money... because that's what we like to talk about after a long day in the office.

I offered that interest rates would increase if/when money became scarcer; he argued the base-rate would actually decrease if the supply of money (i.e. liquidity on a relative basis) was low, but spreads on non-risk free bonds would increase. Risk-free interest rates are more sensitive to the supply and demand of credit.

We picked that discussion back up today and spent a good twenty minutes following the trail.

That led us to a broader conversation on the role and ramifications of interest rates. We discussed how overseas buyers are gobbling up all-things risk, from stocks to commercial real estate, as the Fed pushes their agenda in the hope that legitimate economic growth wil materialize. We asked what the "tipping point" might be if we don't get to where we need to be by the time we need to get there; spitballing, if you will.

I won't rehash the 'cumulative imbalances' discussion because none of it seems to matter anymore, at least until a catalyst serves as a spark in the dark.

What I will do, however, is note potential risks so they remain on the radar. Not as a governing principle mind you, but through the lens of 'seeing both sides' and risk management. 

Once upon a time, that was a good thing, even if it's become anathema of late and a drag on performance the past five years.

There is no way to foresee a black swan -- but Michael and I agree that the 'unexpected' catalyst may well be Russia or somewhere in the emerging markets given the recent 12% move in the Yen. 

With the Ruble down 40% YTD -- which is more than the 25% drop in 1998 that caused a default -- the cost of living (through the eyes of Russian nationals) is through the roof. Factor in the international sanctions, the 24% YTD drop in crude and the quickly-approaching winter months, and the stage is set for a scolding from Mother Russia.

That might be yawned-off -- repetition breeds complacency -- but remember, the end-goal of war isn't death or physical destruction -- it's economic ruin.

With everyone focused on the Fed today, just as they were on earnings before that, and with the markets grinding higher and performance anxiety percolating into year-end, we would be wise to keep an eye on Putin lest he pulls a Grinch out of his hat.

If that borscht hits the fan and there is a cold war in the cold season, the 'weapon of mass deconstruction' may take the form of not honoring financial obligations to the west. 

While they hold less debt than they once did, they're still a force to be reckoned with, a major cog in the economic engine. That matters in an interdependent finance-based global economy.

With increasingly little left to lose, Russia holds a wild card -- the potential to disrupt the world stage in a meaningful way. And that would certainly shock global risk assets, which brings us back to where this conversation began.

After all, as debt burdens continue to increase, liquidity in the system -- and the ability for companies to access credit -- has become an increasingly important variable in the grand equation.

I know; the lunatic ramblings of a man who knows not of what he speaks.

That's alright; I've been here before.


Twitter: @todd_harrison

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