This is the Titanic
Josef Koudelka © MagnumPhotos
I first went to the United Kingdom and to Westminster School in January 1979.
It was a very cold Winter. It is difficult to forget that period and in case you need reminding
Prime Minister Callaghan was asked by a reporter
"What is your general approach, in view of the mounting chaos in the country at the moment?" and replied:
Well, that's a judgment that you are making. I promise you that if you look at it from outside, and perhaps you're taking rather a parochial view at the moment, I don't think that other people in the world would share the view that there is mounting chaos.
The next day's edition of The Sun headlined its story "Crisis? What crisis?"
The Sun has always had a penchant for eye-catching headlines. Who can forget that The Sun’s fabulous headline ‘Freddie Starr Ate My Hamster’ but I digress.
By the early 1990s I was working at Credit Suisse First Boston and was running an Emerging Markets Repo Book. I had flown to New York to meet my credit Officer Walter J. Fakula who was a towering 6ft 8in presence and explained to him how there were a whole slew of Brady Bonds [Brady bonds are dollar-denominated bonds, issued mostly by Latin American countries in the late 1980s. The bonds were named after U.S. Treasury Secretary Nicholas Brady, who proposed a novel debt-reduction agreement for developing countries.] which carried a component of embedded US Treasuries and that we could lend against these securities with haircuts of course.
My Lending Book grew overnight to above $2b and we were making out like ''bandits'' because in those days we had no competition. We grew the business and of course everyone was knocking on my door including a very interesting Fellow called Michael Leitner who tried to squeeze the then benchmark Venezuelan Brady Bond, bought the entire cash bonds available [which I was financing] and then bought calls on those same bonds. Of course, we have seen reiterations of this Gamma Squeeze Trade over and over affirming Edwin Lefevre's adage
“Another lesson I learned early is that there is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market to-day has happened before and will happen again''
Reminiscences of a Stock Operator is a 1923 roman à clef by Edwin Lefèvre.
Now lets fast forward to Q4 1994. By this stage, we were financing all sorts of exotic Instruments one of which was Mexican short term dollar denominated debt, called Tesobonos. Investors were getting a seriously juiced equivalent $ interest rate but everything of course hinged on a stable exchange rate. I had about $300m lent against these securities.
However, in November USD 3bn is pulled out of the country, of which USD 1.6bn on a single day (18 November). I remember that date 18th November 1994 as vividly as I remember Black Wednesday (or the 1992 Sterling crisis) 16 September 1992.
The Tequila crisis unfolded as follows
December 1st, 1994 The new Mexican government, headed by President Zedillo, takes office.
December 15th, 1994 The Wall Street Journal publishes an interview with the new Finance Minister Jaime Serra Puche, in which he denies that Mexico will devalue the peso. The next day, USD 855 m leaves Mexico.
December 20th, 1994 The new cabinet concludes that the situation is unsustainable. Therefore, the Central Bank of Mexico announces a lift of the upper band of the exchange rate by 15%, an effective devaluation of the peso.
December 20-21th, 1994 In the two days after the announcement, USD 4.6 bn leaves the country, half of the foreign exchange reserves.
December 22th, 1994 The intervention on the foreign exchange market is lifted, and the peso is allowed to float freely. The total devaluation of the peso amounts to 35% by the end of December.
Of course, I was now in the eye of the storm and having to give frequent updates to bosses Bob Diamond Marc Hotisky et al. And during this period I said to my Bosses
The US cannot afford for Mexico to crash. Mexico is on the border of the US. The Spillover effects would be unfathomable. Therefore a package of support is inevitable and we need to buy all the Tesobonos at these bombed out prices. Within minutes Diamond had a multi jurisdiction call going on [I still remember his Fridge which was always filled with Diet Cokes], with the Vice Chairman David Mulford, Hotimsky and others. And within thirty minutes, we were in the market and the only Buyer of those Tesobonos.
February 1, 1995 Press Release: IMF Approves US$17.8 Billion Stand-By Credit for Mexico
I was twenty nine years old then and never again have I met a constellation of brilliant minds like I did then, able to make decisions at speed. My Mistake was to think You can find this constellation. That Group at CSFB in 1994/1995 was unique. I have tried to recreate it on Twitter but when you are in the maelstroem, You are not going to Tweet. I worked for many organisations but never again found a Bench like I had at that time.
Before proceeding, we should note that pointing out the flaws in the West’s war response is not “pro-Putin,” nor is it “unpatriotic” as some propagandists on Twitter would have you believe. It is the opposite. Crazy Pills @DoombergT
No matter how the official narrative of this turns out, these are the places we should be looking, not in newspapers or television but at the margins, graffiti, uncontrolled utterances, bad dreamers who sleep in public and scream in their sleep. Thomas Pynchon, Bleeding Edge
Now lets come to this Year. I recall being in London early in the Year and meeting with old school friends really successful ones at the pinnacle of their careers.
And the Ukraine War had started and they all told me ''he is in and he is forced out in a few weeks Chum'' And I said ''No he is not'' and have you thought of what will happen and to be frank I was dismissed out of hand. On Twitter I had to mute the Claque and the echo chamber that is the Western Think Tanker class for my sanity.
The @POTUS Official Who Pierced Putin’s “Sanction-Proof” Economy @NewYorker
Singh said, “We’ve made him stare into an economic abyss. But he could choose to pull back.”
The markets are where these two systems touch—the supply of buckwheat, the joint energy ventures, the price of the ruble—and within this arena the sanctions were a demonstration that Washington still had levers to pull.
“You know, we can play chess, too,” Singh said. “It was important for us to show that the fortress could come crumbling down.”
Hubris (/ˈhjuːbrɪs/; from Ancient Greek ὕβρις (húbris) 'pride, insolence, outrage') describes a personality quality of extreme or excessive pride or dangerous overconfidence, often in combination with (or synonymous with) arrogance.
The democratization of authority spurred by the digital revolution has flattened cognitive hierarchies along with other hierarchies, and political decision-making is now driven by often weaponized babble. @FukuyamaFrancis Fukuyama
I was reminded of Sun Tzu & The Art of War ''victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win” ― Sun Tzu, The Art of War
I wanted to explain that a ''revanchist'' Putin is in fact not a Risk Taker, that he has waited patiently for this moment. Our Western Economies are like a bonfire of turbo financialised QE, that the violence of the geoeconomic boomerang is going to be unprecedented.
Sure Mr. Taleb says ''The Western system is inherently self-correcting. Help preserve it!'' but how do we preserve it with this level of insanity.
The ''Leader of the Free World'' President Biden said his sanctions against Russia would “reduce the Ruble to rubble”
& Today The RUB is the strongest strongest currency in the World via @SantiagoAUfund
The Economist is reporting
Why the Russian economy keeps beating expectations @TheEconomist
“Experts predict Russia’s gdp will contract up to 15% this year, wiping out the last 15 years of economic gains,” the White House gloated.
Both sides of the debate agree the country is still hurting. Massive increases in interest rates in the spring, designed to stabilise the collapsing rouble, along with the withdrawal of foreign businesses, have pushed it into recession. In the second quarter of the year gdp fell by 4% year on year, according to official figures.
Our ability to Pull forward is exhausted. You would have to be an imbecile not to have predicted that
1. Just for fun: Today's Eur 300 gas price is 17x the long-term average and the Dec. 20 price. Putin has to sell 1/17 much as gas as he did in 2020 to make as much money. Who came up with these sanctions? Must have been knuckle-headed academic economists.
2. Germany's consumption of around 1000 TWh of #gas per year just got a lot more expensive. @COdendahl
We used to pay <1% of GDP for gas. At €300, it will be ... 8.4% of GDP.
3. Good Morning from #Germany, which is heading toward an electricity crisis. The 1y ahead power price has skyrocketed to almost €1,000 per megawatt hour. The electricity price has risen by 720% ytd. @Schuldensuehner
4. If bills do indeed exceed £6k next year then you're talking about spending £120bn-£130bn to freeze people's bills. This is a staggering amount - more than double the cost of furlough - which was already the single biggest economic intervention in UK peacetime history @EdConwaySky
5. Just thought I might update you on the latest ‘best’ energy deal available for a pub of our size. We were paying 15p/unit in May. This is the best quote available today. @RoseAndCrownBeb
The most disturbing part of all is that the parabola has not resulted in any policy shifts, and in fact a doubling down.
“But it is a curve each of them feels, unmistakably. It is the parabola They must have guessed, once or twice -guessed and refused to believe -that everything, always, collectively, had been moving toward that purified shape latent in the sky, that shape of no surprise, no second chance, no return.’’
Depending on you see a thing
The ship is free, or is it sinking?
This is the Titanic, plain and simple.
I take you now to Ibn Khaldun who admittedly was speaking about the intrinsic relationship between political leadership and the management of pandemics in the pre-colonial period in his book Muqaddimah
Historically, such pandemics had the capacity to overtake “the dynasties at the time of their senility, when they had reached the limit of their duration” and, in the process, challenged their “power and curtailed their [rulers’] influence...”
Rulers who are only concerned with the well-being of their “inner circle and their parties” are an incurable “disease”.
States with such rulers can get “seized by senility and the chronic disease from which [they] can hardly ever rid [themselves], for which [they] can find no cure”
Emmanuel Macron warned France to prepare for a miserable winter in which they must be ready to pay “the price of liberty”
“the price of liberty” which was not engaging with Putin and at least picking a better moment is beyond calculation. Our Economies are teetering and the downside cascade effects are now in plain sight. Is anyone modelling what is now a cliff edge?
How many Jobs are about to be vaporized? How many Businesses? Are we going to print more worthless Euros?Are our Leaders going to spin more weaponized babble? as we career at top speed off the cliff.
Lets finish off with the markets.
The Euro and GBP are at the cliff edge.
May 2 Currency puzzles I AM EXPECTING THE DOLLAR INDEX TO RALLY TOWARDS 110.00 BECAUSE WE HAVE UNDERGONE A REGIME CHANGE
I believe the The FAO Food Price Index (FFPI) which averaged 140.9 points in July 2022, down 13.3 points (8.6 percent) from June, marking the fourth consecutive monthly decline. @vtchakarova
Is poised to rally sharply higher.
One of the preeminent Thinkers today is @CreditSuisse's Zoltan Pozsar and he said
The policymakers to follow are no longer central bankers, but heads of state at the pinnacle of power who aren’t known for the transparency of their thinking – especially not when at war. @CreditSuisse Zoltan Pozsar
I have no faith in those at the pinnacle of power. None. So I expect more babble and a doubling down.
Sheep spend their entire lives being afraid of the wolf, but end up eaten by the shepherd. Fabio Vighi
The sacrifice of a sheep (1997) Kourush. Daghestan. RUSSIA Thomas Dworzak @fatalstrategies