Even the most distracted remember that in February Trump announced customs tariffs of 25 percent on aluminum and steel. It is the beginning of the end of globalization, it has been said, a new gloomy era of closure of the Western mind begins. Not to mention the economic repercussions, much emphasized by the producers of cans for carbonated drinks and by car manufacturers, traditional users of metals of all kinds. Inflation will rise, economists said, and risks of a global recession. Curiously, as economists calculated the impact on inflation and growth and equity analysts lowered earnings estimates for cans and cars, the stakeholders, namely aluminum and iron ore (used to make steel), in the General indifference went against the tide on their own and went down, not up. Iron ore, at $77 a ton before Trump's announcement, is now at $69.
As for aluminum, it fell by 10 percent in the month following the announcement. However, the descent was abruptly interrupted on April 5, when Trump announced new sanctions against Russia and particularly affected Rusal, the Russian aluminum giant, making it technically very difficult, among other things, to pay the coupons on its bonds. Since that day, in two weeks, aluminum has risen by 30 percent and the rise, according to many industry experts, can still continue. Note that this time no one criticized Trump and no can maker said anything. In the religious wars of our time, globalization is good and Russia is evil. If fighting Russia means deglobalizing, never mind, in this case there is a special dispensation and it can be done. This story offers us many lessons and confirmations.
Most importantly, the second cold war is different from the first. The first was slow and ritualized and used codes and channels of communication that had been formed during World War II when the United States and the Soviet Union fought on the same side. There was, even in the most tense moments, a mutual respect of form and substance. The greatness of the adversary was recognized. The wars on the borders of the two empires were foreseen and were also frequent, but it was known in advance that they would remain local and be fought conventionally, guns, tanks, planes and nothing else. The propaganda was symmetrical, Radio Moscow on one side, Voice of America on the other. Even the very intense espionage activity was regulated to the millimetre. A lot of Cia in Moscow, just as Kgb in Washington. On the economic level, relations were clear and correct.
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The Soviet Union could export its oil without problems and use the Western payment system. It could issue bonds in dollars and pay its coupons with timely punctuality. Western companies were forbidden to export advanced technology, but when Fiat asked the State Department for authorization to open a large factory in Togliatti, this was intelligently granted. The idea was that by making Russians into small owners, even if it was just a small car, the communist ideology would corrode from within. The second cold war makes the first look like a gentleman's dispute. It is irregular, non-ritualised and of movement. The panoply includes warfare and computer espionage and, where already possible, artificial intelligence. These are opaque instruments, impossible to weigh on the scale (and therefore potentially asymmetrical) and on which public opinion can be manipulated as one wishes.
The rhetoric, for its part, has once again included the use of nuclear power while economic relations are less and less predictable and Russia no longer has the guarantee of being able to use the Western payment system in the future. America is learning to use sanctions in a targeted and dynamic way and is enjoying it. It uses much less traditional commercial measures and acts on individuals on the one hand and on the financial system on the other. If you control the world's hydraulic system through the settlement of transactions and custodian banks (all American or with an important presence in America) it is enough to turn off a single tap to cut off the water to whoever you want to hit. Those who operate in emerging markets are used to making decisions based on the economic fundamentals of sovereign or corporate debtors. If it's forewarned, it adds a second layer of geopolitical analysis.
A debtor country may have a terrible current account deficit and may have depleted its foreign exchange reserves, but if it has a saint in heaven (a State Department official who phones the IMF) the money to pay a coupon or repay a bond they will always find each other and, badly, there will be mild and favorable debt restructuring. This was, for example, the case with Turkey for decades, it is the case with Ukraine in our times. Today we need to introduce a third level of analysis, that of the payment system. A debtor may have a healthy balance sheet and a willingness to diligently service its debt, may send the custodian coupon dollars even ahead of schedule, but if the custodian has been barred from distributing the money to bondholders, they will remain unpaid. 'dry. Of course, the day the sanctions are lifted the coupons will be released, but it could take years.
At the next coupon, the willing debtor will propose to the creditors an exchange of bonds in local currency, perhaps with principal and coupons indexed to the dollar, but things will still get complicated. You will need to open an account in a local bank and have the amount credited there, and then repatriate it. At that point the issuer, however healthy it may be, will have to refinance itself at a high price through other channels. There will always remain, in some basement in London, a dedicated boutique that will broker these titles, but for the general public, institutional and individual, access will remain closed. To this can be added operational problems of various kinds. If you search for an Iranian stock on Bloomberg, you will be told that all information is suspended due to sanctions. Something similar has also been proposed for Russia in recent days. The sanctions on financial flows are so powerful that in America it has been proposed, especially on the democratic side, whether to make them even more radical, excluding Venezuela and Russia from the entire system of payments in dollars.
For now, it has been decided to go slowly, so as not to push China and Russia to overdevelop their own alternative system of regulations. China tries to settle everything it can in renminbi and promote its use, but the time frame for creating a reserve currency takes decades, not years. Russia today offers very attractive prices on the ruble, bonds and shares. Interestingly, the United States, which at the time of the Russian occupation of Crimea and the concomitant collapse of crude oil (2014) they hoped for a complete collapse of the ruble to turn the Russians against the government, I tweet today with Trump that Russia and China shouldn't even think of devaluing. However, investors must take into due account the possibility of even more severe sanctions, even if at the moment the possibility that these will affect sovereign debt appears remote. The problems we have talked about concern for now only Iran, Russia and Venezuela. The other emerging countries continue to enjoy excellent financial press and actually still have attractive valuations.
Even in their case, however, 2018 will be better than 2019-2020, when US rates are higher and the global economy slows down. With respect to these concerns, now fueled by the end of the covering of shorts on Treasuries and by the resumption of the decline in prices, the choice of Clarida as number two of the Fed can be comforting. Clarida is a high-profile intellectual figure and is to Powell what Fisher was to Yellen, of which he was the great adviser. He theorizes a neutral real rate at zero from 2014 (for at least another three to five years, he wrote at the time) and suggests a Fed that will limit itself to accompanying inflation, without introducing positive real rates yet, at least, for a few more quarter. Coming to the short, we see a fall in volatility (volatility has become volatile, let's get used to this new world). Stock markets are pushed up by earnings, especially in America, but held back by the reacceleration of inflation expectations, in turn due to oil in recent days. Which, to return to today's topic, should also support the ruble.
