Exciting news! Financial Sense Wealth Management has a beautiful new website: www.financialsensewealth.com. Come take a look!

Russia’s Crisis Is Europe’s Crisis

On the 30th of October 1956, France and Great Britain in support of Israel invaded Egypt.

This military action was taken in response to Gamal Abdel Nasser’s decision to nationalize the Suez Canal. The military campaign was generally a success, however, soon after the Prime Minister of England, Anthony Eden, was forced to withdraw militarily and resign in utter humiliation.

The President of America at the time, Dwight D. Eisenhower, had not been informed by the belligerent nations of their intentions and was furious at their unilateral invasion. The American administration decided to force an about-turn. To achieve this objective Eisenhower did not use American troops, nuclear threat or conventional fire-power. No, he simply declared economic war.

Accordingly, no crisis financial support was granted to Britain. Within a week of the invasion 280 million dollars worth of sterling had been sold, an enormous amount of currency in those days. On the 6th of November Harold McMillan, the Chancellor of the Exchequer, informed Eden that there was a full scale run on the pound. He outlined to an emergency cabinet meeting that without American support the currency of the British Empire was going to collapse. Following frantic high level transatlantic phone calls between Washington and the City of London, a deal was struck. In return for saving the sterling, Eisenhower insisted upon an agreement for the complete withdrawal of all invasion forces. Eisenhower’s demand was met within hours. American economic hegemony was born. The rest is history.

Vladimir Putin would have been well advised to study the lessons of the Suez crisis before he invaded Crimea. Like Anthony Eden of Great Britain he is beginning to realize that economic warfare can be more ruthlessly destructive than military might. Last week’s 17% hike in Russian interest rates is but an indication of the desperation now creeping into Putin’s policy advisors. The charts below clearly indicate that the Russian economy is in total free-fall.

Source: Macrobond

Source: Macrobond

Source: Macrobond

Many believe that the collapse in oil prices is actually a key part of the American policy to destroy Putin’s oligarchic support. America knows oil is Russia’s Achilles heel because the majority of Russia’s currency reserves are dependent upon oil and gas. Given that minimal diversification from fossil fuels had taken place under Putin it was clear to all in the know that he was sowing a Crimean whirlwind, with dire consequences, when he invaded the sovereign territory of Ukraine earlier this year.

However, there are grave risks involved in America’s economic warfare with Russia. Since the fall of the Berlin wall in 1989 Western Europe has grown ever more attached to Russia, economically. The economic sanctions and collapsing prices in oil have had a profoundly negative effect on European GDP. As can be gathered from the charts below, Switzerland, Germany, France, Italy and Great Britain are now experiencing deflation. This is not what the ECB expected to see after years of easy monetary policy.

Given that most of the “tools” available to the ECB have been used up over the last 7 years it is hard to see what policy moves can be made by Brussels to ward of a recession should one really take hold.

Politically, the European Union is operating under a very tenuous paradigm. Monetary union is clearly failing. Due to deflationary austerity, Greece more than likely is heading towards forming a new government which will be dependent on the hard left. This grouping has stated publicly that should it come to power it will seek to cancel 50% of its borrowing from the ECB. Frankfurt has responded by threatening to force a Cyprus type bail-in solution should Greece default. A bail-in on this scale could have devastating consequences on European banks and possibly cause a run on the Euro. Clearly the stakes are very high on how the current Greek crisis plays out.

Source: ElliottWave International

Russia’s crisis is Europe’s crisis, and given the integrated nature of modern global finance, Europe’s crisis is America’s crisis. Europe has not been this unstable since the Soviet invasion of Czechoslovakia in 1958. It does not have an astute EU leadership capable of dealing with the complexity of crises now facing it. Let us hope, for all our sakes, that President Obama and the American administration have a clear end game in sight. All too easily economic warfare could turn into hot conflict and the last thing Europe needs now is a Russian despot, with his back to the wall, forced into a military cul-de-sac for the sake of saving national pride.

Recent Pullback Brings Technical Relief

From mid-October until December 8th, the market had been on a roll. For 35 trading days there was practically no price weakness. During this period the VIX and the McClellan Oscillator were indicating such permanent lack of volatility it was becoming pedantic to watch. It was as if there was no fear left for the market to price in.

The recent pullback, though slight, brought much needed technical relief. Price levels have now been tested and despite the aforementioned global instability the market has come back strong, supported obviously by recent positive statements from the Federal Reserve.

The overall strength and direction of the current trend is not in any doubt given the power of the American recovery. As per Dow Theory a trend is in place until a counter trend is confirmed, by both the Industrial and the Transport Indices. No counter trend is in sight as we speak. Thus, the correct trading strategy at the moment is to buy on any pull-back and sell into ever higher highs.

I would have preferred a more substantial correction but we must accept what is given and follow the price action accordingly.

The last thing any active investor wants at this time of year is to be left behind by any “festive-rally” and I think we just might be getting one.

Chart: Dow Industrials: Daily

Chart: VIX: Daily

Chart: McClennan Oscillator

Charts courtesy of The Irish Independent, Elliott Wave International & Worden Bros.

© Christopher M. Quigley 19th. December 2014

About the Author

wealthbuilder [at] eircom [dot] net ()