The Kaffeeklatsch Board meets in Moscow

Paul Goncharoff

While I was tempted to do another piece about my neighborhood ‘Znakhar’ (witch) as she well and truly cornered me on the street for 20 minutes yesterday. She blasted away at me with both barrels with her geopolitical and economic predictions. So, I’ll spare you the frightening details. Instead, and equally scary was an outdoor cafe meeting I attended later that same day over cognac and coffee with three Russian board members (Victor, Alex, and German) of sizeable all-Russia holdings which shall remain nameless. All were at one or another point in their careers Risk Managers, and their comments oddly enough tracked very closely with those the ‘witch’ burdened me with that very morning.

We chatted about how this pandemic has turned the global economy upside down which is apparent in dramatic growth drops among national economies throughout the world. The focus seems set on what the United States will do next with relation to its political and economic ‘competitors:’ China and Russia. That, and how to influence and otherwise pressure ‘allied’ countries to toe the line. With China it is about decoupling in the fields of communications and advanced technologies, leavened with popular hysterics. With Russia it looks to be simply further knee-jerk pressure on its already frequently sanctioned resource-rich, non-communist economy.

Russia, Victor said was strongly affected by the pandemic but looks financially stable because of its budget surplus, foreign reserves, and a large buildup in its National Wealth Fund. The government has instituted relief measures which are valued at almost 3.5% of GDP. It is worth noting that unlike many countries in similar straits the Kremlin’s relief program did not involve injecting or printing “new” money into the economy, instead it lowered expenses through tax holidays and made borrowing easier through loan guarantees. According to all in this little coffe-klatch I was drinking with, it is likely that the Russian Central Bank will reduce rates yet again, perhaps to 4% probably this month as this mechanism seems to work fairly well.

The pandemic has served to shrink the plans of the National Projects program this year, and it now looks like there will be only $60 billion spent on infrastructure and social spending, which are 3.5% of 2019 GDP and 19% of 2019 federal budget revenues.

No country will emerge unscathed from this pandemic-era, and Russia too has been and will have damages. There was a period when the oil price tanked, but at the $40 equivalent per barrel, it is according to Alex a sustainable and modestly profitable price area for Russia’s producers. The country is not likely to have a full blown financial or economic crisis. Russia has been running a budget surplus, building up its National Wealth Fund ($174 billion equivalent in July 2020), and building up foreign reserves ($592 billion equivant at the end of July 2020). 

After the third Hennesey and second cup of cappuchino the conversation took a turn to the USA theme, and what their representative offices in New York were up to given the uneasy social and economic situation of late. It seems German’s Manhattan office has shut down entirely, and all operations moved to Toronto Canada. The reason was extreme overheads, and an undesirable work environment when all things are considered, ie; safety, costs and advantages. 

Interestingly, both Alex and Victor also mentioned that their companies were seriously looking to relocate out of Manhattan to non-Urban alternatives and lower tax zones. Much of this has been made possible as it is proven business can be done without the classic office environment by using distance work technologies. This trend all agree will continue.

What really sparked up this gathering, aside from the cognac, was the recent actions and expected actions of the US Federal Reserve. Almost as a chorus all were shaking their heads in amazement at the probablility, even the certainty that like Japan, the US Fed will shortly be an open buyer of US stocks. They are already doing so through third party blinds, but this is ‘unproven’ according to Victor who gave us a nod and a wink – he would know 100%. 

It sounds logical as the Fed is already intervening in all of the Treasury markets (US sovereign debt), municipal bond markets (debt issued by states and cities), corporate bond markets by index (debt issued by corporations), corporate bond markets by individual corporate bonds (debt issued specifically by corporations),  commercial paper markets (short-term corporate debt market), and asset-backed security markets (everything from student loans to certificates of deposit and more). The worrisome thing is that such interventions are not part of their charter, may be illegal, and in any case should be left to the ‘free market’ for competitive price discovery. Otherwise, as history has shown, bubbles get inflated.

Alex laughed and said this was the Japanification of the US Fed, as the Bank of Japan also has been printing money and buying stocks outright for years. He said to illustrate that at the end of Q1 this year the Bank of Japan owned 80% of all Japan’s ETF’s. To those who may not appreciate this, it means that the Bank of Japan (not the private sector) is the top shareholder in more than half of the companies traded on the Japanese stock market. This led to the question “So gentlemen, how much of the US stock market has been indirectly and directly bought up by the Fed”? Nobody had an answer to that elephant in the room.

All agreed, myself included that we had better buckle our investment seat belts as it looks clear that we are now in the biggest financial bubble so far experienced. Fundamental rules of free markets no longer apply, like supply and demand. It is a situation directly affecting every economy on earth, which means it is US Dollar dependent. German mentioned that the US Fed has already spent over $3 trillion this past quarter alone, and expects that to be $5 or even $6 trillion before this year ends. Not a very solid or stable vision for the world’s reserve currency, and it serves to weaken further trust in the US Dollar, not a good thing for anyone.

We called out to the waiter to bring us the check, haggling over who will pay. I got the short end and wound up paying the congnac-inflated bill as Alex opined “Paul can always print more”. As we were scraping our chairs and gathering ourselves up with the usual off-color guy jokes, I asked “so fellas, where to put our dollars?”. The answer was an almost unanimous “gold, physical gold”, with one added side comment by German “and a little bit of crypto just to flavor your borscht”. It looks like my “witch” was right, and her without a costly economic education.

Moscow September 1, 2020

Paul Goncharoff