Since 2008, we have warned America that a global economic war was underway. We saw serious battles in place during the 2008-09 financial crisis. We've seen numerous battles since then but nothing like what is happening right now. Our challenges have rarely been greater; our opponents rarely bolder. The economic war should be obvious for anyone with eyes to see or ears to hear. Yet, the government continues to ignore reality even as threats increase.
Interestingly, the market's recent declines began the day that Alibaba's Variable Interest Entity was listed on the New York Stock Exchange in the largest Initial Public Offering in history. That was one month ago. The Dow peaked at a record 17,350 on September 19th. This week it traded as low as 15,855, down almost 1,500 points. The S&P 500 has fared even worse, losing almost 10% from peak to trough. While it is very normal for markets to experience a 10% correction, this one looks and feels different. It is really a tug of war between forces seemingly intent on crashing the market and forces seemingly intent on preventing a crash. While we don't have access to the actual trades (as we did after the 2008 crash which virtually proved there was manipulation), we can be certain that the global economic war is responsible for much of the struggle.
Jim Cramer of Mad Money fame made the case that Russia and other geopolitical concerns were major factors taking the market lower:
"I think this issue is at the fulcrum of much that goes wrong these days. Every time there is a provocation by Russia, we sell off; every time," said Cramer. "Some of that is our knee-jerk following of the selloff in Europe. Some of it is we worry about sanctions put on Russia that could end up slowing world growth."
Impact: If there was ever a wildcard in the market, it's Russian President Vladimir Putin. Cramer says he presents significant uncertainty to the market, which in turn prevents money from going into some higher risk assets.
Granted, Ebola is a part of the problem and we should hope and pray that it is not being used as a biological weapon. But there are other things that may not make the Evening News but are clearly causing global uncertainty and problems. For one, Vladimir Putin believes we are in an economic war against Russia and has promised retaliation.
Putin this week threatened to cut off gas supplies to Europe (even if he did suggest it would be Ukraine's fault). Putin this week reminded the world that Russia is a nuclear power:
Russia's partners should remember the risks involved in disputes between nuclear powers, Putin said. He accused Barack Obama of adopting a "hostile" approach in naming Russia as a threat to the world in the U.S. president's speech to the United Nations General Assembly on Sept. 24.
"We hope that our partners will realize the futility of attempts to blackmail Russia and remember what consequences discord between major nuclear powers could bring for strategic stability," Putin told Serbia's Politika newspaper on the eve of his visit to the Balkan nation today.
We have been warned that Russia can crash our stock market at will. The NSA has admitted the Russians (among others) have that capability–not only to crash the stock market but destroy the whole financial system. Russia has hacked the NASDAQ. Russia hacked JP Morgan and up to 10 other banks and the hack went undetected for a long period. Russian criminals have planned a billion-dollar bank heist. Russia has hacked governments and just about everything in the West. This has gone on for years. Let there be no doubt—Putin and his aides have been telling us that the economic war can escalate at a moment's notice with catastrophic consequences:
"An attempt to announce sanctions would end in a crash for the financial system of the United States, which would cause the end of the domination of the United States in the global financial system."–Kremlin economic aide Sergei Glazyev.
Does he feel justified in retaliating? Absolutely. He's seen sanctions against Russia by the United States and Europe that have cratered the Ruble. And, lower oil prices are more devastating to Russia. Even the New York Times and BBC have offered opinion articles that suggest America and the Saudis have been manipulating oil prices lower to hammer Putin:
16 October 2014 Last updated at 13:11 ET
By Anthony Zurcher Editor, Echo Chambers
Lower oil prices, reflected in falling petrol prices at the pump, have been a boon for Western consumers. Are they also a potent US weapon against Russia and Iran?
That's the conclusion drawn by New York Times columnist Thomas L Friedman, who says the US and Saudi Arabia, whether by accident or design, could be pumping Russia and Iran to brink of economic collapse.
Despite turmoil in many of the world's oil-producing countries – Libya, Iraq, Nigeria and Syria – prices are hitting lows not seen in years, Friedman writes . . . [To CONTINUE Reading at BBC News…]
Have the Russians considered this? You bet they have. Consider this from Pravda earlier this year:
U.S. President Barack Obama tried to convince the King of Saudi Arabia to coordinate actions in the oil market to reduce world oil prices, the main source of Russia's export revenues, and "punish its behavior" in Crimea. Experts estimate that if the prices are reduced by as little as 12 dollars per barrel, the Russian Federation will lose $40 billion in revenue. There has been a precedent, because this is precisely how the USSR collapsed….
There is a precedent of such joint action that caused the collapse of the USSR. In 1985, the Kingdom has dramatically increased oil production from 2 million to 10 million barrels per day, dropping the price from 32 to 10 dollars per barrel. USSR began selling some batches at an even lower price, about $6 per barrel. Saudi Arabia has not lost anything, because when prices fell by 3.5 times the production has increased five-fold. The planned economy of the Soviet Union was not able to cope with falling export revenues, and this was one of the reasons for the collapse of the USSR…. [To CONTINUE Reading at Pravda…]
So, if Russia believes we are attacking them directly, can we not assume that they will respond? Putin has made efforts to crash the dollar. He is continuing in that "end-game" plan but has received a "blowback" from America's pressure on the SWIFT system that handles international money flows. So, he has teamed with China to create an alternative to SWIFT. In the short term, the dollar has remained resilient and even strengthened dramatically. This has limited Putin's current options but not changed his long-term plans. Is it possible that the overt sanctions and possible covert oil manipulation might be sufficient provocation for Putin to unleash the market crash weapon through cyber or other means? The Russians have been quite clear that they will respond tit-for-tat to economic weapons used against them. If they can't hit the dollar now, would they manipulate the stock market?
Prominent market experts understand that computerized trading can drive any correction or crash. Consider these excerpts from an October 13 commentary by Kenny Polcari, director of NYSE floor operations at O'Neil Securities:
Kenny Polcari, October 13, 2014
…Recall – for those of you who can – Oct. 19, 1987, a dark day in history. Portfolio insurance, a risk-management product gone bad, was an early iteration of the current algorithmic risk-management tools that react only to data and technicals – unable to assess the reality able only to respond to data. Void of any interpretation at all.
The global crash came that day because we allowed computers to make investment decisions without questioning. The logic was: If the computer says I must sell X percent of my portfolio to protect it, then I will do that. The problem was that all of these asset managers bought the same protection and then they all got the same "sell" signal, which, then by default, caused a circular reaction. Selling created more pressure to sell and the cycle kicked in again.
This may be the only reason that the correction will come – because we allow the investing process and the execution process to be run by robots. Robots that have no "skin in the game"….
Under more normal circumstances I would not believe that this is the beginning of the correction –I do, though, believe that technically the market has suffered some damage and needs to re-group. Churning and volatility will result and a break of the 200-day moving average on the S&P that will cause the algo's to kick into high gear. Buyers will retreat and move lower and let the sellers come to them – the more pressure created by the algo's, the lower the buyers will move essentially allowing the prophecy to become reality.
All that being said, the fundamentals are not as bad as recent market action makes it seem. We have been living with a weaker Europe for years now, we have been living with the eventual end to quantitative easing and the possibility of rising rates for 8 months now, we have been living with the geopolitical concerns forever. So, I ask again — what has changed? In the end, we have given up the ability to control the markets when we allowed the technology to operate on auto pilot.
Now, when you couple the fact that computers are driving the market and that computers can be manipulated (with Russia having that capability), you can see how serious this becomes. Putin literally has the ability to crash our stock market and he could do so anonymously. We still aren't certain what caused the "flash crash" in 2010 but it absolutely could have been financial terrorism. Also in 2010, a Russian national was convicted of stealing Goldman Sachs' proprietary trading algorithms (although later acquitted on what some viewed as a technicality). What if pressuring American stock markets would strengthen Russia's call to drop sanctions to preserve the global economy? Or to demand that oil prices be pushed higher rather than lower to strengthen the economy? When you consider all the facts, such possibilities become all too realistic.
Interestingly, as every major Western stock market has been in turmoil, Putin has been courting the Chinese. And the Chinese stock market has been remarkably stable, with Chinese shares actually rising while Western share prices collapsed. Beyond that, it is clear that the Chinese have been winning both directions even as Russia and America have suffered:
Putin said China-Russia trade could hit $200 billion by 2020, as Beijing takes advantage of Western pressure on Moscow to cut sweetheart trade and investment deals.
By Fred Weir, Correspondent October 14, 2014
MOSCOW — The economic synergies between energy-rich Russia and resource-hungry China may appear obvious, but mutual suspicions have long kept them apart.
But now, amid Western sanctions blocking Russian access to European and US capital markets, Russia and China have agreed to new deals that go beyond traditional energy and arms sales – giving Moscow some economic relief at a sweetheart deal for Beijing.
During a three-day visit to Moscow that ended Tuesday, Chinese Premier Li Keqiang signed 38 new deals with Russia, including a big expansion in Russian gas sales to China. Russian President Vladimir Putin sealed a huge $400 billion gas contract with China in May, but the fresh deal would reportedly double that. Moscow also reportedly agreed to sell some of its most advanced weaponry to Beijing.
China-Russia trade has grown from around $40 billion to $90 billion in the past six years, but Mr. Putin said Tuesday that it's set to jump to $100 billion next year and $200 billion by 2020. By comparison, Russia's trade with the European Union in 2012 totaled around $340 billion.
It's a golden opportunity for China to leverage Russia's political problems with the West and nail down long-term oil and gas contracts at knock-down prices, say experts. "The fact is that China needs energy, and we have it. Russian negotiators are not fools, they know what the bottom line means," says Mr. Salitsky. "What we see is a long-term mutually complementary relationship taking place here, at an accelerated pace."
In addition, the Chinese are taking advantage of Russia's limited access to Western capital. New Chinese projects include a reported $10 billion commitment to upgrade Russia's railroads, a "strategic partnership" between Russia's state oil company Rosneft and China's CNPC, and a proposed joint development of a long-haul passenger jet…. [To CONTINUE Reading at CS Monitor…]
Our own Pentagon-sponsored war games demonstrated how Russia and China could team up to take down our economy. Or. China could sit on the sidelines and profit as the United States and Russia attacked each other economically. Either way, we lose ground. China gains it. And, according to the IMF, China has already surpassed the U.S. as the world's largest economy. As Larry Kudlow recently admitted, the Chinese are not our friends. They sell us a bill of goods like Alibaba and turn around and want to buy prize American real estate like the Waldorf Astoria from which they could spy on our top diplomats.
The bottom line is that the Russians are being squeezed and we should expect retaliation. Remember, a wounded animal is often the most dangerous.
Don't ignore these realities. The global economic war is underway. Further escalation could be catastrophic.