From John Maudin's newsletter. He is quoting someone else who runs a large hedge-fund but if this drags on this is what this manager is expecting to happen.
The first is a note that I got from the head of emerging-market trading at one of the world’s largest hedge funds. This is what he sent out last week, ahead of any real action:
My view, Putin is stuck now, cannot easily de-escalate. Further escalation is a possibility, with Ukraine cracking along the obvious ethnic fault lines and the West reacting with measures such as sanctions and visa restrictions. Tit-for-tat follows; gas supplies to the EU are disrupted. Russian capital outflows accelerate and the RUB [ruble] quickly gets to 40/$, fueling inflation and unnerving the Russian banking system, and also infecting the European banking system, in the manner that Chris Watling has envisaged. Meanwhile, the Chinese liabilities residing inside the European banking system are also in trouble, of course, and will continue to deteriorate. The CBR [Central Bank of Russia] hikes repeatedly with very little effect on slowing the RUB slide, further hurting GDP growth and economically sensitive segments of the market. The Russian RTX index revisits the GFC lows of 2008, Gazprom ADR's are already within shouting distance of their 2008 lows today. In such a scenario, there is an obvious risk of market contagion spreading throughout Eastern and Western Europe, and in fact the rest of the world. It is likely to resemble something on the order of the 1998 LTCM + RUB collapse + Asian financial crisis magnitude. In fact, a number of hedge funds will fail precisely because they have loaded up so heavily with European debt instruments which will unravel.
I would hope cooler heads will prevail but this is a long term outcome if this continues for quite a period of time. |
learning that art is what makes a good trader. Most of my trades the last several weeks have been range trades but that is hard to teach and harder to master.