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Posted July 19, 2022

Sean Ring

By Sean Ring

Got Rubles?

Credit: Sean Ring

  • The Dow was up about 800 points.
  • Earnings were good; Russia was better.
  • Let’s rehash what I wrote about Russia in March.

Happy Hump Day!

I know you’ve been reading the Rude for ages, but there are some who haven’t.

I sit in NYC, cracking up that the WSJ thinks the Dow is way up on earnings.

It’s really because US investors think their largest export market, the EU, will get Russian gas.

If the EU falls, the US has no one to sell to.

I tried to get this point across in my class today.

Alas, the kids are young.

So in this Rude, I’ll show new readers what I mean what I write things like, “You can’t live without Russia.”

If Russia has turned on the natural gas deliveries again, there may be hope for the other important materials they harbor.

From the Rude edition of March 24, 2022:

————

Good morning on this quiet Thursday from the rural Philippines.

Only a week until I head to Europe, the land of insane energy prices.

As I was sitting in my chair this morning, I was fondly reminiscing about the 1980s.

That’s when America was by far the planet’s garden spot, the rest of the world wanted to emulate the place, and quarterbacks knew how to run a 2-minute drill.

And today, my friends, is the day that era finally ends.

For good.

It’s the day, every decade or so, when the dire predictions of the Austrian School economists come true.

Peter Schiff, stand up.  Take a bow.

For the first time since 2008, you’re correct.

I don’t want to overegg the pudding, but today will be remembered as the day powered shifted irrevocably eastward, towards Mackinder’s Heartland and away from its periphery.

How did it all come to this?

Oh, that’s easy.  Hubris and a lack of strategic thinking.  Lesser sons riding on the momentum of better men.

But it really comes down to this: you can’t trust western governments with your money anymore, and the whole world now knows it.

The pieces have fallen into place.

The US has embarrassed itself; the UK closed its financial center to everyone but ESG investors, and Switzerland has given up its neutrality.

Poland is itching for a fight; why, I’ll never know.

Oh, it’s because they think they can trigger Article 5 and end Russia once and for all.

Sweden has just abandoned its political neutrality to send weapons to Ukraine.

For what?

Does Sweden really think NATO will come to its aid if Russia attacks its weapons convoys?

The virtue signaling is just staggering; ludicrous, even.

The EU needs to wake up – and fast – or its economy is going to be destroyed.

For the US, the damage is already done.

Hunter on a Thursday Morning

Every second Thursday, my friend and mentor, Hunter Hastings, and I have a 30–45-minute conversation.

It’s one of the highlights of my week, as I can vent about business and politics and hear some great advice.

I had postulated in this newsletter and with Hunter that this war was unwinnable from the Ukrainian side.

Why?

Ukraine couldn’t handle Russia itself; America was never going to come to Ukraine’s rescue, and because America’s sanctions would backfire.

Hunter mentioned to me an interview on unz.com with Larry C. Johnson, an ex-CIA officer.

Larry’s bio in itself is worth reading (bolds mine):

Larry C Johnson is a veteran of the CIA and the State Department’s Office of Counter Terrorism. He is the founder and managing partner of BERG Associates, which was established in 1998. Larry provided training to the US Military’s Special Operations community for 24 years. He has been vilified by the right and the left, which means he must be doing something right. His analysis and commentary can be found at his blog, https://sonar21.com/.

Johnson ends his interview with this nugget:

Putin’s primary objective is to secure Russia from foreign threats and effect a divorce with the West. Russia has the physical resources to be an independent sovereign and is in the process of making that vision come true.

The rest is certainly worth reading.

After reading the entire written interview, things are worse than I thought.

And that’s saying something!

Surely, You Can’t Be Serious

Alas, I am.

And there are some specific reasons why I’m calling time on US dollar hegemony.

Let me lay them out first:

    • There’s nothing the US, EU, and UK has that Russia needs.
    • There are many things Russia has that the US, EU, and UK need.
    • The US, EU, and UK have proven themselves utterly untrustworthy as asset custodians.
    • Thanks to stupid Western policy, the China’s Belt and Road Initiative is now a must for the “World Island.”

There’s nothing the US, EU, and UK has that Russia needs.

Coca Cola, Harley Davidson, and Gucci bags are all nice-to-haves.

Don’t get me wrong, Russia’s Instagram “stars” have been crying for weeks.

But there will be other avenues for them.

There’s nothing in Europe or North America that Russia absolutely needs.

And when I write, “nothing,” I mean nothing.

Zip, zilch, nada.

Sure, closing markets are never nice, but Russia isn’t going to starve anytime soon.

And Russia has all the raw materials it could ever need to continue to build, operate, and grow.

There are many things Russia has that the US and EU need.

This is where the “English majors,” as Dmitry Orlov calls them, have really miscalculated.

The US and France need Russian uranium for its nuclear power plants to operate.

Not “want,” but need.

Even if the US ramps up domestic production, it doesn’t have the technology right now to enrich uranium.

Quite the pickle.

Another example: remember how you were taught the US has the best oil in the world, “light, sweet” crude?

Well, that’s great for making gasoline.

But you can’t make diesel with it.

You need Russian Urals heavy oil to make diesel.

From Fortune:

Europe will feel the sting of a diesel shortage, but measures to conserve fuel are being advised everywhere, including the U.S., as oil and gas reserves reach dangerously low levels.

On Friday, the International Energy Agency, a global energy watchdog, prescribed a set of strategies to cope with oil and gas shortages reminiscent of the steps taken during the 1970s oil crisis, including car-free Sundays and reduced speed limits on highways.

What about palladium for catalytic converters?

What about cobalt, of which Russia is the world’s second largest exporter?

You need cobalt to make rechargeable batteries.

It is also the world’s second-largest supplier of vanadium, which is used in large-scale energy storage and in steelmaking.

What about nickel for stainless steel and car batteries?

Russia exports 10% of the world supply of nickel.

After knowing this, would you want to fight these guys, or cut a very large peace/free trade deal?

The US, EU, and UK have proven themselves utterly untrustworthy as asset custodians.

When I teach operations graduates in banks what the primary responsibilities of an asset custodian are, I name four.

You must keep assets:

    • Safe
    • Secured
    • Recorded
    • Reconciled

Right now, Western banks fall at the first hurdle.

If we’re going back to first principles, they’ve clearly violated the sanctity of private property.

Sure, you may think the Russian oligarchs robbed their country blind.

But if the West felt that way, why didn’t those governments seize those ill-gotten assets thirty years ago and return them to the Russian people?

Because the West just wanted the funds to earn enormous fees and loan out the assets as collateral.

Now the West has seized - daylight robbery, folks - those assets.

Why on earth would any Russian ever deposit another cent in a Western bank?

And for that matter, after Kanada proved how easy it was to freeze accounts, are you safe even if you’re not Russian, but a citizen?

No.

No, you’re not.

Thanks to stupid Western policy, the China’s Belt and Road Initiative is now a must for the World Island.

Halford Mackinder, a British geographer, summarized his Heartland Theory thus:

Who rules East Europe commands the Heartland;

who rules the Heartland commands the World-Island;

who rules the World-Island commands the world.

Mackinder’s map looked like this:

Credit: Wikipedia

Why is Eastern Europe, and hence, Ukraine, so important?

Because it’s the only flat land route to invade Russia.

And that’s what this is ultimately all about.

The Heartland itself is mostly Russia.

But now, because Kissinger and his idiots inadvertently pushed Russia into China’s arms, now they’ve got the heartland and a sea route out of it, if they need it.

One can argue the warming of the Arctic is the best thing that could happen to Russia.

That’s because they’ll have their own sea routes and won’t need China’s ports.

By the way, feast your eyes on the map below:

Credit: Wikipedia

That’s China’s Belt and Road Initiative, and it essentially obviates the need for an open water navy.

You know, what American taxpayers have been spending so much money on…

Rail is faster and cheaper than water, if - and it’s a big if - they can get the whole thing off the ground.

Just look at that map as ask yourself one question:

If the Russians have all the resources they need, demand to be paid in rubles for them, and can rail them anywhere on this world continent, what on earth do they need US dollars for?

Answer: they don’t.

And that’s the onion.

So when Vladimir Putin says, “Pay me in rubles,” it’s damn serious.

And it’s a smart move, as well.

If he still got paid in euros or dollars, he’d have to redeposit those monies into Western banks.

That puts the money at risk of seizure.

So he’s just eliminated that problem.

Now, the US, EU, and UK will have to buy rubles first, before they buy wheat, potash, gas, oil, palladium, nickel and other key minerals from Russia.

I can’t overstate how disastrous this will be for the Western standard of living.

There’s no more petrodollar on which most Western consumers get a free ride.

Wrap Up

Inflation was up well before this mess began.

Thanks to the government-mandated private sector shutdown, we had supply chain problems.

Now, we also have The Great Resignation to contend with, driving up labor costs for those remaining as workers.

But the final nail in the coffin of USD dominance is the lack of trust.

Those in DC who don’t know about commodities, logistics, and supply chains took a gamble they shouldn’t have.

Now the entire world knows confiscation is one arbitrary decision away.

Watch China, Russia, India, and Iran skirt the sanctions and build out a new monetary architecture.

Total conjecture here, but I think when Japan finally realizes what’s happening, they’ll switch sides.

That is when you know the world has really changed.

————-

I hope that gets a new reader up to speed on why Russia is so important and why US investors breathed a sigh of relief today.

Until tomorrow.

All the best,

Sean

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