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Four months ago, it appeared that three economic “bad actors” were triumphant in their disregard of economic laws and contempt for the United States: Russia, Venezuela and Argentina. Today, while the iron laws of economics have taken a bite out of all of us, they have taken an especially big chunk out of the economies of these bad actors. Unlike most of us, they will not be quick to recover.

That is good news – for U.S. foreign policy, and for those of us who hope that the more befuddled emerging markets will figure out how to run their economies before Malthusian population pressures overwhelm them.

The world does not need to see bad behavior – political or economic – rewarded.

Let’s consider a few of the worst players.

Russia’s Tactics Backfire

Russia, first, invaded Georgia in August and appeared ready to use its oil-and-gas wealth to rebuild the Soviet military machine, as well as making Western Europe entirely dependent on the whims of its state controlled energy company OAO Gazprombank.

Gazprom’s attempts to control energy supplies to Europe included blocking the Nabucco gas pipeline and striking a deal with Libya, Europe’s main non-Russian potential supplier. Russian defense spending, too, has quadrupled since 2001 and was continuing to increase rapidly – by 26% in 2009, to more than $50 billion (bear in mind that Russia gets more bang for its ruble because its soldiers are both cheaper and require less maintenance than pampered US and EU forces).

Not any more. The decline in oil prices, halving in three months, has thoroughly destabilized the Russian economy and wrecked its budget picture. Russia has been forced to promise $100 billion to its banking system, without any certainty that this capital injection will solve its problems. Inflation is running at 16%, and will rise further as Russia’s foreign exchange reserves are used to prop up the banks. Oleg Deripaska, Russia’s richest oligarch, has been forced to sell assets to meet market calls.

Most pathetically, Belarus, previously Russia’s most reliable poodle ruled by a wholly unreconstructed autocrat, is making promises of “reform” – if it can get access to International Monetary Fund (IMF) cash.  The RTS stock index is down by around 75% from its peak in June – that makes the roughly 30% decline in the Standard & Poor’s 500 Index seem no more than a gentle correction.

Chavez Feels the Pinch

Russia’s the most dangerous of the bad actors, because of its nuclear weapons and belligerent foreign policy attitudes, but it’s not the only one to face hard times. Venezuela is also facing the pinch – although this Latin American player found the benefits of $147 oil were so fleeting that even President Hugo Chavez had failed to spend up to his income (though a 26% increase in dollar spending in the 2009 budget shows he means to try). Inflation is 36%, around the level at which it becomes an overwhelming problem, while oil output has been falling since Chavez replaced the senior management of the oil company Petróleos de Venezuela S.A. (PDVSA).

The cash crunch has not yet hit home – Chavez is desperately trying to postpone any hardship until after the Nov. 23 local elections. The stock market is down only 40% from its January 2007 high – although the nationalization of electricity, telecoms and cement has removed a number of stocks from active trading.

Nationalization also hasn’t helped electricity service – the country has suffered three nationwide power blackouts this year. You can expect further bad economic news from Venezuela in early December, after the local elections.

Cry For Argentina

Finally, Argentina, which is dependent on a broad range of commodities, has also run into trouble. Argentina defaulted on its international debt in 2002, before forcing bondholders to accept new bonds worth about 30% of face value. It also seized most of its residents’ dollar savings: This country seems to succumb to that particular kind of bad-actor behavior about every 10 years.

However, vice had appeared to be rewarded, with 8% annual growth for Argentina in 2003-2007. Inflation is currently running about 25%, but the government solved that problem by forcing out the head of its statistics bureau and making up new inflation numbers, thereby ripping off holders of its inflation-linked bonds.  With the decline in commodity prices, however, the government of Cristina de Kirchner was running into trouble, since it had $20 billion of debt to repay by the end of 2009, even on its written-down schedule.

The government’s solution was simple – it nationalized the $30 billion private pension scheme, set up in 1994 by the previous government – to much IMF and economic reformist applause. So much for pensions privatization – in Argentina, it simply gives the government an additional pot of money to steal. With an additional $30 billion available, the Argentine government can carry on spending for at least another year – at the cost of condemning its middle classes to a penurious old age, since few of us have the foresight to save in more than one pension scheme.

Russia is probably the most seriously affected by the oil-price decline, because its ambitions were most expensive. In Venezuela, trouble hasn’t really hit yet – or Chavez is keeping it hidden until after the local elections. In Argentina, meanwhile, the bad-acting government has found yet another way to make the middle class pay for the leadership’s misdeeds.

However, if oil prices stay below $70 for the next few months, and commodity prices are likewise subdued, we can be confident that even Russian Prime Minister Vladimir Putin, Hugo Chavez and Cristina Kirchner will suffer a very cold winter indeed.

PS. At the other end of the scale, some foreign markets have great recovery potential. Martin Hutchinson picks four markets most likely to “bounce big” after this financial storm.

Source: Trouble Comes Home to Roost for the “Bad Actors” of the Global Economy

You’ll recall that one of the fairest of the Bubble Era’s revelers was the idea that, over the long run, you would make money in stocks. All you had to do was ‘buy and hold.’ Who didn’t like her? She seemed so easy…so willing…so fetching and attractive.

Yesterday, the Dow lost another 203 points. Investors are down 44% so far this year. Worldwide, they’ve lost $10 trillion this month – far worse than the crash of ‘29.

The most successful economy of the 20th century was the United States of America. The second was probably Japan. It rose from the bombed-out ruins of WWII to become a worldwide export powerhouse, dominating the auto and electronic equipment industries.

But yesterday, stock prices in Japan fell to more than a quarter-century low. Investors in Japanese stocks – including your editor (who is better at giving advice than taking it) – have made nothing in 26 years.

Here’s the press report:

“Tokyo’s Nikkei 225 index closed down 6.4 percent to 7,162.90 – the lowest since October 1982 – with exporters like Toyota Motor Corp. and Sony Corp hit hard. The losses came despite a report that the government was considering massive capital injection into struggling banks in a bid to calm jittery financial markets.”

“Decades of pain and still no relief,” adds the Financial Times, noting that investors in Japan have been waiting for a recovery for the last 18 years.

With the mask off, stocks in Japan are giving investors a Halloween fright.

But what other masks are coming off?

How about the sweet mask worn by housing? ‘Housing always goes up.’ And, ‘you can’t lose money in property.’ Remember those beauties? Those masks hit the floor a year ago. Since then, the whole world has looked at the property market and gasped in horror. How could houses be so ugly, homeowners have wondered; they look like they just woke up.

Oh and there’s oil…down to $63 yesterday. Oil was supposed to go up forever. At least, that was one of the favorite masks of the late Bubble Era.

But there are still a few Bubble Era masks that have not yet come off. In fact, the belle of the ball is the mask on ‘progress.’ People still believe that the world grows and improves – if not steadily, at least episodically. It’s certainly true that long periods of history show what appears to be economic progress. Things get better. But occasionally, something terrible happens – plagues, wars, revolutions, Great Depressions and Dark Ages. Then, the world turns backward. The bull market in progress turns into a bear market of progress turns into a bear market of backsliding.

Today, people are losing faith in stocks and housing…but they still have faith in progress. Just a few months ago, they thought capitalism would make them rich. But wicked capitalism has disappointed them badly; it didn’t guarantee rising asset prices after all. So, now they turn their sad eyes to the feds. ‘Oh ye all-knowing, all-seeing, all-powerful ones…hear us. Save us – from capitalism!

They figure the feds will do the trick… And sure enough, all over the world the federales are playing along. The G7, the IMF, the central banks, the finance ministers and Treasury Secretaries – all have put on their own masks…strutting around, pretending to know what they are talking about. Curiously, France’s president Nicholas Sarkozy is a leading strutter. He’s trying to organize a New World Financial Order…based on something other than the dollar.

These poseurs don’t look too bad – as long as they leave the masks on. Take them off, of course, and you will see the same silly clowns who CAUSED the crisis in the first place.

That is what is so amusing about this stage in the collapse of Western Civilization. You see, most of the world’s financial press has come around; they see things much the way we do. They see, for example, that the U.S. Fed erred – big time – by fixing the price of credit too low for far too long.

Of course, there’s nothing in the Manual of Capitalism that allows the feds to fix the price of credit or support the housing market. This was the government at work, not the market. With the misleading signal coming from the credit markets, the capitalists just did what they always do – they overdid it.

Still, the world’s press, pundits and politicians have convinced themselves that the fault lies not in themselves…but in capitalism. And now, they expect the feds to do something about it.

But that’s just the way it works…one hallucination gives way to another. One delusion on the way up; another on the way down.

*** Even star mutual fund managers are getting walloped by this market. Chris Mayer offers us a few examples:

“Managers with great track records are faring poorly, and it may help you feel better about how you are doing. Jean-Marie Eveillard, for example, has been running money for 50 years. He’s beaten the market handily for a long time. He is a cautious type. He likes gold stocks. He likes Japan. He’s down 27% this year. Robert Rodriguez, another cautious money manager who holds a lot of cash and runs FPA Capital, is down 29%. These are among the best of the best, as the market is down more than 40% this year. William Fries at Thornburg is down 43%. David Winters at Wintergreen is down 37%. Wally Weitz at Weitz Value is down 39%. The list goes on and on…

“So you see, nothing is really working well in this market right now – at least not for investors in stocks. However, there are a lot of cheap stocks out there, bargains I haven’t seen in a long time. Unless the world comes to an end, which it has a habit of not doing, future investors will be a happy lot. Count me a cautious buyer of stocks.”

Caution is the name of the game here…and if you’d like to see what Chris has been thoughtfully recommending to his Capital & Crisis subscribers, see here.

And the bargain hunters were abound this morning, setting up a rally worldwide in the markets.

Also boosting the markets is the anticipation of the Fed’s two-day meeting, that begins today. It is widely believed that the Fed will cut rates…but it remains to be seen what, if any, lasting effect it will have on the markets.

Lurking behind this rally is this unsurprising tidbit: consumer confidence in the United States hit an all-time low in October. The Conference Board reported that expectations have turned “significantly pessimistic with the percentage of consumers expecting business condition to worsen over the next 6 months rising to 36.6% from 21% and those expecting fewer jobs rising to 41.5% from 26.9%”

*** Perhaps the biggest delusion of the financial world now is that the dollar…and dollar-based Treasury obligations…are a safe refuge. In a sense, of course, they are. The U.S. government is in no danger of defaulting on its loans. In an emergency, it can always just print up the money. But that’s the problem. An emergency is coming. More on this when we get a chance to think about it…

*** “I’ll be all right down here,” said our old friend Doug Casey. Doug has bought a place in Cafayate, a town that reminds us of Santa Fe or Aspen, before they were ruined by rich people. He’s building a world-class resort – complete with golf course, riding trails, tennis, health spa, library…everything he wants.

Cafayate also has several things going for it that Aspen and Santa Fe did not. First, it is prettier and the weather is better. It is always sunny, with pleasant temperatures. Wherever you look, you see beautiful mountains. What’s more, it produces some of the world’s best wine.

Doug’s place is right in the middle of a vineyard. In fact, he’s got it set up so that revenue from the vines pays much of the operating costs of running a golf course and so forth.

“Another big plus,” says Doug, “is that this place isn’t going to suffer too much from the credit crisis. Nobody down here had any credit.”

*** Doug is not completely right about Argentina’s credit situation. Believe it or not, there were lenders – mostly big banks – who were foolish enough to extend the nation credit. Naturally, the Argentine government treats these angels like taxi drivers in Buenos Aires treat other foreigners.

Almost every time we go to the airport, the taxi driver tries to pull a fast one. “My meter is broken,” said one, “the standard fare is 200 pesos.” (It is really about 70 pesos.) “We crossed into another zone,” said another, “so I have to add another 50 pesos.” “It’s night time,” came another invention, “after dark you have to pay a surcharge.”

It’s all good fun. The taxi drivers are merely establishing the going rate. The price for a run to the airport is much higher for naïve foreigners, but why shouldn’t it be?

So is the price for lending to the Argentine government.

This from MoneyWeek:

“In December 2001 [Argentina] reneged on its $95bn of sovereign debt.

“At the time, that was the biggest default in world history, though these days such a number looks like chicken feed compared with what the world’s bankers have recently managed to mislay. Only in 2005 did Argentina sort the final details, with a ‘take-it-or-leave-it’ 70% ‘haircut’ on face value, again the largest sovereign debt markdown ever.

“Three years later, it’s back to square one. Inflation is rocketing (some estimates put it at 20% annualized) and the government is once again running out of cash. Argentina’s borrowing needs will swell to as much as $14bn next year from $7bn in 2008, says RBC Capital Markets. And any confidence that the country will be able to repay what it owes is fast flying out of the window.

“Argentina’s 8.28% government bonds are due to be redeemed in 2033. Fat chance of that, the way things are looking right now. Now priced at 22 cents on the dollar, they currently yield 31%, as against ‘just’ 12% a month ago. And still no one wants them.

“What’s more, the price of credit default swaps – market insurance that investors can buy to protect themselves against default (Read: All you need to know about credit default swaps for more) – covering the country’s sovereign debt has more than quadrupled over the past month. These CDS now stand at more than three times the Icelandic level, and suggest there’s almost a 2:1 chance that Argentina will go bust this year.”

Does this worry your editor – who has substantial (for him) investments in Argentina? Not at all. As a dear reader pointed out, the average Buenos Aires taxi driver knows more about financial crises than Bernanke, Paulson and Greenspan put together. The Argentines know how to get through a crisis, in other words, and still put steak on the table and wine in their glasses.

We’re going to learn from them.

*** Finally, another dear reader sends a news item explaining why there was a bagpiper in front of our neighborhood church last Sunday.

It was the “kirking of the tartans,” said the headline. Turns out, the local Scottish Argentine society does this every year…a kind of blessing of the clans, performed by the local priest. “Kirk” in Scottish means church.

Source: The Masquerade is Over