Alarm Bells Ring In Russia Over Ruble, Falling Oil Prices

Alarm bells are sounding as Russia, Kuwait Suspends Trading.

Russian stocks plunged and Kuwait suspended trading as a slump in oil to below $55 a barrel roiled emerging markets and increased concern that Moscow will be forced to devalue the ruble.

Russia's Micex Index fell as much as 17 percent and was 7.5 percent lower at 12:15 p.m. in Moscow after it reopened following a 30-minute trading suspension. A court in Kuwait ordered a shutdown as traders lobbied for support after a sixth day of declines. The MSCI Emerging Markets Index slid 3.1 percent to 516.91, adding to an 8.5 percent drop since Nov. 11.

"Alarm bells are ringing," said Tom Fallon, head of emerging-market research at La Francaise des Placements in Paris, which manages $11 billion. "Weaker oil raises a number of issues for deterioration in terms of trade and budget assumptions which are now being seriously called into question."

Oil, Russia's chief export, has fallen 63 percent since the July-high of $147. The ruble has plunged 19 percent against the dollar in the past four months, even as the central bank sold 16 percent of its currency reserves in an attempt to arrest declines.

Selling Reserves A Mistake

Selling reserves to defend a currency and shutting down markets are both huge mistakes. The former is a waste of reserves that may be needed for other purposes such a capital flight and repatriation. The latter creates pent up demand to exit.

Russia MICEX Index



click on chart for sharper image

The MICEX Index is the real-time cap-weighted Russian composite index. It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors. The MICEX Index was launched on September 22, 1997, base value - 100. The MICEX Index is calculated and disseminated by the MICEX Stock Exchange - the main Russian stock exchange.

German Economy Enters Worst Recession in 12 Years

Bloomberg is reporting German Economy Enters Worst Recession in 12 Years

The German economy, Europe's largest, contracted more than economists expected in the third quarter, confirming it has entered its worst recession in at least 12 years as the global financial crisis curbs exports.

Gross domestic product dropped a seasonally adjusted 0.5 percent from the second quarter, when it fell a revised 0.4 percent, the Federal Statistics Office in Wiesbaden said today.

German companies are scaling back production as slower global growth erodes export demand. Siemens AG, Europe's largest engineering company, plans to cut 16,750 jobs by 2010 as profit declines. Germany's benchmark DAX Index has tumbled more than 40 percent this year, business confidence fell to a five-year low last month and manufacturing orders plunged in September.

Investors expect the European Central Bank to lower its benchmark rate by at least half a percentage point at its next meeting on Dec. 4, Eonia forward contracts show. That would be the sharpest rate reduction in the bank's 10-year history after its two half-point cuts in the past month to 3.25 percent.

US Japan Lead In Global ZIRP Race

US and Japan are in the lead in the mad race to global ZIRP. See Global ZIRP And The "Impossible Contraction" for more information. Japan is already at .3% rate and the odds are the Fed cuts rates to .50% in December.

Also note that the UK is on Brink of Meltdown which has Bank of England Governor Mervyn King stating that "policy makers are prepared to reduce interest rates as low as needed to prevent a recession from fueling deflationary pressures."

Australia Stocks Tumble to 4-Year Low

BHP and Banks lead the way as Australia Stocks Tumble to 4-Year Low.

Australian stocks plunged, led by banks and resource companies, after Commonwealth Bank of Australia said bad debts may double, the U.S. Treasury scrapped plans to buy mortgage assets, and metals prices dived.

Commonwealth Bank slumped 6 percent as Treasury Secretary Henry Paulson shifted the focus of the government's $700 billion bailout plan to consumer credit. BHP Billiton Ltd., the world's largest mining company, fell 12 percent, the most in a month.

Australia's benchmark S&P/ASX 200 Index dropped 5.9 percent to 3,697.30 at the close of trading, the lowest since Oct. 25, 2004. The benchmark has fallen 46 percent from its Nov. 1, 2007, record as the global credit crunch triggered by the U.S. subprime mortgage market damped economic growth.

Fractional Reserve Lending The Root Cause

This problem was not "triggered by the U.S. subprime mortgage market" as the article suggests.

The cause of these bubbles is fractional reserve lending, central bank micro-mismanagement of interest rates worldwide, and runaway government spending especially in the US.

The result was a global credit binge of epic proportion that has now bust wide open.

It's also important to note that there are housing bubbles in the UK, Australia, Ireland, Spain, Canada, China, and many other countries too numerous to mention. This is not just a US problem. Finally, housing is just a piece of the problem, and subprime just a piece of the housing problem.

The world is in a deflationary bust that very few saw coming. And in spite of the rock solid case presented in Industrial Bond Yields Strongly Support Deflation Thesis, most still do not see or understand what is happening.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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