By Jason Van Steenwyk
“Buy when there’s blood in the streets.” That’s the old catchphrase from the legendary emerging markets investor John Templeton (1912-2008). There’s more than a grain of truth in that statement, though it’s not a philosophy for everyone. That kind of investing can expose you to stomach-churning volatility and even outright disaster. If a country truly flatlines, you could lose everything.
But for those of us who like volatility, and actually seek out beta as a tool to drive returns, there’s profitability in the blood-stained portfolio. You will just have to put up with the giant price swings – in nearly any asset class – as the notoriously bipolar investment community tries to handicap the chances of a troubled market recovering to some form of normalcy.
Most people who adopt the ‘blood in the streets’ approach to investing take the long view. Indeed, there’s little doubt that the U.S. got a good deal of return out of the Marshall Plan, a massive investment (for that time) in the economic development of war-torn Western Europe. (Indeed, however, in 2013 dollars, the entire Marshall plan amounted to about $148 billion.
Over the years, that money proved to be a terrific investment, jumpstarting the economies of many countries that would ultimately become big consumers of U.S.-made products, while limiting the spread of Soviet power and subversion. In that case, the payoff period was measured in years. Well, not that many of them. Economic output in Europe exceeded 1938 levels in every Marshall Plan recipient by 35 percent within four years.
But what if you don’t want to wait that long for return?
Well, let’s take a look at what happened in the Ukraine over the last couple of weeks, and at the Russian ruble, specifically.
First of all, the current crisis has come about against a backdrop of a longer-term decline of the ruble against the dollar.
Here’s the trailing 12-month picture:
And over the last five years…
So it’s clear, from a long-term monetary perspective, that Russia’s vast oil exports have not helped it shore up its own currency. Russia has been selling dollars recently to try to keep its own currency above water, but it’s clear looking at both charts that any long-term technical supports are long-since busted.
But let’s look at the picture for point-blank traders:
As you can see, there was big panic selling late in the day on the 2nd and reverberating into into the 3rd. Volatility went through the roof – and there were still a number of tradable peaks and troughs for investors before the dust settled – roughly where it was pre-invasion!
So for all the brouhaha in the currency markets, the net effect on the RUB/USD pair has been essentially negligible.
It’s an example of beta offering investors a chance to magnify returns and get a boost over the buy and holders. It’s also an example of the advantage you can get from investing.. well, we pray there will be no blood shed here… but investing when things are at their most uncertain, and keeping an eye on the long view.
And what’s that long view? Consider:
Russia has threatened to dump dollars from its substantial currency reserves as a possible retaliation for anticipated U.S. sanctions – which could be the best thing that ever happened to a struggling U.S. export and manufacturing industry.
Russia’s ability to carry through on this threat, therefore, is pretty limited
Russia is also threatening to intentionally default on any loans from American financial institutions. But even former Russian communists know they don’t want to be either North Korea or Argentina!
Look, as well, to an actual positive development: The Parliament of Crimea is now on record as voluntarily seceding from Ukraine and joining the Russian Republic.
Well, we’ll put “voluntarily” in scare quotes. Yes, there’s significant popular sentiment in Crimea to join Russia rather than continue as part of the long-distrusted Ukrainians. (Ukrainians, for their part, hate the historically murderous Russians). But one would have to be a fool to think that the Crimean parliament didn’t take that vote with the former KGB thug Vladimir Putin in power.
If Putin’s designs stop with Crimea, for now, then the massive network of oil pipelines feeding the rest of the world is not at immediate risk.
And Russia isn’t leaving Crimea. Indeed, the Crimean parliament, having already voted to leave Ukraine and join Russia.
In the end, though, Russia needs to sell oil. It’s a crucial export for them. Likewise the Ukraine. Both need the pipelines open. Europe also relies on that same oil flowing freely from the Caucasus. The United States does not get oil directly from this source, but we also need this oil to flow because what the Caucasus does not produce, the Europeans will have to compete with us to buy.
The central critical interests of all parties coincide. Ukraine will lose Crimea. There will likely be little long-term negative effect.
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