Crossing the Rublecon
Daniel Drew, 12/16/2014
If you are thinking about taking a position in the ruble, consider history, and think twice before crossing the rublecon.
The ruble fell 10% on Monday and 20% on Tuesday, despite the central bank raising interest rates from 10.5% to 17%. The central bank's first deputy chairman Sergei Shvetsov said they could not imagine this situation in their worst nightmare. It sounds like Shvetsov has no memory of 1998.
Timothy Ash, head of emerging markets at Standard Bank, said it is the most incredible currency collapse he has ever seen in his 17 years in the markets. Per Hammarlund, chief emerging markets strategist at SEB, said his traders are reporting "no bids" for the ruble, which reminds me of the Flash Crash on May 6, 2010, when I heard the S&P futures commentator say "there are no bids." SLJ Macro Partners Co-Founder Stephen Jen, an emerging markets veteran, said many emerging market specialists have no experience in a real crisis, and "the youngsters are about to be schooled."
As the ruble plummets to new lows, I recall a day in August 1998 when Russia defaulted. This blew up the account being piloted by the geniuses at Long Term Capital Management, which lost $553 million in 1 day, 15% of its capital. Trying to trade Russian bonds in elaborate convergence schemes was like Napoleon and Hitler crossing the Russian home front during winter.
The rule of the financial markets is that whenever you want a spread to converge, it will diverge. Whenever you bet on divergence, it will converge. If anyone can tame the beast, it would have been the Ph.Ds at the helm of Long Term Capital. Their efforts quickly proved that finance is less rocket science and more alchemy.
The partners at LTCM went on to start new hedge funds and blew them up again in 2008. Nothing attracts a scientist more than new trials and new errors.