To Russia With Love

“Freddie experienced the sort of abysmal soul-sadness which afflicts one of Tolstoy’s Russian peasants when, after putting in a heavy day’s work strangling his father, beating his wife, and dropping the baby into the city’s reservoir, he turns to the cupboards, only to find the vodka bottle empty.” ― P.G. Wodehouse, The Best of Wodehouse: An Anthology

Today I have a full cupboard for you. No vodka, though, but rather a lesson and two conversations to share with you that could save you a lot of money. The lesson first…

Over a decade ago I made a really rookie mistake.

Early 2006 I’d liquidated a real estate holding and investment company I’d founded and built. Everyone told me I was nuts but yields had collapsed to 3% on my assets and my acquisitions had completely dried up. The market no longer made sense. I was done.

I moved aggressively back into old but familiar territory of derivative trading, managing the majority of my capital. I managed to nail the bull run on both the Dow and the S&P as the Dow pushed through 12,000 for the first time since the Dot-com bust. I was feeling confident. In fact, the major indexes had all experienced double digit growth. All good so far but the warning signs were popping up.

Three Warning Signs for the Stock Market

  1. The yield curve had been inverted for the last half of 2006 – a warning sign I’d seen all too often before. An inverted yield curve is often followed by a recession.
  2. Volatility had been rising and rising volatility can often precede a major trend change.
  3. The currency market is really the canary in the coal mine and volatility in the currency market is often a precursor to weakness in the stock market. Currency volatility was steadily rising.

The question of what to do therefore appeared to be an easy one. It was clearly time to take risk off, bank profits and get out of the broad market. Easy!

It was hard to see the market continuing its stellar run. Plus, you know the saying: “A dollar in the hand is worth two in the bush”. Well, it was time to take that dollar. The next step: how to manage a potential recession.

At the time I did not see what Kyle Bass, Mark Hart, Michael Burry and others like them saw. 2007, if you need any reminding, was about one thing: subprime. At least I was out of the real estate market and out of the broad stock market.

My risk off was 2 main trades:

  1. Long physical gold. This worked.
  2. Long the dollar index. This got smashed.

As it turned out, my trade was a synthetic market neutral position but that wasn’t how I’d intended it. In a “normal” global risk-off, the dollar all too often becomes the knee jerk liquidity trade. Gold can perform poorly in this scenario though not necessarily.

I figured that gold was in a bull market; and though I thought it may correct some, gold is money and was a hedge against stock market weakness resulting from global uncertainty rather than deflationary pressures.

All good. The other position which was my rookie mistake was gold miners. I had a decent position in a number of well run gold stocks. If gold is good then miners provided me leverage to that, right?

Well, at times, yes.

While the gold miners weathered the GFC storm, what is important is the risk I took in that environment. Holding gold stocks is naturally far riskier than holding physical gold. In fact, they are like comparing apples and iPods. As the GFC took hold, the risk associated with those stocks rose due to liquidity concerns. Purely from a risk reward basis it was a bad trade.

I was thinking about this recently as we witness the glowing embers of the resource markets flickering into flames. Looking for correlations and for ways to participate with the most upside while finding the least risk is what any smart trader does (or at least should do).

Russia is largely a commodity driven economy with massive reserves of natural gas, oil, and precious metals. Both the stock market and currency markets took a hammering during the Ukraine military intervention and so from an outside perspective with a purely cursory view Russia looks interesting.

Over the last year the Russian market has performed well and investors have been rewarded.


Reward is, however, only one side of the coin. To understand what risk investors are taking investing in Russia, I recently sat down in Singapore with my friend Kim Iskyan to get his thoughts on Russia. Caveat. I’ve just gone long the broad Russian market – bias disclosed.

Amongst Kim’s long list of accomplishments are running a hedge fund in Russia for a number of years. As such, Kim is all too familiar with how Russia operates and the risks involved when investing in Russia. Risks which are rarely apparent to investors who haven’t lived and breathed “the Soviet air”.

I hit record on our conversation for your pleasure and you can listen to it here:

I know you’ll enjoy Kim’s views, and Kim shared with me a recent interview he had with legendary investor Jim Rogers where Jim shared with him a warning.  The conversation is transcribed and you can read it here. I highly recommend it as well as Kim’s excellent thoughts on Asian economies as well as markets in general.

– Chris

“Russia is a riddle wrapped in a mystery inside an enigma.” – Winston Churchill



Leave a Reply