Review of the Year 2014
Many of us started the year 2014 with the hope that finally the economy will recover. The stocks have been surging during the last months of 2013 and although many were expecting a correction there was hope and enthusiasm in the markets, even Europe was preparing to “face some inflation” (today in 2015 it sounds pretty much like a joke). Very few expected to see instead all the mess we have seen. Here there is a short summary of what happened:
• Ebola. The ebola virus started spreading-out in West Africa, but as long as just few African villages were being wiped-out by this virus nobody really cared in the western society. However, when the virus reached big African cities and few cases were reported in the west, we had few weeks of Ebola-panic and the media seemed not to be able to talk about anything else but it will disappear again from the news towards the end of 2014.
• The regime-change in Ukraine. February was also the month in which the CIA-sponsored regime change in Ukraine occurred. Basically, it was just an exchange of oligarchs (towards more western-friendly ones) but it came at the cost of a civil war (although many still don’t want to call it as such). This was just another move in the political chess-board between Russia and the United States, but a very important one because in few weeks it wiped-out 20 years of progress in the relation between Russia and the west, projecting us back 20 years, back to the cold war. In the beginning many dismissed this as paranoia but later on, things would only get worse, confirming this theory. Anyway, Ukraine was seen as a key region for Russia because most of its gas delivery to Europe transmit through Ukraine, and also because this is a vital trading partner. With this move, the west wanted to inflict a vital political blow to the Russians forcing them into submission. However, as it happened with the war in Iraq, the bombing of Libya, the attempt to change regime in Syria and the war in Afghanistan, things did not go as planned.
Russia’s first move was to annex Crimea, this caught the west by surprise even if it was the most probable move Russia would have done. We have to consider that Russia already had military bases in Crimea (therefore the Ukraine government would not dare killing civilians there) news Ukraine and by holding a referendum it could easily get Crimea back in a democratic way because majority of the population in Crimea is Russian anyway. But Russia did some miscalculations too. In fact, probably it did not expect the eastern regions of Ukraine to rise up and demand independence from a west-controlled Ukraine. The new government in Kiev did not take this lightly and in an excess of optimism regarding their military power tried to crush people in eastern Ukraine labelling them as terrorists (most of them are civilians) and officially starting a civil war in which armed private battalions (the government in Kiev does not have enough money to pay for regular troops, thereby allows oligarchs to have or sponsor private battalions) are allowed to kill, rape and take whatever they wish (so far 4700 people were killed and over 10000 injured according to UN estimates) with the western media closing an eye because too busy with the demonization of Putin. The fact that Ukraine was being used to score political points became more evident when the US urged Europe to sanction Russia.
Understandably European countries were at first reluctant to inflict meaningful sanctions against Russia as it is one of the major importer of European goods. However, the tragic crash of the MH17 flight was the trigger that spurred Europe into shooting itself in the foot and apply sanctions against Russia.
• The economic ripercussions of sanctions. For years we heard and waited for the economic recovery and even central banks prophesized that 2014 would be the year of the recovery. However, the economy has been weak throughout the 2014 and probably became even more fragile. To expose this weakness were the effects to the economic sanctions against Russia. The wrong assumption was that the weakening of Russian economy would have no spill over to the western economies. This is just another proof that Europe is governed by a bunch of idiots. What happened was a decrease in demand of European goods by Russia and its diversification towards Asia, in particular China. The relations between China and Russia strengthened resulting with some massive energy deals between those 2 countries decreasing the strategical importance of Europe as a market for Russian energy. In the meantime, the slowdown in Europe becomes more pronounced and inflation looks even more like a mirage.
• The end of QE from the FED and the Oil crash. 2014 was also the year in which the FED decided to end its massive QE stimulus. FED officials were able to avoid a market crash (however, sooner or later the bubble will pop) but also helped by the fact that FED’s balance sheet is still expanding despite the end of stimulus. This, so far is still keeping the American economy afloat. Despite all the troubles in Europe, the American economy seems in better shape, probably helped by the job-creation coming from the shale boom. Nevertheless, another consequence of the end of stimulus is a lower support by the speculative buyers to oil prices. This, in parallel with high supply and a weak demand will cause the oil prices to crash towards the end of 2014. So we can say the FED did not crash the markets (yet) but allowed oil to crash. Some say (and even Obama admitted) that some of this was also an artificial reduction in oil prices aimed at weakening the Russian economy that relies so much in oil exports. In fact, the US may have coordinated with the Saudis to talk down oil and to maintain high supply in order to allow oil prices to go down. Actually the fall of oil prices really hurted the Russian economy, much more than the sanctions.