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From Credit Risk to Existential Risk

“The ideal of morality has no more dangerous rival than the ideal of supreme strength, which has also been called the ideal of aesthetic greatness. That life is in truth the ultimate attainment of the barbarian, and unfortunately in these days of civilization’s withering it has won a great many adherents. In pursuance of this ideal man becomes a horrid thing, a brute-spirit whose cruel mentality exerts a horrible spell upon weaklings.”


The bond market has updated its view on Ukraine. It isn’t pretty. In a few short months, the whole curve has dramatically sold off (note that the data includes an off-the-run bond, 1y3y). Long end yields have almost doubled. The move on the short-end is too much for words. The short end is always where imminent loss is most acutely felt, which explains why a curve inversion is to my knowledge uniformly trouble. It is a signal that the future is bleak, imminently so.

It is true that Ukraine has only about a month of FX reserves for imports, and that spells trouble. But these levels are pricing in more than default. They are pricing in minimal to zero recovery in the event of default. The bond market is moving from credit risk to a more existential risk.

There is suffering and death and loss in Ukraine. Bond markets have no heart. But I do. You see, try as I might, unconnected as I am, it is personal for me.

Ukraine yield curves 1-23-2015.jpg

Our personal past—both the light and the dark—conditions how we relate to the world; our past responses create a default template through which we interact with world events. This holds true no matter what one’s intelligence or capabilities. Heidegger, purportedly one of the greatest philosophers of all time was a documented Nazi sympathizer. Wittgenstein and Sartre were, for at least a time, supporters of the Stalinist regime. Theirs was a common template of despair and rage, a projection of defeat respectively due to the catastrophic defeat of Germany as a result of World War I, the dissolution of the Austro-Hungarian Empire, and the occupation of France in World War II. Their path was not a new beginning, but an end.

Putin’s sycophants share the same template of despair and rage against the world. Take for example Daniel Ivandjiiski. Dan is an ex-securities broker banned from the industry after an insider trading conviction. His father was a “special envoy” for the Bulgarian government in every proxy war in Central Asia and Africa in the 1970s and 1980s. Dan is or was connected to a website that, although declining, has a wide reach in the financial community. It is not much of a stretch to connect the fall of the Soviet Union to the apocalyptic, pro-Putin, anti-US hopeless tone of the site. Note I’m not making accusations here, as I can't confirm the motivations of an anonymous site. I imagine a convicted securities violator would be very zealous to defend what sliver of reputation he has left.

Anger and burning desire for revenge is a template that masks the impotence of people worshipping power for power’s sake. It justifies brutality. What a blight on history, those weaklings that worship power embodied in Stalin, Putin, and surely the next villain that comes along.

It makes it easy to gloss over the unpleasant realities of Russian interference in Ukraine. It overlooks that a pro-West leader Viktor Yushchenko in 2004 was poisoned by lab-processed dioxin. He was campaigning to minimize Russian involvement in Ukraine and build closer ties to the West. It overlooks that the recently deposed leader Yanukovych in 2013 opened fire on non-violent protesters Kiev, killing dozens. It makes it easy to pretend that oppression is justice and the truth is a lie. It is the psychological basis for Orwellian thinking.

There are other, less destructive templates. It is easy for people who have received some level of abuse in their early life to associate with the oppressed and abused in any situation. I am afraid I must admit that I fall into this category myself to some degree. Here I am, pouring emotions into events a world away.

Everyone is flawed and imperfect. All men lose heart and all betray. All men could use a dose of salvation, that is: drop the mask. This is how to save ourselves.

Markets strip away such sentimentality. They are brutally real and honest about everything they evaluate, because a soft-hearted approach leads quickly to bankruptcy. Bonds are saying in its cold way there’s not much time left.

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