A Peek Behind the 'Iron Curtain 2.0'
Kazakhstan's significance goes beyond Borat... Why this obscure nation matters to the markets... A peek behind the 'Iron Curtain 2.0'... The influence on energy prices and bitcoin... Mailbag: More about the 'yield curve'... Our Greg Diamond goes live at 8 p.m. Eastern time...
We don't often talk about the Central Asian nation of Kazakhstan in the Digest...
To most people who haven't been to that neck of the global woods – which is almost everyone who doesn't live there – Kazakhstan is one of a handful of tongue-twister former Soviet republics situated southeast of Russia and west of China...
In case you can't find it on a map, here it is...
Kazakhstan is about four times the size of Texas... and has 19 million people, nearly equaling the population of New York State.
It's probably best known in the West for its depiction in the 2006 mockumentary film Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan (and its 2020 sequel).
But it's a lot more than that. And I (Kim Iskyan) am here today to talk about the facts of this country... what's been going on there recently... and why geopolitics matter to the markets – eventually.
If Kazakhstan is known in financial circles for anything, it is natural resources...
Kazakhstan is a major producer of uranium – and more...
It accounts for about 40% of the world's uranium, the key input for nuclear power... which, as it might surprise some people, accounts for roughly 20% of U.S. electricity generation.
Kazakhstan also produces somewhere between 1% to 3% of the world's coal, oil and natural gas... What's more, Kazakhstan accounts for about one-fifth of the bitcoin hash rate ‒ a measure of the computing power used to process blockchain transactions, and to mine new coins.
When I lived in neighboring Kyrgyzstan – an even more obscure 'stan – for a year in the mid-1990s, Kazakhstan was the rich big brother in the area... It's where you went to have a fancy Sunday brunch at a swanky hotel restaurant.
Today, in Kazakhstan, economic output per capita – a measure of wealth – is around 10% higher than that of Mexico, and 15% lower than China... and one-sixth that of the U.S...
As of early 2019, Kazakhstan had been governed for nearly 30 years with a steel heel by the country's last Soviet-era leader, Nursultan Nazarbayev... One sign that elections aren't free – when the president is regularly reelected with more than 90% of the vote...
He passed the baton to his hand-picked successor, Kassym-Jomart Tokayev, and moved into a power-behind-the-throne role. You probably didn't hear much about that – then or since – until now.
Three years later, the nothing-much-happens-here façade of the country has crumbled...
Kazakhstan made the news – for the wrong, "crisis is happening here," reasons – on January 2...
Long-planned fuel-price hikes to remove government subsidies were implemented, which supposedly triggered protests in a small town in the west of the country... which, almost exactly 10 years ago, was the site of a government massacre of striking oil-industry workers.
This time around, the protests quickly spread to Almaty, the business capital and largest city in Kazakhstan... Protestors stormed government buildings and occupied the airport.
The country's president rolled back the gas-price hike. But it didn't help...
As the Economist explained...
[Demonstrations] turned into fury over wider economic grievances, including rising inflation and unemployment.
Plus, there was anger that the country's wealth of natural resources hasn't trickled down to normal people.
In response, the president fired his cabinet, and took away some of former president Nazarbayev's power. The government restricted access to the Internet – and then pulled out all the stops. As the president explained on Twitter, he threatened death to the opposition...
[Demonstrators] were beating and killing policemen and young soldiers, putting fire at administrative buildings, looting private premises and shops... In my basic view: no talks with the terrorists, we must kill them.
The government – with no evidence – pointed a finger at mysterious "foreign forces" fomenting dissent... and trying to overthrow the government.
More likely, feuding groups fearful that they'll lose their influence as former-president Nazarbayev fades away from power may be behind the unrest... compounded by ancient clan rivalries, Al-Jazeera reported.
Other speculation suggests that man-behind-the-curtain Nazarbayev may have provided the spark... and that the protestors may have been brought in from neighboring Kyrgyzstan.
Reportedly more than 150 protestors have died in clashes, and nearly 6,000 people were arrested...
It's not a big surprise to me that Kazakhstan is in trouble...
When I visited in 2013, I wrote in the former Global Contrarian newsletter, the first Stansberry Research publication I wrote for...
Nazarbayev has been able to unite the country's numerous factions and ethnic groups... He has been the glue that has kept the country together. But chances are that the next president won't have the support of all these groups. And this has people worried.
Markets wasted no time in reacting to this new scenario...
"Kazakhstan Unrest Pushes Up Uranium and Oil Prices," the Wall Street Journal reported late last week.
Uranium doesn't trade on an open market, so live prices aren't all that reliable...
But Brent crude oil, the international benchmark, is trading near $85 per barrel. That's just about at an eight-year high...
Still, this story might have faded away ‒ but for two things...
First, current president Tokayev asked the Collective Security Treaty Organization ("CSTO") – a body similar to NATO that includes six countries from the former Soviet Union – to send peacekeeping troops in to help quell the unrest...
The vast bulk of that peacekeeping force includes 2,000 Russian soldiers.
This is a surprising development given the roughly 135,000 active personnel in the Kazakh military who are already on hand to get the job done... It may have been because Kazakh soldiers would have been reluctant to shoot at their own countrymen, which makes sense. But by inviting Russian troops in, Tokayev did the equivalent of inviting the fox into the henhouse...
Russian President Vladimir Putin is always looking for ways for Russia to make inroads – economic, political, military, or otherwise – into other former Soviet-satellite states... And it's rare that he's actually invited. Putin is also eager to prevent neighboring authoritarians from being overthrown – in case Russians get any ideas about kicking out their own semi-dictatorial president.
When will Russian troops leave Kazakhstan? "Russian Troops Will Stay to Finish Job in Kazakhstan, Putin Says," trumpeted the New York Times on Monday. The next day, the Kazakh president said the job was done. and that CSTO forces would withdraw over the next 10 days... We will see what happens.
Mind you, all this is happening while speculation of Russia preparing for war with Ukraine is making more headlines than what's going on in Kazakhstan...
That makes me think: What would the rest of the world do if Russia, having been invited in, just hung around Kazakhstan?... Probably not a lot. I wrote in February in American Consequences magazine...
If one day Russian President Vladimir Putin gets hungry for a piece of the Central Asian country of Kazakhstan, the response would be a lot of diplomatic huffing and puffing but not much else.
And that hasn't changed...
In contrast, Russia hasn't been invited into Ukraine...
Earlier this week, Russian leaders sat down with members of NATO to discuss Russian concerns that NATO has its eye on including Ukraine into its organization – another former Soviet republic, which is kind of a buffer between Russia and the West.
But what lurks beneath the surface is something much bigger. As political risk firm GZERO explains...
Vladimir Putin wants Joe Biden and NATO leaders to redraw the security map of Europe by promising that Ukraine, Georgia, and other Russian neighbors will never join NATO... [to] in effect, redivide Europe into Western and Russian spheres of influence.
If that sounds a lot like the Iron Curtain 2.0... well, go with your gut.
As we explained last month, the 100,000 or so Russian troops that have been massed at Russia's border with Ukraine since last month have been noticed...
At the time, U.S. Secretary of State Antony Blinken warned that Russia might be planning to invade Ukraine. When Russia invaded Ukraine in 2014, it annexed the Ukrainian territory of Crimea... It might be looking to bite off more this time.
The talks ended with an agreement to continue talking... That's not much, but it's better than the alternative.
What I'm getting at here is this...
Geopolitics, and 'where is that?'-country turmoil, usually don't matter much to markets ‒ until they do...
Some of the world's most important – and, to most people, obscure – commodities are found in places that you won't see on a Condé Nast Traveler "Best Destinations in the World" list.
The Democratic Republic of the Congo ("DRC") – look up "political instability" in Webster's and you may well see it there – produces more than 70% of the world's cobalt (essential to making lithium batteries)... And big consumers of cobalt are rushing to find alternatives so that they won't be stuck when the DRC, as if often does, slips into another round of unrest.
Maybe most notably, the problems of resources overly concentrated in one place came up big-time during the pandemic... when news stories began to point out that 70% of the world's semiconductors were made in Taiwan.
If there was turmoil in Taiwan, the supply-chain problems stemming from a shortage of semiconductors would have been worse than it already was... slowing car production in Detroit even more...
Whether it's Ukraine or Kazakhstan... or the potential for war with China... these sorts of places don't show up in our news alerts much. That is – until they do. So it pays to keep half an eye on them...
However, on a side note, there are plenty of times when countries with names that are a mouthful to pronounce move in the other direction – that is, away from authoritarianism, and toward free markets, allowing for enormous improvements in the standard of living for its citizens, as well as huge opportunities for investors... That's the case with Uzbekistan, for example, as I wrote in May 2020... which is a good Central Asia antidote to what's happening in Kazakhstan now.
The current unrest in Kazakhstan is influencing sentiment about energy prices and cryptocurrencies...
I'll start with the latter – because it's probably less obvious. As I mentioned, a lot of bitcoin is created by people who own computers in Kazakhstan...
Kazakhstan is the world's second-largest bitcoin producer... and with an Internet blackout instituted by the government, that production dropped significantly... Between January 5 and 6, the hash rate in the country fell 11%.
The fact that bitcoin's price had dropped sharply during these events... to around $41,000 on January 7... could simply be coincidence. It has been in a downtrend since hitting all-time highs in November – or it could be more.
A similar sell-off in bitcoin occurred back in May, June, and July – from previous highs to around $30,000 per coin when China basically outlawed bitcoin mining in the country and its hash rate dropped by 54% over three months...
With energy, it might be more straightforward... Any supply questions related to natural resources – like uranium or oil – will likely be considered by the market as fuel for higher prices...
As we've written before, when it comes to oil in particular, there are major tailwinds way beyond Kazakhstan that indicate higher oil prices in the months and perhaps years ahead... But incidents like these, when they occur, can serve as a real catalyst within those trends.
At the very least, this should show you why civil unrest in a part of the world you likely have never thought about could contribute to higher electricity prices in the U.S. And it could tell us a bit about Russia's plans in the region... Which could have longer-term implications for our economy and markets.
So, you see, this stuff in a faraway land doesn't matter – until it does.
One more piece of business before we go...
We want to make sure you don't miss out on the chance to tune in to Ten Stock Trader editor Greg Diamond's new presentation tonight.
Greg's going to give his outlook on the markets right now... why he thinks volatility will be part of the story throughout this year... and he'll also be joined by a special guest that you may have heard about before.
The guest has been called the "most hated man on Wall Street"... so you figure he's doing something right... Greg's presentation goes live soon at 8 p.m. Eastern time. Click here to sign up so you don't miss a thing.
New 52-week highs (as of 1/12/22): AbbVie (ABBV), Bunge (BG), Berkshire Hathaway (BRK-B), Freeport-McMoRan (FCX), ICICI Bank (IBN), SPDR S&P Regional Banking Fund (KRE), Cheniere Energy (LNG), Lynas Rare Earths (LYSDY), Osisko Mining (OBNNF), Suncor Energy (SU), United States Commodity Index Fund (USCI), Viper Energy Partners (VNOM), and W.R. Berkley (WRB).
In today's mailbag, a nice note from a Stansberry Alliance partner, and a question about the "yield curve"... Do you have a question or comment? As always, email us at feedback@stansberryresearch.com.
"It's interesting to see other members' questions that so often occur to me as well...
"As I contemplate the different portfolios and differing approaches at Stansberry, I consider examining them all and achieving some diversification by picking ideas from each of them. Now that I have TradeSmith to help with volatility and position sizing, my current strategy, at 68 years old, is to prepare/combine the defensive and income portfolios (looking for commonality).
"Next up, watching Greg Diamond's 2022 Crash [event tonight] is at the top of my to-do list. Vive la diversification..." – Stansberry Alliance partner Ralph B.
"In this article: 'This Financial Turtle Race Is Worth Watching', you tell us an inverted yield curve means it's time to get out of stocks. Yet, in this article, "The Yield Curve Just Inverted... Time to Sell, or Buy?", you tell us it's the best time to be in stocks.
"Which is it or what's the difference?" – Paid-up subscriber M.E.
Corey McLaughlin comment: Thanks for the note. On first glance, I can see why you might interpret these essays as giving conflicting information, but they actually don't.
In the first one, our Digest from Monday, I said an inverted yield curve has been a reliable, powerful signal that a recession could be coming – but that history has shown that a recession comes, on average, about 19 months after the yield curve first inverts.
The second essay, from Dr. Steve Sjuggerud in DailyWealth back in September 2019, says the same thing. As Steve wrote then...
The financial media, and most investors, believe an inverted yield curve is the sign that the end is near. And ultimately, it is.
However...
The yield-curve inversion is actually a major bullish sign for stocks in the near term.
Steve went on to note that the last three times the yield curve inverted, the market didn't peak until 18 months later... each time. And stocks gained 21% on average.
We just did some math... After the most recent "yield-curve inversion" in August 2019, the benchmark S&P 500 Index gained roughly 16% over the next six months before the "COVID-19 crash."
All that said, it's also important to note again, as we did on Tuesday, that the "economy" is not the "stock market." By definition, a recession is determined by looking backward at data. The stock market is forward-thinking...
Recessions and bear markets usually go together, but not always.
The biggest thing we want to get across is that an inverted yield curve signals that bond investors, who have a lot of money in the markets, are more jittery about the short term than the long term... and that often stems from concerns about the Federal Reserve.
That's why two-year Treasury yields go higher than 10-year Treasury yields, and that's significant...
So when the yield curve is inverted – which it isn't right now – it's a "red flag" for the markets in general over the next year or two. It's an indicator you don't want to ignore.
But it's important to note that stocks can go up for a good bit – and have often gained double digits – in the meantime until they eventually peak.
Regards,
Kim Iskyan and Corey McLaughlin
Ashton and Baltimore, Maryland
January 13, 2022