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The Tell: ‘Russian commodities today are like subprime CDOs were in 2008’, says rates strategist

The 50-year anniversary of the 1973 shock caused by the Organization of the Petroleum Exporting Countries’ oil embargo is being echoed by “something similar but substantially worse — the 2022 Russia supply shock,” according to one widely followed rates strategist.

The wide-ranging commodity shock caused by soaring prices for energy, grains and metals in the wake of Russia’s invasion of Ukraine threatens to upend the financial system in place since the end of the Bretton Woods framework in the early 1970s, with China’s central bank poised to play a key role in a shift that could cement a much bigger role for the yuan currency, said Zoltan Pozsar, global head of Credit Suisse’s short-term rates strategy, in a note dated March 7.

West Texas Intermediate crude for April delivery
CL.1,
+1.31%
,
the U.S. benchmark, rose $4.30, or 3.6%, to close at $123.70 a barrel on Tuesday after President Joe Biden announced a U.S. ban on Russian oil and other energy imports. May Brent
BRNK22,
+1.16%
,
the global benchmark, jumped 3.9% to end at $127.98 a barrel on ICE Futures Europe.

WTI is up 34% and Brent has rallied more than 36% since Feb. 23, the day before Russian President Vladimir Putin launched the invasion of Ukraine. Some Russian crude had trouble finding buyers even though Western powers had sought to exempt the country’s energy flows.

Read: Why Russian oil can’t find buyers even as crude soars above $100 a barrel

Wheat futures
W00,
-1.04%

have soared toward all-time highs, while nickel futures doubled Tuesday before the London Metal Exchange stepped in to cancel trades. Stocks have fallen, with the Dow Jones Industrial Average
DJIA,
-0.56%

entering correction territory on Monday and the tech-heavy Nasdaq Composite
COMP,
-0.28%

slipping into a bear market. The S&P 500
SPX,
-0.72%

is down 1.3% from its level before the invasion.

See: The Russia-Ukraine war is fueling the ‘biggest supply shock to global grain markets’ in living memory

“There are Russian commodities that are collapsing in price and there are non-Russian commodities that are rallying…due to “present and future sanctions-related stigma” that has created a “buyers’ strike” rather than a “sellers’ strike,” Pozsar said.

“Russian commodities today are like subprime [collateralized debt obligations] were in 2008. Conversely, non-Russian commodities are like U.S. Treasury securities were back in 2008,” he wrote. “One collapsing in price, and the other one surging in price, with margin calls on both regardless of which side you are on.”

Also read: Ukraine invasion stokes stagflation worries because Russia is a ‘commodity superstore’

If so, who would be able to provide a backstop? Pozsar said the only candidate is the People’s Bank of China.

Western central banks can’t step in to close the “commodities basis” because their respective governments are driving the sanctions, he argued, while the PBOC has two options:

It could sell Treasurys to fund the leasing and filling of vessels to clean up “subprime” Russian commodities, which would drive weigh on Treasury prices and stabilize the commodities basis, giving the PBOC control over inflation in China, while the West suffers commodity shortages, a recession and higher yields, which move the opposite direction of Treasury prices.

The PBOC’s second option is to do its own version of quantitative easing: printing renminbi to buy Russian commodities.

“If so, that’s the birth of the Eurorenminbi market and China’s first real step to break the hegemony of the Eurodollar market,” he said. “That is also inflationary for the West and means less demand for long-term Treasurys.”

It’s why, according to Pozsar, the crisis is “not like anything we have seen since President Nixon took the U.S. dollar off gold in 1971 — the end of the era of commodity-based money. When the current crisis is over, Pozsar said he expects the U.S. dollar to be much weaker and the renminbi much stronger, backed by a basket of commodities.

“After this war is over, ‘money’ will never be the same again…and Bitcoin
BTCUSD,
+0.37%

(if it still exits then) will probably benefit from all this,” Pozsar wrote.

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