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Chapter 609 The Bottom Fishing Has Begun

In the conference room of Ernst Asset Management, sunlight streamed in through the panoramic floor-to-ceiling windows, but it couldn't dispel the heavy atmosphere in the air.

When Ernst stepped into the room, his eyes were immediately drawn to the urgently printed copy of The Wall Street Journal on the long table.

The front-page headline, in bold black font, occupied the entire page, conveying an undeniable sense of awe.

"Debt Defaults by Nuclear Powers: Moscow Shatters the Global Financial Safety Net".

After he sat down, he reached for the newspaper, then looked up at Jane Fraser, who was sitting in the head seat, and nodded slightly to indicate that the meeting could begin.

Jane Fraser got straight to the point, her voice tinged with suppressed urgency: "An hour ago, Russia officially announced that it would postpone the repayment of bonds totaling $40 billion. The ruble exchange rate has fluctuated wildly in the past two hours, rapidly widening from 6.29 rubles to 1 dollar yesterday to 9.5 rubles to 1 dollar."

Jane Fraser glanced at Ernst, whose eyes were fixed on the newspaper, and continued, "Our ruble short positions will eventually profit $800 million. If the ruble falls to 20 rubles in the next year, our profits are estimated to exceed $11 billion."

She briefly introduced the profit situation of some ruble short positions, then opened the folder, revealing a dense summary of information inside.

"Goldman Sachs, Citigroup, Chase Manhattan Bank, Morgan Stanley, and other nine core financial institutions on Wall Street all issued statements within the past hour, claiming that the Russian debt default will have a limited impact on the global financial system and will not trigger systemic risks."

"But the market reacted quite differently. Just over an hour after the Russian debt default, the average stock price of these institutions fell by 3.1%, with Citigroup experiencing the deepest drop of over 4.7%, wiping out more than $54 billion in market value."

As soon as Jane Fraser finished speaking, Parker Houston pressed the remote control, and the projection screen at the front of the conference room instantly lit up, displaying real-time trading data from the Chicago Mercantile Exchange. Pointing to the constantly fluctuating curves on the screen, his professional excitement was undisguised. "The agricultural market is showing signs of collapse first. The price of the most active soybean futures contract has plummeted by 3% in the past hour. Given the current selling pressure, today's drop will most likely exceed 5%, which would be the largest single-day drop since the Black Monday stock market crash of 1987."

"Agricultural exporters in São Paulo have completely stopped taking orders. The Brazilian central bank just announced that it would raise the benchmark interest rate to 45%. The high interest rate has led to a liquidity crunch in the Brazilian real, and exporters are simply unable to obtain dollar credit to pay for the purchase of US soybeans."

He paused, a hint of regret in his voice, "Unfortunately, it's currently winter in the Northern Hemisphere, and soybean deliveries in the main producing areas have basically been completed. If this had happened in the summer, which is the window of opportunity when grain traders and Midwestern farmers in the United States sign supply contracts, this wave of price drops could have been at least 10%, and the cumulative decline within three months could have exceeded 30%."

The data on the projection screen kept changing, and Bai Wen Houston continued to add, "Except for soybeans, other commodity prices are also under pressure. The corn futures contract fell 2.8%, the US chicken futures price fell 2.43%, and the prices of wheat, cotton, and sugar all fell by more than 1.5%."

"Our agricultural research team's conservative estimate is that global agricultural futures will fall by at least 15% on average over the next month."

Ernst gently placed the newspaper on the table, somewhat surprised by the data.

It wasn't that the drop was smaller, but rather that the drop was too large, so he asked in a deep voice, "What is the core logic supporting this judgment?"

"A double squeeze from a broken funding chain and collapsing demand." Parker Houston immediately responded, "Based on our analysis of the Russian Federation's financial and import data over the past three years, they are the world's second-largest importer of agricultural products and the largest exporter of agricultural products to the United States. Yet now they can't even afford to pay wages, let alone continue purchasing agricultural products from overseas."

He pointed to the futures position data on the screen and said, "The current apparent calm in the futures market is actually due to large Wall Street investment banks using quantitative trading to raise short-term prices in order to stabilize market sentiment and find buyers for their large long positions in agricultural products."

"Although 60% of U.S. agricultural exports have been delivered this year, 40% of signed orders remain unfulfilled, involving more than $320 billion. Given Russia's status as the largest export market for U.S. agricultural products, at least 20% of U.S. agricultural products will directly face the risk of order default."

Currently, the largest export market for US agricultural products is not China, but Russia.

This is why the Russian debt default had such a significant impact on US agricultural products. Farmers in the American Midwest are highly dependent on bank credit for their production and operations, with leverage ratios generally exceeding 60% in areas such as breeding, fertilizer, and agricultural machinery purchases.

These farmers will face double pressure if Russia defaults on its orders.

On the one hand, bank credit contracts will not be extended due to trade defaults, and failure to repay loans upon maturity will directly lead to the forced liquidation of farms.

On the other hand, to avoid bankruptcy, they must find new buyers in the short term, which will lead to a sudden oversupply in the market, further depressing agricultural product prices and creating a vicious cycle.

Ernst shifted his focus from agricultural data to the more pressing area of ​​"the metals and energy markets."

"The industrial metals market has entered a full-blown bear market." Patrick Houston switched to the London Metal Exchange's real-time quotes: "International copper prices have fallen below $1350 per tonne, a drop of over 25% since the beginning of the year."

"Aluminum prices fell to $2100 per ton, with a year-to-date decline of 22.3%, while precious metals such as nickel, palladium, and silver all saw declines of over 15%."

"Except for gold, almost all metals have seen significant price drops this year."

"The most dramatic example is oil, which has fallen by more than 45% since the outbreak of the Asian financial crisis last year."

"A Russian debt default would be the final straw that broke the camel's back for metals and energy."

Brent crude futures prices fell to $10.56 per barrel, while Ti crude futures prices hit a historic low of $10.3 per barrel. A Russian debt default could trigger a chain reaction of defaults on Russian energy export contracts, and coupled with shrinking global demand, the probability of crude oil prices returning to single digits is over 70%.

At this point, Perkin Houston paused, turning his gaze to Ernst. "A Russian debt default would be a fatal blow to the already fragile global economy, especially emerging markets, which could face a triple crisis of debt default, currency devaluation, and capital flight." "Global demand will shrink further, consumer confidence will collapse, and business investment will stagnate. The contraction in demand and the tightening of global liquidity will resonate together."

"In addition, in the financial industry, hedge funds must liquidate their long positions in commodities to cope with redemption pressure, which will exacerbate the price decline and form a death spiral of decline-default-liquidation."

Are you still sticking to your point of view?

Ernst raised his head, his eyes firm, and said without hesitation, "That's right, a global economic crisis will not come."

"The strength of the US economy and the appreciation of the dollar are one aspect."

"Secondly, the recovery of East Asian economies will become a ballast for the global economy."

"The Bank of Japan's latest quarterly economic outlook report shows that Japan's GDP grew by 0.8% quarter-on-quarter, ending two consecutive quarters of recession. Export data, especially exports to Southeast Asia, saw a 12.3% increase, demonstrating strong recovery momentum."

"The situation in South Korea is equally optimistic, with semiconductor exports increasing by 9.7% month-on-month, and the average capacity utilization rate of companies such as Samsung and SK Hynix has rebounded to over 80%."

"You can take a look at China's economy; its growth is very strong, and its growth can offset the impact of the global consumption contraction."

"And Western Europe, it wasn't affected much either."

Ernst stated his assessment: "I still maintain that the global economy will stabilize quickly, the Fed's interest rate cut is inevitable, and even PEC may significantly reduce production in the next month or two."

He glanced at everyone present and said, "Don't forget, Russia is a major energy and mineral producer." Many people immediately realized this and their eyes lit up.

The ruble's devaluation due to the Russian debt default will put severe cost pressure on Russian energy and mining companies.

Based on the current ruble exchange rate, energy export revenue denominated in local currency will shrink significantly, and companies will face huge losses if they continue to fulfill existing contracts.

Therefore, Russian energy and mineral companies will most likely choose to suspend the performance of some long-term contracts or demand renegotiation of pricing terms, which will lead to a contraction in the global energy and mineral supply.

"You mean, the supply contraction will offset the downward pressure on prices caused by the shrinking demand?" Parker Houston immediately asked.

"That's right," Ernst nodded.

"Taking the oil market as an example, Russia is the world's second-largest oil exporter, with an average daily export volume of about 480 million barrels. If Russian oil companies reduce their exports by 30% due to the devaluation of the ruble and financial pressures, global oil supply will decrease by about 140 million barrels per day, which will effectively alleviate the current supply and demand imbalance."

The logic is the same in the metals market. Russia is the world's largest exporter of nickel, the second largest exporter of aluminum, and the third largest exporter of copper, accounting for 22%, 16%, and 8% of global trade, respectively.

If Russia's metal exports contract due to debt default, a significant gap will emerge in the global metal supply.

Jane Frazier and Perkin Houston exchanged a glance, then she said, "In that case, I'll contact those hedge funds."

Contact with what?

Of course, it's their long positions. Right now, all hedge funds are selling off their long positions in commodities, fearing a global economic crisis.

If the global economy can stabilize quickly, this will be the best time to buy at the bottom.