You cannot fool markets

Thursday, December 18, 2014

By Farrokh Langdana, Director, Executive MBA Program & Professor of Finance and Economics

Faculty Blog: business.rutgers.edu/langdanamacro

You can fool your people. You can fool your family. You can fool your country. You can fool other countries. You can even try and fool the angels in heaven. But you cannot fool markets.

On December 15, 2014, the ruble fell to a new record low against the dollar, offering a clear signal that a panicked market had not been persuaded by the Russian central bank’s decision to jack up its benchmark interest rate by 6.5 percentage points to 17%.

Russian President Vladimir Putin can try and amass all the gold that he likes – Russia has bought about 150 metric tons of gold in 2014 – and has been asking the Europeans for only gold in exchange for gas. But gold does not make a currency strong. It can back the currency, it can give it some temporary value (a la the Bretton Woods accord), and it can impose some discipline on the country's central bank. But the real fundamental strength of a currency is in its intangibles, NOT in gold. 

Strength in a currency comes from the long-term strength of the country's institutions, its long-term macro outlook, and the value of its human capital – not from resources in the ground such as oil and gas – and its relative reputation and credibility in the world. Putin can act like he will peg the ruble to gold, but he cannot fool markets who know that Russia is a paper bear, imploding from within.

Read more:

TAGS: Business Insights Executive MBA Faculty Farrokh Langdana Finance MBA Thought Leadership