“This fast financial tightening cycle might end sooner than we think:”  Fed Governor Mary Daly.

The Fed isn’t know for telling simple stories in plain English, but Fed Governors Mary Daly and Esther George are doing just that.  Their narratives contradict the dominant narrative of the business media/pundit complex.  Maybe they are trying to tell us something?

The media/pundit/sentiment complex is all about Armageddon – drama gets clicks.  Daly (considered a dove) and George (considered a hawk) both see a low-drama path to the economy settling down without a major crisis or deep recession.  The wisdom of the crowds in commodity and bond markets are voting with the Fed governors so far.

Not also that Fed Governors and the financial markets are out on the field.  The pundits are just commentating from the stands.

Before we get to Daly’s forecast (below), lets start with a chart and the sentence in bold.  She’s setting her stage this way for a reason.

While adjustments in financial markets after FOMC communications are not unusual, the speed and magnitude of the movements during the past six months have been unprecedented, as the figure shows. 

The fact that financial conditions and real activity are adjusting to expected monetary policy tightening, even when actual rates have not fully risen, means that long and variable lags may not be as long, or variable, as typically assumed.

Figure 1
Financial conditions around federal funds rate increases

Financial conditions around federal funds rate increases

Source: Goldman Sachs US Financial Conditions Index and FRBSF staff calculations.

Ms Daly goes on to share her own forecast (my emphasis below).  It is surprisingly specific and contrary to what you’ll read in the WSJ or FT.  Many want us to believe the behind-the-curve Fed is desperately clutching at straws.  I don’t see that here.  Time may prove her wrong, but she makes a fair. reasonable argument based on what we know today.

The question is: how much economic slowing are we likely to see? Here, history gives us some useful reference points.

One is the Great Inflation of the 1960s and ’70s and the subsequent Volcker disinflation, which, by the mid-1980s, had brought inflation down from its double-digit peak. But it came at a very high cost, pushing the economy into what was then the most severe recession since the Great Depression.

But this is not the only example or precedent of how the economy reacts to policy tightening. In the mid-1990s policymakers faced a rapidly declining unemployment rate and worried that a 1970s-style high inflation environment was coming. So they raised interest rates by 3 percentage points in roughly a year. This rapid policy tightening put the brakes on falling unemployment, but the overall effects on growth were mostly benign. Most notably, the economy and the labor market maintained a relatively strong expansion through the end of the decade, and inflation remained in check (see Blinder 2022 for additional discussion of past tightening).

For a number of reasons, I expect our economic transition now to look more like the mid-1990s than like the 1970’s Great Inflation and subsequent painful disinflation. That’s because many of the factors that helped fuel the Great Inflation are not as prominent today.

…conditions in the economy are quite different now than they were in the Great Inflation. There is a sizeable amount of excess demand in both product and labor markets, supported by COVID-related fiscal and monetary policy. This translates into large, accumulated back orders for goods and historically high job vacancies in the labor market. Adjusting rates to slow the economy will most likely reduce these backlogs and high job vacancies before digging into current production and employment.

In economics terms, this would mean that we are on the steep portion of a fixed supply curve or Beveridge curve (see Waller 2022). And moving along those curves by reducing aggregate demand to return normal conditions would bring inflation down with a more limited effect on overall economic activity (Powell 2022).

In its extreme form, this implies that policy adjustments to lower inflation will be cost free. While I think that scenario is highly unlikely, I do expect the costs of adjustment to be moderate, with some slowing of GDP growth below its longer-run trend and an increase in the unemployment rate from the very low levels we see today.

There is another surprise here;  Another Fed Governor offering a direct, plain-English narrative forecast.  This is weird.  Especially because the stories diverge markedly from what market pundits and business media are saying.  That gap is worth minding.

I harbor deep suspicions about the media/pundit narrative.  All the bold-face magazine covers – regime change!, massive inflation!, run-for-the-hills!  This stuff gets clicks, makes reputations, and drives trading flows.  That is exactly why I mistrust it.

The Daly and George narratives are less exciting, but more reasonable.  We’ve had a massive shock.  Hopefully we work it out.  In a year the Ukraine War is over and supply chains have has sorted this out.  This year’s drama is mostly forgotten.

We’ll only know who is “right” with perfect hindsight.  I’m trying to stay open minded.  But I’m inclined to believe the commodity/bond markets and the Fed, not Larry Summers and a bunch of big-name investors talking their books.

As an aside, her speech also contains a very reasonable explainer for why the Fed didn’t act more quickly to raise rates.  She is correct here.  The Fed’s critics are only “right” with perfect hindsight – the second-to-last refuge of a scoundrel.

To manage these risks [deflation vs inflation in 2021] we needed to do more than just assess their likelihood. It was also important to stack the potential outcomes against the tools we had to deal with them. Unfortunately, with the proximity of the zero lower bound our tools are not symmetrically effective. When inflation is too high, we have ample room to raise the federal funds rate to pull it back down. But when inflation falls too low, and the zero lower bound binds, we have to rely on less robust tools, such as asset purchases (Cúrdia, Chen, and Ferrero 2012).

This meant there could be significant potential costs to overreacting based on emerging—but still limited—evidence of price pressures. Especially when any premature tightening would be hard to reverse and its consequences could hamper growth and productivity in the longer run.

Policy Nimbleness Through Forward Guidance

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“Lets Not Rush into Recession to Salve One Man’s Vanity:” Fed Governor Esther George

Take a moment to read the short, surprisingly clear speech by Fed Governor Esther George July 12th.  It contains a warning to her fellow Fed Governors.  She thinks the current Fed consensus risks a major policy error by overly hasty action.  Confusing temporary (pandemic and Ukraine) shocks with long-term shocks.  It is also a tidy analysis of our present economic situation.

She has been around a long time and is known as a “hawk.”  She was also the only Fed Governor to vote against the 75bp interest rate increase last meeting.  This is not typical hawk-speak… 

I find it remarkable that just four months after beginning to raise rates, there is growing discussion of recession risk, and some forecasts are predicting interest rate cuts as soon as next year. Such projections suggest to me that a rapid pace of rate increases brings about the risk of tightening policy more quickly than the economy and markets can adjust…it is unclear just how high rates will need to move in order to bring inflation down. These dynamics suggest it will be particularly important to observe how the economy is adapting to changes in monetary policy.

The bond and commodities markets see the same risk.  Commodity prices are tanking.  The bond market expects the Fed to be cutting rates in 2023 (meaning too-fast raises in ’22 followed by an unseemly scramble to undo the damage in ’23).  The 10 year yield is pointing to slowing growth and rate cuts (going DOWN even while expectations for near-term rate cuts are going up).  Market-based inflation expectations have been coming down for weeks now.   So has the Cleveland Fed’s inflation expectations index.

With the evidence above, you could usually bet the Fed will follow the markets (while pretending to lead).  Multiple markets are clearly signalling the tightening campaign is (or should be) getting close to its conclusion.

The risk is the Fed (or Powell) refuses to take the hint.  Powell has been widely reported as desperate to protect his reputation/legacy.  He wants to be remembered as a Paul Volker (“slayer of the inflation dragon!”)  not an Arthur Burns (“wimp of the 70’s stagflation”).

So are we going to have a recession to protect the vanity of one man?  Ms. George seems to be asking that question to nudge her fellow governors away from enabling Powell’s agenda.

The good news?  Powell probably can be convinced to declare victory if inflation readings start to come down because prior, temporary shocks are, well, temporary (we can’t say “transitory” anymore).  Especially if the market is telling him the alternative is an “unseemly scramble.” If Powell is that much of a egoist/politician, he’ll be tempted by the easy win.

More sympathetically, the Fed and Powell need to talk tough now to get the result they want.  But some of that tough talk is, hopefully, just bluster.

Markets are usually more right than pundits, but they still might also be wrong about declining inflation.  They were wrong 6 months ago when the Fed started talking about raising rates (the 10 year also went down in November/December too).  Although the markets are usually more right than the Fed or the talking heads.  Lots of risks and uncertainty, as always….

The speech is still worth a read in full.  She does a great job of summing up “where we are and how we got here.”  In particular, she clarifies just how weird and out-of-whack the whole situation is.  Prior analogues are pretty useless because we’ve never seen a situation like this before.  When someone starts telling you about the 70’s/80’s or (much worse) 2001 and 2008, you already know they are wrong.  Navigating on a bad map using a broken compass is certain to get you lost.  Navigating from common sense gives you a fighting chance.

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Raise Taxes, Not Interest Rates! Think About It After You Stop Laughing…

“If only we had something more precise! Says surgeon holding a rusty kitchen knife over a tray full of scalpels…  

How “should” we slow demand in an overheating economy?  Congress should be (temporarily) raising taxes.  The Fed’s rate policies should be back page news today and always.  Yes, that sounds absurd.  Because we have all succumbed to political learned helplessness.  But it is still blindingly obvious.

How many times have you read some variation on? “Fed rate changes are a blunt weapon, but (insert shrug here) its the only way to slow demand.” This is poppycock.

The tax code gives us infinite ways to slow demand immediately with precision.  With the side benefit of reducing the deficit in the bargain.  Yet the tax code toolbox just sits there un-opened.

It didn’t used to be this way.  In the 1940’s, tax increases were the “expected” inflation response.  This is the Fed Chair writing in 1943.

The public, which has come to understand the need for increased taxes as a means of inflation control, would find it more difficult to see how an expansion of the Social Security program at this time would serve the same purpose.

Of course, we know there is zero chance that we would ever use the surgical tools of the tax system.  We will, instead, sign the whole economy up for brutal economic chemotherapy.  Because that learned helplessness serves a political agenda…

BTW the alternate title to this post:  “They” Say They Care About The Deficit. They are Lying...

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Putin Has Lost. Can Ukraine Win?

The consensus forecast on the Ukraine war seems be for grinding, low-level conflict.  That seems unlikely.  It is probably mostly or totally over by Winter. That is a better outlook than forecasters have assumed.  It might be the outlook markets are pricing in via, for example, plunging commodity prices.

Putin has already lost the Ukraine war  Ukraine, by continuing to exist, has won a minimum victory by simply not losing.  By keeping the war hot enough for 6-7 months, they can likely win – either big or small.

Ukraine doesn’t want a grinding war.  So they will use the next 6-7 months to break the Russian military machine.  Ukraine wins either by sparking a Russian rout or by grinding the Russian war machine down to a dull nub.  Either way, the “hot” war is probably over when winter takes hold and/or before mud season.

Every month of fighting increases the probability the Russian line collapses in some neglected sector.  The Russians will be that much more stretched, tired, and bogged down in static positions the Ukrainians can hit with precision artillery/missiles.  Ukraine will keep forcing Russia to play whack-a-mole – hoping they miss a whack.

Over time, high-quality troops become low-quality troops.  Russia today has a mix of low-quality troops holding most of the line backed by reserves of high-quality troops.  The high-quality troops press attacks and act as a sort of “fire brigade” to handle local emergencies.  Ukraine is pressing local attacks to exhaust those fire brigades.

Eventually, a mole doesn’t get whacked.  The fire brigade fails to arrive in time or sufficient force.  The Russian lines break.  If a local breakthrough gets traction, it will spark a rout – another Kyiv-style panicked retreat or a mass surrender.  A second Russian collapse re-captures big chunks of  Ukraine’s lost territory and likely brings Russia to the negotiating table.  That would be an unequivocal win for Ukraine.

What if Ukraine doesn’t rout the Russians? Every month of combat now pushes out the date that Russia can resume the war.  If Ukraine (and the US) grind the Russian war machine down far enough, that date slips past the sell-by date for Putin’s regime (and/or lifespan). 

Even if Putin hangs on, Ukraine buys years to rebuild its military/economy and integrate with Europe.  By the time Putin is ready to invade again, he’s likely confronting a very different Ukraine and a much lower chance of success.

In the calculus above, we need to be watching Kherson and Melitipol.  The Donbas battles get all the press coverage, but the war won’t be won or lost there.

I wrote up some more detailed commentary on these two scenarios, but the above gets the point across.  So including it as a sort of appendix.

Hobble the Russian War Machine Until After Putin’s Sell-By Date:

If Ukraine just keeps fighting the Russian military to a (relative) standstill, they buy themselves 5-10 years.  That is enough time to re-arm with NATO gear, rebuild and integrate with Europe, and potentially even join the EU (which has a mutual defense pact).  If there ever is a next round, Ukraine will be in a much better position to defend itself.  Especially in contrast to a Russia stagnating under the weight of sanctions.

I ran across a convincing article arguing that, after another 6-7 months of war, Russia would need 7-10 years to replace their Tank/APC losses and re-build precision missile stocks.  I’m in no position to judge how “right” that 7-10 year production estimate is, but the war has shown that Russia’s entire military needs a total structural and personnel overhaul – different organization, tactics, and skills.  That structural rebuild alone probably needs 10 years even if the equipment stocks are there.

Putin may not have even 5 years.  Especially if he loses badly enough in this ill-considered war.  He probably doesn’t have much more than 10 years given his age and the likely trajectory of post-war Russia.  Leaving aside the rumors Putin is seriously ill.

So prolonging the war now postpones any possible resumption of hostilities in the future.  Potentially past Putin’s time in power or on this earth.

Another Kyiv – Rout The Russians

How does Ukraine precipitate a rout?  Doing what they are doing right now.  Probing and poking for weak spots.  Blowing up supply dumps with the HIMARS rockets (as they are doing right now).  Blasting individual positions with accurate artillery fire (the NATO 155mm guns are MUCH more accurate than the Soviet-era stuff). In this regard, the recent arms shipments may have legitimately tipped the balance.

The front line Russian troops are left to sit and wait – feeling cut off, under-supplied, and dreading a sudden, deadly 155mm knock on the door.  If they don’t sit still, they must move and move and move again.  Mobility is also exhausting and leaves you vulnerable to ground attack and (again) artillery.  If Ukraine punches through a weak spot and threatens to cut them off, those front-line Russians will break and run.  That is how Ukraine sparked the rout around Kyiv.  They will try to do it again around Kerson, Melitipol, and/or Izyum.

Putin can’t afford another headlong flight like we saw around Kyiv  Much less a mass surrender.  The large loss of equipment would set them back further (per the above).  The loss of face/morale would be devastating.  Politically, another rout leaves Putin a dead man walking.  It would likely leave the Russian military a shattered force like the Soviet Army after Afghanistan or the US Army after Vietnam.

 

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Putin Won Lysychansk. He Has (Still) Lost the War. A Monkey Dancing. Ukraine Grinds the Organ.

Why will the Ukraine war end in a Russian defeat?  Because Russia has already lost.  Winning a war means choosing when to end the fighting and on what terms.  Putin cannot end the conflict on his terms.  He lost that option months ago in front of Kyiv.  Ukraine controls when, how, and on what terms the war ends.  Zelensky is the organ grinder.  Putin is the monkey.

Ukraine (and the US) will try to keep Putin dancing until he slips and falls.  Publicly.  Shamefully.  Looking like a loser.  His reputation in tatters.  His military in shambles.  Putin can only hope his increasingly exhausted forces don’t stumble and collapse again like Kyiv.  That face-saving outcome is possible, but unlikely.

Putin can (barely) take Lysychansk.  But Putin cannot force a decision.  He can’t stop the war from grinding on.  Grinding his army to pieces along the way.

Ukraine can and will keep grinding as long as the US keeps supplying them.  The US will keep supplying Ukraine until Russia’s army is well and truly broken.  Because the US and Ukraine both win by shattering Putin’s military capabilities.  That is the end game.

When? Zelensky just told the NATO summit the war likely ends Christmas 2022 – the front half of winter on the steppes.  My guess is that is the intersection of two lines

  1. How long it will take to break Russian morale and fighting strength – precipitating another Kyiv-style rout someplace somewhere.
  2. How long Ukrainian morale can hold out (hopefully long enough to force the result above).

Zelensky’s bet is that Russia’s army will break someplace, somewhere.  Keep grinding the organ and wait for the monkey to stumble. Forcing Russia to the negotiating table in a position of weakness.

What are Ukraine’s victory conditions?   My guess would be.

  1. A shattered Russian military.  Needing years to fix.  How many years?  More time than Putin has – either in power or on this earth (especially if he really is ill with cancer).
  2. A return to (roughly) pre-war conflict lines.  Zelensky wins that via… a shattered Russian military.  If he’s really lucky, he wins more.
  3. Note the US’s victory condition is also a shattered Russian military.

Christmas is a long time from now.  Europe and the rest of the world would love to get the wheat shipped and the oil/gas flowing before then.  Ukraine controls that timing, not Russia.  Russia can’t/won’t drop its blockade until Ukraine decides to end the war.  Ukraine won’t end the war until they “win.”   

Even the French and Germans seem to have (finally) figured this out.  After flirting with   appeasing Russia, they have realized that won’t get the gas flowing.  Destroying Russia’s military will.  The faster Ukraine achieves its victory conditions, the faster the world gets back to normal. Cue German and French deliveries of new artillery systems after the NATO summit last week.

Regardless, the world likely starts 2023 with the war over, the gas taps back on, a shattered Russian military, and a big sigh of relief (unless you are named Putin).  I don’t see this in a lot of market/economic forecasts.  But it should be.

So that is the political/strategic end game.  I’ll do a short piece on the military end game later this week.  Then back to economics.

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Schrodinger’s Economy Can’t Be Alive and Dead Forever.

We are currently living with a Schrödinger’s cat economy.  It exists in a state of quantum uncertainty.  It won’t last forever, but right now we can’t quite see if we are alive or dead.

In quantum mechanics, Schrödinger’s cat is a thought experiment that illustrates a paradox of quantum superposition. In the thought experiment, a hypothetical cat may be considered simultaneously both alive and dead as a result of its fate being linked to a random subatomic event that may or may not occur.  https://en.wikipedia.org/wiki/Schr%C3%B6dinger%27s_cat

One possible state is “Regime Change!”   A future path battling persistent inflation, possible financial crisis, and austerity-through-high-interest rates.

The other possible state is “Back to  2018 (more or less)”   A future path battling deflation, possible financial crisis, and austerity-through-sluggish-demand.

Neither path is all that thrilling.  The sluggish on-the-ground reality won’t be too different.  The main difference will be in real and nominal interest rates.  Either rates end up high (to battle inflation) or low (to battle deflation).

Those two states are, for now, as much a matter of belief as facts.  “The numbers” point down both paths.  Your belief in the likely path is just that – belief.  What numbers you choose to weigh most.

So that’s where we stand.  This is what I was expecting to be blogging about 6 months ago before Ukraine exploded.  Figured I might as well explore here now (with the occasional digression as always).

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Will Russia’s Army Collapse Before Global Resolve? Russia Has Peaked. Likely Can’t Hold.

Putin is betting on Western resolve collapsing before his military collapses.  I don’t think he is going to win that bet.

We’ve been through a weird period where Russia and the media re-narrated capturing a 2nd tier regional city (Severdonetsk) into a major strategic pivot point.  At the same time, Ukraine went on a PR offensive emphasizing its losses to crank up Western weapons deliveries.  The narrative has changed, but the facts on the ground haven’t.

  • Ukraine is trying to bleed Russia white and force a collapse.
  • Russia is trying to find some way to declare victory, freeze the current conflict, and go lick its wounds.  Preparing for another round of battle in a few year’s time.

What has changed is the Russian army has peaked. The evidence of exhaustion is right in front of us.  The Russian’s vaunted Eastern offensive has taken a tiny amount of territory by firing an incredible number of artillery shells backed up by shrinking, increasingly timid ground forces.  Barring a lucky breakthrough, Russia isn’t going to take much more territory. They have lost a huge number of soldiers.  Their remaining men are depleted, exhausted, and demoralized after months of hard fighting.

We now know Putin can’t/won’t fully mobilize the nation for this war.  Hence Russia’s scraping out the bottom of its manpower/materiel barrel – obsolete T-62 tanks and men well over military ages going to the front.  Putin has no meaningful reserves left to throw into the fight.  

So the Russians have peaked – “culminated” being the (slightly post-orgasmic) military/strategic term.  That leaves two open questions.

  1. Can they hold the ground they have with the forces at hand?  No.  The front lines are too long and their forces too depleted to hold everything everywhere all the time.
  2. Can they convert a hot war into a “frozen conflict” to be resumed at some later date?  Probably not.  Even as Germany/France have flirted with appeasement, Ukraine, the US and the front-line NATO states have shut that door.  That leaves Russian capitulation as the world’s fastest/only exit route out of today’s gas, oil, and wheat shortages.  A lot of nations quietly hoping for a quick Ukrainian surrender will eventually realize their best interests lie in hastening a Russian retreat.  Even China, struggling with an economic slowdown, might eventually see that logic. 

Militarily, it is possible the Russians achieve a lucky breakthrough.  It is equally (or arguably more) possible the Ukrainians break through.  Especially towards Kherson or Melitopol where Russian forces are weakest.  Otherwise, we are going to see a static front line with the Russians being picked off by longer-range artillery they can’t reply to.  That leads (eventually) to another Russian collapse somewhere and somehow.  When and where will be impossible to know until it happens.  But the world will be hoping it happens sooner vs later.  More detailed commentary below.

1).  Can Russia hold the ground they have with the forces at hand?  No.  

Every Russian on the ground will struggle just to get through the day.  There is nothing worse for military morale than a static, but “hot” front line of bad food, no hot water, flies/shit-smells everywhere, boredom, and dread of the (deadly accurate) shell with your name on it.  The Ukrainians can rotate troops back to friendly, communities behind the lines.  The Russian havens are farther away and much less committed to the fight.

Russians in static positions will be, literally, cannon fodder.  Ukraine is now taking delivery of artillery and HIMARS rockets with much longer range and greater accuracy than the Russian artillery can match.  Every time and every place the Russians try to settle in, Ukraine can drop a shell or rocket in their midst without risking retaliation.

Russian soldiers will come to know there is a shell with their name (or GPS coordinates) on it.  The only thing more demoralizing than indiscriminate artillery barrages (Russia’s approach) are discriminating, accurate, devastating artillery bolts-out-of-the-blue.  Having the command post wiped out by 4-5 “surprise” shells is more psychologically damaging than losing it to a barrage of 40-50 shells.  The only “safe” places will be where there aren’t enough forces concentrated to make for a decent target.  Those places will be tempting targets for Ukranian ground attacks.  Leaving no place to hide.

Russian artillery troops will go from hunters to hunted – scuttling about dodging incoming Ukrainian counter-battery fire.  Every Russian artillery crew that fires a shot will have 4-5 minutes to run before Ukrainian shells come roaring in from beyond the Russian guns’ range.  If they don’t fire, they still risk satellite or drone spotted pre-emptive attacks.

If Ukraine’s artillery lacks juicy front line targets, they can use the (longer-range) HIMARS missiles to hit rear-area supply depots and command centers.  The Russian’s only weapon against the HIMARS are direct air attacks.  The Russian Air Force hasn’t been up to that task so far.  They likely won’t manage it any better in the next few months.

While Russia’s front line troops get picked off along a very long front line, the occupied rear areas will remain a problem.  An occupation can require more troops than an invasion.  Especially if/as local sentiment shifts against continued conflict.  Consider the US experience in Iraq.  The IED’s haven’t started up yet in Ukraine, but they will.

The Ukrainian army will have its own struggles on that static front line, but;  They will shelter under an increasingly effective long-range artillery counter-battery umbrella; They are defending so they can hold the line thinly;  They will gain morale-boosting hope from local or strategic counter-atacks; They have higher morale to start with.

Can Russia convert a hot war today into a “frozen conflict” to be resumed at some later date?  Not as long as Ukraine (and the US) want to keep it a hot war. 

Putin is betting the Germans and French will want the gas taps turned back on before winter comes to Europe.  But the US and the front-line states – Poland, the Baltics, Slovakia – won’t countenance appeasement.  They know it just kicks the can down the road.  We’ve destroyed a lot of the Russian army already.  We might as well finish the job now.

That takes a “frozen conflict” off the table.  If Putin declares a cease fire and invites negotiations, Ukraine will just keep on shelling the Russians.  Their supply of shells will keep rolling in across the Polish border.  Unless Germany invades Poland to stop that supply.  That seems unlikely.

Putin’s risk is the Germans et al finally realize a Russian military collapse is a faster path to turning the gas back vs a Ukrainian surrender.  Because that is the only path Ukraine, Poland, the Baltics, and the US are forcing on Germany and France.

The same goes for the global famine card Putin is playing.  Either “the world” works to push Ukraine to surrender or “the world” works on Russia to unblock the port at Odessa.  The world will also figure out that Russian surrender is the better bet.

————————————

Haven’t blogged in a while.  I’ve been busy/distracted, but also not a lot new to say on Ukraine.

I’d originally dusted off this blog to write up some thoughts on the Fed/Economy etc. I’ll turn to that in the next weeks/months.

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Bleeding Russia White. Bad News? We’re at War With Russia. Good News? They Can’t Keep it Up Much Longer.

The US (and Ukrainian) strategy now seems to be “bleed the Russians white.”  Not in terms of manpower (impossible) but equipment (already well on the way to being done).

There hasn’t been much change on the ground lately in Ukraine.  That is news itself.  For the attacker, not much change = you are losing.  As evidenced by the retreat from Kyiv, not much change eventually leads to collapse and retreat.

Russia’s lack of progress is almost a problem.  If Russia had managed a big thrust, Ukraine could have cut them off and precipitated a retreat with massive equipment losses – Kyiv all over again.  If Russian forces stay bogged down within a one-day supply truck drive of Russia, the risk is we see a static grinding war develop.  Like the Donbas conflict from 2014 to today.  That seems to be what a lot of people (particularly Putin) are expecting.

But this assumes Russia can keep up a long grinding war across a much longer front line.  They have enough people to do it.  But they are rapidly running out of equipment.   

Putin is destroying the fighting capability of the Russian military for at least a decade. He’s used up ~70% of his precision missiles (per Bellingcat).  800-1,000 tanks destroyed** out of a functional force of maybe 2,000 t0 3,000 (ignoring storage parks of rusting armored hulks stripped bare of anything of value over decades of corruption).  Note that Russia’s only tank factory can only produce 200 tanks a year (WSJ).  Except it has shut down production for lack of foreign semi-conductor supply. Missile production is hampered by the same supply constraints.  Aircraft production too. The above also ignores the structural and logistics investments now made obvious by the war.  Putin can’t just re-build the military, he must re-make it.  Under severe sanctions and with a struggling economy.

A mob without tanks, missiles, and air cover is not going to hold much for long.  Especially as we pour weaponry into Ukraine.  A few more months of losses at these rates and Russia will (literally) run out of tanks.  To that end, it is worth looking what happened after the US Defense Secretary recently went to Kyiv.  The result was a strategy to accelerate that Russian loss rate.  I’d guess the conversation went like this.

US SecDef:  So what you are saying, Volodymyr, is you will gladly keep fighting the Russians until they bleed white as long as we keep shipping in more NATO-grade weaponry?  Even if that means major losses on your side?

Ukr Pres Zelensky:  Lets face it Lloyd, we are going to fight this battle now or later.  Putin has made that clear.  So we might as well fight it out now.  We are half-way there, my people are united, and we have your attention and support.  If Putin is mis-informed enough to keep on destroying his army until it is past the point of no return, lets hurry him over that cliff.   So yes, lets just get it over with and work hard to ensure the Russian military rebuild takes longer than Putin’s life expectancy (either as President or on this earth)

US SecDef: OK.  I’ll go bang some heads together and shame the Germans to start sending heavy weapons.  You won’t get any push-back from Congress if US defense contractors get big fat orders.  And we are pretty sure the Chinese have let Mr. Putin know that using nukes would be a super big no-no, so I think we are OK on that front.  Especially since they wouldn’t really do him much good given how degraded his military already is.

Ukr Pres Zelensky:  And you do realize, Austin, we are going to end up in the EU (which has a mutual defense clause too) and probably NATO at the end of all this.  So might as well get on with arming us up to NATO standards.

US SecDef: (Sigh).  Yeah, we’ve kind’ve figured that out.  With Sweden and Finland joining NATO Putin is going to be pretty steamed.  But… him and what army are going to be able to do anything about it? (roars of laughter around the table).  Although lets hope whoever replaces Putin realizes Russia’s best interests lie in extending NATO all the way to the Chinese border…. (sober silence).

I do worry what happens when someone finally has to tell Putin the game is up.  He will be humiliated, angry, and looking to lash out.  So he says “lets use a tactical nuke to blow a huge hole in Ukrainian defenses and take Kyiv!!!”  And that poor someone will have to reply “We don’t have enough tanks and trucks to even get to Kyiv much less hold it.  Even with a nuke.  Also the Chinese have told us they’ll have to join the sanctions if we do.  We’d have a revolution in the streets – especially if we announce conscription. The economy is already in free-fall.  Besides, a lot of Russians have relatives in Ukraine and a nuke is a big step up from atrocities in Bucha.  And if the wind blows fallout towards Moscow…

I am genuinely worried about what happens after that conversation.  We know Putin will have already lost any potential practical gains from nuclear or chemical escalation.  I am fairly confident his military knows that.  Putin will hopefully come around.

He will lash out.  The Russian humiliation will be as (or more) devastating as the fall of the Soviet Union.  That will be a rough patch to handle.

Then again, this is the path Putin chose.  Geo-strategic nay-sayers seem to assume our actions could have chosen Putin a different path.  This over-states our influence and under-estimates Putin’s mis-informed stupidity.

Against his own best interests, Putin has chosen to drive Russia into the ditch.  All we can do is dig that ditch as deep as possible so he can’t climb out again. 

** The 2,000 to 3,000 estimate is someone else’s guess, but we KNOW Russia is running out of tanks because they have started sending more, truly ancient Soviet-era gear into the fight.  All the gear with little “Red Star” flags on this site is Soviet-Era while mreo modern stuff has the Russian flag.  It isn’t that Russia didn’t produce a lot of fancy gear, but turns out Russia imposed a 2%-4% profit limit on sales to the Russian Army, so their weapons makers sent as much of their production as possible to higher-profit overseas markets.    https://www.oryxspioenkop.com/2022/02/attack-on-europe-documenting-equipment.html

Taking my cue from smarter observers, I have also started taking the Ukrainian numbers of Russian losses seriously.  Turns out the Ukrainians have a track record since 2014 of being too cautious in their claims.  Their numbers also track pretty well to 3rd party data based on actual photos etc… For example, Ukraine claims they have destroyed 900 Russian tanks.  This 3rd party site (which ONLY counts documented photos) sees 580 (and he’s backlooged badly right now – see https://www.oryxspioenkop.com/2022/02/attack-on-europe-documenting-equipment.html).  The other 320 tanks he can’t count could be behind enemy lines, damaged, or simply un-photographed.  Point being the difference isn’t that great and, as others have noted, the two number sets have remained in synch with each other since the start of the conflict.  Ukrainian numbers are likely too high in some places (esp aircraft losses), but that is probably over-hopeful reporting on missile strikes and simple “fog of war” stuff vs deliberate propaganda.

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We are All Japan?  Especially China? World Population DOWN by 2100? China’s Population Cut in Half?

A study in the Lancet forecasts total world population will decline A LOT over the next 70 years.  China’s population, for example. could drop by half.  700 million fewer people than their peak population year in 2024.  As the study somewhat blandly puts it…

Our forecasts for a shrinking global population have positive implications for the environment, climate change, and food production, but possible negative implications for labour forces, economic growth, and social support systems in parts of the world with the greatest fertility declines.”

“Possible Negative Implications?”   Wouldn’t “multi-decade deflationary mega- shock?” be a more appropriate descriptor?

If China’s population really does fall in half over the next 70 years, that would require something like half the housing stock, no?  That doesn’t suggest a great outlook for Chinese Real Estate.  Or global demand for steel, concrete, dishwashers, etc….  China’s working age population has already peaked and their total population peaks in 2024.  That is a tough look for the country “everyone” expect to challenge the US for Global supremacy.  The GDP forecasts in here have China taking the #1 spot in 2025 and giving it back to the US by 2100. 

Worth a look at the charts and tables in the Lancet study below.  What is creating those abandoned rural towns in Spain, Italy, Japan, etc…  Even if their forecast is off by 25% it is pretty scary stuff.

The study might be wrong.  Other studies aren’t so negative.  As they note, their lower numbers stem “a third due to faster declines in sub-Saharan African fertility and two thirds due to the lower level of TFR (Total Fertility Rate) expected in populations with fertility lower than the replacement level, especially China and India.

Then again,

  1. Chinese women are not showing new enthusiasm for more kids (COVID has set back Chinese fertility per a recent FT series).
  2. More education + access to contraception usually means lower fertility regardless of income trends.  That is driving their lower African estimate.  Note that India saw fertility crash as girls got even a few years of education.

And, even if they are wrong, some form of demographic slowdown is going to happen.  Unless large numbers of women/families suddenly change their minds about babies for some miracle reason.  COVID actually reduced birth rates in China and there is no sign of a rebound yet per a recent FT story.

Also note this is where the economic debate was in…. 2018-2019.  Deflation was the main worry.  Now everyone is running around worrying about inflation.  But the long-term demographic trend hasn’t changed at all.

Our findings suggest that, because of progress in
female educational attainment and access to contraception
contributing to declining fertility rates, continued global
population growth through the century is no longer the most
likely trajectory for the world’s population. By contrast, world
population might peak just after mid-century and substantially
decline by 2100. The difference in population forecasts between
our reference scenario and the UNPD forecasts is a third due to faster declines in sub-Saharan African fertility and two thirds due to the lower level of TFR expected in populations with fertility lower than the replacement level, especially China and India. Our findings show that some countries with fertility lower than replacement level, such as the USA, Australia, and Canada,
will probably maintain their working-age populations through
net immigration. Our forecasts for a shrinking global population have positive implications for the environment, climate change, and food production, but possible negative implications for labour forces, economic growth, and social support systems in parts of the world with the greatest fertility declines.”

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Putin Likely Has One Big Push Before Military Collapse. Consensus For a Long, Grinding War Doesn’t Reflect Reality on the Ground.

Putin’s Army has one big push left.  Maybe. If that fails, his forces are useless as an effective attacking force.  They are already too small and degraded to effectively occupy much territory.  Leaving Putin where?  In a bad place.  Which is still worrying.  But not a long grinding war.

The Russians likely will make gains nevertheless and may either trap or wear down Ukrainian forces enough to secure much of Donetsk and Luhansk Oblasts, but it is at least equally likely that these Russian offensives will culminate before reaching their objectives, as similar Russian operations have done. – ISW

General consensus seems to expect a long, grinding war in Ukraine.  The consensus of the “sub-group of analysts that have actually called it right so far,” however, suggests Putin has only one more throw of the dice before his military collapses.  We have already seen one collapse around Kyiv last weekend.  A similar collapse in the East probably finishes off the Russian Army’s offensive capacity.  Putin can try to keep the pot simmering, but he’s done until/if he manages to rebuild a shattered army under heavy sanctions.

The general consensus is making three common analytical errors;

  1. Excessive reliance on tidy, quantifiable top-down analysis (ignoring messier, more anecdotal bottom-up analysis).
  2. Shrinking away from forecasting non-linear inflection points in preference for (safe-seeming) linear projections.  Even though most things human happen along curves and rarely along straight lines.
  3. Clinging to a comfortable-but-wrong mental model even after facts disprove it.

Mistake 1 is relying on top-down analysis => What does Putin want to achieve?   Flying at 50,000 feet pouring Russia’s “1 million man army” into a Ukraine-wide map covered in ominous Red blobs. Accompanied by beard-stroking commentary on the 5-10 year impact on China/Russia relations, China’s Belt and Road projects, wheat trade via a Russian controlled Odessa, and that shambling humbug idea of  the “land bridge to Crimea.”  That top-down, geo-strategic view has been reliably, totally wrong since the war began.

Before the war started, the geo-strategic, top-down perspective seemed valid.  But it got mugged by reality about 1-2 days into the shooting war.  Those red blobs on the map were just thin threads of roadway the Russians only “controlled” when driving them in force.  Their “million man army” has visibly and obviously run out of actual fighting troops and equipment beyond the 190,000 committed.  6 weeks later, that geo-strategic, top-down model is largely disconnected from obvious facts on the ground.  Yet it still dominates the media and investor/market consensus.

What has worked well after those first 1-2 days of war was bottom up analysis, asking => what is the Russian army actually capable of?  This group of analysts, working bottom up, were early (and correct) in calling the outcomes we have actually seen.  The daily updates from the Institute for the Study of War have been reliable, balanced, and accurate.  As have military-specialist academics and think-tankers.  The UK Ministry of Defence has also been a reliable source – their daily analysis post has spoken volumes between the lines even if they have avoided specific forecasts.  Supported by a gaggle of people with weirdly specialized expertise looking “up” from logistics, equipment types, tire wear?!?, troop counts, maintenance, reinforcements (or lack thereof) etc…  Russia’s shortage of trained, fighting-capable manpower is obvious from their own actions – bringing in Syrian mercenaries,  raiding the training divisions for officers…  Morale problems are clear in the anecdotal, daily tally of functional Russian vehicles left abandoned, often with gas in the tank.  Out of 2731 independently documented Russian vehicle losses, 1021 were captured in usable working order;  187 tanks abandoned/captured out of 464 documented losses.  With a terrifying (for their crews) number of obsolete, 30+ year old Soviet era tanks/APC’s in that count.

The sum of that bottom-up analysis showed an under-motivated, poorly supplied, under-strength military with ineffective air support and weak communications/command asked to do too much in too many places.  That picture emerged early in the war.  It culminated in last weekend’s headlong retreat from Kyiv.

It isn’t just Russian weakness.  Ukraine’s surprising success also tells us that defense had a greater-than-expected advantage over offense in the modern era.  Small, cheap missiles operated by small, units are chewing up big-ticket weapons systems at an unsustainable rate.  This isn’t just the Russian’s problem.  One day the US Army is going to waltz into a reasonably well armed country and get chewed to pieces just as badly.  Especially because our military industrial complex will work overtime to obscure that lesson.  They want to keep making those high-profit, big-ticket systems even if our boys/girls get incinerated in them down the line.

So the top-down approach has failed and the bottoms up approach has worked pretty well so far.  SCORE: Armchair generals/colonels = 1. Armchair geo-strategists – 0.  

The second error – shying away from forecasting inflection points – is harder to criticize.  I went away on a camping trip this weekend with a pretty solid sense the Russians were in trouble around Kyiv; Hoping an inflection point might be reached.  But I did not expect much less forecast they would fall apart in a pell-mell retreat over one weekend.  That is a classic inflection point.   They are always hard to forecast.  At best you hazard a guess at how things might go non-linear.  The “when” is impossible to predict with accuracy.  Which is why consensus forecasters shy away from inflection points in favor of comfortable linear trends.  If you are too obviously wrong with a non-linear forecast, they won’t invite you back on CNN for the next war.  Better to be conventionally wrong (with the crowd) than unconventionally right (alone).

Pentagon background briefing “On the refit, Bob, we don’t know for sure how long this is going to take because some units are much more devastated than others. We’ve seen indications of some units that are literally, for all intents and purposes, eradicated…”

The final error – sticking to an obviously wrong mental model – is less defensible.  After 6 weeks of evidence to the contrary, the general consensus now expects those same shattered Russian forces – with no obvious reinforcements or time to rest – to wheel across Eastern Ukraine and secure that blessed land bridge to Crimea.  The “million man Russian army” still crops up in supposedly informed commentary.  People talk about the Russian Air Force flying 250-300 sorties a day, but fail to note those flights are mostly in Russian airspace firing a diminishing stock of stand-off missiles.  A number of people still don’t seem to understand how little ground Russia has ever “controlled,” or that shops and even restaurants were open in Kyiv during an assumed Russian siege.

Putin could still get lucky. If he doesn’t, Putin can still cause trouble.  Either way, he’ll end up with a shattered military.  He can keep the pot boiling on a small scale.  But that is only what he was doing in the Donbas before the invasion.

Even that might be too much for him.  He has destroyed pro-Russian sympathies in Ukraine.  He has frittered away most of the (forcibly conscripted) Donbas-region soldiers in the meat-grinder of Mariupol and frontal assaults on the Ukranian lines in Donbas.  He might not even be able to hang on to those breakaway DNR/LNR regions once that butcher’s bill arrives in full.  He’ll also be struggling under sanctions and a for-real-now European shift away from buying his gas and oil.  Rebuilding the military he’s just destroyed will take time and money he may not have.  It is hard to re-build precision missile stocks without (western) semi-conductors in a sputtering economy.

I’m including below two excellent, expert pieces that sum up the bottoms-up analytical consensus as of this weekend.  Both are must-reads in full.

If I was a gambling man, which I’m not, I would wager it’s more likely we see a major Russian military collapse somewhere in the south and east (Kherson?) by May 9 through being overstretched and attritted than a Russian Army having seized Dnipro and surrounded the entire Donbas.  – Phillips O’Brien “Professor of Strategic Studies, University St Andrews, Author: How the War was Won, and Second Most Powerful Man in the World. Editor in Chief, War in History”

https://threadreaderapp.com/thread/1512053218448183300.html

The Russian military is attempting to generate sufficient combat power to seize and hold the portions of Donetsk and Luhansk oblasts that it does not currently control after it completes the seizure of Mariupol. There are good reasons to question the Russian armed forces’ ability to do so and their ability to use regenerated combat power effectively despite a reported simplification of the Russian command structure. This update, which we offer on a day without significant military operations on which to report, attempts to explain and unpack some of the complexities involved in making these assessments.

We discuss below some instances in which American and other officials have presented information in ways that may inadvertently exaggerate Russian combat capability…. 

We assess that the Russian military will struggle to amass a large and combat-capable force of mechanized units to operate in Donbas within the next few months. Russia will likely continue to throw badly damaged and partially reconstituted units piecemeal into offensive operations that make limited gains at great cost.[1] The Russians likely will make gains nevertheless and may either trap or wear down Ukrainian forces enough to secure much of Donetsk and Luhansk Oblasts, but it is at least equally likely that these Russian offensives will culminate before reaching their objectives, as similar Russian operations have done.

https://understandingwar.org/backgrounder/russian-offensive-campaign-assessment-april-9

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