Strong Views Lightly Held

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.

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).

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.

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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.

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.

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.”

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.

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

The below is not a prediction.  Nor is it a recommendation. 

My only real tool for stocks and markets is to ask Is it Getting Better or Getting Worse?  IF it is Getting Better, you buy.  If it is Getting Worse, you either hang on tight or just outright  sell.  The terms are intentionally subjective because life is subjective.

As hairy as things might feel today, things are clearly Getting Better.  If you look out 6-12 months, things could actually be pretty darn good.

3-6 months ago. we now know the market was looking ahead to 2 really ugly, nasty unknowns.  Ukraine and the Inflation/Fed/Rates dynamic.  Today, we know a lot more about both.  The outlook ranges from not too bad to downright positive.  Most important, it is a whole lot brighter than it was 5 weeks ago.  So the scale tilts solidly towards Getting Better.  Which might be why the market has been behaving better lately.

Ukraine:  The world will likely be a safer, more secure place next year.
The war is horrible, but “we” (the West and the USA) are winning. The Ukrainians are not just building themselves a better future. They are building the whole Free World a better future.That is already obvious today.

• We will still be dealing with a loose-cannon in Russia, but a fatally weakened one.  Every day this war drags on the Russian military falls deeper into a hole that will take years and billions (that Russia may not have) to exit.  Their energy-supply “weapon” is permanently  blunted – Europe is dead serious about replacing 2/3 of Russian gas buys by 2023.  Even if they only replace half, it is enough.
• Conflicts with China still looms sometime in the future, but this war pushed it out by probably a decade.  The Chinese are going to learn a lot of lessons from the sanctions and the Russian military failures.  Most of those point to “lets not start any Cold War 2.0’s anytime soon.  We’ve got some serious housekeeping to do before we get to that.”  
• Most important, “the West” is now in much better shape to handle both a (weaker) Russian and China.  Well get complacent and greedy again eventually, but we’ve bought at least a decade of vigilance.

That is a win, ugly as it may seem right now. It is also a good argument for pressing the win as long as we can. Russia is digging itself into a hole (and dragging China into it). Let them keep digging. It is awful for Ukraine, but even they will be better off in the end. Trading long-term insecurity for short-term stability is usually a bad bet.

Fed/Inflation/Rates:  The worst case scenarios likely aren’t happening.  The more likely scenarios aren’t that bad.

• The cure for high prices is… high prices.  Everyone is hyper focused on the Fed, but gas at $4-$5 a gallon is going to slow the economy a lot faster than anything the Fed does.
• The Fed is raising rates fast enough to be able to cut them (which it will probably need to do soon).
• The markets are resolutely refusing to price in sustained inflation.  They are pricing in sustained negative real rates.

Now idea if the above resolves to a relatively hard or soft landing, but it does look like a landing vs a crash.  Everyone walks away relatively unhurt.  That is not necessarily great, but it is definitely Getting Better vs (overblown) fears 3 months ago.

Just musing here, not predicting.  So I’ll leave this here for the moment.

OK.  One prediction.  We are winning big in Ukraine. 

Eventually people will figure that out.  Even Tucker Carlson will have to acknowledge that eventually.  OK, maybe not Tucker Carlson.  But most everyone else.

I’m seeing a lot of grand predictions about a new Cold War between the US and China.  There is definitely one coming eventually.  But now?  Maybe China is that dumb.  But probably not.   If they aren’t dumb, the want the Ukraine war over quickly with no more damage done to the world order.  Although it has already done a lot to damage Chinese interests.

Everyone will agree that China wants to “win” the coming Cold War with the USA.

• A win = effectively replacing the USA at the center of the world’s power nexus.
• A draw = an (uneasy) equal status bipolar world.
• A loss = the dustbin of history. Where the Soviet Union ended up.

Most would also agree that wealth ultimately “won” Cold War 1.0.  The US got richer faster than the Soviet Union.  The US also attracted richer, more successful allies than the Soviets.  Note that, in 1960, this was not yet obvious.  Russia had just gone through a truly amazing 40 year transformation from backward agricultural peasant economy to an industrial powerhouse (does that narrative sound familiar vis China today?).  By 1980, it was obvious the USSR and its moribund client states had fallen hopelessly behind.  All Gorbachev did was acknowledge that reality.

China knows that history.  China does not want to lose Cold War 2.0.  Meaning China does not want to repeat Russia’s mistakes.

Right here, right now, China does not want to escalate to Cold War 2.0.  They know they would lose.  To have a chance of winning, China needs to develop its economy further.  It needs the West’s technology to do that.  The most obvious example is semiconductor manufacturing, where China is totally dependent on Western equipment.  You really cant win a Cold War (much less a hot one) without semiconductors.  To have any chance of winning eventually, China can’t any Cold War 2.0 battle lines harden right now.  They need to keep the global situation fluid and friendly.

When China does escalate (eventually), they will want successful (rich) allies. In a lot of stuff I read, China is lined up with Russia, Iran, Myanmar, and other dubious allies.  With friends like that, China has zero chance of winning Cold War 2.0.  The Soviets ended up leading the League of Losers, Parade of Pariahs, Army of Also-Rans.  China knows the leader of the League Of Losers ends up losing.  China’s best hope would be to peel Europe away from the US.  Not necessarily into the Chinese sphere of influence, but into a more neutral “mercantile” stance.  Germany, especially, was already heading in that direction.  Until Ukraine happened.

Seen in this light, the Russia/Ukraine war is already a massive setback for China’s long-term ambitions.  It has…

1. …pushed Europe back into the US embrace (and vice versa).
2. …pushed odious Russia (and its war crimes) a little too obviously into China’s too-obvious embrace.
3. …set back China’s own developmental ambitions.  It is going to be that much harder to convince “the West” to keep handing over critical technologies (like semiconductor manufacturing know-how).  Putin destroyed at least a decade worth of complacency on that front.
4. …reminded “everyone” of the dangers of authoritarian states with long-term designs on strategically important place like Ukraine or Taiwan.
5. … cranked up defense spending in Europe and innovations in sanction regimes.
6. …demonstrated that Taiwan might be a harder nut to crack than China first assumed.  Military advantage hasn’t shifted to favor the defender this drastically since maybe WW1.

The longer the war goes on, the worse it gets for China.  Especially if the rest of the world decides to perceive China as the new Pasha of the Pariah States.  China doesn’t want to choose teams for a new Cold War right now.  It especially doesn’t want to end up leading a “team” of lagging pariah states.  Russia led a team of lagging pariahs in the first Cold War.  Russia lost.  China understands that.

So it is in China’s best interests to get this war past us sooner vs later.  Without further damaging Russia (now a vassal state) or damaging the “open market” world order on which China’s development depends.  If it retreats behind a Bamboo Curtain today, it will retrace the Soviet’s steps.  Actually I suspect they will retrace them regardless (another blog post for later), but the Chinese are probably smart enough to try and avoid that.

China wants to replace the US as global hegemon.  Their long term goal is not to replace the Soviet Union on the shabby, lagging side of a new Iron/Bamboo Curtain.  Right here and right now, they don’t want Putin to break things any more catastrophically than he already has.  Or at least that is where China’s best interests lie.

Again, read this for a Chinese articulation of China’s own interests.  Cold War later, not Cold War now.  https://uscnpm.org/2022/03/12/hu-wei-russia-ukraine-war-china-choice/

If China is rational, they will start pushing Russia to end the war in Ukraine sooner vs later.  This is our single best hope for ending the war quickly.  OK, hope is not a strategy.  But “hope” is not why I see China reining in Russia.  I see China acting in its best interests, which are best served by a quick end to this war.

First, an aside: On Feb 22, I argued that invading Ukraine wasn’t in Putin’s self-interest – “If Putin is rational, he’d played this mess out to the most face-saving “win” he’s going to get.”  Taken as a prediction, I was wrong.  Taken as analysis, I was “right” in that invasion was a huge mistake.  I never write these pieces to be “right” in a predictive sense.  It is too hard to factor in purblind stupidity and/or incompetence.  I try to tease out what “should” happen (if people act rationally) not what will happen (if some people make stupidchoices).  Take the below in that spirit.

China wants Russia as a weakened-but-productive vassal state.  A dependent supplier of oil, wheat and other commodities.  A semi-captive buyer of Chinese manufactures to balance that trade.  China already has that win.

Putin has driven Russia straight into the (soon-to-be-uncomfortable) embrace of Chinese hegemony.  His Ukraine blunder has destroyed Russia’s military credibility and surrendered its Great Power status.  He is well on his way to destroying Russia’s economic importance.  He has already permanently lost his best oil/gas markets.  He has severed most economic and social ties to “the West.”  The West can and will write Russia off as a player and a market.  China will become Russia’s second-best (but only) customer, with all the dependency that implies.

So China has acquired a new vassal state.  But China wants a useful, productive, power-additive vassal state. China has years of painful experience with the nuclear-blackmailing, economic basket case client state North Korea.  Putin and The Cronies may see advantages (for them personally) in a North Korea or Iran scenario.  But China does not want to drag another, Russian pariah client along in its quest for global hegemony.  China now owns Russia.  They will want to maximize the value of that asset.

Putin probably hasn’t figured the above out yet.  Any more than he’d figured out his own best interests in Ukraine  But his new Chinese masters will eventually yank the collar Putin has put around his own neck.  A nice sharp tug towards ending the Ukraine war would communicate Putin’s new reality to him quite nicely.

Why would China want to stop the war now?  There are a lot of reasons, but here is the over-arching one.  It would keep Putin from tearing down more of the property he has just deeded over.  Like a wastrel inheritor, Putin has run the place down far enough to lose his ancestral land.  The new owners won’t want to run it down any further.

I’ll flesh out this argument further in subsequent pieces.  The Chinese article below helped a lot in thinking this all through.  Give it a read in full. 

Hu’s long-term goal, like all Chinese Officials, is China’s long-term goal of replacing the US as global hegemon.  He is arguing China’s selfish best interests, no more no less.  Subsequent reporting clarified Hu was not stating “official Chinese” policy.  Just one side of the debate among Chinese officials (of whom Hu is one). But in doing so he shines a very clear light on China’s self-perceived interests.  Others in China may see the path to serving those interests differently.  But they all likely agree on those end goals.  I also think he makes a convincing case for taking his path forward.

Will Xi find Hu’s argument compelling?  I have no idea.  That wanders too far into the realm of prediction.  As with Putin, I’ll stick to what Xi should do, not what Xi will do.

Possible Outcomes of the Russo-Ukrainian War and China’s Choice

On a final note, most (Euro-centric) China/Russia commentary I’ve seen puts too much weight on Russia’s interests.  China’s interests are what matters now.  Russia is a vassal state, not a partner.  Yet another reason to read the above.

It occurred to me (after a conversation with a friend today) that looking for signs of Russian military collapse might come across as wishful thinking.  Perhaps I’m letting sentimental attachment to the Ukrainian cause bias me?   Except that isn’t how I got myself there.  It was just a depressing elimination of other, less-grim outcomes.  So let me detour away from China for a sec and lets go though the various ways this war might end.

1. Russia has gotten as far as it can get.  So there is no likely master-stroke blow that wins this for them.  If you don’t agree, just leave that for now and see below.
2. Ukraine will not back down.  That seems pretty obvious.  It is a fight for survival.  They know they must fight the battles now (with strong global support) or risk fighting them later without being certain of that support.  Besides, so far they are holding out OK.
3. Ukraine would sign a reasonable peace settlement.  But that probably requires
   1. All its pre-invasion territory back and retaining its territorial claims on the Donbas and Crimea (although maybe leaving Russia occupying them until some sort of referendums or etc…).
   2. Explicit security guarantees from major powers.  Not official NATO membership, but pretty darn close.
4. Russia won’t voluntarily sign a “reasonable” peace agreement.  They can’t/won’t meet Ukraine’s terms.  Even Putin’s PR machine couldn’t sell that as a win for Russia.  Putin is still looking for a win.
5. Putin has already lost, but he won’t accept that loss.  Probably partly because no-one will tell Putin he has already “lost.”  So his cronies will keep pressing the war and hoping for a miracle until something operational finally breaks.

Something must break.  The Russians probably break before the Ukrainians do.

Ukraine understands this is a war for survival. They are fighting like it.  So they will just fight on with abundant supply (and open supply lines) from the West.  If the Ukrainians were going to break, they would have broken already.  With the Russians already on their back feet, the critical moment for Ukrainian morale has already passed.  They will just keep grinding away.

How many Russian soldiers believe this is a war for survival?  They certainly aren’t fighting like it.  Putin and The Cronies barely made the case before sending them in.  Most went in because it is their job and are now fighting mostly because the Ukrainians are shooting at them.

Russian motivation/morale will only last so long.  How long?  I have no idea.  It depends on events.  If Ukraine pulls off a few high-profile victories, the Russians will break quickly.  If it settles down into a grind, they will break slowly.  But they likely collapse before the Ukrainians do.  It takes a lot more energy to attack/invade than it does to defend.

I mean “collapse” like a souffle.  A step-function change just like most human group dynamics; the tiny shift in energy that tells you and everyone else a party has crested and the night is winding down.  Time to start collecting your coat and making your goodbyes.  Or go for that bathroom break and just never make it back to the unit.

Non-linear, impossible to predict in advance, and unstoppable once it starts. 

Enough individual Russian Army soldiers and (eventually) whole units desert, surrender or just plain malinger to a tipping point where the whole effort falls apart.  That is what I mean by collapse.

How many soldiers losing how much heart is “enough” to precipitate collapse?  I have no idea.  You never do in advance.  But in an instant, everyone knows the party is winding down.  Then they all, collectively, wind it down.  The souffle collapses.  We’ll know it when we see it.  The average Russian soldiers will know it before we see it.  Putin will likely see it last.  I feel sorry for whoever has to tell him.

———————–

Why Russia has gotten as far as it can get.  They…

1. …haven’t encircled Kyiv and won’t.
2. …can’t supply the army they have, much less a necessarily larger occupation force.  Supply problems are widely documented already.  An occupation force would have to assert broader control over a broader area.  Requiring more supply.  Requiring more troops to guard/protect/deliver that supply.  Which requires more supply…. The math doesn’t add up.
3. …don’t control the air.  Yes, they are flying 200 sorties a day but most of those flights never leave Russian airspace (per the Pentagon).  They have already fired over 50% of their air-to-ground missile inventory (per the Pentagon) and have very little industrial capacity to build more even if they had the time (sanctions on semiconductors, raw materials, etc…).
4. …are running out of troops.  They have lost 40,000 killed, wounded, or captured out of a force of 190,000.  They are depleting remaining units to replace losses and scrambling to find more soldiers in Russia, Syria, Belarus – anywhere.  Hard as it may be for some people to accept, Russia’s 1 million man army on paper only had about 200,000 – 300,000 effective soldiers in reality.  40,000 are now lost and many are needed elsewhere.
5. …running low on equipment.
   1. They have lost more tanks than the entire British Army has in total.  Nor do they have modern tanks in reserve (a lot of tanks already deployed were 30-40+ year old Soviet-era gear).
   2. Tank/vehicle tracks wear out fast.  So do the engines. Off-road capable trucks also wear out (even if the tires aren’t sun-rotted as widely noted already).  All that stuff is built to go hard for a short burst, then get a complete rebuild in a well equipped mechanics shop.  Or it breaks down in the middle of a field and gets abandoned (as we’ve seen in how many photos already?).
   3. High performance aircraft engines wear out even faster. Those will also need a total rebuild.
6. …running lowest on morale.  No army anywhere can keep people in combat indefinitely (except maybe a hyper-motivated guerilla army like the Viet Cong).   Humans wear down from cold, crap food, poor hygiene, and stress (if they avoid being wounded or killed).  You have to rotate troops out of the front lines to keep them effective.  Russia doesn’t have the manpower reserves to do much of that.
7. …don’t “control” anything beyond the narrow stretches of road and local structures their troops hold.  The newspaper “blob” maps are highly misleading this way.  They don’t really “control” occupied towns (why protests still happen).  They don’t control any territory off the main roads at all.  If they do “dig in” their pitifully few troops, Ukrainian soldiers will just make a short walking detour and go around them (to attack their supply lines).  If they fall back and concentrate in territory they can actually hold, they will have effectively retreated most of the way to the border.  That retreat would be pretty much the same as losing and they’d know it.