War: Ukraine-Russia
Ukraine’s Eastern Territory Being Nibbled Away but Russia’s losses continued so much so they had to import 8,000-10,000 North Korean mercenaries / comrades to fight. Ukraine inflicted the first casualties on North Korea in the northern Kursk region, where Russia is trying to take back its territory. So far, Kim’s troops have not proven effective against the more experienced Ukrainian soldiers. In terms of interesting war-related news, an Indian pharmaceutical company, Shreya Life Sciences, legally exported 1,111 high-end, computer servers optimized to run artificial intelligence programs to Russia, worth $300 million. India is now the second-biggest supplier after China of restricted technology to Russia, Bloomberg reported October 12th. Malaysia also is involved in supporting the Russian war effort by trans-shipping Western technology. The current US administration at the end of October blacklisted 390 companies and individuals for doing business with Russia, including from China, India, Turkey, Dubai and Switzerland. Russia’s intelligence efforts took a darker turn when they sent two incendiary devices via DHL to the US and Canada. Fortunately, both bombs went off on the ground due to lucky flight delays, one in Germany and the other in the UK. Four people were arrested so far on charges of sabotage with two more being sought in Poland. Finally, China put sanctions on US’ largest drone maker Skydio, disrupting production for the US and Ukrainian military, due to Chinese production of the battery packs the firm utilizes. Not directly an act of war but what will the US do under the new president?
Ukraine’s 2024 Grain Exports in the current season totaled 12.5 million metric tons as of October 16th, up from about 7.7 million tons over the same period of the previous season. Wheat was over half the total with corn and barley making up the balance. The full period exports were estimated to decrease to 40 million metric tons from 51 million tons in the previous season due to a smaller harvest and a lack of carryover stocks. Russia’s economy is bending, though not broken, as inflation accelerated to +9.8% on a trailing twelve month basis – despite having increased weekly interest rates from 19% to 21% at the end of October. Government industries may still be operating thanks to their subsidies but the war is taking its toll at home, not just at the front line.
Macro: Asia
China’s September Trade Data reported that exports in USD terms fell strongly from +8.7% y/y last month to up only +2.4% y/y, with exports to the EU (+1.3% y/y) and the US (+2.2% y/y) slowing sequentially. Imports also decelerated, shifting up only +0.3% y/y, versus +0.5% y/y in August. Weak domestic demand was cited as the culprit. Headline real GDP increased +4.6% y/y in Q3, compared with
a market consensus of +4.5% and +4.7% growth in Q2. China’s central bank reduced its primary benchmark lending rates by 25 basis points, sending the one-year loan prime rate to 3.1%, and the five-year LPR down to 3.6%. CPI data showed a +0.4% y/y gain in September, vs. +0.6% y/y in August, indicating a high interest rate premium over inflation. Existing home prices decreased in all 70 of China’s major cities this year (see graph right), with the average vacancy rate at 12% nationally. As by 2050 China’s working-age (15–64) population was predicted to have shrunk by about 25% from the 2025 level, there is no end to this downward spiral. Recall that China’s total debt to GDP ratio is about the same as the US’ at about 350%, so, like the US, there is little room for the kind of fiscal stimulus that everyone seems to think is necessary to kick the can substantially down the road.
Macro: US
Powell Delivered The Expected 25 Basis Point Cut at the November meeting, but inflation did not slow as much as wished for by the committee. Prices are still going up, grinding away at household budgets. 
Unemployment held steady in October at 4.1% as payrolls grew by only +12,000, lower than the estimate of +100,000 but with the hurricane damage and labor strikes at ports and at Boeing there were a lot of messy variables. Hourly earnings again increased m/m healthily by +0.4% but the average duration of unemployment rose from 22.6 weeks to 22.9 weeks. The Q3 GDP grew by a strong +2.8%, reassuring many as consumer spending, which comprises the largest share of economic activity, advanced +3.7%. Durable goods orders slipped m/m by -0.3% versus holding steady as forecasted and industrial production fell by the same amount. Again, the weather and strike effects were cited. Inflation numbers were mixed as annual consumer inflation fell to +2.4% in September but the “supercore” measure of services excluding shelter prices, ticked up again, and the annual rate remains above +4.0%. As the graph left shows, services remained the central driver of the moderating inflation.
US Federal Government Spending Widened over tax revenue as seen in the graph to the right – another way to say this is that over the last ten years, tax revenues have
increased +63% while spending increased +93%! The US national debt exploded higher, increasing by over $600 billion in just the last 2 months, fast approaching $36 trillion. On an individual level, US home prices were up over 50% in the last 5 years, more than double the increase in wages. The median household income necessary to purchase the median home for sale in the US ($120k) is over 40% higher than the current median household income ($85k). Both these disparities are just mind-boggling to me with the first being the fiscal irresponsibility death spiral and the second crushing affordability out of the lives of the citizenry. And the US is not the most egregious of countries in this kind of economic mis-management. How will we manage during the next four years remains to be seen.
Macro: Europe
Eurozone Economy Grew +0.4% for the third quarter of 2024 as Germany squeaked out a positive figure, beating expectations. So far in 2024, Eurozone GDP has grown just under +1%, with only the fourth quarter to
go. Inflation grew +2.0% annualized in October, slightly higher than the +1.7% annualized in September. European Central Bank cut interest rates on October 17th by -0.25% as widely expected. The market believes that the ECB is still on track to further reduce rates by -0.25% in December, from 3.25% currently. Core inflation (ex-food and energy) was up +2.7%, steady with September. In follow up to last month’s commentary on the European automobile industry, Volkswagen announced plans to close at least three German plants and cut thousands of jobs. The manufacturer has never closed a factory in its home country and also included an outline to reduce salaries by 10%, which could affect some 140,000 workers. Meanwhile, as the graph right showed, car sales in Europe fell for the first consecutive monthly decline in more than two years as the region’s economy continued to stagnate. Volvo Car’s CEO told Bloomberg that he sees a softening in the auto market due to a number of factors, including inflation pressures, a slower-than-expected rollout of fast-charging infrastructure for electric vehicles, as well as trade tariffs.
All the best in your investing!
David Burkart, CFA
Coloma Capital Futures®, LLC
www.colomacapllc.com
Special contributor to aiSource