War: Ukraine-Russia and Israel-Iran
Ukraine Lost More Eastern Territory but continued to inflict strategic losses on Russian ammunition supplies, oil refineries and fuel storage facilities. Russian armored vehicle depots continued to deplete at rapid rates and Putin ordered a new mobilization to increase the military by 180,000 soldiers to 1.5 million troops. This would be the third expansion, with the previous two (August 2022 and December 2023) of smaller sizes (137,000 and 170,000, respectively). Putin’s 2025 budget increased military spending by +25% to $145 billion, underscoring his war commitment. The United Kingdom’s Ministry of Defense estimated that since the beginning of the war, Russia has suffered more than 610,000 casualties (dead and wounded), with casualties still running at over 1,000 per day in August and September. Using the conventional 1:3 ratio of dead to wounded, this implies over 125,000 Russian combat deaths. Besides battling on a wide front from Kursk in Ukraine’s north to the Robotyne in the south, the lack of protective vehicles made Russian human wave attacks particularly costly. That said, Russia historically relied on such callous tactics, and with a 3:1 population advantage over Ukraine, continued that military tradition. Winter is coming soon so fighting will likely intensify for now as both sides jockey for final positions before the cold slows military operations.
On the Risk of Nuclear War, a political pundit called out the following:
So far in the Ukraine War, the Russians have threatened Finland and Sweden with nuclear annihilation for joining NATO, Germany with nuclear annihilation for providing tanks, Britain with nuclear annihilation for providing missiles, France with nuclear annihilation for merely discussing the possibility of troops, and America with nuclear annihilation because it was a Tuesday. Needless to say, the credibility of Russia’s threats leaves something to be desired…
Flippancy aside, he raised a good point about confrontation and deterrence – the US and Europe may not be willing to die for Ukraine but Russia is not either, and thus these threats are not credible. Ukraine even invaded Russia proper in Kursk and there was no nuclear response. Russia may conquer Ukraine at a ghastly cost but it can be conventionally done. Paradoxically, the more Russian blood spilt now may actually further cow Europeans in case Russia decides to go after the Baltic countries (and NATO members, please remember) or other former Soviet republics. Note that the Cold War stayed cold for a reason, because of MAD – Mutual Assured Destruction.
Ukraine’s 2024 Grain Harvest may decrease to 54.6 million metric tons from around 60 million tons in 2023, mostly due to unfavorable weather, the newly appointed Ukrainian agriculture minister said, including 21.8 million tons of wheat and 25.8 million tons of corn. Russia’s crude shipments rebounded to the most in three months last week on the resumption of normal flows from the country’s main Pacific terminal at Kozmino and a second week of elevated exports from Primorsk on the Baltic. Four-week average crude volumes, climbed to 3.3 million barrels a day (mbpd) in the week to September 29th, up by 160,000 from the previous period. China was slated for about 1.4 mbpd and India for 1.5 mbpd with the remaining barrels listed for “unknown.”
Macro: Asia
China’s August trade data reported that exports gained +8.7% y/y in USD terms, accelerating from a +7.0% y/y rise in July and exceeding a +6.5% y/y growth forecast. It was the fifth consecutive month of growing sales, that reached a 23-month high at US$309 billion last month, including higher exports to the EU (+13.4% y/y) and the US (+4.9% y/y). Some of this was shipping material ahead of potential tariff increases into 2025. Meanwhile, Chinese imports only inched up +0.5% y/y in August, drastically slowing from a +7.2% y/y gain in the preceding month. This confirmed fears of weak domestic demand. China embarked on a large stimulus package designed to increase systematic leverage by cutting bank reserve ratios (the amount of capital banks have to keep on their balance sheets to cover losses) by -0.5%, bank interest rates by -0.2% and mortgage rates by -0.5%. The unusual aspect of the consumer mortgage rate reduction is that rules were changed to more easily allow for refinancing of existing mortgages, not just lower rates on new mortgages, as was typical under previous mortgage rate cuts. Another $100 billion was set aside for brokers and funds to borrow to buy stocks as well as companies to borrow to buy back stock. Xi really likes leverage! In addition, Bloomberg reported that the Chinese government was considering a $142 billion cash injection for banks, and issuing $284 billion in new debt for fiscal stimulus. In the end, what can we expect as the result? One economist cited by Reuters saw these measures boosting growth by +0.4%, not much versus the GDP growth goal of +5.0%. Another view is the logic that a declining population will be hard pressed to grow GDP regardless of policies, especially when the number of workers per retiree are now half what they were at the turn of the century (see graph right).
Meanwhile India has overtaken China’s weighting in one of the world’s biggest stock market benchmarks, as share sales and rising liquidity in Indian companies make the country more open to investors. India’s share of the free-float, “investable”, version of the MSCI All-Country World index, which tracks almost all global stocks, rose to 2.33% this month, eclipsing China’s 2.06%. It also reflected demand in India’s red-hot stock market as the Chinese economy slumped and fund managers dumped China-related stocks. Will adding more leverage to the Chinese stock market improve the quality of its offerings or will India continue to outpace China in the longer run based on relative fundamentals? The answer is obvious.
Macro: US
Powell Delivered A Big 50 Basis Point Cut at the September meeting, justified by slowing inflation, “the committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance.” The Fed’s preferred inflation measure — the core PCE deflator — rose +0.1% in August and was up +2.7% from a year ago. Prices still going up, not down, but more slowly. Will the Fed cut again by 50 in November? It does not seem likely given that unemployment surprisingly fell in September, from 4.2% to 4.1% on a +254,000 change in payrolls, way over the estimate of +150,000. Hourly earnings also increased m/m healthily by +0.4%. Note that the October report will be impacted by the Boeing strike (33,000 workers) but not the longshore union who returned to the job until January 15th. The Atlanta Fed’s Q3 GDP growth estimate rebounded as per the chart right, implying that higher rates have not limited the economy. Looking ahead to Christmas, retailers were expected to hire fewer seasonal workers this holiday season than last year due to a softer labor market and tighter consumer spending heading into the crucial shopping period, according to Reuters. Retailers were expected to add 520,000 new jobs in the final quarter of 2024 compared to 564,200 in 2023. This trend may indicate that further rate cuts are likely if not November, then December (or both).
US Federal Government Spending was relentless: in the last 4 months, the administration disgorged $1.63 trillion more than receipts, sending the deficit back over $2 trillion. Another way of viewing this is US government spending was 17% of GDP in the 1950s, rose to 22% in the 1980s (those Reagan deficits!), fell back a little to 20% in the 2000s on the “peace dividend” and rocketed higher to 27% so far in the 2020s. Politically we see this in Trump (cut spending) and Harris’ (raise taxes) messaging. Neither will be easy. Meanwhile, poorer and younger Americans continue to have financial trouble
with auto loan delinquencies rising for all age groups but particularly for 18-29 year olds, approaching levels last seen in the 2009 financial crisis (right). Also, auto repossessions were up +23% versus a year ago. Declining interest rates may be of help here – certainly mortgage rates have fallen to the 6.1% range from over 7% at the beginning of 2024 and the lowest level since February 2023. Refinances have begun but still early days yet.
Macro: Europe
European Central Bank Lowered Interest Rates in September by -0.25% and looked set to lower another -0.25% in October as Eurozone inflation fell to +1.8% annualized in September. While we noted last month the large layoffs pending at Volkswagen, more statistics emerged indicating a faltering economy. New car sales in the European Union fell by -18.3% in August to their lowest level in three years, dragged down by double-digit losses in the major markets of Germany, France and Italy. Electric vehicle sales also slipped, both in absolute and relative terms. The graphic left underscored the widespread underutilization by Europe’s major auto manufacturers and implications for more losses – the problems were not just at Volkswagen, but endemic to Europe as a whole. In breaking news, EU lawmakers decided to impose tariffs up to 45% on Chinese electric cars in order to protect domestic production. While not unanimous, the vote indicated one view of trade protection. Chinese retaliation, if any, was still to be determined.
All the best in your investing!
David Burkart, CFA
Coloma Capital Futures®, LLC
www.colomacapllc.com
Special contributor to aiSource