moon of alabama

What Explains The Recent Russian Retreats?
Moon of Alabama, Oct 4 2022

Over the last months Ukraine has launched a counteroffensive against Russian positions in the Kharkov region. The attack against thin Russian forces was quite successful but has cost the Ukrainian army several thousand men and irreplaceable hardware. That does not seem to matter for Kiev. Several reasons for the success were given. The Russian forces in the area were even smaller than people had thought and the Ukraine was willing to push every reserve it had through the Russian defense lines. The Russian artillery was equally thin and could not use enough area weapons like MLRS to stop the storming Ukrainian forces. In consequence the Ukraine took a quite large share of land. Most st of these was thinly inhabited rural areas. Even the city of Lyman which the Russian gave up on had less than 30k pre-war inhabitants.

Kharkov region Oct 4

Kharkov region Sep 1

But another Ukrainian counter-offensive lets me doubt the explanations given for the area losses near Kharkov. In the Kherson-Nikopol region the Ukrainians made several attempts to push the Russian forces from the land north of the Dnieper river. All had failed with large losses for the Ukrainian side. But over the last week the Ukrainians tried a new attack along the river and breached the Russian front line. The Russian troops retreated in good order and the Ukrainians pushed further.

Kherson-Nikopol region Oct 4

Kherson-Nikopol region Sep 1

Neither the explanation of too few men, nor the explanation of too few MLRS systems or ammunition which may explain the Kharkov success hold up for the Kherson region. During the summer Russian troops were pulled from the Kharkov region and send to the south to defend the Kherson regions. There are lots of Russian units in the area including many artillery systems. And while the Ukrainians have damaged some bridges that cross the Dnieper the Russian forces have enough ferry equipment to keep up the supplies. Most of the previous Ukrainian attacks were defeated rather easily.

I thus find it hard to explain the current situation. My current ‘feel’ is that the Russian forces have orders from high above to conserve forces and to let go of land and retreat when the pressure becomes big enough and severe Russian casualty numbers are likely. Why were such orders given? What are the plans behind them? I don’t really know. But I am sure will find out when Russia opens the new phase of the war.

The weather has become quite bad in Ukraine with rain making the passing over fields with tanks etc nearly impossible. That is why the attack in the south was pushed along a road. In two month the ground in Ukraine will likely be frozen. The Russian military leadership seems to believe that the Ukrainian operations will cease soon and that the mobilized reinforcements that are starting to come online will be able to decisively change the picture as soon as the winter comes.

Another potential reason behind the order to conserve forces and to not hold onto territory at any price may be political. The Russian public was starting to get a bit tired of the war but after the losses in the Kharkov region the TV pundits pushed for winning the war. That allowed Russia’s president to launch the mobilization of reservists. The further losses since may be designed to allow for more political measures.

The law that will allow for the four regions to return to Russia after a hundred years of being part of Ukraine today passed the upper house of Russia’s parliament:

According to the documents, the DPR and the LPR will retain their status as republics after joining Russia and Russian will be their official language. The Kherson and Zaporozhye regions will also join Russia as constituent entities and will continue to be called “regions.” The borders of the republics and regions will be the same as those that “existed on the day of their creation and accession into Russia.” International accords specify that their borders with other countries will be regarded as Russia’s state borders. At the same time, under the constitutional laws, the DPR and the LPR are joining Russia under the 2014 borders enshrined in their constitutions.

President Putin will now have to sign the new law to enact it. The heads of the LDPR have already signed laws ratifying treaties on joining Russia. With the laws enacted the Special Military Operation will become a war to prevent attacks on Russian grounds and to retake the parts of Russia that are currently under Ukrainian occupation. I expect that the gloves which Russia was still wearing during recent operations will come off.

The Expected Financial Crash Is Finally Here
Moon of Alabama, Oct 3 2022

When two experienced economy and finance analysts, who both correctly predicted the derivative crisis of 2008, again warn of an imminent crash one better listens up. Today Yves Smith of Naked Capitalism writes about the now Inevitable Financial Crisis:

For months, I have been confident that Europe would suffer a financial crisis and a depression, as in a real economy catastrophe accompanied by a market crash. It might not be that severe and lasting as 1929, but the breadth would mean there would not be 1987 quick bounceback nor a 2008 derivatives crisis concentrated at the heart of the banking system. Even though that looked like financial near-death experience, the same factors that made it more acute in many respects also made it easier for the officialdom to identify and shore up the key institutions that took hits below the water line. The short version of what follows is things are looking even worse now, and on multiple fronts.

Below we’ll discuss the rapidly accelerating real economy crisis, which is exacerbated by central bank tightening as pretty much the only line of defense against inflation that is almost entirely the result of a multi-fronted supply shock. Needless to say, the Fed raising interest rates (which Bernanke recognized as necessary in 2014 to tame bubbly asset prices but then lost his nerve) does nothing to get more chips from China or magically cure Covid-afflicted staffers so they can show up at work. But it will whack all sorts of speculators and financial firms who have wrong-footed their interest rate positions. And it also seemed apparent that the US would be pulled into the maelstrom, perhaps not as far, but contagion, supply chain dependencies, and the importance of Europe as a customer would assure the US would suffer too.

The second warning comes from ‘Dr Doom,’ Nouriel Roubini:

There are signs that a debt crisis has already started taking shape, and a hard landing of the economy before the end of the year is now the baseline scenario, according to top economist Nouriel Roubini, who has earned the nickname “Dr Doom” for his pessimistic views on markets and the economy, and has warned of a looming debt and inflationary crisis for about a year. Previously, he predicted it would lead to a Frankenstein-style recession by the end of 2022, mixing the worst aspects of 1970s stagflation and the 2008 financial crisis. And the signs of that financial meltdown are finally emerging, Roubini said, who referred to a hard landing as the baseline scenario in an op-ed for Project Syndicate on Monday. “Signs of strain in debt markets are mounting … the crisis is here,” Roubini said, referring to recent moves by central bankers to stem market volatility.

Roubini’s Project Syndicate headline is the message: The Stagflationary Debt Crisis Is Here. His argument which I highlighted is nearly similar to the one Yves makes:

NEW YORK – For a yearnow, I have argued that the increase in inflation would be persistent, that its causes include not only bad policies but also negative supply shocks, and that central banks’ attempt to fight it would cause a hard economic landing. When the recession comes, I warned, it will be severe and protracted, with widespread financial distress and debt crises. Notwithstanding their hawkish talk, central bankers, caught in a debt trap, may still wimp out and settle for above-target inflation. Any portfolio of risky equities and less risky fixed-income bonds will lose money on the bonds, owing to higher inflation and inflation expectations. Everyone now recognizes that these persistent negative supply shocks have contributed to inflation, and the European Central Bank, the Bank of England, and the US Federal Reserve have begun to acknowledge that a soft landing will be exceedingly difficult to pull off. Fed Chair Jerome Powell now speaks of a “softish landing” with at least “some pain.” Meanwhile, a hard-landing scenario is becoming the consensus among market analysts, economists, and investors. It is much harder to achieve a soft landing under conditions of stagflationary negative supply shocks than it is when the economy is overheating because of excessive demand.

The central banks have misdiagnosed the reason for the currently high inflation rates. They were caused not only by too much stimulus provided by governments and the central banks but to a large part by the lack of supplies which is to the consequence of the pandemic and the ‘western’ sanctions following the war in Ukraine. By increasing interest rates the central banks fought against the wrong enemy. They made things worse:

Are we already in a recession? Not yet, but the US did report negative growth in the first half of the year, and most forward-looking indicators of economic activity in advanced economies point to a sharp slowdown that will grow even worse with monetary-policy tightening. A hard landing by year’s end should be regarded as the baseline scenario. While many other analysts now agree, they seem to think that the coming recession will be short and shallow, whereas I have cautioned against such relative optimism, stressing the risk of a severe and protracted stagflationary debt crisis. And now, the latest distress in financial markets, including bond and credit markets, has reinforced my view that central banks’ efforts to bring inflation back down to target will cause both an economic and a financial crash. Moreover, there are early signs that the Great Moderation has given way to the Great Stagflation, which will be characterized by instability and a confluence of slow-motion negative supply shocks. In addition to the disruptions mentioned above, these shocks could include societal aging in many key economies (a problem made worse by immigration restrictions); Sino-American decoupling; a “geopolitical depression” and breakdown of multilateralism; new variants of COVID-19 and new outbreaks, such as monkeypox; the increasingly damaging consequences of climate change; cyber-warfare; and fiscal policies to boost wages and workers’ power. US and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress. The crisis is here.

There is little one can do to protect oneself from the consequences of this crisis. Try to stay on the safe side. Have as little debt as possible. If you have debt it will likely be much better to have it at a fixed interest rate. Don’t bet on the value of any assets you might have. This storm will be rough and the consequences will be severe.

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