Bulls and bears alike wonder when the next market bubble will emerge and pop. In recent years, major stock market downturns have come from bursting bubbles. Recessions, threats of war, terrorist attacks and other disturbances have caused market ripples. But the big gut wrenchers--the nosedives that wrecked your retirement--have come from the popping of asset bubbles. The gross over-valuation of tech stocks in 2000, the ridiculous real estate lending of 2005-07, those are the events that clobbered equities. What does the future portend?
Today, the mess in the Middle East grips our attention. Medieval atrocities by the Islamic State, a mosh pit with weapons in Gaza, mind-numbing slaughter in Syria and sectarian strife in Iraq appall and fascinate. But none of them will significantly drive down stock valuations. They just don't have the economic impact. The Ebola epidemic is now raging out of control in West Africa. But America's economic exposure to West Africa is miniscule. And the disease isn't likely to present a major threat to the industrialized world.
Is there an impending market bubble that could burst and dynamite the world's financial system? The answer is maybe, in Europe. The European economy is slowing. Growth is seen only on alternating Sundays. The EU stays afloat on a cushion of sovereign and bank debt--a lot of it. With Europe's slowing economy, it will be tough to pay down this debt and expedient to refinance by issuing even greater amounts of debt. Risks to larger members like Italy and France are rising. The EU is a financial and currency union without a unitary government. Thus, it is tailor made to borrow in bulk without governmental controls to interfere. We in America know from the 2007-08 mortgage crisis what happens when you bulk up on debt that can't be easily repaid. The vast amount of European debt presents potential systemic risk, just like the vast amount of American mortgage debt outstanding in 2007.
Exacerbating Europe's problems is the war between Ukraine and Russia. As Russia's direct involvement in combat is becoming increasingly clear, the war is likely to have ever greater impact on Europe. Sanctions by the West will probably be heightened, and Russia's retaliation will likely hit Europe harder than America. Europe's financial system could begin to totter as the EU is pushed into recession and capital flees the Old World. (Indeed, part of the buoyancy of U.S. stocks can be attributed to the arrival of capital now fleeing Europe.) A run on the Euro could be the straw that breaks the bubble's back.
The European Central Bank, as always, does a fan dance about how accommodative it will be. While it's become much more interventionist in the past couple of years, it remains constrained by its anti-inflation charter and the stolid, ever-frowning Germans. Maybe the ECB will save the day. Or maybe not.
Europe's economy, as a whole, is larger than America's. A tummy ache there could affect the rest of the world. if you're worried about where the next bursting asset bubble could come from, keep your eye on Europe.
Saturday, August 30, 2014
Tuesday, August 19, 2014
Vladimir Putin and the Art of War
Sun Tzu, the Chinese military strategist, wrote in The Art of War: "[T]hose skilled in war subdue the enemy's army without battle. They capture his cities without assaulting them and overthrow his state without protracted operations."* This would seem to have been Putin's approach from the beginning of Ukrainian crisis. Without a shot fired, Russian troops seized Crimea. Crimea was low hanging fruit, since Russian military personnel were already there on a base that Ukraine had allowed Russia to maintain. Vlad the Invader was no doubt emboldened by the ease and bloodlessness of this victory to seek control of eastern Ukraine. And he probably hoped to use his success in Crimea to bluff and bully Ukraine into surrendering without Russia having to fight a hot war.
But things haven't gone Putin's way. After initial ineffectiveness, the Ukrainian military has rallied and is now on the way to retaking all of eastern Ukraine (except perhaps for Crimea). Only two major cities (Donetsk and Luhansk) remain in rebel hands, and both are surrounded by the Ukrainians. While a substantial news blackout seems to exist with respect to combat operations, it's clear that the Ukrainian military has suddenly attained the ability to use heavy weapons effectively against the more lightly armed separatist forces. The success of Ukraine's air force is unclear; the separatists tout shootdowns, but the Ukrainian military is mum on successes. If Ukraine's air force can now effectively support its ground forces, the separatists haven't got much of a chance. Air power, as the Islamic State learned the hard way in Iraq, is still the trump card on the battlefield.
How has Ukraine so suddenly become so capable in battle? One wonders if there aren't advisers in Ukraine, who speak the language with non-native accents and can offer the benefit of experiences from other wars. No military in the world has as much experience as the U.S. military. And the Iraq War, fought on flat terrain in and around towns and cities, would have been similar in many ways to the fighting in Ukraine, It is hard to imagine that there aren't U.S. Special Ops personnel and CIA agents working with the Ukrainians. Recent claims by Ukraine that its artillery pummeled a Russian armored column entering Ukraine at night, if true, would strongly indicate an American role. How could Ukrainian artillery smack the yogurt out of a Russian column at night without precise targeting information, such as might be provided by American satellites and drone aircraft?
But now is not the time for Ukraine and the U.S. to celebrate. Putin cannot afford to be seen as a loser in this war. If he were, he'd lose his job, and maybe more. He'll lash out like a cornered rat if forced to face definitive defeat. Even as we write, there are reports of rebel reinforcements being sent from Russia into Ukraine--some 1,200 men with 150 armored vehicles, including 30 tanks. (There we go with U.S aerial surveillance again.) Putin won't stop fighting.
Yet, the Ukrainian military is holding its own and more. If Putin overtly sends Russian troops into Ukraine, he'll probably sustain more casualties than the war weary Russian people will tolerate. (Russia took painful losses in Afghanistan and in the wars in the Caucasus.) Western sanctions would escalate sharply and capital flight from Russia, already a torrent, would become a flood that would impress Noah. The Russian economy could crater, threatening to take Putin down with it. So an overt invasion of Ukraine by Russian troops entails tremendous risk.
Putin is for practical purposes limited to using the separatists rebels, who are now outnumbered and outgunned. As a result, he has violated one of Sun Tzu's principles: "If weaker numerically, be capable of withdrawing." He cannot commit the forces needed to win, but he cannot withdraw. He is trapped.
What will Putin do? Most likely, he'll continue and perhaps increase the covert assistance and support he's been giving the separatists. The more success the Ukrainian military enjoys, the more desperate Putin will become, and the more covert action he will take. Since there seems to be a ready supply of separatist rebels, Putin could keep the war going at least for a while. If the Ukrainian military defeats the separatist forces on the battlefield, the rebels could go underground and fall back on terrorist tactics that have become all too familiar in today's world. And Putin could apply the economic weapons he's used in the past, such as shutting off the natural gas Russia exports to Ukraine and Europe. Ukraine may well be on the way to battlefield victory. But instability and disruption will continue.
*Sun Tzu, The Art of War, translated by Samuel B. Griffith, Oxford University Press, 1963.
But things haven't gone Putin's way. After initial ineffectiveness, the Ukrainian military has rallied and is now on the way to retaking all of eastern Ukraine (except perhaps for Crimea). Only two major cities (Donetsk and Luhansk) remain in rebel hands, and both are surrounded by the Ukrainians. While a substantial news blackout seems to exist with respect to combat operations, it's clear that the Ukrainian military has suddenly attained the ability to use heavy weapons effectively against the more lightly armed separatist forces. The success of Ukraine's air force is unclear; the separatists tout shootdowns, but the Ukrainian military is mum on successes. If Ukraine's air force can now effectively support its ground forces, the separatists haven't got much of a chance. Air power, as the Islamic State learned the hard way in Iraq, is still the trump card on the battlefield.
How has Ukraine so suddenly become so capable in battle? One wonders if there aren't advisers in Ukraine, who speak the language with non-native accents and can offer the benefit of experiences from other wars. No military in the world has as much experience as the U.S. military. And the Iraq War, fought on flat terrain in and around towns and cities, would have been similar in many ways to the fighting in Ukraine, It is hard to imagine that there aren't U.S. Special Ops personnel and CIA agents working with the Ukrainians. Recent claims by Ukraine that its artillery pummeled a Russian armored column entering Ukraine at night, if true, would strongly indicate an American role. How could Ukrainian artillery smack the yogurt out of a Russian column at night without precise targeting information, such as might be provided by American satellites and drone aircraft?
But now is not the time for Ukraine and the U.S. to celebrate. Putin cannot afford to be seen as a loser in this war. If he were, he'd lose his job, and maybe more. He'll lash out like a cornered rat if forced to face definitive defeat. Even as we write, there are reports of rebel reinforcements being sent from Russia into Ukraine--some 1,200 men with 150 armored vehicles, including 30 tanks. (There we go with U.S aerial surveillance again.) Putin won't stop fighting.
Yet, the Ukrainian military is holding its own and more. If Putin overtly sends Russian troops into Ukraine, he'll probably sustain more casualties than the war weary Russian people will tolerate. (Russia took painful losses in Afghanistan and in the wars in the Caucasus.) Western sanctions would escalate sharply and capital flight from Russia, already a torrent, would become a flood that would impress Noah. The Russian economy could crater, threatening to take Putin down with it. So an overt invasion of Ukraine by Russian troops entails tremendous risk.
Putin is for practical purposes limited to using the separatists rebels, who are now outnumbered and outgunned. As a result, he has violated one of Sun Tzu's principles: "If weaker numerically, be capable of withdrawing." He cannot commit the forces needed to win, but he cannot withdraw. He is trapped.
What will Putin do? Most likely, he'll continue and perhaps increase the covert assistance and support he's been giving the separatists. The more success the Ukrainian military enjoys, the more desperate Putin will become, and the more covert action he will take. Since there seems to be a ready supply of separatist rebels, Putin could keep the war going at least for a while. If the Ukrainian military defeats the separatist forces on the battlefield, the rebels could go underground and fall back on terrorist tactics that have become all too familiar in today's world. And Putin could apply the economic weapons he's used in the past, such as shutting off the natural gas Russia exports to Ukraine and Europe. Ukraine may well be on the way to battlefield victory. But instability and disruption will continue.
*Sun Tzu, The Art of War, translated by Samuel B. Griffith, Oxford University Press, 1963.
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