Weekend Reading
China/Russia
Humiliating the Chinese before their big party conference/coronation was not Metternich level strategy. China will be materially more supportive of Russia going forward.
Tom Friedman in the NYT, where he criticizes Speaker Pelosi and airs White House doubts about Zelensky.
The public signaling that the US may be losing confidence in the Ukrainian leadership, in combination with mainstream press coverage like this CBS documentary, means that a growing faction in the US government is injecting some realism into our foreign policy.
Sleepwalking Into War with China
The fact is that Beijing has the preponderance of power along its coasts. I reviewed the comparative force position in a 2020 book. As Air Force strategist and Stanford professor Oriana Skylar Mastro wrote last year, “China’s offensive weaponry, including ballistic and cruise missiles, could…destroy U.S. bases in the western Pacific in a matter of days…Recent war games conducted by the Pentagon and the RAND Corporation have shown that a military clash between the United States and China over Taiwan would likely result in a U.S. defeat, with China completing an all-out invasion in just days or weeks.”
America Isn’t Ready for War With China
Just as Biden the man is visibly sundowning, the America that he leads now seems to be in the throes of advanced senility. The Empire no longer has any idea what its core interests are, so everything is. Protecting women's football teams in Kabul is just as important as Ukraine NATO accession, which is just as important as Taiwanese independence. And because everything is equally important, nothing really is, because nothing actually gets done right.
Published before Pelosi’s trip—China on the Offensive and What to Expect From a Bolder Xi Jinping
The Fall and Rise of Russian Electronic Warfare.
Market Links
The Bank of England’s balance sheet reduction plan is much better than the Fed’s.
Bullard’s presentation on ‘credible disinflation.’
Lars Christensen post—Recession or not? Answering a question the Fed should not care about
On the one hand NGDP growth remains far too strong and even though NGDP growth is set to slow further in the coming quarters (I discuss that here) there is a risk that the Fed becomes preoccupied with real GDP growth, which as we have shown also is influenced by supply side factors, which it cannot control.
If the Fed where to conclude from the real GDP numbers alone then it would likely abandon monetary tightening right now and ease monetary policy instead and the calls for doing that are likely become louder in the near future.
GS in the FT summarizing how inflation, and it’s implicit removal of the ‘Fed put,’ benefits trend following systems.
Lefty crypto nastygram that compares crypto and the S&L crisis. My favorite part was the correction at the end.
Correction: An earlier version of this essay incorrectly described Elon Musk’s Tesla as a blue-chip firm, implying it is consistently profitable, stable, and generally recognized as a safe investment. Tesla is none of these things. We regret the undeserved compliment.
Perry Mehrling, Zoltan Pozsar’s sensei, on Allisson Schrager’s podcast mostly talking about crypto—$ maximalist sentiment as well.
The end of privilege: A re-examination of the net foreign asset position of the US.
Because US equities have outperformed and foreigners own a lot of them, the US net foreign asset position has gone from -5% of GDP in 2007 to -65% of GDP at the end of 2021.
Surging US equity values in a context of substantial foreign ownership of US equity have led to a collapse in the US net foreign asset position. Financing this net debt to the rest of the world requires, in expectation, that the US run larger trade surpluses moving forward. Our preferred interpretation of the surge in US equity values is that US firms unexpectedly became more profitable, while foreign firms did not. In a closed economy, this shock would redistribute to American firm owners at the expense of American workers. In our open economy model, the situation for Americans is worse: a large share of the income lost by American workers accrues to foreign owners of US firms. A key open question here is whether profits are rising in the US because of the growth of very productive superstar firms in the US (Baqaee and Farhi 2017), or alternatively because US markets are becoming less competitive (Philippon 2020). In the first case, the shock is fundamentally good news for Americans, and transfers abroad might be efficient. The second scenario, in contrast, is a bad news shock for the US, and higher transfers abroad make a bad situation worse.
John Cochrane on inflation:
…. economics really doesn't fully know the answer to the most basic question, is inflation stable or unstable around an interest rate target, and does the Fed need to raise interest rates more than observed inflation to bring inflation under control. You now know as much as just about anyone.
Open interest in SOFR futures now exceeds the open interest in eurodollars.
In light of the proposed tax on stock buybacks—Cliff Asness defending them
Congress Looks Set to Finally Pass Historic Climate Legislation—Climate activist appraising the climate bill and supporting further policy to restrict the supply of crude oil—buy XLE.
Bullish energy thesis from a fund manager.
Lefty easy money takes—here and here
Marc Andreessen says he’s all for more new housing, but public records tell a different story.
The secondary shares advisory firm Setter Capital is pitching investors on heavily discounted positions in private startups. The firm’s proposed discounts range from 35% to 85%. (Secondary market shares often trade at a discount to the preferred valuation, but these discounts show how far prices are falling and how different startups’ standings are being assessed on the secondary market.)
US Armed Forces recruiting is not going well.
The tight labor market is likely the primary cause of the shortfall. But this is really bad.
Every branch of the military is struggling to make its 2022 recruiting goals
2022: The Worst Year for Military Recruiting
Lawmakers press Pentagon for answers as military recruiting crisis deepens
With Few Able and Fewer Willing, U.S. Military Can’t Find Recruits
…the pool of young people qualified to join the military without requiring any exception to the standards continues to shrink: It has gone from 29 percent in 2016 to 23 percent in 2022. The biggest drivers are obesity, vision, asthma, mental health issues (such as severe anxiety), low scores on the qualification test, and a history of crime.
…the academic side of the recruiting process is equally grim, with applicants struggling to pass the Armed Services Vocational Aptitude Battery, or ASVAB, an SAT-style quiz. In the past, McConville said the pass rate was about two-thirds of applicants, but that has fallen to about one-third in recent years.1
The ASVAP cutoff for the Army is the 31st percentile,2 which is ~ an 80 to 90 IQ.
In 1967, Robert McNamara and LBJ lowered the IQ cutoff into the 60s—it did not go well for the new recruits.
Probably, ASVAP scores are lower because the smarter kids have better opportunities in the private sector and aren’t taking the test. The unpalatable alternative is that the kids are not alright. Maybe smartphones and the Covid lockdowns are ushering in Idiocracy.
What if They Gave a War and Everybody Was Woke?
Army Combat Fitness Test (ACFT)—You can pass with 10 pushups and 11 minute miles.
Miscellanous
The little-known network underneath the French capital is Europe's biggest ‘urban cold’ system.
Paul McCartney —“the pound is sinking, the peso’s falling…”