April 13

Ukraine 

Unfortunately, the attention span of the average person in the United States and in western Europe is akin to that of a gnat, not long. Ukraine is already receding from public focus, replaced by more immediate, but less important, concerns about inflation and economic growth. 

Inflation and growth are important but liberty, economic freedom and democratic government are more important. Without the pillars of the global liberal order, we will have nothing but the boot of despotism on our necks. 

I will continue to bang the drum loudly on Ukraine, a war free countries must win. 

It appears that a major World War 2 type battle is about to unfold in eastern Ukraine. The center of gravity appears to be near the eastern city of Izium, which Russian units seized last week as they try to link up with other forces in the Donbas region, the southeastern part of Ukraine. The Russians are also trying to solidify a land corridor between the Donbas and the Crimean peninsula on the Black Sea, which Russia invaded and annexed in 2014.

There are other signs that the two armies are gearing up for a big fight. Newly-released satellite images showed a Russian convoy of hundreds of vehicles moving south through the Ukrainian town of Velykyi Burluk, east of Kharkiv and north of Izium.

This is going to be a large scale battle with hundreds of tanks and fighting vehicles — it’s going to be extremely brutal,” said Franz-Stefan Gady, a research fellow at the International Institute for Strategic Studies in London. “The scope of the military operations is going to be substantially different from anything the region has seen before.”

Since Russia’s annexation of Crimea, Moscow has backed separatist uprisings in two eastern provinces — Donetsk and Luhansk — of the Donbas. The conflict has killed more than 14,000 people over the past eight years.

“Russia is operating in terrain which is very familiar,” said Keir Giles of the Conflict Studies Research Center in Britain. Moscow’s forces “will have learned from its mistakes in the early days of the campaign against Ukraine,” he added.

There’s also the added benefit for Russia of railways in the east, Mr. Giles said, explaining that the networks there are dense and traverse territories already under Russia’s control.

Still, for all of the presumed Russian advantages in the east, some analysts doubt that the army will be any more effective in eastern Ukraine than it was north of Kyiv. The Russian forces that attacked the Ukrainian capital were so badly mauled that many of the units are too depleted to start fighting again, according to Western officials and analysts. They also say that many Russian units appear to be suffering from low morale, with some soldiers refusing to fight.

“Normally, a serious military would take months to rebuild, but the Russians seem to be hurling them into this fight,” said Frederick W. Kagan, the director of the Critical Threats project at the American Enterprise Institute, which has partnered with the Institute for the Study of War to track the war in Ukraine. “The forces they are deploying are badly beat up and their morale appears to be low.”

Mr. Kagan said that, in the east, Russian forces may encounter some of the same mobility problems that they sustained in their invasion of northern Ukraine. Russian forces were largely confined to the country’s roads, as they were not able to traverse the terrain. That left Russian armored vehicles and trucks vulnerable to attack from Ukrainian forces, which — using Western-supplied anti-tank missiles — destroyed hundreds of Russian vehicles.

For the Russians, transportation problems are likely to get worse. Spring rains will turn much of the terrain into mud, further hampering mobility.

Mr. Kagan noted that Russian forces are “remarkably road-bound, which might actually make the east more challenging because the road network is much worse than the network around Kyiv.”

Ultimately, Mr. Kagan said, both armies face steep challenges.

“The Russians have a lot of weight to bring to bear, but they have a lot of problems,” Mr. Kagan said. “The Ukrainians have high morale, high motivation. And a lot of determination. But they’re outnumbered and they don’t have the infrastructure of a militarized state to support them.”

“In my mind, it’s a tossup.”

Short of putting uniformed boots on the ground, the United States must do everything it can, including the insertion of covert forces to ensure that Ukraine wins. Free countries must win.

If Putin wins, then Xi wins, and the probability of a hot war in the littoral waters of China increases exponentially. 

Markets and Stocks 

As anticipated by everyone and I mean everyone, the March consumer price inflation report was a hot print, but the internals of the data release were better than expected. Core CPI inflation came in at only .3 percent. I see an inflation rainbow. 

Consumer prices increased 8.5 percent in the year through March, the fastest inflation rate since 1981, buoyed by rising gas costs and higher rents — expenses that are stretching budgets and undermining confidence in the U.S. economy. 

Excluding volatile fuel and food, so-called core prices climbed 6.5 percent in the year through March, up from 6.4 percent in the year through February, also a brisk pace. Still, the core index offered a glimmer of good news: Core inflation slowed down a bit on a monthly basis, rising 0.3 percent from February. 

Economists say price increases should begin abating in the coming months, in part because gasoline prices have come down - a gallon cost $4.10 on Tuesday.  Prices below from AAA for regular, mid-grade, premium, diesel and E85.

I expect that both oil and gasoline prices will stabilize around current levels. On oil the price of West Texas Intermediate, the U.S. benchmark should trade between $90-100 over the coming months. The oil and gas sanctions against Russia are not very effective. Maybe one million barrels a day of Russian production is shut in by the sanctions. Typically, Russian production runs around 10 million barrels a day. Oil releases  by the U.S. and other nations are buffering the impact of shut in Russian production. And Covid lockdowns in China are reducing global oil demand. 

More importantly, I believe that the inflation news will rapidly improve over the coming months. As noted energy prices should stabilize. Food prices should also be peaking as consumers shift food consumption patterns in the face of high supermarket prices. See below under Economics for a brief review of the differences between the consumer price index and the Fed’s preferred inflation measure, the core personal consumption expenditure price index. 

The economy will slow as the Fed tightens monetary policy, but a recession is unlikely to occur until 2H 2023 at the earliest. Business is investing. The consumer is spending. Aggregate income is growing in real terms. The consumer is partially protected against inflation by excess savings of over $2 trillion, though those savings are concentrated among higher income households. And most importantly, the job market is very strong. Encouragingly, the strong employment market is drawing in older men and women who were retired. More workers means reduced wage pressures. 

As the Wall Street Journal puts it: high  inflation is pushing more people, including retirees, back into the labor force. That’s good for the economy overall, since it pushes up the labor force participation rate. The share of people aged over 55 who were either working or looking for a job rose to 38.9% in March from 38.4% in October, according to the Labor Department. More than 480,000 people in that age group entered the labor force during the past six months, more than the 180,000 who did in the six months before the pandemic.

Economics 

There are two common measures of inflation in the US today: the Consumer Price Index (CPI) released by the Bureau of Labor Statistics and the Personal Consumption Expenditures price index (PCE) issued by the Bureau of Economic Analysis. The CPI  gets more press, because  it is used to adjust social security payments. The Federal Reserve, however, states its goal for inflation in terms of the PCE.

The two measures, though following broadly similar trends, are certainly not identical. In general, the CPI tends to report somewhat higher inflation. Since 2000, prices as measured by the CPI have risen by 39 percent, while those measured by the PCE have risen by 31 percent, leading to differing average annual inflation rates of 2.4 and 1.9 percent. In this century, then, CPI inflation has run about half a percentage point higher than PCE inflation. 

Importantly, the personal consumption expenditure price index takes into account the substitution effect of consumer behavior. When the price of beef goes up, consumers buy more chicken or cheaper cuts of beef. In addition, the PCE does a better job of capturing quality improvements and overall changes in consumption patterns. But as Goolsbee and others have empirically demonstrated both inflation measures overstate real inflation and understate real improvement in wages and standards of living. 

The two measures also carry different weightings for various household consumption categories. Given the hyper inflation in the cost of Shelter, it is important to note that the cost of owning or renting a residence, carries a weight of .18 percent in the personal consumption expenditure price index data series. By contrast, in the consumer price index data set, the Shelter weighting approaches 40 percent. 

Over the course of the next 18 months, the inflation news as measured by the personal consumption expenditure price index should steadily improve. 

Politics 

The Biden Administration continues to be cognitively impaired when it comes to energy policy. 

The President is expected  to announce that the Environmental Protection Agency will issue an emergency waiver permitting year-round sales of E15 gasoline, which contains a 15% ethanol blend.

The sale of E15 gasoline is usually prohibited from June to mid-September because of air quality concerns. 

Per White House estimates, E15 sales could save consumers 10 cents per gallon on average, while reducing reliance on foreign fuels. As part of Tuesday's announcement, the EPA will also take steps to facilitate the expanded use of the biofuel, including outreach to states and modifications to E15 fuel pump labeling at gas stations across the country.

But E15 is less fuel efficient. Any savings are illusory. While E15’s price per gallon tends to be cheaper, it has lower fuel economy, so the direct price comparison can be misleading. Ethanol contains about one-third less energy than gasoline, according to the U.S. Energy Department. Today E15 is roughly 3% less expensive than E10 fuel, according to an assessment from S&P Global Platts, making the actual savings negligible.

More importantly, the raw material for ethanol fuel is corn. Because of the war in Ukraine, there is a global food crisis. It is bad policy to use corn to make gasoline cheaper when the corn is needed globally to prevent mass starvation. What is the thought process?

Sociology 

Almost always, I was able to shower before I went to the chow hall for dinner. Because I knew I would be in a hurry, I had my clean underwear-I had three sets of Whites, tee shirts and shorts, ready to go, hanging on the top of the four foot high ceramic wall which separated the shower area from the sinks and toilets. If I needed to change my Blues, my prison shirt and trousers, I did that after dinner. 

Laundry was collected five nights a week: three nights Whites, two nights Blues. Laundry is another story. 

Sometime around 5 PM, the officer on duty would shout “chow.” We would all line up by the electronic door. I always tried to be near the front of the line. Sometimes, the kitchen ran out of food that the guys liked, baked chicken for example.  By being at the front of the line, I maximized my  chances of getting a piece of baked chicken or a cookie if cookies were on the menu. I craved sugar when I was in prison. Almost all of the inmates craved sugar. Innately, humans crave sugar when under extreme emotional stress. Prison is trauma. 

When the door was released, we walked single file to the chow hall. Two officers accompanied us. Each dorm went separately. The officers tried to keep contact between dorms to a minimum. If dorms intermingled, the chances of a fight or stabbing with a shiv increased. Men in blue walked the yellow line. 

In the chow hall, we received our trays, went to the next available table and seat and scarfed our food in about 4-5 minutes. Then an officer would shout “times up, get out.” We would rise, take our trays to a portal for dirty trays and walk out. Then we would stand for a minute or two until an officer shouted, “march.” We marched back to the dorm, and we were locked in for the rest of the night.