Rent Control

The article is from 2000, but turns out that there are certain topics where Mr. Krugman and I have no disagreement.

The Arctic

An interesting article from Geopolitical Futures on the Arctic and the factors to consider when determining its relevance in geopolitics.  From an economics standpoint, this region presents two opportunities: (1) new trade routes that will expedite transportation of goods between various points on the globe; and (2) potentially vast untapped oil & gas reserves.  But both such benefits come with important caveats.  For the time being, unless significantly greater amounts of ice melt, it is a very expensive route to take, nor one that can currently be used year round.  And, as oil prices have swooned, the reserves are not economical since the typical project has a breakeven price of $100 per barrel.  Lastly, where we have previously discussed choke points in the South China Sea, the Arctic Ocean is even more vulnerable, and any powerful navy (wink, wink) really can dominate sea activity at will.

Overall, a good primer on the metrics to think in terms of this area.

Revisionism?

George Friedman:

"In making the decision to use a nuclear weapon, the U.S. faced some tough choices. It had to balance its moral responsibility to American troops and those who were still being slaughtered by the Japanese against the lives of those who would be killed in a nuclear attack. But the idea that Japan was ready to surrender is a myth. It was ready to negotiation a peace deal; it wouldn’t accept unconditional surrender. This could have opened the door to another war, allowing the slaughter of Americans who had already fought and survived a long war."

Impact of Brexit

Courtesy of Geopolitical Futures:

"Following the 2008 crisis, the integration of eurozone economies showed its vulnerabilities. Taking into account that eurozone consumption has dropped since 2008 while financial and socio-economic distress has increased, eurozone countries prefer to trade with non-eurozone markets with which they have limited integration – and therefore less contagion risk. This makes Germany more interested in the British market than vice versa. While the eurozone has to deal with questions surrounding the future of its common currency, this has never been a concern for the U.K. Still, the hurdles of trading with eurozone members caused British exporters to look for other markets even before the 2008 crisis. This prepared them for the post-2008 drop in continental European consumption. By then, British companies had already increased their exports to non-EU markets and continued to do so. Because of this, it’s likely that Brexit will not have a dramatic impact on the U.K.’s economy."

The Dollar

Another great interview on Real Vision with Luke Gromen.  He covered a lot, but I thought his summary below of Bretton Woods and how other countries are turning their backs on it, and the implications, is very useful.  Not for nothing, but part of the reason to prefer a Trump over Clinton was because of the belief that Clinton was prone to follow path one:

“…look, the deal was-- to be flip, the deal was, you take our jobs. You take our factories. You take our dollars. And then you lend us back the dollars, and we'll buy the stuff from you. And in third quarter '14, with the rollover in FX reserves, the world's saying, we're not taking the dollars anymore. And so I think what's ultimately happening is there's two paths for the US to go with that. Path one is, we'll invade your country and make you take the dollars. And path two is, fine. Deal's off. We'll bring the factories back. We'll bring the jobs back. If you don't want the dollars, you don't get to keep the factories. It's your choice.”

Sign Posts

Courtesy of Geopolitical Futures:

"According to the German Shipowners’ Association, German banks and investors own about 29 percent of the world’s container ship capacity. German lenders have been the biggest issuers of shipping loans. Based on Petrofin Global Bank Research statistics, German banks own one-fourth of all outstanding shipping loans made by large banks (about $90 billion). That makes them vulnerable to the shipping malaise."

Immigration

I don’t think that the immigration ban is about racism at its core. And, to that end, as usual, George Friedman offers up useful insights:

“The issue is not whether Trump and his followers are generally anti-immigrant. The question is why they are so hostile toward Muslims, who roughly total the same number as the Chinese and Indians, and to Mexicans, who vastly outnumber these groups. I wish the explanation were more complex, but it is actually quite simple in both cases.

The United States has been at war with Muslim groups since Sept. 11, 2001. When the U.S. has gone to war with foreign powers, there has been a surge of hostility toward immigrants from that foreign power’s country. During World War I, German immigrants in the United States who still spoke German came under suspicion and were pressured to adopt English. During World War II, Germans who had maintained close and cordial ties to Germany prior to the war were harassed, and in some cases, arrested under suspicion of espionage and subversion. Japanese citizens of the United States were arrested and sent to detention camps out of fear that they might be conducting espionage or sabotage for the Japanese. During the Cold War, post-war émigrés from Soviet satellite nations were distrusted by the FBI, which feared they were sent by the Soviets as spies and saboteurs.

When there is war, there is suspicion of the enemy. When there is suspicion of the enemy, there is fear that émigrés might be in the United States on false pretenses. Historically, émigrés have been caught in the middle to some extent because their loyalty is questioned. In war, there is rage as the casualties mount, particularly if sabotage and terrorism are carried out in the homeland. This is hardly new or difficult to understand. If those of us old enough to recall the terror after 9/11 will do so, we can remember the fear and uncertainty not only about what comes next, but also whether the next terror team already was present in the United States. After 15 years of war and many Americans dead, this has congealed into a framework of distrust that may well go beyond the rational. The detention of the entire Japanese community was not rational. Nor was it something that cannot be understood. It is hard to calibrate what you ought to be afraid of in war, but you know that something dreadful might happen. Are all Muslims warriors against the United States? No. Do you know who is or isn’t? Also no. Wars, therefore, create fears. There is nothing new in the American fear of Muslims in the context of war.

The Mexican situation is different. There was a war, but it was long ago, and fear of war is not the driving issue. Rather, the driving issue is illegal Mexican immigration. There is a great deal of homage paid to the rule of law. Congress passed a law specifying the mechanics of legal migration. Some 5 million Mexicans broke the law. Whether this has harmed the U.S. economy or not, the indifference to enforcing the law by people who are normally most insistent on the rule of law has created a sense of hypocrisy. At the same time that the middle and lower-middle classes feel as though their interests are being ignored, the presentation of illegal aliens as “undocumented immigrants” reveals a linguistic maneuver. The “illegals” are transformed into the merely “undocumented,” implying a minor bureaucratic foul-up.

The anger is not only directed at the Mexicans. It is part of the rage against those living in the bubble, who present themselves as humanitarians, but who will encounter the illegal aliens, if at all, as their servants. And rightly or wrongly, some suspect that open support for breaking the law is designed to bring cheap labor to support the lifestyles of the wealthy at the expense of the declining middle class. The fact that the well-to-do tend to be defenders of illegal aliens while also demanding the rule of law increases suspicions.

There is a somewhat deeper layer. As long as illegal immigration is permitted, the foundations of American culture are at risk. It is not simply immigration, but the illegality that is frightening, because it not only can’t be controlled, but also the law is under attack by those who claim to uphold it. The fear that a person’s livelihood is being undermined and his cultural foundation is being overwhelmed creates deep fear of the intentions of the more powerful. The issue appears to have little to do with NAFTA and other economic concerns. The U.S. and China have equally intense economic issues, but there is minimal tension over Chinese immigration. The economic and immigration issues seem only tenuously connected.

It is rare that an issue of such emotional impact as Muslims during a war with Muslims, or immigration in violation of the law, would not cause tension. As we saw with President Franklin D. Roosevelt and the Japanese, things that are obvious to those living decades later are not obvious at the time. Indeed, it is a failure of imagination to be unable to empathize with the fear felt after Pearl Harbor. In our time, the failure to empathize comes from those who feel immune to illegal immigration or the 15-year war. It is part of the growing fragmentation of American society that different classes and regions should experience these things so differently, and that each side has so little understanding of the other.”

Oil

From Louis Gave (on Real Vision):

“2 and 1/2 years ago Xi Jinping went to Moscow and signed a 50 year deal where China was buying natural gas at a fixed price, which was like half the market from Russia, paid for in renminbi. Now when you think that, who's the marginal buyer of oil in the world? It's China. For all the talk about how Chinese growth is collapsing, et cetera, Chinese oil imports last year were up 16% year on year to new all-time highs. So China needs energy, and keeps on. The reason oil went to $150 was China's emergence. So when China does a side deal with Russia and says basically, hey, we're covered here, then if your marginal buyer disappears, then all of a sudden the cost of oil doesn't go to the price where the marginal buyer's willing to pay, it goes to the price of where the marginal producer produces it. And so it eventually went-- And now we're obviously at the marginal cost. But that marginal cost may go down again. Because now with Donald Trump, we're going to get the Keystone Pipeline. I mean, you go to Alberta, your oil is at $25 a barrel. It's stuck there because it can't move. You put the Keystone Pipeline in and oil price goes down…”

NATO

Courtesy of Geopolitical Futures:

"Nations have the right and obligation to carry out their foreign and military policies as they wish. But an alliance constrains nations to behave in a certain way given certain events. An alliance is a pooling of sovereignty. It is absolutely true that NATO wasn’t conceived to fight wars outside of Europe. Nor was it conceived as an organization where the primary military burden falls on the Europeans. But Europeans must face two facts. First, this is 2017, and the wars that matter to the U.S. are being fought in the Islamic world. Second, this is not 1955, and Europe is not struggling to recover from World War II. It is a wealthy region, and its military capabilities should be equal to those of the U.S...

Trump’s approach to NATO has been forced on the U.S. by the Europeans and would be on the table with a different president. NATO doesn’t function as an alliance. It is a group of sovereign nations that will respond to American requests as they see fit. The U.S. understands this, and inevitably, the veil of good manners was going to be torn away. Someone was going to point out that NATO is obsolete. Trump happened to enjoy saying it.

But whether it is a tragedy or comedy, the matter can be summed up the following way. The Europeans are wondering if the U.S. will leave NATO. The U.S. is wondering if the Europeans will join NATO. Forgetting NATO, the question is this. What is the commitment of European countries to the United States, and what is the American commitment to Europe? It is not clear that there is a geopolitical basis for this commitment any longer. Interests have diverged, NATO is not suited to the realities of today, and the U.S.’ relations with European states differ from nation to nation, as do European nations’ relations to the United States."

Duterte and the Philippines

Courtesy of Geopolitical Futures:

"China wants to have the Philippines as an ally. The Philippines wants to become less dependent on the U.S. The United States wants the Philippines to behave as the U.S. wishes. However, desire does not determine reality. Until either China or the Philippines is willing to give up sovereignty claims in the South China Sea, it is hard to see how an alliance between Beijing and Manila could work. Until the Philippines develops a better military or finds a naval power capable of replacing the U.S. security guarantee, the Philippines will remain an American ally, if a reluctant and boisterous one. The U.S. has always been slow to learn that self-righteous moral indignation does not translate into strategically valuable action and will have to re-examine its approach to the Philippines if it wants the relationship to be based on anything more than superior strength and need. Duterte is likely to produce plenty more eyebrow-raising quotes, but until one of these variables changes, the Philippine relationship with China won’t progress much beyond a tease."

Trade Wars

Courtesy of Geopolitical Futures:

“The U.S. and China are dependent on each other in different ways, but the oft-repeated assertion that the economies are too interconnected for the U.S. to increase protectionism does not hold up to scrutiny because the dependencies are not equivalent. Trump will be compelled to do what he claims to do best: negotiate a better deal for American workers. As he does this, he will be able to deploy three main arguments in his negotiations with the Chinese. The first is that U.S. dependence on Chinese goods is a matter of convenience, not of China possessing critical commodities the U.S. can’t obtain anywhere else. The second argument is that although the manufacturing sector of the U.S. economy has been hurting for years and is significantly degraded, a great deal of unused U.S. capacity remains; in the event of a serious economic conflict with China, this unused capacity could be relied upon to pick up much of the slack. The third argument is that U.S. protectionist measures raised against Chinese goods will hurt China far more than any of China’s potential retaliatory responses will hurt the U.S.”

China

From Bloomberg:

All of which raises a simple question: Why is Beijing working so hard to prop up the yuan and crack down on outward capital flows?

The common answer is that it fears the trade consequences of a declining yuan. But that's not it. Since the government devalued the yuan on Aug. 11, the combined value of imports and exports has fallen by only 8 percent, even as the value of the yuan has fallen 8 percent against the U.S. dollar. Any coming decline in the currency won't make much difference, given the weak global economy and the product mix China is buying and selling.

The real reason is that the government is concerned about the implications of further liberalizing. China's rickety banks, with delinquency rates of 30 percent, are receiving regular liquidity injections from the People's Bank of China. Money market rates have been rising, from under 2 percent this summer to above 2.3 percent in Shanghai today. Allowing international capital mobility could easily trigger larger withdrawals -- and hence liquidity crunches for banks already feeling the pinch of bad loans.

In other words, China is caught between trying to prop up a currency facing long-term decline and letting capital leave at will, risking a bank crisis.

Hope is not a strategy

Here is Bill Gross’ relatively tongue-in-cheek but mostly spot-on analysis of what the policymaker plan is to solve the global debt crisis:

1. As in Japan, the Eurozone, the U.S., and the UK, central banks bought/buy increasing amounts of government debt (QE), then rebate all interest to their Treasuries and eventually extend bond maturities. Someday they might even “forgive” the debt. Poof! It’s gone.

2. Keep interest rates artificially low to raise asset prices and bail out over-indebted zombie corporations and individuals. Extend and pretend.

3. Talk about “normalization” to maintain as steep a yield curve as possible to help financial institutions with long-term liabilities, but normalize very, very slowly using financial repression.

4. Liberalize accounting rules to make some potentially “bankrupt” insurance companies and pension funds appear solvent. Puerto Rico, anyone?

5. Downgrade or never mention the low interest rate burden on household savers. Suggest it is a problem that eventually will be resolved by the “market”.

6. Begin to emphasize “fiscal” as opposed to “monetary” policy, but never mention Keynes or significant increases in government deficit spending. Use the buzzwords of “infrastructure” spending and “lower taxes”. Everyone wants those potholes fixed, don’t they? Everyone wants lower taxes too

7. Promote capitalism – even though government controlled, near zero percent interest rates distort markets and ultimately corrupt capitalism as we once understood it. Reintroduce Laffer Curve logic to significantly lower corporate taxes. Foster hope. Discourage acknowledgement of abysmal productivity trends which are a critical test of an economic system’s effectiveness.

8. If you are a policymaker or politician, plan to eventually retire from the Fed/Congress/Executive Wing and claim it’ll be up to the Millennials now. If you are an active as opposed to passive investment manager, fight the developing trend of low fee ETFs and index funds. But expect to retire with a nest egg.

More Sign Posts

Despite that 4.6% headline national unemployment rate, an interesting chart from VP Research which shows that now 40% of states have rising unemployment.  Not a good trend.

More on that Economic Boom

Courtesy of the folks at Zero Hedge, we know that over the last three months, the U.S. has gained 638,000 part-time jobs and lost 99,000 full-time jobs.  But, by all means, the stock market should be going gangbusters, and the media should be putting out articles like this...

More on the "Legacy"

I came across an article by Bob Murphy looking at some of the claims in the third presidential debate, and trying to offer some rebuttals to the immediate criticisms that were engendered.  That's an introduction to what I read, because in reality I don't really care about that part of it.  What I did find interesting is where he offers a basic retort to all the people who think our economy is anything better than anemic.  Specifically:

"However, Trump was not wrong for suggesting that the U.S. should have enjoyed—at least temporarily—growth rates of even 8 percent in the wake of the Great Recession, if indeed the government (and Federal Reserve) had enacted sound policies. Historically, the U.S. economy rebounded very strongly after a bad recession, at least partially making up for the lost output of the previous downturn...

Since the ostensible recovery began in the summer of 2009, only rarely has year-over-year U.S. real GDP growth bounced above 2.5 percent, and it has centered around 1.5 percent.

In stark contrast, going all the way back to World War II, GDP growth following a recession soared, albeit just briefly. Look, for example, at the early 1980s. In the first quarter of 1984, real GDP was 8.6 percent higher than it had been a year earlier.

The disparity in recovery growth rates is even more alarming when we consider that the depth of the Great Recession exceeded that of any other recession in the postwar era...

If the rhetoric from Obama and Clinton partisans were correct—namely, that the Great Recession had been caused by awful Republican policies which were fixed under Democratic rule—then we would have seen at least a few quarters of very high economic growth. Yet we have seen no such thing."

8 Days From Now...

From George Friedman:

"Neither seems to believe that laws and social norms apply to them. And neither knows how to close off an ongoing issue with a simple admission of error, a clear explanation of how that error occurred and a profound apology. Trump can barely get the word sorry out of his mouth. Clinton will say it more easily, but less believably. Clinton can get out of this current problem by doing two things. One, explain coherently and believably why she set up the server. Two, come clean on why she deleted 33,000 emails. She won’t, either because she can’t reveal the truth or because she can’t utter it."

Russia Falls Into Old Habits

A really worthwhile read from Stratfor:

Nearly 10 years ago, Stratfor published a series on Russia's historical boom-and-bust cycle. At that time, Russia was clearly at the height of a boom, rebuilding itself into a stable and robust power. Today, the country is quickly descending into the next, less pleasant stage. The strategy that revitalized the country is becoming less effective, forcing Russia and its leaders to act more aggressively at home and abroad. Though still assertive, Russia is no longer acting from a position of strength. The country may maintain some semblance of strength for years to come, but its fragility will eventually become apparent, forcing it into the next phase of the cycle.

Geography's Role in Russian History

For nearly eight centuries, Russia has been trapped in a loose cycle: It rises from chaos, returns as a regional and sometimes even global power, grows aggressive as the system cracks, and then collapses before rising again. The cycle is less about political choice than it is about geographic constraints. Geographically speaking, Russia is operating from an inherently weak position. It is the largest country in the world, covering roughly 13 time zones (split now into four mega-zones). Yet 75 percent of the country is virtually uninhabitable frozen tundra that becomes marshland in the summer, making domestic trade extremely difficult. Maritime trade is also difficult for Russia, given that its only warm-water port, on the Black Sea, is blocked by rivals, including Turkey. Therefore, the country has struggled to develop economically.

Furthermore, Russia's heartland — which runs from St. Petersburg south through Moscow and into the Volga region — lies on a series of plains, making it vulnerable from all sides. This has forced Russia to seek to expand its borders and influence outward to create a buffer zone between its heartland and rival regional powers. As Catherine the Great famously put it: "I have no way to defend my borders except to extend them." The longest sustained example of this expansion occurred during the Soviet period, when the Russian heartland was shielded by Siberia, 14 other Soviet republics and seven Eastern Bloc countries.  

Expanding Russian influence comes at an immense financial, military, political and social cost. During the Soviet period, Moscow had to centralize control over the entire Soviet space, subsidizing most of the Soviet states' economies while managing their diverse populations. Moreover, Soviet gross domestic product was half of U.S. GDP, even though the two countries had roughly the same population. By the last decade of the Soviet Union, Western intelligence sources estimated that half of Soviet industrial output went toward building up the military, causing vast shortages of industrial goods. Thus the dilemma: Russia must expand to survive, but that expansion is unsustainable and has historically led to its collapse.

A Perpetual Cycle

Russia's cycle can be divided into roughly three parts: collapse, resurrection and fragility. It starts with a catalyst that causes governance to break down and disrupts the social order, leading to collapse. Historically, this has taken many shapes. In the 13th century, it was the Mongol invasion; in the 17th century, the Time of Troubles; in the 20th century, the Russian Revolution, fall of the Soviet Union and the 1998 financial crisis.

From collapse comes the next stage of Russia's cycle: resurrection. Typically the system that governed during the crisis is transformed into something new — usually with a strong personality at the fore. This figure tends to create a stable system in which Russia can consolidate itself and its borderlands. This figure also fosters a sense of national identity, helping Russians and peripheral populations unite under a common patriotism.

Examples include Ivan III, who threw off the Mongol yoke and united Russia; the first Romanov tsar, Mikhail I, who led Russia out of the civil wars of the 16th century; the "greats," Peter and Catherine, who transformed Russia into a global empire; Vladimir Lenin, who transformed Russia into the Soviet Union; and arguably, Vladimir Putin, who ushered in prosperity following the Soviet collapse.

None, however, has been able to overcome Russia's geographic challenge. All have fallen into the problematic pattern of trying to consolidate the heartland while expanding Russian influence, practically ensuring their own collapse. When the inevitable stress points begin to emerge — whether political, social, security or economic — Moscow tends to tighten its grip and to act more aggressively within and along its borders.

The leaders, who were once seen as the saviors of Russia, are either replaced with, or evolve into, more authoritarian (and often ruthless) leaders, who quash dissent and aggressively defend Russia's borders and borderlands. This is the age of fragility. Fragility leaders lack the stability their predecessors enjoyed and have less time to devote to consolidation and nation building, making them appear more erratic.

Brutal leaders often emerge from crumbling systems. The most famous fragility leader was the Soviet Union's Josef Stalin. Similarly, when droughts and famines followed Ivan III's and his successor's successful tenures, Ivan IV — aka "The Terrible" — severely restricted freedom of movement and lashed out in a series of wars against the Polish-Lithuanian Commonwealth, eventually leading to civil war after his death.

Throughout history, internal and external pressures first lead to political, economic, social and foreign policy stagnation before the cracks in the system force a complete transformation. At times, such transformations are simply political, such as the transition from Stalin to Nikita Khrushchev; at others, the entire system collapses into chaos, such as the fall of the Russian Empire or the Soviet Union. Then, the cycle begins anew.

Putin's Edition of the Cycle

The rise and endurance of Putin and his government fit within Russia's historical cycle. After the Soviet collapse, Russia lost direct control over its borderlands. The country devolved into chaos. Broken attempts to transition to a market economy through what was known as shock therapy only led to radical privatizations and the rise of oligarchs — which in turn resulted in a 40 percent decline in GDP and a deep financial crisis by 1998. The political landscape wasn't much better. The government was made up of dozens of parties with vastly different agendas all attempting to agree on a new political system. The security services and military were further degraded by President Boris Yeltsin. The Russian people struggled to find a new identity to unite them as the Soviet Union had. Rumblings of secession arose in many of Russia's regions, with a brutal war erupting between Moscow and its Northern Caucasus republics, particularly Chechnya.

A bureaucrat from St. Petersburg, Putin was appointed by Yeltsin to head the KGB's successor, the Federal Security Bureau, in 1998. The intelligence agency was charged with containing the chaos. Yeltsin assumed that Putin, a Moscow outsider, would not be able to challenge him. But Putin and his cadre of loyalists from St. Petersburg (many former KGB agents) took strong steps against the various problems facing Russia, and by the next year he was prime minister. Once in office, he continued to consolidate and rebuild the security services and military. He issued ultimatums to the Russian regions to support the government financially and politically and to cease talk of secession. Putin's efficiency began to convince many Moscow elites to support him, and he eventually supplanted Yeltsin as president.

At the time, Putin was seen as a great reformer, consolidating the country economically, politically and socially. He cracked down on the oligarchs, seizing strategic assets for the state — such as the highly coveted energy sector. He streamlined the political process, bolstering a single party under his control with the opposition parties built into a system he could manipulate. He reined in the unruly Northern Caucasus, dividing the region's militant groups and creating a broadly loyal Chechen force to help end the Second Chechen War. Perhaps most important, he made a social pact with the Russian people to stabilize and boost the country.

Good luck also helped. Global energy prices began to rise sharply in 2004 and natural gas demand in Europe rose dramatically — just as Russia got its energy production back up following the Soviet collapse. Flush with cash, Russian GDP rose tenfold between 2000 and 2009. Russians' standard of living increased fourfold, and real disposable income rose 160 percent. Unemployment and the poverty rate were reduced by half. But with more income came more military spending: Under Putin, spending on the military increased nearly fivefold.

For most of Putin's leadership, the Russian economy and its financial position have been relatively stable. This enabled Moscow to focus on its borderlands — and specifically to push back against what it perceived as persistent foreign encroachment following the Soviet collapse. NATO and the European Union had expanded into some of the former Warsaw Pact and Soviet states, either offering them membership or association agreements. But with the United States preoccupied with the post-9/11 wars in Afghanistan and Iraq, Moscow was able to gain traction against what it perceived as expanding foreign influence on its borders.

Russia made its own security alliances to counter NATO with the creation of the Collective Security Treaty Organization in 2002. Moscow also used its energy resources to manipulate alliances on its borders. It used a series of energy cutoffs to Europe to ensure that Ukraine and Georgia would not be admitted into NATO. Then, Russia invaded Georgia in 2008, and NATO did not intervene. In 2010, Moscow pressured Ukraine to elect a more Russia-friendly leader. From 2010 to 2015, Russia expanded its economic union with Kazakhstan and Belarus to include Armenia and Kyrgyzstan.

The West painted Putin as a thug and Russia as an aggressor, but the Russian people praised the man who helped their country return to being a regional, and even global, power. Putin fulfilled his social contract with the Russian public, and in return, the people loved him.

Signs of Weakness Presage the Next Phase

Despite Putin's popularity, his rule is beginning to show signs of weakness, and threats to Russia's stability and external influence are increasing. The cycle, it seems, has not been broken. In 2014, Russia experienced a series of blows to its power. First, the Russian-friendly government in Ukraine was overturned in another uprising, leading to a staunchly pro-Western government in Kiev. Moscow attempted to incite the country against what it deemed a Western-backed coup, but its attempts only revealed the limits of Russian power. Now, Russia has only limited influence in a sliver of eastern Ukraine held by Russian-backed rebels.

Russian actions in eastern Ukraine united the European Union and the United States to exact a series of economic sanctions on the country and on several of its citizens. Meanwhile, oil prices crashed, falling from triple-digit prices per barrel in mid-2014 to the low $40s per barrel today. The combination of low oil prices and conflict with the West caused foreign investment into Russia to plummet by 50 percent in 2014. By 2015, foreign investment fell to nearly zero. The Russian ruble fell by 40 percent in 2014 and remained volatile the following year, and capital flew from the country, $160 billion in 2014 and another $85 billion in 2015.

The Russian people are bearing the brunt of the economic pain. With the decline in the currency, 25 percent of Russians have had their salaries cut, and 15 percent have lost their jobs altogether. The average monthly wage has dropped to below $450 a month, less than in China, Romania and Serbia. On average, Russians have spent half their incomes on food this year. And more than half of Russians believe that their economic position will only worsen in the years to come.

The current recession in Russia differs from the 2008-2009 economic crisis, which was part and parcel of the global financial crisis. Moreover, this recession is coupled with foreign policy shortcomings in Ukraine and in its standoff with the West. Russia is now seen as isolated on the international stage. The Kremlin has sporadically rallied national support over the past two years with its annexation of Crimea and with its intervention in Syria against the wishes of the West, but such acts have only momentarily increased patriotism.

Instead, the economic and foreign crises are starting to burden Putin's government, forcing the Russian leader to become increasingly authoritarian, according to the cycle. Even Ivan the Terrible started out popular, carrying on his grandfather's push to transform Russia from a medieval regional state to a far-reaching empire. It was not until famines and failed wars began to threaten Russia that Ivan IV became the brutal leader he is now remembered as. Putin could meet the same fate. He faces similar dilemmas, and will soon have to make tough decisions on how to maintain power and stability and protect Russia's borders.

As cash flows diminish, the political, security and business elite that make up the current Russian government are grasping for assets and power. Previously, Putin has been able to manage such power-grabs, but over the past two years the elite have pushed back, leading to the fall of some of the most powerful men in the country. Increasingly concerned that those fallen leaders will band against him, Putin is surrounding himself with loyalists who have no power of their own. Progressively uncertain of the loyalty of the Russian military and security services, the Russian leader has also created his own personal military, the National Guard, made up of 400,000 troops directly accountable to him.

Putin has been able to rule Russia with an iron grip for 16 years because of his government's popularity, but this, too, is slipping. Approval ratings for the government have fallen from 66 to 26 percent, and Putin's personal approval rating has fallen from 88 percent to 74 percent over the past two years. In recent parliamentary elections in September, voter turnout was the lowest in post-Soviet history, revealing the lack of faith in the process and government. In those elections, Putin was able to massage the results enough to give his party, United Russia, a supermajority so he could push through the tough and unpopular legislation necessary to hold power. Under the increasingly authoritarian leader, the government passed a series of draconian laws to suppress the Russian people should dissent become instability.

These domestic challenges come as pressures on the country's borders continue to mount. Russia's intervention in Ukraine has vacillated between a frozen and low-intensity conflict. The West maintains sanctions on Russia and is even discussing expanding those sanctions because of Moscow's intervention in Syria. NATO continues to build up its position along Russia's periphery, and Moscow's attempt to gain leverage in its talks with the West via Ukraine and Syria has fallen relatively flat in recent months. Russia could ramp up hostilities in the various theaters under negotiation with the West, but this risks isolating and over-extending Russia even more — similar to what happened in the period between Leonid Brezhnev and Mikhail Gorbachev.

This is not to say Russia is on the brink of collapse, only that the country is entering the next phase of its historical cycle, in which the state is highly vulnerable yet increasingly aggressive. Putin will therefore be acting from a position of survival instead of strength. Russia could muddle along in its compromised position for some time, but eventually the cycle must progress, and the next phase of transformation will begin.

 

Checking in on an old friend

Courtesy of The Real Deal:

“Jonathan Gray thinks people are getting too worked up about interest rates.

“There’s a (false) sense that owning real estate is the same as owning a bond,” Blackstone Group’s real estate head said in an interview on CNBC Tuesday. “Real estate, like stocks, can see earnings growth. And that’s what we’re seeing today because of favorable fundamentals.”

As the Federal Reserve readies itself to raise short-term rates later this year, many in the real estate industry worry that higher short-term rates could spill over into higher long-term rates, which could increase the cost of financing and put downward pressure on property prices.

But Gray argued that rising rates don’t have to be bad for the real estate market since they tend to coincide with improving fundamentals – such as employment and income. He pointed out that the real estate market “did OK” in previous eras of rising rates.

“We don’t expect to see the growth in value in the next couple years that we’ve seen in the last four or five years,” he admitted. “But we don’t expect to see some sort of sharp decline in the near term.””

It’s worth paying attention to the guys at Blackstone, as they are the biggest of the big in institutional real estate. And his logic about real estate having an ability to increase rents does distinguish it from bonds. BUT…we are dealing in unchartered territory when it comes to central bank policy, and part of what has driven recent pricing in real estate is the interest rate environment that we live in. As such, many folks have increased their allocation to the space because of its financialization and as an expression of an alternative to traditional fixed income. So, Gray may be right, but there is a lot more going on that muddies the waters in terms of what comes next.

Job Story

An interesting read on the Obama "boom".  In particular, this chart tells a story that the media often glosses over: