FactSet StreetAccount Summary – US Weekly Recap: Dow +1.09%, S&P +2.02%, Nasdaq +3.15%, Russell 2000 +1.47%
CHARTS OF THE YEAR:
These two charts should make you seriously cogitate during this long weekend (in North America). I will post on their implications next week but here’s a hint:
Earnings growth = Revenues growth (sales volume growth X sales inflation) minus costs inflation
The View From NATO’s Russian Front The Army commander in Europe on Putin’s new way of war, Russia’s growing arsenal, and coping with U.S. military budget cuts.
‘I believe the Russians are mobilizing right now for a war that they think is going to happen in five or six years—not that they’re going to start a war in five or six years, but I think they are anticipating that things are going to happen, and that they will be in a war of some sort, of some scale, with somebody within the next five or six years.”
So says Lt. Gen. Frederick “Ben” Hodges, commander of U.S. Army Europe. (…)
“What’s happening in eastern Ukraine is very serious,” the 56-year-old West Point alumnus says. “When they fired into Mariupol that got my attention. Mariupol is an important place, city of 500,000 on the Black Sea. Russia has to resupply Crimea by sea or air, and that is very expensive, so obviously they would like to do it overland. Mariupol sits right in the way. They would really like to drive right through there.”
What Russian President Vladimir Putin “has done in Ukraine,” he says, “is a manifestation of a strategic view of the world. So when you look at the amount of equipment that has been provided, and the quality and sophistication of the equipment that has been provided to what I would call his proxies . . . they clearly have no intention of leaving there.”
The new weapons Mr. Putin has supplied to these proxies include “some of the latest air-defense systems,” says Gen. Hodges. “They also have brought in some of the latest, most-effective jamming, what we would call electronic-warfare, systems.” This level of assistance suggests Ukraine “is not a foray, not a demonstration. They are deploying capabilities way above and beyond anything that any militia or rebel organization could ever come up with.” (…)
The Russians have “got some forces in Transnistria,” he says of the state that broke away from Moldova in the 1990s. “They’ve got forces in Georgia. And I think they view China as their existential threat, so they’ve got a lot of capacity out there.” The Russian military is thus already somewhat stretched, and Moscow had to carve out from existing units the battalion task groups currently arrayed near eastern Ukraine. Yet “they are clearly on a path to develop, to increase, their capacity,” Gen. Hodges says. Add to this expansion that “they’ve got very good equipment, extremely good communications equipment, their [electronic-warfare] capability, T-80 tanks.” How long will it take for Russia to reach its desired military strength? “I think within another two or three years they will have that capacity,” he says.
Gen. Hodges notes that the Russians already have an advantage in the information battleground: “They’re not burdened with the responsibility to tell the truth. So they just hammer away, and whenever somebody in the West puts out a blog or a tweet, there’s an immediate counterattack by these trolls.”
Russia Today, the Kremlin’s foreign-language television service, is estimated to be within reach of 600 million viewers world-wide. Russia Today’s YouTube channel has received a billion views, making it one of the most-watched channels on the online-video platform.
Then there is the Kremlin’s sheer aggressiveness, not least on the nuclear front. The Pentagon last year announced that it is removing missiles from 50 of America’s underground silos, converting B-52 long-range bombers to conventional use and disabling 56 submarine-based nuclear-launch tubes—all well ahead of the 2018 New Start treaty deadline. Moscow, by contrast, has been simulating nuclear strikes on Western capitals as part of annual exercises. (…)
Fear of provoking Russia has been part of the recent debate over providing lethal aid to Kiev. As a member of the military, Gen Hodges won’t weigh in directly in the Washington policy debate. “What’s more important is this,” he says. “We have to have a strategy. Just military aid is not a strategy.” Western leaders should first determine what outcome they’d like to see emerge in the region, he says, and then apply a “whole-of-government” approach, including a military dimension, to achieve it. (…)
Many Americans and their representatives are tempted to regard Crimea as a distant geographical abstraction—and to say that it’s about time Europeans met their own defense needs instead of financing bloated welfare states.(…)
Yet the failure of many of European leaders to live up to their defense commitments “doesn’t change our interest,” Gen. Hodges says. “And the U.S. economic link to Europe, to the EU, dwarfs any other economic link in the world, anywhere in the Pacific, China, India, you name it. So if for no other reason it’s in our interest that Europe be stable, that people make money so they can buy U.S. products. . . . We provide capability assurance here by being present here.” (…)
Nor can the U.S. project national power world-wide, as it has since the end of World War II, with an overstretched Army. “There are 10 division headquarters in the Army,” he says. “Nine of them are committed right now. I’ve never seen that. I don’t think at the height of Iraq and Afghanistan you had nine out of 10 division headquarters committed against some requirement.” That leaves little in reserve if another conflict breaks out.
To a commander like Gen. Hodges, the strain on the Army caused by budget sequestration is palpable. “With the possibility of sequestration hanging over our head, the Army will have to go to 420,000” personnel, he says. “That’s about another 80,000 below where we are now. . . . The strength of the Army at the height of the buildup was about 560,000.”
What Gen. Hodges fears is a “hollow” Army, in which commanders will have to forego a capable and sufficiently large personnel, readiness or modernization to meet budget requirements. To serve its purpose, however, an Army needs a depth of resources at its disposal. (…)
Kissinger on Iran Has the U.S. already conceded a new era of nuclear proliferation?
One big question coming out of the Munich security conference this weekend is whether Iran and the U.S. can strike a nuclear deal before the next, and perhaps final, deadline in March. But the better question may be what happens if they succeed—what happens if they sign an accord close to the parameters of the talks as we now know them? The Obama Administration may be underwriting a new era of global nuclear proliferation.
That’s the question Henry Kissinger diplomatically raised in recent testimony to the Senate that deserves far more public attention. The former Secretary of State is the dean of American strategists who negotiated nuclear pacts with the Soviets in the 1970s. This gives his views on the Iran talks particular relevance as President Obama drives to an accord that he hopes will be the capstone of his second term.
On Jan. 29 Mr. Kissinger appeared before the Senate Armed Services Committee with two other former Secretaries of State, George Shultz and Madeleine Albright. Here’s how he described the talks in his prepared remarks:
“Nuclear talks with Iran began as an international effort, buttressed by six U.N. resolutions, to deny Iran the capability to develop a military nuclear option. They are now an essentially bilateral negotiation over the scope of that capability through an agreement that sets a hypothetical limit of one year on an assumed breakout. The impact of this approach will be to move from preventing proliferation to managing it.” (The italics are Mr. Kissinger’s.)
Mull that one over. Mr. Kissinger always speaks with care not to undermine a U.S. Administration, and the same is true here. But he is clearly worried about how far the U.S. has moved from its original negotiating position that Iran cannot enrich uranium or maintain thousands of centrifuges. And he is concerned that these concessions will lead the world to perceive that such a deal would put Iran on the cusp of being a nuclear power.
Administration leaks to the media have made clear that Secretary of State John Kerry ’s current negotiating position is that Iran should have a breakout period of no less than a year. But as Mr. Kissinger told the Senators in response to questions, that means verification and inspections become crucial. “In the space of one year, that will create huge inspection problems, but I’ll reserve my comment on that until I see the agreement,” Mr. Kissinger said.
“But I would also emphasize the issue of proliferation. Assuming one accepts the inspection as valid” and “takes account of the stockpile of nuclear material that already exists, the question then is what do the other countries in the region do? And if the other countries in the region conclude that America has approved the development of an enrichment capability within one year of a nuclear weapon, and if they then insist on building the same capability, we will live in a proliferated world in which everybody—even if that agreement is maintained—will be very close to the trigger point.”
Mr. Kissinger didn’t say it, but those other nations include Saudi Arabia, which can buy a bomb from Pakistan; Turkey, which won’t sit by and let Shiite Iran dominate the region; Egypt, which has long viewed itself as the leading Arab state; and perhaps one or more of the Gulf emirates, which may not trust the Saudis. That’s in addition to Israel, which is assumed to have had a bomb for many years without posing a regional threat.
This is a very different world than the one we have been living in since the dawn of the nuclear age. A world with multiple nuclear states, including some with revolutionary religious impulses or hegemonic ambitions, is a very dangerous place. A proliferated world would limit the credibility of U.S. deterrence on behalf of allies. It would also imperil U.S. forces and even the homeland via ballistic missiles that Iran is developing but are not part of the U.S.-Iran talks.
President Obama would claim the inspection regime is fail-safe, but Iran hid its weapons program from United Nations inspectors for years. That’s why the U.N. passed its many resolutions and the current talks began. Iran also hid its facility at Qum. All of this shows how difficult it is to maintain a credible inspection regime in a country determined to evade it. Or as Mr. Kissinger delicately put it, “Nobody can really fully trust the inspection system or at least some [countries] may not.”
Our own view is that Mr. Obama is so bent on an Iran deal that he will make almost any concession to get one. In any case Mr. Kissinger’s concerns underscore the need for Congressional scrutiny and a vote on any agreement with Iran.
From Jeffrey Saut’s Investment Strategy:
(…) Plainly, corruption is rampant in Russia with 110 people controlling 35% of the country’s wealth, while “50% of adults have household wealth of $871 or lower (WSJ).” Boy, talk about “The 1%!” No wonder Russian capital flight is epic. Moreover, in 2014 food prices surged 15.4% while crude oil prices plunged. Crude oil exports from Russia account for roughly 50% of Russia’s GDP, and the breakeven price for a barrel of oil to balance Russia’s budget is notionally $100. Further, Russian crude oil, for the most part, is priced in U.S. dollars, which is why much of Russia’s debt is also priced in U.S. dollars. Given the dollar’s strength vis-a-vis the ruble, that debt is becoming increasingly difficult to service. For example, if a Russian energy company borrowed $1 million dollars at the beginning of last year when $1 equaled ~33 rubles (33 million rubles), the size of that loan is now 67 million rubles since the exchange rate currently is $1 to ~67 rubles. Accordingly, our hypothetical Russian energy company’s debt has effectively doubled, while its revenues have been cut in half due to the crash in oil prices. (…)
During the AT&T Pebble Beach golf tournament yesterday, one AT&T officer tells the Golf Channel listeners that one of AT&T’s objective is to “tell our children of the dangers of texting while driving”.
Less than 100 miles to the North, some “children” are not listening as this WSJ piece sadly reveals. Note that these are tech executives…