Daily Comment (January 11, 2023)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Our Comment today opens with an update on the Russia-Ukraine war, where a key Russian blogger has broken taboo and directly criticized President Putin for his management of the invasion.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including some welcome signs of increased investments in U.S. manufacturing and energy production.

Russia-Ukraine War:  Reports indicate that Aleksandr Lapin, the former commander of the Central Military District forces that allowed the Ukrainians to recapture huge swaths of territory in eastern Ukraine last summer, has been reassigned to take over as chief of staff of the Russian ground forces.  In response, influential Russian military blogger and former rebel commander Igor Girkin published a criticism of President Putin for appointing and refusing to remove Russian military leaders who oversee frequent and disastrous military failures.  The criticism marks one of the first times an influential nationalist has directly criticized Putin for his management of the war.  It therefore signals how the disastrous invasion continues to undermine Putin’s political position within Russia.

Saudi Arabia-Pakistan:  The Saudi government said yesterday that it is considering offering some $11 billion in aid to Pakistan to help it avoid a threatened default on its foreign debt.  Along with earlier offers of aid from the United Arab Emirates and Qatar, the major Middle East oil producers have now said they may provide up to $22 billion to Pakistan.

  • The support could strengthen Pakistan’s hand in negotiating a restart to a stalled bailout from the International Monetary Fund.
  • Pakistan has so far been unwilling to agree to the IMF’s terms for a deal, which include raising electricity and gasoline prices and increasing taxes.

Egypt:  As part of its negotiations for a $3-billion bailout from the IMF, the Egyptian government has reportedly agreed to reduce the role of the military in the country’s economy, including via the privatization of military-owned businesses.  The military’s economic activity has spread through the economy since President Abdel Fattah al-Sisi took power in a coup in 2013, reducing opportunities for private business owners.

Brazil:   As prosecutors in Brazil continue to investigate last weekend’s capital rioting by supporters of Former President Bolsonaro, the former leader said he will leave the U.S. and return to Brazil within a few weeks.  Bolsonaro’s return to Brazil would likely be welcomed by the White House, which has come under pressure from some Democrats to expel him.

Peru:  At least 17 people have been killed in political protests this week, as the demonstrations intensify against last month’s removal and detention of Former President Castillo.  According to the country’s independent human rights office, 39 civilians have been killed in the unrest since Castillo’s arrest, while the defense ministry says 75 police officers have been injured.  The continued violence could threaten production at Peru’s globally important mines producing copper and other key minerals.

United States-China-Taiwan:  A series of 24 war games held by the Center for Strategic and International Studies found that an alliance of the U.S., Japan, and Taiwan would likely be able to repel a full-scale Chinese invasion of the self-governing island, but at the high cost of dozens of navy ships, hundreds of aircraft, and tens of thousands of troops over three to four weeks of fighting.  The report recommends that the U.S. improve its effort to increase deterrence against the Chinese by raising the expected costs that they would pay for an invasion.

U.S. Demographics:  A new study from the Aspen Economic Strategy Group finds that falling birth rates, declining population growth, and population aging are among the biggest risks for the future U.S. economy.  To address the threat, the study recommends that the U.S. adopt policies to increase fertility and boost immigration.

U.S. Monetary Policy:  At an event with other central bankers in Sweden yesterday, Federal Reserve Chair Powell said that he remains strongly committed to lowering inflation by restraining economic growth through interest-rate increases, even if doing so fuels political blowback.  In fact, he stressed that preserving the Fed’s ability to make tough economic calls without political interference would require it to avoid straying into issues that aren’t directly related to its economic-management objectives, such as climate change.

U.S. Industrial Policy:  South Korean conglomerate Hanwha Group (000.880.KS, KRW, 27,200) said that it will invest $2.5 billion to expand the production of solar panels and components at a facility in Georgia.  The commitment would reportedly be the biggest foreign direct investment in U.S. solar manufacturing ever.

  • The South Korean plan is also a sign that the big green-energy subsidies in the recently passed Inflation Reduction Act are already drawing increased investment to the U.S. that otherwise may have gone to other countries.
  • That risk has already generated pushback from the European Union, prompting some limited concessions from the U.S. We suspect that the U.S. subsidies will continue to spur concerns by other countries as more investment is redirected toward the U.S.  The U.S. program will also likely spur calls for similar subsidies in other countries.

U.S. Oil and Gas Industry:  Despite popular perceptions that U.S. oil and gas drilling is at a standstill, the Wall Street Journal has an interesting article today showing that activity in at least some regions is actually beginning to boom again, especially in natural gas fields.  We still suspect that environmental regulations, the rise of green energy, and investor demands for capital discipline will slow new energy investment and contribute to higher energy prices in the future, but today’s article points to at least some new activity after a long period where high prices failed to prompt the usual supply response.

U.S. Air Travel Industry: This morning, the Federal Aviation Administration halted all domestic air departures until at least 9:00 am ET due to an outage of its computer system that alerts pilots to advisories and other flight information.  The halt has reportedly produced numerous flight delays, pushing airline stocks lower.

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