by Greg Valliere, AGF Management Ltd.
Insights and Market Perspectives
THREE CONCLUSIONS SEEM INCREASINGLY APPARENT: First, Ukraine can hold on to Kyiv and much of the west, despite Russian shelling. Second, Russian casualties have been enormous, as its troops run out of supplies. Third, the Russians will continue to shell much of Ukraine with impunity.
THESE CONCLUSIONS WILL SET THE STAGE for negotiations today in Turkey, as the seeds have been planted for a deal within a month or even days. Neither Vladimir Putin nor Volodymyr Zelensky have the troops or supplies to continue this war for much longer.
THESE BATTLEFIELD DEVELOPMENTS are more important than the heated debate over regime change, which has mesmerized the Washington press corps. Joe Biden doubled down yesterday, reinforcing a belief that he and his top advisers aren’t on the same page, which is perplexing to America’s NATO allies.
A FRIEND ASKED US YESTERDAY HOW THIS WAR ENDS: Our best guess — 70% chance — is that a stalemate and partition are likely, with Russia keeping some territory in the East and Ukraine promising not to join NATO — not a great deal for Zelensky but his people would be spared further carnage.
BUT THERE’S A 30% CHANCE that Ukrainian troops will continue their counter-offensive, driving demoralized Russian troops out of most of the country. This would make Putin even more erratic and viscous, of course.
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WHITE HOUSE SURRENDERS ON DOMESTIC AGENDA: Presidential budgets are quickly dismissed — but not this one. Yesterday’s eye-opening 2023 budget proposal barely mentioned the Build Back Better plan, while emphasizing more spending for police and control of illegal immigration.
DEFICITS WILL STILL BE HIGH — well over $1 trillion annually for as far as the eye can see — but well below the $3.1 trillion in fiscal 2021. As a percentage of GDP, the deficit would fall from 12.4% of the nation’s overall economy in 2021 to about 4.8% in 2032, if you believe the Biden projections.
LOTS OF FUZZY MATH: The proposal doesn’t make any significant spending cuts, and its assumption of higher taxes depends on Congress, where tax hikes face an uphill fight. And the budget’s GDP and interest rate assumptions are aspirational, to say the least.
BUT THE DOCUMENT PROVIDES COVER for most Democrats seeking re-election this November. It contains a 10% hike in defense spending (which probably will be raised even more), and a major increase for police. “The answer is not to defund our police departments. It’s to fund our police and give them all the tools they need,” Biden said.
IN AN ASTONISHING REVERSAL, Biden would hike spending by about 13% on Customs and Border Protection, presumably to curb illegal immigration. His budget even includes $19 million for border fencing.
NEEDLESS TO SAY, PROGRESSIVES were glum, with the BBB plan on life support. A few chunks of it — curbing the cost of prescription drugs, for example — are still alive, but Sen. Bernie Sanders summarized the mood among his allies. “At a time when we are already spending more on the military than the next 11 countries combined, no, we do not need a massive increase in the defense budget,” Sanders said.
BOTTOM LINE: We’d be exaggerating to call this a frugal budget, but two conclusions stand out: First. the rate of increase on spending clearly is slowing. Second, Biden has moved toward the center but Republicans nevertheless will say he’s spending way too much — and the GOP still has the upper hand in this fall’s elections.
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This post was first published at the AGF Perspectives Blog.
