Fortune : Jeremy Grantham: The Fed is killing the recovery

Jeremy Grantham: The Fed is killing the recovery

The money manager argues that the Fed’s interventions have ruined the very recovery it was supposed to stimulate and that the market is poised to disappoint investors.

FORTUNE — If you hate the Federal Reserve, you have a new hero.

A few weeks ago, Jeremy Grantham, the co-founder of money management firm GMO, called newly appointed Federal Reserve chairman Janet Yellen "ignorant" in the New York Times. He also said the reason for the slow recovery was not the severe financial crisis, continued high unemployment, or the many standoffs in Washington. Instead, he blamed the Fed for ruining the recovery it was supposed to stimulate. To someone who believes in the laws of economics, it’s hard to overstate how odd that claim is. It’s positively bonkers.

Low interest rates stimulate the economy. The Fed has done everything in its power to keep interest rates down, lower and longer than anyone can remember. That should have helped the economy. And yet the recovery has been just meh. So, either Grantham is bonkers, or he is onto something. Fortune recently caught up with him to find out.

Fortune: You believe the Fed’s policies, particularly quantitative easing, have slowed the recovery. What’s your proof?

Grantham: It’s quite likely that the recovery has been slowed down because of the Fed’s actions. Of course, we’re dealing with anecdotal evidence here because there is no control. But go back to the 1980s and the U.S. had an aggregate debt level of about 1.3 times GDP. Then we had a massive spike over the next two decades to about 3.3 times debt. And GDP over that time period has been slowed. There isn’t any room in that data for the belief that more debt creates growth.

In the economic crisis after World War I, there was no attempt at intervention or bailouts, and the economy came roaring back. In the S&L crisis, we liquidated the bad banks and their bad real estate bets. Property prices fell, capitalist juices started to flow, and the economy came roaring back. This time around, we did not liquidate the guys who made the bad bets.

Can you really blame the Fed for the bailouts? That was an act of Congress.

I don’t like to get into the details. The Bernanke put — the market belief that if anything goes bad the Fed will come to the rescue — has had a profound impact on people and how they act.

Okay, but that’s still not proof that quantitative easing slowed the recovery.

There’s no proof on the other side, that the economy is any stronger from quantitative easing. There’s some indication that the crash would have been worse and the downturn would have been sharper had the Fed not stepped in, but by now the depths of that recession would have been forgotten, the system would have been healthier, and we would have regained our growth.

It’s economic doctrine that lower interest rates boost the economy. Are you saying that’s wrong?

Economic doctrine says the market is efficient. My view of the economy is not really principle-based. Higher interest rates would have increased the wealth of savers. Instead, they became collateral damage of Bernanke’s policies. The theory is that lower interest rates are supposed to spur capital spending, right? Then why is capital spending so weak at this stage of the cycle. There is no evidence at all that quantitative easing has boosted capital spending. We have always come roaring back from recessions, even after the mismanaged Great Depression. This time we are not. It’s anecdotal evidence, but we have never had such a limited recovery.

But the Fed does seem to have boosted stocks. Even if it did nothing else, doesn’t a better market help the economy?

Yes, I agree that the Fed can manipulate stock prices. That’s perhaps the only thing they can do. But why would you want to get an advantage from the wealth effect when you know you are going to have to give it all back when the Fed reverses course. At the same time, the Fed encourages steady increasing leverage and more asset bubbles. It’s clear to most investing professionals that they can benefit from an asymmetric bet here. The Fed gives them very cheap leverage on the upside, and then bails them out on the downside. And you should have more confidence of that now. The only ones who have really benefited from QE are hedge fund managers.

Okay, but then I guess that means you think stocks are going higher? I thought I had read your prediction that the market would disappoint investors.

We do think the market is going to go higher because the Fed hasn’t ended its game, and it won’t stop playing until we are in old-fashioned bubble territory and it bursts, which usually happens at two standard deviations from the market’s mean. That would take us to 2,350 on the S&P 500, or roughly 25% from where we are now.

So are you putting your client’s money into the market?

No. You asked me where the market is headed from here. But to invest our clients’ money on the basis of speculation being driven by the Fed’s misguided policies doesn’t seem like the best thing to do with our clients’ money.

We invest our clients’ money based on our seven-year prediction. And over the next seven years, we think the market will have negative returns. The next bust will be unlike any other, because the Fed and other centrals banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before. Assets are overpriced generally. They will be cheap again. That’s how we will pay for this. It’s going to be very painful for investors.

>>> US After Hours

After Hours Summary: SONC +5.2% following earnings/guidance

After Hours Gainers: Companies trading higher in after hours in reaction to earnings: SONC +5.2%

Companies trading higher in after hours in reaction to news: - OFIX +8.9% (announced the filing of restated financial statements), - RLD +4.5% (announced agreement with Wanda Cinema to add 780 RealD 3D Cinema Systems across China),  - MDVN +1.5% (co's partner confirmed marketing approval in Japan for XTANDI (enzalutamide) capsules, an advanced prostate cancer treatment), - CVA +0.6% (announced adjustment to the conversion rate on its 3.25% cash convertible senior notes due June 1, 2014), - HLF +0.4% (appointed former Senator Reid Senior Advisor Angela Arboleda as Vice President, Community Engagement and Health Policy)

After Hours Losers:

Companies trading lower in after hours in reaction to news: - AI -3.1% (announced 2.75 mln share common stock offering), - COMM -2.1% (announced secondary offering of 17.5 mln shares of common stock by an affiliate of The Carlyle Group), - AWAY -1.3% (announced proposed $350 mln offering of convertible senior notes due 2019,  - VEEV -0.4% (filed amended S-1: Veeva offering 890k shares, selling stockholders offering 11.11 mln shares of common stock)

>>> Asian Update

Asian Market Update: BRiCs in focus as S&P cuts Brazil, G7 boycotts June summit in Russia, and China official warns of "mini-crisis" in local govt debt

***Economic Data*** - (CN) CHINA FEB CONFERENCE BOARD LEADING ECONOMIC INDEX: 0.9% V 0.3% PRIOR - (PH) PHILIPPINES JAN TRADE BALANCE: -$1.38B V -$850ME

Market Snapshot (as of 03:30 GMT): - Nikkei225 -0.3%, S&P/ASX -0.3%, Kospi -0.1%, Shanghai Composite +0.4%, Hang Seng flat, Jun S&P500 +0.1% at 1,851, Jun gold +0.2% at $1,314, May crude oil -0.1% at $99.47/brl

***Highlights/Observations/Insights*** - S&P cut Brazil credit rating to BBB- from BBB, the lowest level of investment grade, with Stable outlook. S&P noted the downgrade "reflects the combination of fiscal slippage, the prospect that fiscal execution will remain weak amid subdued growth in the coming years, a constrained ability to adjust policy ahead of the October presidential elections, and some weakening in Brazil's external accounts." Brazil Finance Ministry response noted the downgrade contradicts economic fundamentals, and that the analysis by the credit rating agency of the country's FDI trends is not correct.

- The spigot of western sanctions on Russia has widened further as G7 officials meeting at the Hague announced they would forego the planned G8 summit in Sochi this June in continued protest of Moscow annexation of the Crimea peninsula. Recall the leaders had previously only went as far as suspending the preliminary work on attending the conference, but have since hardened their stance following the swift Moscow-endorsed Crimea referendum as well as elevated concern over the presence of Russian troops amassing near the east Ukrainian borders. G7 leaders also noted they are prepared to bring more sanctions on Russia if the Ukraine situation is further destabilized.

- Former PBoC adviser Li Daokui said China govt has more room to expand credit and forecasted broader economic expansion in Q3-Q4, but also said the State Council is unlikely to heed calls for more stimulus and that a "mini-crisis" in local govt debt is possible. Economist with the Conference Board, which reported further modest growth in China leading economic index, said as much, noting that "any government intent to support growth more actively in the coming months is unlikely to help much in improving economic conditions."

- The head of Japan's top pension fund GPIF reiterated he would not oppose lowering domestic bond holdings to certain extent due to low yield conditions. These comments were similar to the statement made in early March, when GPIF also said investment no longer needs to focus on domestic bonds in portfolio allocations as Japan emerges from deflation, presumably endorsing a greater allocation to the equity market.

- Bank of Korea released its systemic Risk Survey identifying top risks to domestic economy. Fed's tapering of bond purchases topped the list with 77%, followed by China's slowdown with 72% and household debt problems with 70%.

***Fixed Income/Commodities/Currencies*** - (AU) Australia MoF (AOFM) sells A$200M in indexed Bonds due 2022; Avg yield: 1.4017%; bid-to-cover: 3.44x - (CN) PBoC to drain CNY46B in 28-day repos (11th consecutive drain) - GLD: SPDR Gold Trust ETF daily holdings rise 4.5 tonnes to 821.5 tonnes (highest since 827.6 tonnes on Dec 13th) - (CN) PBoC sets yuan mid point at 6.1426 v 6.1452 prior setting (2nd consecutive session of firmer yuan setting)

- USD majors are generally range-bound in a quiet Asian session albeit with some modest relative JPY weakness. EUR/USD is in a 10-pip range below 1.3840, AUD/USD tested a 3-month high above $0.9150 before pulling lower, and NZD/USD briefly rose above $0.8560 - up 20pips from the lows. USD/JPY rose about 15-pips from its lows above 102.30, while EUR/JPY and AUD/JPY rose 20 and 30pips above 141.50 and 93.50 respectively.

***Equities*** US markets: - SONC: Reports Q2 $0.07 v $0.06e, R$109.7M v $110Me; +7.1% afterhours - DIS: To acquire Maker Studios, the leading network of Online Video Content for $500M (as speculated); +0.4% afterhours - LLY: Said to have announced a pay freeze this year amid expiring patents for key drugs (Cymbalta, Evista) expected to weigh on sales - financial press; -0.1% afterhours - BOX.IPO: Files S1 for $250M IPO

Notable movers by sector: - Consumer Discretionary: Anhui Anli Artificial Leather 300218.CN -4.5% (FY13 results); Guangdong Advertising Co Ltd 002400.CN +3.7% (FY13 results) - Consumer staples: Kweichow Moutai 600519.CN -3.9% (FY13 results); Foshan Haitian Flavoring & Food 603288.CN +3.4% (FY13 results); David Jones DJS.AU +2.3% (pushes forward merger deal) - Materials: CSG Holding 000012.CN +4.3% (FY13 results); Anhui Conch Cement 914.HK -0.3% (FY13 results); Beadell Resources Ltd BDR.AU -7.4% (production update) - Energy: Ausdrill ASL.AU -1.6% (S&P lowers rating) - Industrials: Jingwei Textile Machinery 000666.CN +8.3% (FY13 results); Sufa Technology Industry 000777.CN +2.0% (FY13 results); Zhengzhou Yutong Bus 600066.CN +1.8% (FY13 results); China Merchants Energy Shipping 601872.CN +1.7% (FY13 results); Shimadzu Corp 7701.JP +2.5% (CapEx and R&D plan); Orica Ltd ORI.AU -2.8% (CEO comments on H1) - Technology: Beijing SPC Environment Protection Tech 002573.CN -8.3% (FY13 results); Ningbo Ligong Online Monitoring Technology 002322.CN -8.9% (FY13 results) - Healthcare: Shanghai Fosun Pharmaceutical Group 2196.HK +1.1% (FY13 results) - Utilities: Tepco 9501.JP -0.3% (halts decontamination system)

Barron's : Big Bank Stock Rally Looks Wobbly on Charts


Big Bank Stock Rally Looks Wobbly on Charts

Bank shares moved higher on the heels of Janet Yellen's inaugural testimony, but the rally may be fizzling.

One of the key sectors of the stock market is the financial sector, specifically the banks. Last week, banks broke out to levels not seen since September 2008 after new Fed Chief Janet Yellen made her remarks following the Federal Reserve's two-day meeting.

On the surface, that was good news for the market as a whole. But two days later, the benchmark KBW bank index (BKX) abruptly ended its rally and closed in the red for the day. Something happened in the market's mind to suggest that the breakout was not real. For investors, it is a new drama – was it a breakout or wasn't it?

Right now, the technicals do not have the answer, although something does seem to be wrong. Here are the signs to watch to figure out the market's true intent.

First, we have to establish just what type of pattern was in place before the breakout attempt. Let's go to the charts.

The bank index moved above resistance from the top of what was arguably a continuation pattern called a cup-with-handle (see Chart 1). It was named for its look of a tea cup with a small, often downward sloping handle, or pause, on the right side. However, the BKX index sports a cup with a rather narrow bottom, not unlike a water glass. Does it matter? In this case, I would say it does not, because the spirit of the pattern – a pullback, rally, pause and breakout – is still there.

Chart 1

Standard & Poor's 500

[image]

There is one more point of importance on the chart. In February, the index dipped below the trendline drawn from the November 2012 bottom, when the index and the market as a whole set an important low. After only a few days, however, it began to rally again and the breakdown failed. In technical analysis, failed bearish signals often become bullish signals and that is what happened here – at least through last week.

But failed signals work in both directions. Should the BKX index fall back below its breakout level of 71.75 it would have a failed upside breakout (the index traded at 72.47 Monday afternoon). While the prospect of a failure of a failure seems to be a hot mess on the charts, we have to accept that the market can and does change its mind. It behooves us to change our forecasts with it.

One of the strengths of technical analysis is helping us figure out very quickly if a forecast was wrong. We are waiting now to see if the current call – an upside breakout – will "stick."

We can look for supporting evidence in related areas. The Select Sector SPDR Financial ETF (ticker: XLF), which includes banks, insurance, brokers and asset managers, also scored a bearish reversal Friday after Thursday's push to new highs (see Chart 2). It is already below its previous high set earlier this month.

SPDR Financial ETF

[image]

However, there is little else on the chart to suggest this ETF has peaked. Relative performance vs. the market is rising. Trendlines and moving averages are still intact. Only volume indicators hint at anything other than a strong sector.

Let's then look at the big picture. Last week, the SPDR S&P bank ETF (KBE) reached the 50% retracement level of its 2007-2009 bear market (see Chart 3). With Friday's high volume bearish reversal, this looks to be a very important juncture for the ETF and the sector.

Chart 3

SPDR S&P Bank ETF

[image]

Again, the evidence is mixed, with signs in the long- and short-term suggesting the current sector breakout is in jeopardy. Even major stocks within the group are in different conditions. For example, JPMorgan Chase (JPM) is holding on nicely to its upside breakout, but Bank of America (BAC) is already down 3.5% from its post-Fed high.

Which side will win?

I think the best clue is the performance of other key sectors and what that means for the market as a whole. For example, homebuilders initially jumped Wednesday on good internal news but gave back almost all of their sharp gains after Yellen's comments. Whereas the banks rallied but stalled, homebuilders fell – and kept going. That is a negative for the stock market.

Tech stocks did not move much on the Fed news last week, but the Select Sector SPDR Technology ETF (XLK) now sports falling momentum and volume indicators. There weren't any breakdowns in the chart, but it certainly is not among the leading sectors over the past two months. In addition, such momentum leaders as Netflix (NFLX) andAmazon.com (AMZN) have broken down sharply. That is another negative for the market.

With key stock sectors falling or weakening, and safety assets such as Treasury bonds rising since last week's Fed comments, the evidence for a weaker stock market is growing. That heavy weight could tip the banking sector back to the downside.

FT : Palo Alto Networks buys Israel’s Cyvera

Palo Alto Networks buys Israel’s Cyvera

Palo Alto Networks, a Silicon Valley security company, has bought an Israeli cyber defence company for about $200m, in a deal that highlights the increasing mergers and acquisitions activity in the sector.
The New York-listed company, whose shares have risen almost 30 per cent so far this year, acquired Cyvera for its products, which help protect against so-called “zero day” attacks. Such cyber attacks take advantage of previously unknown software vulnerabilities.

This is the second acquisition by Palo Alto Networks this year, as one of a new generation of cyber security companies busy consolidating to take on older companies such as Intel Security and Symantec, best known for their antivirus software.
Mark McLaughlin, chief executive of Palo Alto Networks, said the addition of Cyvera allowed the company to provide security to enterprises all the way from the computer network to individual devices.
“For customers, this translates into the most sophisticated and automated threat prevention for the entire organisation,” he said.
The co-founders of Cyvera – Uri Alter and Netanel Davidi – said they were pleased to join Palo Alto Networks to improve the protections it provides on “one of the most vulnerable frontiers of cyber attacks”.
Cyvera is one of the several cyber security start-ups to come from Israel, which has about 5 to 7 per cent of the online security market because government subsidies encourage investment in the sector.
Global investment in cyber security has soared with early stage venture capital funding up by almost 60 per cent last year in anticipation of a dealmaking boom.
Shares in Palo Alto Networks fell 4.9 per cent by the close in New York.

RTR - Shifts in rainfall, not warming pause, slow sea level rise

(Reuters) - Heavy rains from the Amazon to Australia have curbed sea level rise so far this century by shifting water from the oceans to land, according to a study that rejects theories that the slowdown is tied to a pause in global warming.

Sea level rise has been one of the clearest signs of climate change - water expands as it warms and parts of Greenland and Antarctica are thawing, along with glaciers from the Himalayas to the Alps.

But in a puzzle to climate scientists, the rate slowed to 2.4 millimeters (0.09 inch) a year from 2003 to 2011 from 3.4 mm from 1994-2002, heartening skeptics who doubt that deep cuts are needed in mankind's rising greenhouse gas emissions.

Writing in the journal Nature Climate Change on Sunday, experts said the rate from 2003-2011 would have been 3.3 mm a year when excluding natural shifts led by an unusually high number of La Nina weather events that cool the surface of the Pacific Ocean and cause more rain over land.

"There is no slowing in the rate of sea level rise" after accounting for the natural variations, lead author Anny Cazenave of the Laboratory for Studies in Geophysics and Spatial Oceanography in Toulouse, France, told Reuters.

In La Nina years, more rain fell away from oceans, including over the Amazon, the Congo basin and Australia, she said. It is unclear if climate change itself affects the frequency of La Ninas.

Rainfall over land only temporarily brakes sea level rise.

"Eventually water that falls as rain on land comes back into the sea," said Anders Levermann, a professor at the Potsdam Institute for Climate Impact Research, who was not involved in the study. "Some of it goes into ground water but most of it will drain into rivers, or evaporate."

HIATUS IN WARMING

The apparent slowing of sea level rise coincided with what the U.N. panel of climate experts calls a hiatus in global warming at the Earth's surface, when temperatures have risen less sharply despite record emissions of greenhouse gases.

"The slowdown in sea level rise ... is due to natural variability in the climate and is not indicative of a slowdown in the effects of global warming," Nature Climate Change said.

Many scientists suspect that the "missing heat" from a build-up greenhouse gases in the atmosphere is going into the deep oceans as part of natural variations in the climate.

But, because water expands as it warms, that theory had been hard to reconcile with the apparent slowdown in sea level rise.

Sea levels have risen almost 20 cms since 1900. The U.N. panel of climate experts expects an acceleration, with gains of between 26 and 82 cms over 100 years to the late 21st century.

Melting an ice cube with sides 7 kms (4.3 miles) long is roughly the equivalent of adding a millimeter of water to the world's oceans.

Last year, another study said that unusually heavy downpours over Australia in 2010 and 2011 had curbed sea level rise, before a rebound reaching a rate of about 1 centimeter a year globally, partly as water flowed back into the sea.

"It has tailed off in the past 12 months or so" to above 3 mm a year, said John Fasullo of the U.S. National Center for Atmospheric Research who was lead author of the Australia study.

>>> BlackBerry sale to Lenovo killed after firm no from Ottawa

BlackBerry sale to Lenovo killed after firm no from Ottawa
Received part of tax refund early in deal one analyst says "may have saved the company"

BlackBerry tried to sell itself to Chinese computer giant Lenovo last year. But CBC News has learned the company got a firm no when it approached the federal government to find out if the bid would be approved.
At the time, the company was told that either Chinese or Russian investment would be met with stiff opposition. So it abandoned the sale.
But it turned out there was something Ottawa could do to help the beleaguered company. BlackBerry received an early Christmas present from the federal government, courtesy of a remission order – a $696 million US ($767 million Cdn) early payment of part of its tax refund.
The infusion was a boon to the company, which at the time was burning through its cash reserves and attracting investors who were betting big money it would fail.
Another rough year for BlackBerry
Last year was one of crisis for the company, which saw the launch of its much-anticipated Z10 and Q10 phones. But that launch was a flop, forcing the company to take huge writedowns on unsold products and report losses that saw it burn through its previously flush cash reserves.
"It was snowballing pretty out of control," says Peter Misek, a BlackBerry analyst and managing director with Jefferies. "Within the company, within Waterloo, there was devastation and there was glee amongst short sellers.
"It was kind of sad because thousands of people stood to lose their jobs."
In August of last year, the company put itself up for sale. It was at that time Lenovo, among others, started kicking the tires, inquiring about a potential sale. When BlackBerry asked the federal government whether the deal would be approved, Ottawa said no and the possible sale was quickly and quietly killed
By Sept. 20, when the company announced it would lay off 40 per cent of its staff, its cash reserves had plunged to $2.6 billion US, $500 million lower than they were just three months earlier.
At that rate, the company would have been out of money in about a year, as the market was rapidly losing confidence and consumers seemed hesitant to buy new phones from a company seemingly on the way out.
Cash reserves rebounded
By the end of the year, however, BlackBerry's cash reserves had rebounded, and were sitting at $3.2 billion US.
That was in large part due to the backing of one investor – Prem Watsa of Fairfax Financial, who organized a $1-billion US financing effort and brought turnaround expert John Chen on as the company's new CEO.
But another huge chunk of cash – $696 million US – came from an early payment of its spring tax refund by both the federal and Ontario governments last November, in what's called a remission order.
According to BlackBerry's publicly available management discussion and analysis filing, during the third quarter the company "took steps to accelerate the receipt of a portion of the tax refund to which it is entitled".
It arranged with both levels of government to receive the majority of its tax refund ahead of time, and receive the remainder, which BlackBerry estimates at $170 million US ($187 million Cdn), later this year.
According to Misek, that extra payment had a massive impact, saying "it might have saved the company – we might look back in a year or two, whatever BlackBerry becomes, and say that was the day they saved the company".

>>> US Close Dow -0,16% S&P -0,49% Nasdaq -1,18%

Closing Market Summary: Biotechnology Leads Stocks Lower

The stock market kicked off the new trading week on a cautious note with the Nasdaq leading the retreat. The tech-heavy index lost 1.2% while the S&P 500 fell 0.5% with eight sectors ending in the red. For its part, the Dow Jones Industrial Average (-0.2%) held up relatively well.

Equity indices began the session in the green, but quickly slumped into the red as biotechnology continued its recent woes while other momentum names displayed broad weakness. Late-afternoon buying lifted the key averages off their lows, but the Nasdaq could only reclaim a portion of its loss.

The iShares Nasdaq Biotechnology ETF (IBB 239.23, -6.78) settled lower by 2.8% after testing its 100-day moving average (235.61) for the first time since early November. Today's loss widened the ETF's March decline to 9.5%, but the high-flying industry group remains up 5.4% so far in 2014.

The underperformance of biotechnology pressured the health care sector (-1.4%), which spent the entire session behind the other nine groups. Health care was not the only influential sector weighing on the broader market as the consumer discretionary space (-1.0%) lagged throughout the session while technology (-0.4%) did not overtake the broader market until the late afternoon.

Momentum names did their part in keeping the two sectors on the defensive. Amazon.com (AMZN 351.85, -8.77) and Netflix (NFLX 378.90, -27.09) pressured the discretionary space, posting respective losses of 2.4% and 6.7%, while Facebook (FB 64.10, -3.14), Google (GOOG 1157.93, -25.11), andLinkedIn (LNKD 188.14, -8.58) contributed to the early weakness in technology.

Speaking of technology, the sector led the market lower in the morning, but was able to finish the day ahead of the S&P 500 thanks to the relative strength of top-weighted names. Apple (AAPL 539.19, +6.32), IBM (IBM 188.25, +1.58), and Microsoft (MSFT 40.50, +0.34) gained between 0.9% and 1.2% with Apple's strength coming amid reports indicating the company is working on a content distribution agreement with Comcast (CMCSA 50.30, +0.30). In all likelihood, the news exacerbated today's loss in the shares of Netflix.

Even though heavily-weighted sectors lagged, the broader market was prevented from registering additional losses by the relative strength among consumer staples (-0.1%), energy (-0.1%), and financials (-0.2%). Elsewhere, telecom services (+0.3%) and utilities (+0.2%) posted modest gains, but the pair carries little sway over the broader market since it accounts for just 5.5% of the S&P 500.

Treasuries posted modest gains after climbing off their overnight lows. The benchmark 10-yr yield slipped two basis points to 2.73% after hovering near 2.78% ahead of the opening bell.

Participation was in line with average as roughly 714 million shares changed hands at the NYSE.

There was no notable economic data reported today, but some news of note came out of the G7 meeting at The Hague where the G7 nations issued a joint statement, saying they are suspending their participation in the G8 until "Russia changes course."

Tomorrow, the Case-Shiller 20-city Index (consensus 13.3%) for January and the January FHFA Housing Price Index will be released at 9:00 ET while March Consumer Confidence (consensus 78.2) and New Home Sales for February (consensus 445K) will be reported at 10:00 ET.
  • Russell 2000 +1.7% YTD
  • Nasdaq Composite +1.2% YTD
  • S&P 500 +0.5% YTD
  • Dow Jones Industrial Average -1.8% YTD

FT : A Ukraine war would spell disaster for Russia (G.Rachman)

A Ukraine war would spell disaster for Russia

The economic blowback from more military action would threaten the Kremlin leadership

As US President Barack Obama and the leaders of the EU huddle together this week, they will strive to look united and resolved. The reality, as Vladimir Putin knows, is that they are divided and uncertain. The Russian president has moved with a speed and ruthlessness that has left western leaders floundering. Russia swallowed Crimea, in less than a week, with scarcely a shot fired. It has now massed troops on Ukraine’s eastern border – and all that the west has so far offered the Ukrainian military is a supply of US army ready-meals.
But the notion that Mr Putin has notched up a brilliant victory is misleading. In reality, he has gambled dangerously – and he is likely to lose his bet on the use of force. The annexation of Crimea is risky enough. But an invasion of eastern Ukraine would spell disaster for Russia.

Mr Putin’s decision to grab Crimea was a desperate response to a Ukrainian revolution that the Kremlin could neither stop nor control. Rather than go down in history as a weakling who was watching ice dancing in Sochi as Russia “lost” Ukraine, Mr Putin decided to move on Crimea. It worked. Within days, he was enjoying standing ovations in Moscow and soaring opinion poll ratings.
But by grabbing Crimea, Russia has ensured that it will eventually lose Ukraine. If Ukraine is allowed to proceed with elections in May, an anti-Moscow majority is all but assured since the Russian speakers of Crimea will no longer be voting, and the remaining electorate is likely to be radicalised by the Russian threat. The interim Ukrainian government has just signed an accord with the EU – the very development that Russia was striving to prevent in the first place. Despite the carefully engineered display of pro-Russian euphoria in Crimea, the territory’s disgruntled minorities – particularly the Tatars – may well resist incorporation into Russia.
A military move into eastern Ukraine would greatly increase the dangers of a political, military and economic blowback sufficiently powerful to threaten the leadership in the Kremlin. Western military analysts have no doubt that, in the first instance, the Russian army would swiftly overwhelm Ukrainian forces. But recent history suggests that, when the world’s leading powers resort to military intervention against a hostile local population, they almost always suffer a long-term strategic defeat. The swift conventional military victory feels great at the time – but is followed by long-term agony.
Mr Putin, who has lamented that the collapse of the Soviet Union was the greatest “geopolitical disaster of the 20th century”, should know that “disaster” was greatly accelerated by the draining effects of the Soviet war in Afghanistan. Even the mighty US – with the largest economy and the most advanced military machine in the world – was unable to win in either Iraq or Afghanistan.
The cautious, professorial leader in the White House has apparently learnt the lessons of these failed wars far better than his swaggering bare-chested rival in the Kremlin. Of course, the Russian (and American) public get a certain retro thrill from a macho leader who is willing to send in the tanks. But, in time, they end up lamenting his folly.
Why is it that military force has become so much less effective in achieving political goals? Jeremy Shapiro of the Brookings Institution, who until recently worked for the policy-planning staff at the US state department, suggests that changes in military and social technology have made it much harder for invading armies to secure a lasting victory.
Unless the population of the area that has been invaded is tiny – or almost entirely welcoming – an insurgency is likely to develop. Modern-day insurgents usually have weaponry, such as roadside bombs or rocket-propelled grenades, that can inflict steady casualties on an occupying army.
They now also have social media and mobile communications technology that make it much easier to get organised. If the insurgency also has powerful external supporters – as in Afghanistan, Syria and Iraq – it can be almost impossible to subdue.
The Russians have one “advantage” that they could deploy in trying to suppress an insurgency in Ukraine: the willingness to act with extreme brutality that was displayed during the Chechen wars. But the population of Chechnya is only a little more than 1m and the territory lies within the borders of the Russian state. Deploying “Grozny tactics” after an invasion of a sovereign nation of 45m people, on the borders of the EU, would be an entirely different matter.
For that reason, Mr Putin may prefer – for now – to use his military to nibble away at smaller targets, such as Moldova. His tactics in Ukraine could initially be restricted to economic pressure, using the leverage of Russian energy, as well as political destabilisation and bribery. Yet trying to turn its large, western neighbour into a basket case is also not a great long-term option for Russia. Even if Mr Putin is not yet set on an invasion of eastern Ukraine, economic and political warfare could unleash a series of events that would eventually lead to armed conflict.
If Russian troops do go into Ukraine, you can expect initial triumphalism in Moscow – and hand-wringing in the west. But a “show of strength” in Ukraine would ultimately gravely weaken the Russian state.