Trump, Putin, and Ukraine: Part 2

Last week we wrote up what we thought was a successful conclusion to the Trump-European-Ukraine meeting in Washington D.C. ( See: https://shulmaven.blogspot.com/2025/08/trump-putin-and-ukraine-now-comes-hard.html ) Unfortunately, little did we realize that Trump and his hapless special ambassador Steve Witkoff, and Secretary of State Marco Rubio, were played for suckers by Putin. Put bluntly, Putin did not agree to security guarantees from the Europeans to be coordinated by the United States. Putin wants all of the Donbass and no European troops in Ukraine.  

So what is to be done now? The U.S. and Europe should step up arms shipments to Ukraine and greenlight Ukrainian attacks deep into Russia. In addition both the U.S. and Europe should sanction Russia to the max. The attacks have already begun with Russia's energy infrastructure now under long range attack. Gas lines are now forming in Russia. In addition, as we have argued in the past, Ukraine should set ablaze the Russian oilfields in Western Siberia. The path to a negotiated settlement requires Russia to feel real pain putting the ball in Trump's court. Hopefully that will happen.   

The Wall Street Journal follows Shulmaven on Serfdom

 

Sunday, July 27, 2025

On the Road to Serfdom*  (See: https://shulmaven.blogspot.com/2025/07/on-road-to-serfdom.html )

Trump, Intel and the Road to Serfdom

Hayek warned of the danger of government ownership stakes in major companies.  (See: Trump, Intel and the Road to Serfdom - WSJ paywall)

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By 

Daniel J. Smith

Aug. 20, 2025 1:47 pm ET

Trump, Putin, and Ukraine: Now Comes the Hard Part

I have been writing about Ukraine since 2014 (See: https://shulmaven.blogspot.com/2014/03/the-ukraine-what-is-to-be-done.html ) and as recently as last March. (See: https://shulmaven.blogspot.com/2025/03/shame.html ) Yesterday’s White House summit meeting with European leaders and Ukraine President Volodymyr Zelensky reversed the very negative vibes set off by Friday’s Trump-Putin Alaska summit where it was feared that Trump was about to sell out Ukraine. The conversations were both serious and friendly and it seems that there was a real reproachment between Trump and Zelensky.

 

However, the hard part is now ahead of us. It remains to be seen whether or not Putin will actually meet with Zelensky. Today Switzerland offered up its good offices as a meeting site. Should that happen, it would open the way for a trilateral summit with Trump, Putin, and Zelensky.

 

What has to be ironed out is the precise border between Ukraine and the Russian held provinces. That border would have to be defensible, which means that the current Ukrainian position in the Donetsk region would have to be maintained, something that Russia is opposed to. Another question is what the European security guarantee would cover.  For example, would it include troops on ground, air support and rebuilding assistance? Perhaps more important what would be the modalities of the United States’ role as security coordinator. Would it include intelligence sharing, military hardware, and air support? Although Trump has ruled out combat troops, would it allow for support troops involved in training. And don’t forget Putin has a vote in all of this.

 

Nevertheless, for the first time since the war started over three years ago there is a pathway to a settlement. It certainly won’t be perfect because Putin’s aggression would be rewarded, but it will enable Ukraine to be a viable and prosperous state. Remember, diplomacy is the art of the possible.

My Review of Andrew Lambert's "No More Napoleons"

The Balance of Power

King’s College naval historian Andrew Lambert has written an over-detailed evaluation of British geopolitical strategy from 1793-1914. After fighting France for 22 years Britain settled on a strategy of offshore balancing and maintaining order in Europe enforced by the Royal Navy and a small expeditionary force. The initial goal was to prevent a revanchist France from regaining control of Europe. The architects were Prime Minister Lord Liverpool, Foreign Secretary Castlereagh, and the Duke of Wellington. The latter initially as the hero of Waterloo and later as prime minister. Their policies were enhanced by Lord Palmerston as both foreign secretary and prime minister.

Britain’s greatest fear was that a continental power could launch an invasion from the low countries. Hence it was crucial to keep France out of the Scheldt Estuary and the Port of Antwerp. When Belgium split off from Holland the 1839 Neutrality Treaty orchestrated by Palmerston kept France out. The result of that treaty and Britain’s troop presence in Belgium in 1870, kept both France and Germany out of Belgium during their war. This would not be so in 1914.

The linchpin of the strategy was the power of the Royal Navy whose goal was to be at least twice as strong as any two powers. Aside from a quantitative advantage the Royal Navy had the most technologically advanced fleet by taking advantage of steam power, screw propellers, gunnery, and hydrology. The Royal Navy truly ruled the waves and it enabled Britain to become a global power through its colonies, but for that power to be maintained there had to be an offshore balance in Europe.

For most of the 19^th century the policy succeeded largely because France was in a long-term relative decline while Britain was moving to its heights. However, after 1870 Britain entered into a relative decline in relationship to a newly reunified Germany. As a result, it required an alliance with France which severely limited Britain’s freedom of action. Britain learned the hard way in the trenches of France. Given all of Britain’s interest in Belgium, it is a wonder why Germany was unsure about Britain’s entry in World War I after it invaded Belgium.

Although Lambert discusses the 1815 Vienna settlement, he makes little note of Count Metternich of Austria whose interest in a stable Europe was greater than Britain’s. He also does not cite Henry Kissinger’s “A World Restored” on the Congress of Vienna. He also left out a discussion on the 1878 Congress of Berlin where British Prime Minister Disraeli played a leading role in settling, at least for a time, the Balkan question. There is way too much information in this book, and I would only recommend it to history nerds.

 

  

The Wall Street Journal Follows Shulmaven on Socializing the Economy

 Today's Wall Street Journal brought with it an important article by economics columnist Greg Ip entitled "U.S. Marches Towards State Capitalism...." (See: https://www.wsj.com/economy/the-u-s-marches-toward-state-capitalism-with-american-characteristics-f75cafa8?mod=hp_lead_pos5 , paywall) In the article Ip outlines how the U.S. is moving towards state capitalism with Trump's demands for a share of NVIDIA's chip exports to China, the golden share in the U.S. Steel takeover and Biden's industrial policy. In my words, socialism with American characteristics. 

Aside from the over-night news about chip exports, Shulmaven made the same case on July 27th where we added tariffs and Biden's DEI policies. ( https://shulmaven.blogspot.com/2025/07/on-road-to-serfdom.html )Whether we call it state capitalism, socialism or fascism, the result is the same. We are entering a world of state controlled economic activity which in the words of Hayek will put us on "the road to serfdom."

Will AI be a winner Take All Market?

 Much has be written about the explosive growth in capital spending on AI by Google, Meta, Microsoft, and Amazon. (See: https://www.wsj.com/economy/the-ai-booms-hidden-risk-to-the-economy-731b00d6?mod=author_content_page_1_pos_1 , paywall) Those four companies are on tap to spend about $360 billion this year on building out data centers and related investments. Given the high prices of their stocks, market participants are assuming that AI investment will have a huge payoff in the future and are willing to overlook short term declines in free cash flow.

My sense is that investors are underappreciating three risks. The first is that the return on tangible capital will likely be lower than the hitherto high returns on intangible capital earned by the four companies. Second, the bidding war for talent where $100 million payouts have taken place will squeeze margins. Third, and perhaps most important, is that AI will not, at least initially, be a winner take all market. It is likely that AI will be nowhere near as profitable as winner take all Microsoft's operating systems, Google's search, and Meta's social media. 

Why? At the present time there are six highly capitalized entrants in the AI market and many smaller ventures competing for market share. The six are ChatGPT, Gemini, Anthropic, Perplexity, Meta AI, and Grok. Although ChatGPT has the current lead, this is a highly fluid market environment with deep pockets competing for market share. Thus, my guess is that investors will soon be disappointed with the returns coming from AI. The likely beneficiaries of this competition will be consumers and the highly talented employees.

The Guns of August*

One hundred and eleven years ago the guns of August opened fire signaling the start of World War I. Although far from being deadly, the July employment report reeked carnage on the stock market with the S&P 500 declining by 1.6% on Friday while the bond market sustained a massive rally with the 2-year note yields declining by 27 basis points and 10-year yields declining by 14 basis points. The markets are clearly sniffing out a recession.

 

Nonfarm payrolls increased by a meagre 73,000 jobs, but what really spooked the markets was a gigantic downward revision of 258,000 jobs for May and June. Further, all of the gain can be accounted for by healthcare and social services, hardly growth drivers. The three-month average for employment gains of 35,000 jobs is indicative of a stalled labor market. The far more volatile household survey was much worse with the average monthly decline from May to July of 287,000 jobs. My guess is that the administration’s immigration raids are now taking their toll on the job market. The labor market is experiencing simultaneous demand and supply shocks.

 

In March I called for the recession of 2025 to begin in the second quarter. (See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html ) That obviously didn’t pan out, but with real final domestic demand growing at only 1.2% in the second quarter and the job market stalling out, it was pretty close to a recession.

 

The day before the employment data came out, President Trump announced a panoply of tariffs on a host of countries that have failed to make a deal with him. Those tariffs and the earlier ones announced for the E.U. and Japan means that the U.S average tariff rate is now about 19%, eight times above where we started the year. Simply put, Trump called the market’s bluff on the TACO trade an eventuality we noted in June. (See: https://shulmaven.blogspot.com/2025/06/stocks-too-complacent-about-taco-trade.html )

 

As a result, with Trump’s tariffs now baked into the cake and with a stalled job market, the U.S. economy is on course for stagflation. The tariffs will keep inflation as measured by the core price indices above 3% and that will put the Fed between a rock and a hard place, especially because the unemployment rate will remain well contained, at least for now.

 

Adding insult to injury President Trump fired BLS Commissioner Erika McEntarfer because he didn’t like the revisions to the employment data. His big, beautiful economy is not as beautiful as he thought. This banana republic move will lower the market’s confidence in future data coming out for the government’s data mills, not a good thing.

 

Lastly, I have been skeptical of the stock market’s big rally off the April lows. (See: https://shulmaven.blogspot.com/2025/06/my-ucla-anderson-forecast-presentation.html ) My sense is that this skepticism will soon be justified.

*- With apologies to Barbara Tuchman