Posts tagged: geopolitics

Just a quick note about China

I have been hearing about intermittent shutoffs in Twitter for a while, but now it looks as if LinkedIn is being blocked in China. Looks like the Chinese are afraid that the same social networks that are helping overthrow decades of dictatorships in the Middle East will also be used to overthrow decades of authoritarian rule in their backyard. See the story on TechCrunch: http://tiny.cc/qcizm. As I mentioned yesterday and prior, Asia is the marginal buyer that I am keeping my eye on for the next pressure point for world markets. There’s a good chance the Middle East is only a precursor.

Nothing to add

The US markets are closed for Presidents Day – and what a day it is. There are endless stories going around about Qaddafi escaping to Venezuela with gold and what-not in tow. I don’t know. I have no good sources for that kind of information. What I do know, is that our concentration in precious metals and energy was prescient. I have continually written that geopolitical risk and global social unrest are being underpriced – and I continue to believe that. Industrial commodities, which depend on marginal demand staying high and rising (read: China) seem to be a risky speculative punt right now. Copper is only a NEED when housing is ramping up alongside production. Right now, it’s just a want. The 4 staples (wheat, corn, soy, and rice) along with energy, are the NEEDS. Meanwhile, safe havens are becoming NEEDS as well. Silver is hitting $34 and heading towards the all-time Hunt-brothers high of $50, except this time, it’s widespread. Gold, too, is heading up. I’m just holding (remember, we ended up allocating our precious metals portfolio to gold, silver, platinum, and palladium, along with some gold miners).

Lastly, equity-land should start shuddering a little. Aside from the market going higher on ever decreasing volume, the fundamentals and prospective fundamentals (with decreasing margins) are horrible. When the coming correction finally arrives, pundits will talk about the triggers as black swans. While no one I know could have predicted the specific order of events, social unrest and instability was a given. In fact, I think it could go further, as dictatorships and extreme market manipulators face increased pressure. This will be a direct threat regimes in Africa as revolts start spreading southward, to the Chinese political power structure, and South American strongmen. We’ll just have to see how it plays out.

Relevant ETFs: PALL, PPLT, GLD, GDX, SLV, PHYS, PSLV, USO, XLE, NLR, KOL

Geopolitics for breakfast

Asian markets are open already, but European and later US investors, will get some more geopolitics for breakfast.

South Korea is down just over 1% as I write this, mostly over tensions with North Korea, military exercises, etc. When money gets tight, tensions run high. I think this is only the beginning of world flare-ups. Shanghai, is down 3%, with property and bank shares leading the charge. How many times can I write about property and finance companies being a sham in China before investors realize they will not get paid for the risk of Chinese investments. If you’re not local and tapped into the bureaucracy, stay away at these valuations!

In the meantime, the euro is ticking lower and I am guessing that it breaks the 1.30 handle before everyone goes away for Christmas. Which brings me to another thought of the evening…

Everyone is expecting a slow, boring week, and the volumes will probably reflect that. But what if they’re wrong? For those who fly, you’ll understand the following analogy: the most dangerous times in a flight are the take-off and landing. The next two weeks are the landing for 2010. Thinner volume, ridiculously low-priced VIX, 6-sigma currency vol, rising bond yields, etc. all lead me to want to buy insurance. I’m already so underweight equities, and short so many asset classes, that I’m not adding to anything, but new funds would definitely be searching for insurance at these levels.

GDP is out and disappointing, but that’s not what is important today…

Let’s start with the GDP report:

The Bureau of Economic Analysis reported today that U.S. real GDP grew at an annual rate of 2.0% during the third quarter.

Read the breakdown at Econbrowser.com.

But quite honestly, the market doesn’t care and neither should you. Why? Because this market is being kept in tact until after the election: POMO, China talks, whatever can keep the market from going where it will eventually go.

And then, there’s the geopolitical. As I write this, I see the headline flash on CNN that a bomb was found on a UPS flight from Yemen. Additionally, the TSA is investigating other cargo planes. No news on it yet, just a headline, but certainly more important than the unexciting GDP numbers.

Thai stock exchange –

Heads up for Monday: Thai stock exchange down almost 4% as of this writing. Remind me again: what happened the last time Thailand’s markets went haywire? Oh yeah, some big hedge funds got screwed, got bailed out, and Goldman made a lot of money. Let’s see if it has any impact this time around – probably not given how the market has been reacting to bad news lately.

Upheaval Likely To Weigh On Thai Stocks

4/11/2010 9:50 PM ET

(RTTNews) - The Thai stock market moved back to the upside again on Friday, one day after the end of the modest two-day winning streak in which it had gathered more than 10 points or 1.2 percent in the process. The Stock Exchange of Thailand finished just below the 790-point plateau, but now investors are likely to stay on the sidelines until the current domestic upheaval is sorted out.

At least 21 people have died, including a Japanese cameraman, and more than 900 injured in violent clashes that occurred in Bangkok over the weekend, as the Thai army tried to retake areas from anti-government protesters. The Thai Army launched a crackdown on anti-government protesters in Bangkok leading to clashes.

During the protest Thai troops fired rubber bullets and tear gas at demonstrators, while anti-government protesters fought back with petrol bombs and grenades. After hours of violence, army spokesman Sansern Kaewkamnerd said troops would pull back and avoid confrontation while the government seeks negotiations with the protesters.

Protesters have been demonstrating for weeks, demanding that Prime Minister Abhisit Vejjajiva to dissolve Parliament and call new elections. Now media reports suggest that the government may call for new elections in six months – three months earlier than expected. The protestors continue to insist on an immediate withdrawal.

For the full article, click here.

Geopolitics – Are they priced in?

The stock market as a discounting mechanism has definitely been implying that things in the world are getting less risky. But are they? Earlier today, as ship off the coast of South Korea, in disputed waters sank. No one know for sure what’s happened yet, but it’s a good opportunity to posture some scenarios. If North Korea did fire on South Korea (http://www.cnn.com/2010/WORLD/asiapcf/03/26/south.korea.ship.sinking/index.html?hpt=T2) would the market go down? If tensions with Iran, or Israel, or Russia, or any of the “-stans” heat up, would the market feel comfortable that it had already anticipated these moves? There are so many cross currents at this juncture that it often feels difficult to keep track.

We tend to go back to valuations, so we already feel that the market is overvalued as we’ve outlined before. However, I’d like to posit that part of what makes the market overvalued is that it is specifically NOT assigning any uncertainty to the world stage, when in reality, it should. Aside from the protectionist talk all around (CNY reval for example, Russia/nat gas/Europe, Germany threatening Greece, etc.) there is additional risk from the political front that is more difficult to quantify and therefore to take into account, but it doesn’t make it any less real.

We’ll write more about it this weekend.

Geopolitics…

Does anyone remember Iran? The oil markets do. They’re back pushing $80. At some point, sounds like it might be in the near future, the geopolitics in the area will once again come to the front burner. I guess once Tiger is off the air.

http://www.latimes.com/news/nation-and-world/la-fg-iran-nukes19-2010feb19,0,4731330.story

2009 in Review: The Year of Obama (from Stratfor)

This report is republished with permission of STRATFOR

By George Friedman

President Barack Obama’s speech in Oslo marking his receipt of the Nobel Peace Prize was eloquent, as most of his speeches are.

It was also enigmatic — both for its justification of war and for his speaking on behalf of the international community while making clear that as commander in chief, his overarching principle is to protect and defend the United States.

In the end, it was difficult to discern precisely what he meant to say. An eloquent and enigmatic speech is not a bad strategy by a president, but it raises this question: At the end of his first year, what precisely is this president’s strategy abroad? Ironically, it is useful to consider Obama in the light of the last president who dominated and defined his time: Ronald Reagan, a man as persuasive, polarizing and enigmatic as the current president.

These two men share much, including charisma and a desire to revive American power abroad. But Obama is about to diverge from this parallel. Whereas Reagan chose to reassert American power to bring U.S. allies back into line, Obama seems to be choosing to rejuvenate American alliances to revive national power. And this choice constitutes the largest foreign policy risk to his presidency in the months and years ahead.

A Year of Presidential Dominance

Obama dominated 2009 as no freshman-year president has since Reagan. As with Reagan, the domination came not only from character and charisma but also from deep public disappointment with his predecessor.

Reagan succeeded Jimmy Carter, who was seen as having led the country into the double miasma of a major economic crisis and a global crisis of confidence in the United States. The Iranian hostage crisis of 1979-1981 raised the question of the limits of American power and the extent to which U.S. allies could count on American power. The 1979 Soviet invasion of Afghanistan drove home the diminished state of American power, as the United States seemed incapable of responding.

George W. Bush very much paralleled Jimmy Carter, as different as their respective ideologies seemed. Like Carter, Bush’s presidency also culminated in a grave economic crisis, while his foreign policy had created deep distrust worldwide about the limits and effectiveness of U.S. power.

It is ironic in the extreme that both Reagan and Obama ran on platforms emphasizing the need to do something about Afghanistan and castigating the prior president for alleged fecklessness with dealing with it. At some point, someone should write a history of the last American generation and its Afghan obsession. This has become a symbol of our times, and not for obvious reasons.

Reagan vs. Obama

The similarities and profound differences between Reagan and Obama are a good starting place for understanding the last year. Reagan took office in a powerful country that seemed to have lost its confidence, and he saw his mission as restoring both American self-confidence in its global mission and its appetite for pursuing it.

To Reagan, the American-led anti-Soviet alliance was in jeopardy not only because of the Carter presidency but also because of Gerald Ford (whom Reagan had challenged for the nomination in 1976) and ultimately because of Richard Nixon. They saw the United States as a declining power and sought to manage that decline. Reagan intended to preside over the reassertion of U.S. power and global leadership.

The Obama presidency is partially a reaction to Bush’s response to 9/11. Obama argued that the war in Iraq was not essential and that it diverted American forces from more important theaters, particularly Afghanistan. Like Reagan, Obama feared the fate of the American alliance system, though for very different reasons.

Whereas Reagan feared that unwarranted American caution was undermining the confidence of the alliance, Obama’s view has been that excessive and misplaced American aggressiveness was undermining its alliance, and weakening the war effort as a result.

Both Reagan and Obama set about changing the self-perception of the United States, and with it the perception of the United States in the world. Neither was uncontroversial in doing this. Indeed, critics vilified both for what they did, frequently in extraordinarily vituperative ways.

Surging Then Sagging Popularity

The controversy of each president has been rooted in a shared fact: Neither won the presidency overwhelmingly. Reagan took 50.7 percent of the vote, but Carter lost by a large margin because of third party candidates. Obama won with 52.9 percent. Put another way, 47.1 percent of the public voted against Obama and 49.3 percent voted against Reagan.

Both surged in popularity after the election and both bled off popularity as the rhetoric wore thin, economic problems continued and actions in foreign affairs didn’t match promises. Reagan fought a brutal battle for tax cuts to stimulate the economy and was attacked by Democrats for greatly increasing the deficit. Obama fought a brutal battle for more spending and was attacked by the Republicans for greatly increasing the deficit.

As a result, Reagan suffered a sharp setback in the 1982 midterm elections as Republicans lost seats in the House of Representatives. Reality overwhelmed rhetoric, and Reagan’s rhetorical skills even began to be used against him. But over time, as the economy recovered, Reagan began to gain ground in foreign policy. There were many failures to be sure, but Reagan succeeded by aligning his policies with geopolitical reality.

The United States was enormously powerful, regardless of psychic wounds and poorly deployed resources. The Soviet Union was much weaker than it appeared to those who feared to challenge it. Reagan did not try to change this reality; instead, he crafted policies that flowed from this reality. For all his mistakes, this made him both a two-term president and one more fondly regarded today than he was in his time.

Repudiation vs. Continuity

This is where the difference between Reagan and Obama begins to emerge, and the two men as historical figures begin to diverge.

Reagan repudiated his predecessor’s foreign policy and understood that by flexing American power, the allies would regain confidence and fall back into line. By contrast, Obama has taken a different turn — and is traveling a much more difficult road. He has retained a high degree of continuity with his predecessor’s policies while seeking to resurrect American power first through popularity in order to get allies to cooperate. This is a complicated proposition at best.

With Iraq, Obama continues the Bush policy of phased withdrawal subject to modification. In Afghanistan, the president has carried out his campaign pledge to increase forces, continuing the war that began in 2001, again with a timetable and again subject to change.

With Iran, Obama continues the Bush policy of using sanctions while not taking any other options, like war, off the table. With Russia, Obama has maintained the position the Bush administration took toward NATO expansion to Ukraine and Georgia, as well as resisting Russian attempts to dominate the former Soviet Union. With China, Obama’s position is essentially the Bush position of encouraging closer ties, not emphasizing human rights and focusing on tactical economic issues.

This continuity is combined with a so-far successful attempt to create an altogether different sensibility about the United States overseas. Obama has portrayed the Bush administration as being heedless of international opinion, whereas he intends to align the United States with international opinion. This has resonated substantially overseas, with foreign publics and governments being far more enthusiastic about Obama than they were about Bush.

As a result, the president has been particularly proud of the number of nations that are part of the Afghan war coalition, which he puts at 43. The Iraq war saw only 33 countries send troops, substantially less than Afghanistan but still not indicative of isolation. But in both cases this use of popularity as power is illusory. In many cases the numbers of troops sent are merely token gestures of goodwill.

Nevertheless, there is no question that Obama has managed to generate far more excitement and enthusiasm about his presidency overseas than Bush did. This is the marked achievement so far and it is not a trivial one. His goal is to create an international coalition based less on policy than on a perception of the United States as more embedded in the international community.

The question is: Will this gambit succeed? And if the answer is yes, the next question is: What does he plan to do next? Reagan intended to change the U.S. perception of itself to free him to conduct a more aggressive and risk-taking foreign policy. His view of the world was that the American perception of itself was irrational and limiting and that by lifting the limitations, American power would surge.

Obama’s strategy thus far is to change the perception of the United States in foreign countries while at the same time conducting a foreign policy imposed on him by geopolitical reality, much as it imposed itself on Bush. Obama’s problem is that the perception he has deliberately generated and the actions that he has taken are at odds. What will the allies offer him, for instance, if he has simply resurrected American popularity — but not changed U.S. policy?

Indeed, significant policy changes so far have not succeeded. Openings to Iran and Cuba have not been reciprocated. The opening to the Islamic world has not revolutionized U.S. relations in the region. The Russians are deeply suspicious of Obama, as is Eastern Europe. The Chinese find it hard to see a difference. The major impact has been in Europe, in particular Europe west of Poland. But even here there is a difference between popular enthusiasm and the unease of governments, particularly in Germany.

The Obama Paradox

And so it is in Europe that Obama’s strategy will face its defining moment.

In Europe, two goals are at odds. For the Europeans, a definitive, new era is one in which the United States will stop making demands on Europe to support foreign adventures and, ideally, stop engaging in foreign adventures except with European approval.

Obama expects that the Europeans, when approached, will be far more willing to join the United States in foreign adventures because their perception of the United States is more positive.

This is the deep paradox of Obama’s foreign policy, which he expressed in Oslo as he accepted the peace prize and went on to make the case for just war and for sanctions against regimes like Iran. In the coming months, three questions will manifest themselves. The first is: Will the Europeans shift from greater control over U.S. actions and less risk to less control and more risk? The second is: What will the president give them in exchange? How much control will pass to them in a consultative foreign policy? The third: How much active support for the Untied States are the Europeans able and willing to bring to bear?

After all, the reality is that the American president who just accepted the Nobel Peace Prize is engaged in multiple wars and a confrontation with Iran. Europe’s good wishes have some value, but not the same as material engagement. Indeed, it is not clear why foreign states would embrace Bush’s foreign policy conducted by Obama, simply in exchange for consultation. The Europeans will want more.

Aligning Foreign Policy and Geopolitics

Reagan’s foreign policy was elegant and aligned with geopolitics. It sought to create a domestic surge in self-confidence in order to support larger defense budgets and a more aggressive policy toward the Soviet Union. Reagan’s read of the situation was that the United States was stronger than had been thought and the Soviets were weaker. He had many problems along the way: economic setbacks, scandal, etc., and his popularity shifted. But his thrust was clear.

What is inelegant, though, in Obama’s foreign policy is the relation between continuing many of Bush’s old policies while improving America’s image overseas. Continuity is understandable: Geopolitics deals the cards and the choices are few. The utility of the popularity is important; it can only help. What is unclear as he enters his second year is the relationship between the two.

Most presidents do not fully define their strategy in the first year. But those who do not in the second year tend to run into serious political trouble. Obama has time, but not much. He must show the hand he is playing, or invent one, fast.

This report is republished with permission of STRATFOR

Foreign Policy Magazine – Top 10 Missed Stories

Foreign Policy Magazine recently published its list of underreported, underappreciated, under-read stories…here’s a preview:

  1. The Northeast Passage Opens for Business: Look for conflict over borders, national alliances, resources. The main players so far: Russia, US, Canada, Denmark.
  2. Iraq’s New Flashpoint: Even though it’s not reported anymore, tensions still run high between Sunni, Shia, and Kurdish interests.
  3. A Hotline for China and India: Sounds nice to think of a direct link between two nuclear superpowers, but the motivation is from fear of being too quick to draw. Main area of conflict is Tawang, a region claimed by India and China (through Tibet). What ever happened to the Free Tibet movement?
  4. A New Housing Bubble? “The government’s solution to the housing crisis might, ironically, be causing the new problem, by encouraging irresponsible home buying by people who aren’t able to afford it.” Yup.
  5. The ‘Civilian Surge’ Fizzles: This will be interesting in light of the military surge in Afghanistan.
  6. The Beijing-Brazil Naval Axis: Beijing is practicing using a Brazil aircraft carrier. Surprising? Nope. China is building up it’s naval capabilities and Brazil needs to find new partners, so looking to one of it’s largest trading partners is no surprise.
  7. Dead Man Gets Passport: just embarrassing, especially as I watched a few older women getting frisked at the airport over the Thanksgiving holiday.
  8. Chechen Murders Go Global: Russia, Russian gangsters, Russian politicians, and Russian politics continue to be some of the scariest things out there, with a global reach, and awful power.
  9. America Joins Uganda’s Civil War
  10. A ROTC for Spies: CIA sponsors classes and people. Next up, CIA will be buying kegs for new recruits. Maybe the CIA should take a look at how Osama recruits for some ideas. All joking aside, having the CIA identify potential candidates earlier sounds like it might have some potential.

http://www.foreignpolicy.com/category/section/the_list

Obama to Iran: It’s OK if you go nuclear, just make sure its peaceful

Obama campaigned on talk and now he is delivering, on the “talk” that is. This is the headline from cnn.com: “US to Iran: Prove your nuclear program is peaceful”. In yesteryear, the US stated that we will not allow a nuclear Iran. Sadly, the US has made a huge turn. We wrote on this was coming when Hillary Clinton mentioned that the key to stability was a defense shield in the region. This implied to us that the US stance was one that was OK with Iran developing nuclear capabilities while at the same time developing a defense strategy. At the time, we were suprised that the US was taking such a reactive stance, and disappointed that we weren’t pursuing an aggressive, multi-faceted approach to ensure that Iran did not reach nuclear status. So by now, I can’t say I’m surprised that what Obama wants is just to send in monitors after Iran goes nuclear.

Most of the current administration are alumni of the Clinton team. They are using the same blueprint they used for North Korea. Monitor, let some things slide, and hope the  problem is not as serious as analysts predict. Of course, North Korea now has nuclear weapons, the monitors are long gone, and our ability to stand up to North Korean aggression, human rights violations, etc. are forever diminished.

What does this mean? For starters, it means Israel might be forced to act alone. The ramifications of that are unknowable. Certainly the world will cry out and criticize. However, most of Iran’s neighbors hope Iran doesn’t go nuclear for fear of changing the balance of power. Second, most of the west nations hope they don’t need to deal with a nuclear Iran and the prospect of nuclear terrorist organizations it supports. So all in all, everyone will probably be happy but act mad. I hope, that’s the worst of it.

http://www.cnn.com/2009/POLITICS/09/27/us.iran/index.html