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It's All About Jobs
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By John Mauldin
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April 7, 2012


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Today's employment numbers were decidedly soft, but the unemployment rate went down anyway, and that is about the best you can say. And this being a holiday weekend, it provides us an opportunity to look deep into the employment numbers, while we put off thinking about Spain for at least a week. And who knew that being an unmarried Asian-American in the US was a risk for unemployment? Plus a few other interesting items will make for an interesting letter.
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Just Trying to Keep Up



March saw "only" 120,000 jobs created. Expectations were for 200,000 new jobs. It wasn't all that long ago that any positive number would have been seen as good, but with the last six months averaging 200,000 jobs, this was disappointing. It gives force to the worry that once again we could see the employment numbers get soft during the spring and summer. And adding to interest in the topic, the employment numbers will take on a decidedly political tone this summer, as every poll shows that jobs and the economy is the #1 thing on voter's minds. This will be underscored only four days before the presidential election on Tuesday, November 6, as the jobs report for October is scheduled to be released on Friday, November 2. Think that one won't be analyzed more than usual? I keep writing that the current release is adjusted so often that it is hard to see more than a trend in the actual monthly releases, but that will not keep pundits from using the release to support their candidate with all the spin they can muster.



There is reason to believe that today's lower number was partially due to the weather being so good in the earlier part of the year, so that what is usually seasonal employment started earlier than is typical; so it might be better to average the last two months, which is still disappointing in that it barely stays ahead of population growth. At this rate it will be another three years before we get back to new employment highs, and that does not factor in any population growth. And it also assumes there is no recession in the meantime. Given that the US must start at some point to get its budget balanced, there is little hope that more government spending (aka stimulus) is on the way.



The Bureau of Labor Statistics churns out a massive amount of data each month. Let's look at one table and then discuss what we see. This is Employment Situation Summary Table A of the Household Data report, seasonally adjusted.
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First, the unemployment rate fell by 0.1%, to 8.2%. But we see that the number of people who are actually employed dropped by 31,000, so how can the unemployment rate fall? Because the number of people looking for a job dropped by 164,000. If you aren't looking for a job, you are not considered unemployed. Thus the participation rate, or the number of adults either working or looking for work, dropped by 0.1% to 63.8%.



Note that this table shows 133,000 new jobs. This is the HOUSEHOLD report, which is the report created from a survey of households. The 120,000 new jobs number is from the ESTABLISHMENT report, which is a survey of established businesses, plus a guess as to the number of jobs created from new businesses that have been born in the last month, also known as the birth/death ratio. This month the birth/death number added 90,000 new jobs to the total number. The B/D ratio is a very volatile number. It is based on data from the last five years and is projected forward. Again, the unemployment number is taken from the household survey, and the new jobs number is taken from the establishment survey. While you can get a new jobs number from the household survey, it is notoriously volatile and essentially useless as a month to month indicator. As an example, it was 428,000 in February. Variations can run in the high hundreds of thousands month to month.



But over time the household survey gives a pretty good picture and eventually comes quite close to the establishment survey, although there are often some major adjustments after a year or more that help bring the numbers into alignment with the actual numbers that come in from tax data.



Now, let's look at a few other items. You can find employment by age, race, education, and gender. This page has a summary, although you can get very detailed data if you want to. For instance, this month we find that those with a college degree have a 4.2% unemployment rate, while 12.6% of those who did not finish high school did not have a job. Teenagers have a 25% unemployment rate. That number falls with each ten-year increase in age, until we get to those who are over 55, who are down to only 6.2% unemployed. Women have a lower unemployment rate than men at all ages.



Married men and women (spouse present) seem to fare better, with an average unemployment rate of 5.2%. The graph below shows us that married men tend to lose jobs faster during a recession but also get back to work quicker. I guess it helps you find a job if you have someone reminding you to go to work every morning.
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If you had never been married you had a 12.5% chance of being out of work in March. For what it's worth, Asian-Ameroicans seem to do slightly better in most categories than whites, while African-Americans have almost twice the unemployment levels. Hispanics are about halfway between whites and blacks across the board. One odd thing that stuck out was that married white couples have a lower rate (5.3%) than Asian couples (6.2%) while never-married whites are unemployed at 10.5% and Asians at 9.2%. I am sure my readers, both Asian and white will have all sorts of anecdotal reasons for this, but even though I have Asian daughters and black sons (adopted, for those who wonder how), I don't get that one. You can find more data than you want to think about here



Participating in the Labor Force



Earlier we talked about the "labor-force participation rate." This is the percentage of working-age persons in an economy who are employed or are unemployed but looking for a job. Typically "working-age persons" is defined as people between the ages of 16-64. People in those age groups who are not counted as participating in the labor force are typically students, homemakers, and people under the age of 64 who are retired.



Let's look at three graphs from the St. Louis Fed FRED database. The first is the participation rate of men since the late '40s, and the second is the participation rate of women.



The first graph shows the participation rate of men falling consistently since the 1950s and then plunging since 2007. This is a 20% drop overall. Contrast that with the significant rise of women in the labor force until about 1995 and the gradual decline since 2008. In the United States the average labor-force participation rate was usually around 67% (since 1990) until the recent recession.
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Let's look at one last graph of the total participation rate, but this time it will not be seasonally adjusted. Note the very large seasonal volatility in the number. This was especially true when they began collecting the data in the late '40s, but the seasonal variation has lessened with time; and since the recession it has fallen back to where it was in the late '70s. This just demonstrates in yet another way that more people want a job than can find one.
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Just as disappointing as the total new jobs this month was the average work week fell, especially in manufacturing. This does not bode well for the next few months. Interestingly, the average wage for manufacturing is now 2% below the wages paid in the service industry.

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Some Good News on Employment


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Looking elsewhere, we can find some good news on employment. The polling company Gallup produces its own household survey each month. Gallup does continuous daily polling all through the month, while BLS takes a sample week in the middle of the month. While the Gallup overall unemployment number was at 8.4%, higher than that of the BLS, it did drop sharply in the last half of the month. And if they use the same seasonal adjustment the BLS uses, the number drops to 8.1%. Both are down sharply over the last month, and Gallup noted that most of that drop was in the last two weeks.


Gallup makes the following comments at the end of its release this week here. 


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"… The March and January rates are the two lowest since Gallup began monitoring and reporting unemployment in January 2010. They are also consistent with Gallup's other behavioral economic data for March showing a new high in Gallup's Economic Confidence Index and a post-recession high in its Job Creation Index as well as strong consumer spending.



"While the sharp drop in the U.S. unemployment rate during recent months is clearly good news, it raises some significant economic questions. Traditional economic analysis raises the question of why the unemployment rate is falling much more rapidly than can be justified by the modest pace of current economic growth. Answering this question is essential to determining the sustainability of the declining trend in unemployment.



"Federal Reserve Board Chairman Ben Bernanke made this issue the centerpiece of his recent speech to the National Association for Business Economics, noting, 'the better jobs numbers seem somewhat out of sync with the overall pace of economic expansion.' He went on to explain his hypothesis that companies shed many more jobs than necessary during the recession and financial crisis of 2008-2009, and now they are correcting their workforces for this understaffing of the past. The chairman went on to suggest that achieving further declines in the unemployment rate is likely to require a more rapid pace of economic growth going forward.



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"If Bernanke is right, then the rapid decline in the unemployment rate might be approaching its end as individual businesses achieve a right-sizing of their workforces. Further, traditional economics also suggest that many people who have been sitting on the sidelines waiting for the economy to improve might decide that now is the time to seek a job, increasing the baseline figure used to calculate unemployment. In turn, this could keep the unemployment rate from decreasing or even send it higher, negatively affecting economic confidence and the overall economynot good news for political incumbents, including the president.



"On the other hand, the economy might continue to build on the momentum indicated by the current positive trend in Gallup's behavioral economic data, or perhaps the economy is already growing faster than the current economic data suggest. Either way, if true, the unemployment rate could fall below 8.0% in the not-too-distant future – particularly if the workforce does not growmeaning good things for the economy, incumbents, and the president's re-election effort."


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Gallup had one more chart that does not bode as well for political incumbents, although even here they find a bright spot in the direction of the data. We will close with this. Gallup's US underemployment measure combines those unemployed with those working part-time but looking for full-time work. As a result of sharp declines in both of these groups, the underemployment rate, on an unadjusted basis, fell to 18.0% in March from 19.1% in February 2012. The underemployment rate declined to as low as 18.0% last July before reversing course in August; it also increased from November through January. This compares with the BLS U-6 unemployment rate of 14.5%, which is the rate of unemployed plus those who are part-time but want full-time work.
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Employment and the economy in the US are getting better, just not as fast as we would like. And the world is still vulnerable to a renewed crisis in Europe, which seems to be coming back around. David Kotok notes that Greece is "in a downward death spiral." He continues:



"The private losses on Greek debt are mostly taken. The government/institutional/official losses are in the hands of politicians and still lie ahead. The Greek economy shrinks as the debt burden grows. This perpetual subsidy from others is on an unsustainable collision course with eventual Greek financial collapse. Meanwhile, 92 members of the Greek parliament have offered amendments to water down the austerity budget (hat tip to Barclays). The Greek prime minister vows to defeat all of them. Next week Greece will announce its bank recapitalization plan. Those banks that are deemed 'viable' will be able to gain financing from the ECB. Those that are not will need to fund liquidity from the Greek central bank under the Emergency Liquidity Assistance (ELA) program (hat tip to Credit Suisse). Note that ELA lending is central bank advances with lower-grade collateral. The Greek tragedy continues.



"We are tracking ELA balances in every euro zone country. It is not easy to do. The central banks of the 17 euro zone nations do not break it out in a single available figure. They also report with a lag. There is little reporting consistency among them. Greece has only revealed its ELA balance through November. We estimate it was about 40 billion euros then, up from about 7 billion in July. We have no idea what the balance is today. The European Central Bank could separately identify each country's ELA balance but chooses not to do so. Why not? Consider this: would you deposit your money in a bank that was in a national system with rising ELA? Not if you are sane. The flip side is that Eurozone folks have to guess. So they move money faster than they otherwise might and cause a bank run and an increase in that country's ELA. It is always better to cut off a small loss and be forthright about it than to maintain a growing loss and try to hide it. But politicians do not know how to learn that lesson." Indeed. That seems to be the one consistency across nations. Politicians never learn until it is too late, and even then.



I hope you have a great week as well!


Your really an optimist at heart analyst,


John Mauldin
John@FrontlineThoughts.com

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Copyright 2012 John Mauldin. All Rights Reserved.


Up and Down Wall Street
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SATURDAY, APRIL 7, 2012
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What the Bard Would Ask Ben
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By RANDALL W. FORSYTH
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Last week, the wind shifted again, after release of the minutes of last month's FOMC meeting, which showed that support on the panel for a third round of quantitative easing had dwindled to just "a couple" of members— from "a few" at the previous confab.



QE or not QE? That is the question.

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In Hamlet-like fashion, the financial markets have been contemplating the possibilities of further Federal Reserve securities purchases, which central banks prefer to call "quantitative easing"—instead of the less formal but more descriptive term of money-printing.



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After QE1 was launched at the depth of the financial crisis in March 2009, QE2 was floated at the end of August 2010 by Fed Chairman Ben Bernanke and set sail the following November. While there's no QE at the moment, the Fed is rearranging the deck chairs in its portfolio in what it's calling Maturity Extension Program, swapping shorter notes for longer-term notes and bonds and mortgage-backed securities.



All of these maneuvers were aimed at engineering ultra-low interest rates, which are supposed to provide some steam to propel the thus-far sluggish economic recovery.



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In the past few weeks, expectations about a new round of quantitative easing, QE3, have switched back and forth with the latest shift of the economic winds.


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After the March 13 meeting of the Federal Open Market Committee, the wording of the panel's policy statement seemed to lower odds of QE.


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Then came an unprecedented public-relations blitz by Bernanke, featuring a positive cover story in the Atlantic; a series of lectures to economics students at George Washington University, which were Webcast for the public's perusal; a major policy speech to the National Association for Business Economics on March 26, in which the Fed chief voiced concerns about the strength of the labor market; and finally, an interview with Diane Sawyer on the ABC Evening News the following day.



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All those appearances provided Bernanke with forums to emphasize his view that the Fed shouldn't be too quick to move away from its ultra-easy policies—a view that had begun to attract increasing opposition from some economists and financial-market watchers as well as some Fed district presidents.




Last week, the wind shifted again, after release of the minutes of last month's FOMC meeting, which showed that support on the panel for QE had dwindled to a just "a couple" of members from "a few" at the previous confab.



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Global markets cratered in reaction to the prospect of no further monetary juice, with equity markets falling from 1% Wednesday in the U.S. to more than 2% in Europe and Asia, with financials the hardest hit.



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But the winds reversed again Friday, after the U.S. Labor Department reported distinctly punk employment data for March. But most bourses were shuttered for the Good Friday holiday, except for equities futures trading through 9:15 a.m. Eastern daylight time, 45 minutes past jobs report release, while trading in bonds carried on until noon.


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While there were relatively few around to hear the proverbial tree fall, the data did send reverberations. Stock futures lost more than 1%, while Treasury yields moved sharply lower to reverse nearly all of the their previous jump, kicked off in the wake of the March FOMC meeting. In other words, sentiment has all but come around full circle in the space of about three weeks.



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What caused the reversal was news that nonfarm payrolls expanded by only 120,000 last month, far short of the 200,000-plus prognostications, with even more weakness apparent below the surface. Work-week hours edged down, as did aggregate hours worked, which offset the positive impact on pay packets from a 0.2% uptick in average hourly earnings.



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Philippa Dunne and Doug Henwood of the Liscio Report note that temporary hires shifted into reverse last month, to minus 8,000 from up 55,000, while retail jobs shrank another 34,000 in March on top of February's 29,000 drop.



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Government employment fell by only 1,000, as the widespread sacking of state and local workers appears to have been halted. Let's see what happens when a new fiscal year begins July 1 in most states, and budgets have to be balanced and deficits closed, again.


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Even the one ray of good news, a one-tenth percentage-point downtick in the unemployment to 8.2%, had plenty of clouds around it. That wasn't caused by more folks finding work, but a 164,000 shrinkage of the labor force in the household survey.


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Paul Kasriel, Northern Trust's chief economist, alerts us that this wasn't because of "discouraged" or "marginally attached" workers who dropped out of the labor force. Even adding them back in, the jobless rate dipped, he points out. Still, the labor-force participation rate dropped 0.1 percentage point, to 63.8%, and the percentage of the population employed slipped to 58.5%. Demographics explains part of that, with baby boomers moving into retirement,including Kasriel in a few weeks!



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Be that as it may, Bank of America Merrill Lynch economists note that, even while the headline jobless rate is down substantially from the peak of 10% in late 2009, the employment-to-population rate has been flat for the last three years. "Chairman Bernanke has focused on this metric because it gives a better sense of labor-market slack," they write.



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And for all the apparent collegiality from the airing of diverse views at the Fed, only one vote really countsBernanke's—writes Michael Lewis, who heads the Free Market Inc. consultancy in Chicago.


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His March 26 speech reflects "Bernanke's true opinion of the economy, namely that it is likely too fragile to survive without the Fed's helping hand. It also seems to reflect a somewhat delusional view of what the Fed can do. While it can surely help to stabilize a crisis, in the medium-to-longer run, monetary policy determines nominal growth, not real gains."



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But for the financial markets, QE lowers yields on risk-free government securities and puts investors on a forced march to riskier investments in order to earn a decent return. Some of that has trickled down to housing, where near-record-low mortgage rates have contributed to record affordability, which has produced the barest uptick in building. But the financial markets have been major beneficiaries of central-bank largesse.



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Ed Yardeni, who heads the advisory firm bearing his name, points out that between the European Central Bank's $1 trillion provision to euro-zone banks and the Fed's Maturity Extension Program announced last September, corporate bond yields have tumbled. U.S. companies around the world issued $1.14 trillion in the first quarter, nearly matching the record $1.16 trillion issued in the first quarter of 2009 as the financial crisis began to ease. "Odds are that a significant portion of these funds will be used to buy back stock," Yardeni writes.



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Financials have been the big gainers from the lows of last Oct. 3, he adds, "as a result of the latest rounds of central-bank liquidity programs and relatively stress-free stress tests on the banks."



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But that ignores the unintended consequences of Fed QE, says Lacy Hunt, chief economist of Hoisington Management. The Fed's liquidity expansion lifts stock and commodity prices, but once it's released, the central bank can't control where it goes. Near-term, the pressure is felt in gasoline prices.



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But, he adds, it doesn't benefit take-home pay, which is showing up in tax receipts. Prior to the latest jobs report, the Labor Department reported an increase of 1.8 million jobs in the preceding five months. But in that span, Hunt observes personal-income tax receipts to the U.S. Treasury are down 0.2% (from last year). "It's an indication of the unproductive nature of the policies, which do not generate income growth," he says. "Real disposable income per household is how we measure prosperity, not [gross domestic product]."



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Even though QE hasn't produced prosperity, more weak reports like March's jobs data may tip the balance in favor of further Fed moves. In fact, the more dire the data and the financial markets' action, the better the odds for Bernanke & Co. to act. The April 24-25 FOMC meeting probably is too soon. Mark the June 19-20 confab on your calendars as the first likely chance for QE3, although a convenient crisis could do the trick.


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IF, FOR THE MOMENT, THE STOCK MARKET can't rely on the Fed to supply it with liquid courage (forgive me for repeating a phrase I used in the weekday version of this column at Barrons.com), it will fall to earnings to carry it higher. And earnings will very much be in focus when Alcoa (ticker: AA) kicks off the first-quarter earnings season Tuesday.



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Barclays Capital strategists Barry Knapp and Eric Slover write that profit margins for the Standard & Poor's 500 companies are estimated to have declined in the quarter just ended, despite falling commodity prices, and reflecting slowing global growth. The same forces that power profits also push up raw-material prices; higher prices correlate with higher earnings. Now, material costs, as tracked by the CEB raw-materials index, have declined substantially—even as energy and refined-product prices sit near record highs.



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If overall commodity-cost pressures aren't the culprit, margins are under pressure because of the slowing growth outlook, especially in emerging markets, which hurts sales. "Given [that] many S&P 500 companies rely on international markets for incremental revenue growth, we believe this slowdown is reflected in top-line expectations, where growth is expected to slow from about 10% to mid-single digits for full-year 2012." The Barclays team terms this a "mid-cycle slowdown." Investors will be looking for confirmation—or lack thereof—in companies' forecasts with their results.
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Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved



April 5, 2012, 9:07 am
.No More Mr. Nice Guy
.By ANDREW FINKEL


ISTANBUL — For much of the Cold War, Turkey was NATO’s lonely sentinel, patrolling Europe’s southern flank. It’s not surprising that the thawing of that conflict left Turkey feeling somewhat abandoned. Its principal function — a strategic importance to its Western allies — had been devalued by the removal of the Soviet threat.



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War in Iraq, tensions with Iran, Turkey’s willingness to send peacekeepers to the Balkans and Afghanistan meant that Ankara has remained a large piece of the strategic puzzle. But in the last 10 years, under the current Justice and Development (AK) party government that came to power in 2002, Turkey attempted to further redefine its post-Cold War role. It was an interesting experiment while it lasted.



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The guru of this transformation was the current foreign minister, Ahmet Davutoglu. Whereas Cold War Turkey thought of itself as an island of stability in a dangerous sea, Davutoglu’s new motto was “zero problems with neighbors.” A new kind of pragmatic realism was born.


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The best way, Davutoglu declared, to deal with authoritarian regimes was to give them an incentive to reform. The new Turkey would rely not on military might but on its new-found economic clout. Upping the balance of trade with Iran, for example, would succeed where sanctions would fail in getting Tehran to resign its membership of the axis of evil.



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Turkey saw itself as up to the job of regional Mr. Nice Guy for a host of reasons: it has a cultural affinity with fellow Muslim-majority nations, and its economy is the biggest in its region. And after refusing to allow the United States to invade Iraq through its territory in 2003, Turkey demonstrated that it was no longer in Washington’s thrall.



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Best of all, “zero problems” was popular with Turkish voters who saw it as a restoration of the country’s independence and prestige.



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But to Washington, the policy smacked of appeasement; it meant Ankara would turn a blind eye to Damascus or Tehran while failing to mend fences with Armenia (where the United States had a pressing interest in reconciliation). We have WikiLeaks to thank for a former American ambassador’s faint praise for Davutoglu’s strategy, describing it as “Rolls Royce ambitions but Rover resources.”
The net positive results of Turkey’s new approach didn’t last. Pragmatism turned out not to be so pragmatic after all.



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Turkey’s relations with Israel eventually deteriorated, those with Cyprus never improved, and there was a falling out with the United States in 2010 when Washington pushed ahead with sanctions against Iran while Turkey and Brazil were trying to negotiate a compromise over Tehran’s nuclear-fuel enrichment program.



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The real blow to “zero problems,” however, came when the Arab Spring began to turn into a prolonged season of attrition. In the eyes of the West, Turkish pragmatism resembled support for regimes that oppressed their own people.


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Ankara ignored accusations of ballot rigging to be among the first to congratulate President Mahmoud Ahmadinejad of Iran for his re-election victory in 2009. Turkey only reluctantly abandoned support for the Qaddafi regime when it became clear the international community was determined to see him go. Increased tensions with the West over Ankara’s attempts to be a friendly neighbor were not part of the plan.



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Syria’s troubles have been particularly vexing for Turkey’s neighborhood relations. Ankara’s rapprochement with President Bashar al-Assad (which began in earnest in 2004) had once been the best example of the success of itszero problems policy. Now, Turkey spearheads the call for regime change, even denigrating Kofi Annan’s joint U.N.-Arab League plan for a settlement. This, in turn brings, Turkey into conflict with Tehran, which has no desire to see Assad retire.



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Zero problems” is on its last leg. And things seem just like the old days. Even relations with the United States have improved.



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If Davutoglu is looking for a new catchphrase he could do worse than borrow from another pragmatist, Harold Macmillan. When asked what might derail his government’s policy, the British prime minister is reputed to have repliedEvents, dear boy. Events.”




Andrew Finkel has been a foreign correspondent in Istanbul for over 20 years, as well as a columnist for Turkish-language newspapers. He is the author of the book “Turkey: What Everyone Needs to Know.”