The challenges emerging markets investors must confront in 2020

The US and global economies seem supportive, but the sector is replete with risks

Jonathan Wheatley

Demonstrator run past burning debris at Plaza Italia during the fifth straight day of protest which erupted over a now suspended hike in metro ticket prices, in Santiago, on October 22, 2019. - President Sebastian Pinera convened a meeting with leaders of Chile's political parties on Tuesday in the hope of finding a way to end street violence that has claimed 15 lives, as anti-government campaigners threatened new protests. (Photo by Pedro Ugarte / AFP) (Photo by PEDRO UGARTE/AFP via Getty Images)
Investors were blindsided in October when protests erupted on the streets of Chile — formerly an oasis of stability — and spread to other countries in Latin America © AFP via Getty Images


Conditions appear benign for emerging markets going into 2020.

Analysts expect the US economy to grow at a steady pace: neither so quickly as to suck risk appetite out of emerging-market assets, nor so slowly as to erode confidence in the global environment. The Federal Reserve is expected to leave interest rates unchanged, while many EM central banks continue their easing cycles. China can be relied on to provide enough stimulus to keep its own outlook buoyant, providing support for the rest of the emerging world.

Prospects for investors should be bright, then. But they face two difficulties. One is how to make the most of these conditions while dodging trouble in individual countries. The other is that the benign outlook itself may be an illusion.

Among those focused on the former problem is Matt Murphy, institutional fixed income portfolio manager at Eaton Vance in Boston.

“The macro environment is really not bad for EM risk,” he said. “But there are serious concerns in the large emerging markets because of a deterioration in fundamentals. In the big names, nothing good has happened.”

He points to political and economic difficulties in markets with big index weights such as Mexico, Brazil, South Africa, Poland and Russia, and to immediate problems of keeping up debt repayments in Argentina, Ecuador and Lebanon, as well as the smaller frontier markets of Suriname, Cameroon and Papua New Guinea. His approach: ignore the benchmark indices and look for returns in the likes of Serbia, Egypt and Ukraine.

Dodging trouble in big and small markets has become harder in recent months. Previously, crises in places such as Argentina and Turkey were well contained. But investors were blindsided in October when protests erupted on the streets of Chile — formerly an oasis of stability — and spread to other countries in Latin America including Colombia, another economy previously seen as a rare bright spot. Some investors began to worry that reform momentum in Brazil, which had been gathering pace with the passage of a landmark pension reform, would stall.

So far, contagion has not spread beyond Latin America. But growth has disappointed in sub-Saharan Africa, in emerging Europe and even in Asia. India, previously tipped by some to take up the slack as Chinese growth inevitably slows, has fallen short of expectations.

So the health of the US economy will be especially significant for EMs next year. Many investors are banking on strong employment and consumer demand to keep the pace of growth not far below this year’s.

But several analysts disagree. Stephanie Pomboy of MacroMavens — who has long questioned the resilience of the US economy — notes that despite low unemployment and low debt service costs among consumers, US inventory levels have been persistently high and US companies have been unable to pass on the costs of raised import tariffs to retail prices. Demand has failed to pick up, she argues, because the US consumer, rather than consuming, has been saving ever more aggressively since the housing crisis of 2008-09. She does not expect that to change next year.

Erik Norland, senior economist at the CME Group, argues that the US economy has been held back by an overly-aggressive Federal Reserve that raised interest rates by more than it should have, leaving US monetary policy tight even after recent rate cuts. That has negative consequences for global growth and for EMs in particular, he said.



“It was Fed tightening in the 1990s that led to the Mexican, Asian and Russian crises. A tight Fed is not good for emerging markets.”

He expects slowing growth in China to be a drag on emerging markets next year, as the global economy slows from its pace in 2019.

Piotr Matys, an analyst at Rabobank, is gloomier still, expecting the US to go into a mild recession.

“Once the Fed realises that the risk of recession is much higher and starts cutting interest rates aggressively, starting in April, it will be too late,” he said. “This is one reason why it is hard to have a constructive view on emerging markets, apart from a short-term relief rally on the back of the phase-one trade deal [between the US and China].”

Rather than a recovery, he expects EM assets to continue their recent pattern of sharp moves in both directions — a continuation of the inflows and outflows that have mirrored the baffling US-China trade talks.

With the short-term issue of a phase one deal out of the way, he argues, investors’ horizons will be dominated by longer-term concerns such as intellectual property rights, access to China’s market and Chinese state support. None of that is likely to be resolved quickly.

Even if the dollar does remain supportive for emerging markets next year, the sector will face plenty of headwinds.

Central banks running low on ammunition, warns Mark Carney

Exclusive: Bank of England governor sees threat of ‘liquidity trap’ undermining fight on recession

Lionel Barber and Chris Giles in London

07/01/2020 Mark Carney, Governor of the Bank of England. Photographed in his office today during an interview with the FT.
Mark Carney: 'If there were to be a deeper downturn, [that requires] more stimulus than a conventional recession, then it’s not clear that monetary policy would have sufficient space' © Charlie Bibby/FT


The global economy is heading towards a “liquidity trap” that would undermine central banks’ efforts to avoid a future recession, according to Mark Carney, governor of the Bank of England.

In a wide-ranging interview with the Financial Times, the outgoing governor warned that central banks were running out of the ammunition needed to combat a downturn.

A liquidity trap occurs on the rare occasions when monetary policy loses all effectiveness to manage economic swings and looser policy does not encourage any additional spending.

“It’s generally true that there’s much less ammunition for all the major central banks than they previously had and I’m of the opinion that this situation will persist for some time,” he said.

That meant there was a need to look for supplements to monetary tools, including interest rate cuts, quantitative easing and guidance on future interest rates, he said. “If there were to be a deeper downturn, [that requires] more stimulus than a conventional recession, then it’s not clear that monetary policy would have sufficient space.”

Despite concerns about a potential downturn, Mr Carney was optimistic about the City’s prospects after Brexit. He made clear there was no point in London, as a world financial centre, being a rule taker from Brussels.

He urged the UK government to avoid aligning its financial regulations with those in the EU in the hope of better trade terms after Brexit.

“It is not desirable at all to align our approaches, to tie our hands and to outsource regulation and effectively supervision of the world’s leading complex financial system to another jurisdiction,” he said.

Mr Carney echoed other central bankers, such as the European Central Bank’s Mario Draghi and his successor, Christine Lagarde, in recommending that governments consider fiscal policy tools, such as tax cuts or public spending increases when tackling a downturn. However, he accepted “it’s not [central bankers’] job to do fiscal policy”.

The governor said monetary policy was not yet a spent force internationally, with US and eurozone interest rate cuts last year encouraging borrowing and spending. “We’re starting to see that stimulus flow to the global economy.”

He insisted that he was not leaving his successor, Andrew Bailey, without any tools in the armoury. The BoE could still cut interest rates from 0.75 per cent to close to zero and “supplement monetary policy with macroprudential tools” by relaxing banks’ capital requirements to enable them to lend more.

Mr Carney predicted that the City of London could profit from the “huge commercial opportunity” of helping to finance and accelerate action to mitigate global warming — although he recognised that the financial sector was not a substitute for effective policies at the national and international level.

He predicted that the City could benefit from financing the transition to a low-carbon economy in place of some EU activity. “This happens to be a huge commercial opportunity for the City of London and the UK financial sector writ large.”

The Bank of England has led other central banks on taking a firmer stance on combating the financial risks to banks and insurance companies that stem from global warming.

Mr Carney has been criticised for straying beyond his mandate with this position, but he dismissed those concerns. “Anybody who says that doesn’t know the breadth of the powers of the Bank of England,” the governor said.

With little more than two months left in office, Mr Carney accepted that his tenure had turned out differently than expected when he was hired as the central bank governor in late 2012, and had been shaped more by Brexit, the issue of Scottish independence and climate change than by economic recovery.

He had no regrets, however. “We . . . have a statutory responsibility to identify the major risks to financial stability,” he said. “We can’t dodge that.”

The greatest concern in managing the British economy and those of other advanced countries, he added, was how central banks might respond in future to a sharp downturn.

If Britain were to fall into a recession, he accepted that the BoE could run out of monetary policy space and revealed that the central bank was looking into the issue. “Hopefully [a recession] doesn’t arrive in the next 69 days,” he quipped, noting the short period left before his 16 March departure.

Historic misión

07/01/2020 Mark Carney, Governor of the Bank of England. Photographed in his office today during an interview with the FT.
When Mark Carney was appointed, Britain was convulsed in arguments over whether it was heading for a triple-dip recession © Charlie Bibby/FT


Sitting behind an 18th-century table, Mr Carney’s office demonstrates what he called the management challenge of coming into the BoE from Canada to bring the bank into the 21st century and “fix the [central] bank, fix the financial system and secure the recovery”.

It cannot be missed how history and modernity live cheek by jowl inside this part of the bank. The table contrasts with the day’s financial figures on two huge screens on his work desk; an aged imitation Canaletto painting of London hangs awkwardly on the wall next to a digital image of Venice, enclosed in an antique gold frame. The serenity of the BoE courtyard outside his rooms is remote from the bustle of London’s financial district beyond the main walls.

When Mr Carney was appointed, Britain was convulsed in arguments over whether it was heading for a triple-dip recession, but soon these questions of whether demand and spending were adequate no longer dominated monetary policy as expected.
 Demand returned in 2013, just as he took up his position. After that, the main concerns became unexpected movements in supply: how many people could be employed without inflation and how much they would produce every hour of work.

“There was this big supply uncertainty — historically supply had been relatively predictable,” he said, leading to “a different recovery in many respects” than he and others had expected. “The strength of the labour market stands out,” he said with record employment and “wage growth returning to historic averages”.

The monetary policy committee also had to grapple with structural difficulties such as the near stagnation in productivity measured by output per hour worked compared with pre-crisis average annual growth rates around 2 per cent. “It’s safe to say [productivity] has been weak for a long time and a continual disappointment,” he said.

Amid these economic uncertainties, the main task of the BoE, according to the governor, was to finish core reforms to the global financial system and react appropriately to the political upheavals of the Scottish and Brexit referendums and the challenges of climate change. Mr Carney insists that rather than be too political, as his predecessor Mervyn King has suggested, the BoE had to get involved because it now had a duty to preserve financial stability.

“It’s a different thing when something directly affects the financial system or the monetary system, as in the currency choice in the Scottish referendum or certain forms of Brexit which would have had a material impact on the financial sector.”

Climate policy

Noting the preparatory work the BoE forced on the financial system, he said the bank “had to do more than pray that the issue will be addressed”. He added that part of the reason he had agreed to stay on was to face the consequences of a no-deal Brexit rather than saying: “Don’t worry, it’ll be fine, I’m going back to Canada, good luck”.

But he was clear that the financial sector could not mitigate global warming alone and without wider agreements to limit global warming and action to enforce targets.

“I don’t think the financial sector should be or will be a substitute for climate policy,” he said.

Adding that it could only amplify wider environmental policy action, he said: “I don’t think that climate policy should be run by stealth though capital ratios or other use of prudential policy to shift incentives”.

The governor will return to Canada in the summer and in the meantime has taken up a UN role as special envoy for climate action and finance until the November climate summit in Glasgow.

When he returns, he said, he would go home with fond memories of an “amazing country”.

“There’s the diversity of the cultural activities here, the history and the humour. This is a fantastic place. It’s a pleasure to live in the UK in the 21st century.”

But frustrations of UK life in the crosshairs of polarised political debate will also haunt him in the search of a new job.

 “This role is just much more public than the same role in Canada,” said Mr Carney.

“You’re just always in public . . . you’re not always performing but you’re always in public. It’s nice to be in private.”


Iran and the United States: What Comes Next

By: George Friedman


In order to understand the current confrontation between Iran and the United States, we might begin with the Persian-Babylonian wars.

Alternatively, we could begin with the decision of the United States to withdraw U.S. forces from Iraq after the election of Barack Obama. Efficiency demands the latter.

The U.S. invasion of Iraq in 2003 was carried out without opposition from Iran and indeed with covert support. Iraq and Iran had fought a brutal war during the 1980s, resulting in about 1 million casualties and costing a combined $5 billion.

Not long after, Iraq would overestimate its position by invading Kuwait, leading to the first Gulf War.

To Iran, the control of Iraq by Sunnis – a minority population and a sectarian rival no less – was an existential threat. Tehran was therefore delighted to see Saddam Hussein fall, since his absence would create an opportunity for it to dominate whatever government came next.

The war went differently. The U.S. blocked Shiite ambitions, fought the Sunnis and wound up in a crossfire between the two. Obama came into office committed to making it stop, planning to withdraw most but not all U.S. troops and to build an Iraqi army consisting of both Sunnis and Shiites that was friendly to the United States. (Iran, naturally, opposed the prospect.)

But then came the Islamic State, which forced Washington to maintain troops in Iraq and caused Iran to intervene so as not to let a Sunni power take hold in Baghdad. The U.S. and Iran often cooperated with each other in the ensuing fight.

Yet, they were always wary of each other, in no small part because of Iran’s aspirations for a nuclear weapons program. Tehran’s pursuit of nuclear weapons resulted in an imposition of massive sanctions and in a widely advertised, U.S.-Israeli cyberattack on Iranian nuclear enrichment that was supposed to have set back the program dramatically.

This reopened the possibility of keeping troops in the country, just as Donald Trump was taking office.

Trump said he wanted to reduce the U.S. military footprint in the Middle East but also favored regime change in Iran. This apparent contradiction had to do with the logic of a U.S. withdrawal.

For Iran, directly controlling or at least neutralizing Iraq is a geopolitical imperative, but Tehran could not afford another war. After the fight against the Islamic State, the withdrawal of U.S. troops to a very small number left Iran in an extremely powerful position.

At the same time, Iran maintained a number of pro-Iran groups in Lebanon, Syria, Yemen and Iraq, and was supporting the Assad regime even before the Russian intervention.

In other words, Iran had used its operations in various countries, coupled with the drawdown of U.S. troops, to create a massive sphere of influence commonly known as the “Shiite Crescent,” stretching from Iran to the Mediterranean and all the way to the Arabian Sea.

This strategy was forwarded by a series of elite Iranian generals, such as Qasem Soleimani. Iran had gone from solely defending itself from Iraq to emerging as the major force in the Middle East.

Escalation With the U.S.

The American perception of Iran was formed largely in the post-1979 era, with the occupation of the U.S. Embassy in Teheran and the bombing of the Marine barracks in Beirut. While it’s true that Iran is responsible for both acts, it’s also true that Iran is more pragmatic than it is sometimes portrayed. It cooperates with the U.S. when it needs to and acts hostilely when it doesn’t.  

This is pretty normal behavior, but it creates confusion through which Washington has to navigate.

So when it was time to turn its attention to Tehran after the defeat of the Islamic State, Washington had two strategies.

The first was to sponsor a coalition of states to undermine the growing Iranian sphere of influence. The key members of this odd coalition were Israel, Saudi Arabia and the United Arab Emirates. Israel was focused on attacking Iranian assets in Syria (and potentially in Lebanon).

The Saudis and UAE were fighting Iranian proxies in Yemen, where a battle erupted between the country’s Sunnis, who had been largely out of power since the fall of Saddam, and the Shiites. Managing this battle fell to the U.S. soldiers and intelligence personnel still in the country.

The second response was to increase economic sanctions on Iran, not really because of its nuclear or missile programs, but to remind Iran of the risks of building its sphere of influence.

The sanctions severely damaged the Iranian economy, and the protests, arrests and amnesties commonly associated with economic duress broke out. The government in Tehran was not existentially threatened by sanctions, but they were bad enough to cripple the economy, spark internal unrest and thus warrant a response.

There were riots in Lebanon and Iraq, both threatening Iranian socio-political influence. In other words, the gains that Iran had made were in danger of being reversed, while the Iranian economy itself was weakening.

Iran needed a counter. The goal was to demonstrate the weakness of the United States as a guarantor of regional stability and the ability of the Iranians to impose counter-economic pressures and, in the worst of cases, cause a U.S. intervention.

The latter would be an intervention with insufficient force and might solidify the government’s position, providing an otherwise unhappy populace and Iran-sponsored militias with a unifying cause.

The first attempt at this came in the Persian Gulf, where Iranians captured several tankers.

The hope was that soaring oil prices and pressure on the U.S. from oil consumers would halt hostile operations against Iran.

It was a low risk, high reward tactic that ultimately failed to achieve its goals, especially after the U.S. declined to launch an air attack on Iran in response and indirectly supported the U.K.'s seizure of an Iranian tanker off the coast of Gibraltar.

The second attempt was an escalation on the same theme: the attack on a Saudi oil facility through Yemeni Houthi militants. It was also designed to boost oil prices and encourage the Saudis to reconsider their relationship with the U.S.-backed coalition. Once more, the attack didn’t achieve Iran’s ultimate objective.

Iran was in an increasingly precarious situation. Domestic unrest due to sanctions persisted. Its sphere of influence was under pressure on every front, particularly in Lebanon and Iraq where anti-Iran sentiment was growing.

Tensions Come to a Head

The deterioration of Iran’s position demanded that the government consider more assertive actions, particularly in Iraq. Its answer, as it had been so many times before, was the Quds Force, an elite branch of Iran’s Islamic Revolutionary Guard Corps, led by none other than Soleimani. Like U.S. special operations, they specialize in training and maintaining allied forces abroad – including, in Iran’s case, Hezbollah and the Popular Mobilization Forces in Iraq.

When U.S. bases were attacked, the assumption was that the attacks were planned and perhaps carried out by Quds-backed militias, such as the PMF and Kataib Hezbollah. Whether the U.S. knew before or after the attacks that Soleimani was in Iraq after a trip to Syria, it was obvious that major operations were being planned against U.S. diplomatic and military personnel in Iraq, Lebanon and Syria. The capture of Soleimani would be catastrophic to Iran.

Therefore, the American read that the Iranians were being pressed to the wall was confirmed by his presence. Iran was taking a major risk given his knowledge of its operational capabilities. That meant that the Iranians had decided on escalating beyond prior attacks.

The Quds Force’s specialty was attacking specific facilities to undermine military or intelligence capability or to achieve psychological and political ends.

In any case, seeing him near Baghdad Airport likely told U.S. intelligence not only that he was there because the situation was difficult, but that he was there to correct the imbalance of Iranian power in the Levant.

In other words, he was working with his Iraqi counterpart to carry out significant operations. It followed that the U.S. didn’t want these operations, whatever they were, carried out, and that killing him was a military necessity.

All of this has to be framed in the strategic context. The U.S. does not want to engage in extensive operations in the region. Washington is depending on sanctions and proxies. Iran still wants to maintain its sphere of influence into the Mediterranean, but above all, an even greater priority is the neutralization of Iraq and the stabilization of its own country.

Iran can’t afford to allow Iraq to become a bastion of anti-Iran forces, nor can it wage a conventional war against the U.S., Israel, Saudi Arabia and the UAE. Iran must therefore use what it has used so effectively in the past: special and covert operations.

It follows that Iran will take its time to respond. It also follows that the U.S. and its allies, having bought time by killing the head of the Quds Force, must use the time effectively.

America must be ready for Iranian retaliation

The US should launch a diplomatic initiative and prepare limited military responses

Richard Haass

Iranian demonstrators chant slogans during a protest against the assassination of the Iranian Major-General Qassem Soleimani, head of the elite Quds Force, and Iraqi militia commander Abu Mahdi al-Muhandis, who were killed in an air strike at Baghdad airport, in front of United Nation office in Tehran, Iran January 3, 2020. WANA (West Asia News Agency)/Nazanin Tabatabaee via REUTERS ATTENTION EDITORS - THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY.
Iranians protest against the assassination of Qassem Soleimani who has cult-like stature in the country © VIA REUTERS


In William Shakespeare’s play Julius Caesar, Mark Antony tells the audience what he plans to do to incite revenge for the Roman dictator’s assassination: “Cry ‘Havoc!’ And let slip the dogs of war.”

It is quite possible that Iran is readying the dogs of war following the US assassination of Qassem Soleimani, the chief of the Iranian Revolutionary Guards’ overseas forces. Indeed, this targeted air strike has the potential to be the most significant development in the troubled Middle East since the 2003 decision by then-US president George W Bush to launch the Iraq war.

The obvious big question is what happens next. There is little or no chance that matters rest where they are. Iran is highly likely to retaliate given the cult-like stature of Soleimani inside the country.

But when and where and how Iran might respond remains undetermined. If it comes to war, then we need to understand this will not be a traditional conflict fought by uniformed soldiers on clearly defined battlefields. The arena will be the entire region and possibly the world. It is unlikely to have either a clear start or a clear end.

Iran has a wide range of targets to choose among. There are US troops in Iraq, Afghanistan, Syria, Qatar, Saudi Arabia, Bahrain, and elsewhere, and American diplomats and businesses scattered throughout the Middle East. US ally Saudi Arabia was recently targeted by Iran via a strike on its oil facilities and could well be again. So, too, could Israel.

Iran can employ various militias, including Hizbollah. It could also target the US homeland with cyber attacks. Still another option for Iran is to accelerate its planned breakout from the 2015 nuclear pact.

Tehran also has enormous influence in Iraq. The Pentagon may have no choice but to pull out its 5,000 troops if (partly at Iran’s urging) the Iraqi government requests that it do so. The US may also deem it wise to remove American diplomats if the Iraqi government is unwilling or unable to protect the US embassy compound in Baghdad, which was attacked by angry demonstrators earlier this week. The result would be an Iraq in which Iran has even more sway and where terrorists once again would gain a large footing.

The case for killing Soleimani could be based on his past actions — he masterminded attacks that have killed many Americans — as well as potential ones. The air strike could have constituted a pre-emptive attack, if, as US secretary of state Mike Pompeo asserted on Friday, the Iranian general was planning new attacks that were in fact imminent. That would be consistent with self-defence under international law.

But what may be legally justifiable is not the same as a prudent course of action. US strategy towards Iran under Donald Trump’s administration has been controversial from the outset.

The starting point was Mr Trump’s rejection of the 2015 nuclear accord. He saw it as fatally flawed given the limited duration of the constraints on Iran’s nuclear programme and the fact it did not cover either Tehran’s missile programmes or its regional activities.

Mr Trump took the US out of the pact and imposed severe sanctions on Iran, using maximum pressure designed to bring about a fundamental change in Tehran’s behaviour or even the downfall of the regime. Iran, feeling the economic pain, responded militarily — against tankers, Saudi refineries, US personnel, and the US embassy in Baghdad.

What the Trump administration has done with the Soleimani assassination — and with its retaliation days before against an Iran-backed militia responsible for killing an American contractor — is move from economic warfare to military action. It is less clear why it did so now given the many US vulnerabilities in the region and the American need to commit resources to contending with the Russian threat to Europe and the challenges posed by North Korea and China in Asia.

The US would be wise to try to head off a dangerous and costly escalation with Iran. A diplomatic initiative that seeks to calm matters should be put forward. The goal should be to create new constraints on Iranian nuclear and missile programmes in exchange for a degree of sanctions relief. Indeed, such an initiative should have been launched months ago to provide an alternative to the tensions that have materialised.

Now, it may well be too late, at least in terms of preventing a degree of Iranian retaliation. But diplomacy should still be explored, as a limited set of armed actions and reactions is preferable to a large-scale, long-term conflict. Iran’s leaders could be open to a truce if they conclude the Islamic revolution itself is in some jeopardy. They reached such a deal in the late 1980s with then arch-rival Iraq.

The US should reduce its vulnerability throughout the region and prepare limited military responses in the hopes of deterring at least some of what Iran plans to do.

Such an effort might fail. If so, it would hardly be the first time governments learnt the hard lesson that it is easier to start or escalate a war than it is to slow or stop one.

The Middle East, long defined by violence, seems about to add another chapter.


The writer, the president of the Council on Foreign Relations, is the author of the forthcoming book ‘The World: A Brief Introduction’

The Suleimani Assassination and US Strategic Incoherence

Following its targeted killing of Iran's second most powerful leader, the US could well find itself with no alternative but to devote more military resources to the Middle East, a path that could lead to additional Iranian provocations. And that shift would occur at a time of growing challenges to US interests elsewhere in the world.

Richard N. Haass

haass109_Mark WilsonGetty Images_trumplookinglikeababy


NEW YORK – The United States emerged from the Cold War some three decades ago possessing a historically unprecedented degree of absolute and relative power.

What is baffling, and what will surely leave future historians scratching their heads, is why a series of US presidents decided to devote so much of this power to the Middle East and, indeed, squander so much of America’s might on the region.

This pattern can be traced back to George W. Bush’s war of choice against Iraq in 2003.

The US did not need to go to war there at that moment; other options for containing Saddam Hussein were available and to a large extent already in place. But in the aftermath of the September 11, 2001, terrorist attacks, Bush decided that he must act, whether to prevent Saddam’s development and use of weapons of mass destruction, to signal that America was no helpless giant, to trigger a region-wide democratic transformation, or some combination of the above.

His successor, Barack Obama, entered office determined to reduce American involvement in the region. Obama removed US troops from Iraq and, although he initially increased the number of US troops in Afghanistan, set a timetable for their withdrawal. The big strategic idea of his administration was “rebalancing”: US foreign policy should de-emphasize the Middle East and focus more on Asia, the principal theater in which the world’s trajectory in the new century would be decided.

But Obama had trouble seeing this strategy through. He never completely withdrew US forces from Afghanistan, reintroduced them into Iraq, and undertook an ill-conceived military campaign against Libya’s leader that resulted in a failed state. Obama also voiced support for regime change in Syria, although in that case his reluctance to involve the US further in the Middle East won out.

When Donald Trump succeeded Obama close to three years ago, he was determined not to repeat the perceived mistakes of his predecessor. “America First” signaled a renewed emphasis on domestic priorities; economic sanctions and tariffs, rather than military force, became the preferred national security tool. The boom in domestic oil and natural gas production had made the US self-sufficient in terms of energy, thereby reducing the direct importance of the Middle East.

To the extent foreign policy remained a US priority, it was to manage renewed great-power rivalry, above all the challenges posed by China in Asia and Russia in Europe. Indeed, China and Russia were singled out for criticism in the 2017 National Security Strategy for wanting “to shape a world antithetical to US values and interests.”

In the Middle East, Trump went out of his way to shrink the US footprint and commitment. He looked the other way when Iran attacked oil tankers, US drones, and Saudi oil refineries, and turned his back on the Kurds in Syria, although they had been America’s partner in defeating ISIS there. “Let someone else fight over this long-bloodstained sand,” was what Trump had to say this past October.

The principal exception to this avoidance of military action was the US strike in late December 2019 on sites associated with Kataib Hezbollah, an Iran-backed militia accused of launching an attack days before that killed an American contractor and injured several service members.

It is against this backdrop that Trump ordered the targeted killing of General Qassem Suleimani, by most accounts the second most powerful man in Iran. What prompted him to do so remains unclear. The administration claims it had intelligence that Suleimani was planning new attacks on US diplomats and soldiers.

But the decision to act also could have been motivated by images of the US embassy in Baghdad under attack from Iran-supported militia – images that recalled the siege and subsequent hostage-taking at the US embassy in Tehran in November 1979 or of the 2012 attack on the US consulate in Benghazi that Republicans used to criticize then-Secretary of State Hillary Clinton.

Another contributing factor might have been a tweet attributed to Iran’s Supreme Leader Ayatollah Khamenei that taunted Trump by saying, “You can’t do anything.”

Given Suleimani’s standing, Iran is unlikely to back down. It has many options at its disposal, including a wide range of military, economic, and diplomatic targets in many countries in the region.

It can operate directly or through proxies; it can use armed force or cyberattacks. The US could well find itself with no alternative but to devote more military resources to the Middle East and to use them in response to what Iran does, a path that could lead to additional Iranian provocations.

And that shift would occur at a time of growing concern about North Korea’s nuclear and missile programs, Russian military threats to Europe, the weakening of arms-control arrangements meant to curb US-Russian nuclear competition, and the arrival of a new era of technological, economic, military and diplomatic competition with China.

The premise of my commentary in December was that the US was increasingly distancing itself from the Middle East, owing to domestic frustration with what wars there have wrought, reduced energy dependence on the region, and a desire to focus its resources elsewhere in the world and at home.

It could well be that I got it wrong – or that Trump has, by embarking on a course of action without first thinking through the strategic consequences.


Richard N. Haass, President of the Council on Foreign Relations, previously served as Director of Policy Planning for the US State Department (2001-2003), and was President George W. Bush's special envoy to Northern Ireland and Coordinator for the Future of Afghanistan. His next book, The World: A Brief Introduction, is forthcoming in May.

Imagining a World Without Capitalism

On September 24, 1599, not far from where Shakespeare was struggling to finish Hamlet, the first corporation with tradable shares was born. Liberalism’s fatal hypocrisy was to celebrate the virtuous neighborhood butchers, bakers, and brewers in order to defend all the East India Companies that have since made a mockery of freedom.

Yanis Varoufakis

varoufakis61_Miguel Navarro Getty Images_emptyofficecorporatesad


ATHENS – Anti-capitalists had a miserable year. But so did capitalism.

While the defeat of Jeremy Corbyn’s Labour party in the United Kingdom this month threatened the radical left’s momentum, particularly in the United States, where the presidential primaries loom, capitalism found itself under fire from some unexpected quarters.

Billionaires, CEOs, and even the financial press have joined intellectuals and community leaders in a symphony of laments about rentier capitalism’s brutality, crassness, and unsustainability. “Business cannot continue as usual,” seems to be a widespread sentiment even in the boardrooms of the most powerful corporations.

Increasingly stressed and justifiably guilt-ridden, the ultra-rich – or those with any sense, at any rate – feel threatened by the crushing precariousness into which the majority are sinking. As Marx foretold, they form a supremely powerful minority that is proving unfit to preside over polarized societies that cannot guarantee non-asset owners a decent existence.

Barricaded in their gated communities, the smarter among the uber-rich advocate a new “stakeholder capitalism,” even calling for higher taxes on their class. They recognize the best possible insurance policy in democracy and the redistributive state. Alas, at the same time, they fear that, as a class, it is in their nature to skimp on the insurance premium.

Proposed remedies range from languid to ludicrous. The call for boards of directors to look beyond shareholder value would be wonderful if it were not for the inconvenient fact that only shareholders decide directors’ pay and tenure.

Similarly, appeals to limit exorbitant power of finance would be splendid were it not for the fact that most corporations answer to the financial institutions that hold the bulk of their shares.

Confronting rentier capitalism and fashioning firms for which social responsibility is more than a marketing ploy requires nothing less than re-writing corporate law. To recognize the scale of the undertaking, it helps to return to the moment in history when tradable shares weaponized capitalism, and to ask ourselves: Are we ready to correct that “error”?

The moment occurred on September 24, 1599. In a timbered building off Moorgate Fields, not far from where Shakespeare was struggling to complete Hamlet, a new type of company was founded. Its ownership of the new firm, called the East India Company, was sliced into tiny pieces to be bought and sold freely.

Tradable shares allowed private corporations to become larger and more powerful than states.

Liberalism’s fatal hypocrisy was to celebrate the virtuous neighborhood butchers, bakers, and brewers in order to defend the worst enemies of free markets: the East India Companies that know no community, respect no moral sentiments, fix prices, gobble up competitors, corrupt governments, and make a mockery of freedom.

Then, toward the end of the nineteenth century, as the first networked mega-companies – including Edison, General Electric, and Bell – were formed, the genie released by marketable shares went a step further. Because neither banks nor investors had enough money to plough into the networked mega-firms, the mega-bank emerged in the form of a global cartel of banks and shadowy funds, each with its own shareholders.

Unprecedented new debt was thus created to transfer value to the present, in the hope of profiting sufficiently to repay the future. Mega-finance, mega-equity, mega-pension funds, and mega-financial crises were the logical outcome. The crashes of 1929 and 2008, the unstoppable rise of Big Tech, and all the other ingredients of today’s discontent with capitalism, became inescapable.

In this system, calls for a gentler capitalism are mere fads – especially in the post-2008 reality, which confirmed the total control over society by mega-firms and mega-banks. Unless we are willing to ban tradable shares, first introduced in 1599, we will make no appreciable difference to the distribution of wealth and power today. To imagine what transcending capitalism might mean in practice requires rethinking the ownership of corporations.

Imagine that shares resemble electoral votes, which can be neither bought nor sold. Like students who receive a library card upon registration, new staff receive a single share granting a single vote to be cast in all-shareholder ballots deciding every matter of the corporation – from management and planning issues to the distribution of net revenues and bonuses.

Suddenly, the profit-wage distinction makes no sense and corporations are cut down to size, boosting market competition. When a baby is born, the central bank automatically grants her or him a trust fund (or personal capital account) that is periodically topped up with a universal basic dividend. When the child becomes a teenager, the central bank throws in a free checking account.

Workers move freely from company to company, carrying with them their trust-fund capital, which they may lend to the company they work in or to others. Because there are no equities to turbocharge with massive fictitious capital, finance becomes delightfully boring – and stable. States drop all personal and sales taxes, instead taxing only corporate revenues, land, and activities detrimental to the commons.

But enough reverie for now. The point is to suggest, just before the New Year, the wondrous possibilities of a truly liberal, post-capitalist, technologically advanced society. Those who refuse to imagine it are bound to fall prey to the absurdity pointed out by my friend Slavoj Žižek: a greater readiness to fathom the end of the world than to imagine life after capitalism.


Yanis Varoufakis, a former finance minister of Greece, is leader of the MeRA25 party and Professor of Economics at the University of Athens.

David Stockman on What an Audit of the Federal Reserve Could Really Reveal

by David Stockman



Doug Casey’s Note: David Stockman is a former congressman and director of the Office of Management and Budget under Ronald Reagan.

Now, anyone with connections to the government should elevate your suspicion level. But as you’ll see, David is a genuine opponent of government stupidity. Although his heroic fight against the Deep State during the Reagan Administration was doomed, he remains a strong advocate for free markets and a vastly smaller government.

We get together occasionally in the summer, when we’re both in Aspen. He’s great company and one of the few people in this little People’s Republic that I agree with on just about everything. This absolutely includes where the US economy is heading.

I read his letter the Contra Corner every day, and suggest you do likewise.


International Man: Trump is calling for a weaker dollar and negative interest rates. What does this tell you about Trump’s understanding of economics?

David Stockman: It tells you that he has no understanding of economics at all!

I think Trump is not even primitive when it comes to economic comprehension. His views are just plain stupid when it comes to exchange rates. He seems to think it’s some grand game of global golf, where the strongest player gets the lowest score.

What sense does it make tweeting as he did recently in attacking the Fed?

According to Trump, the US economy is so much better than the rest of the world’s economies, and therefore we should have the lowest interest rate as a result. It has nothing to do with economic logic or with principles related to sound money. I think he’s just thrashing about trying to create a warning that if things go badly, it's the Fed’s fault.

The whole narrative on the economy is wrong.

The low unemployment rate is something he inherited. It’s the end of the longest business cycle in history—126 months.

As the economy continues the inch forward, the inventory of excess labor goes down. The unemployment rate, even as badly measured as it is by the U.S. Bureau of Labor Statistics (BLS), inherently goes lower. He didn’t have anything to do with it.

In fact, if you look at the first 33 job reports under President Trump, the average gains have been 190,000 a month. During the last 33 reports under President Obama, it was 225,000 a month.

There has been no acceleration. There has been no improvement. It’s a running out of the business cycle, even as the foundation underneath has been made worse and worse by Trump’s trade policies and a really insane fiscal policy of driving the deficit to over a trillion dollars at the top of the business cycle.

Even John Maynard Keynes himself said that you ought to try to balance the budget and even generate a surplus at the top of the cycle.

We’re right in the middle of the worst kind of economic policy in my lifetime, anyway—going back to the 1960s.

Trump is completely clueless about how we got here, how he got here, and where we’re going.

I’ve said many times that if you boast about it, you own it. He’s been boasting about the stock market, which is the greatest bubble in history. He’s been boasting about a business cycle that he inherited that’s got all kinds of rot underneath and that’s nearing its final days.

All of that’s going to come home to roost, and I think it’s very likely to happen before the 2020 election.

So the 2020 election is not all over except for the shouting, as a lot of people believe. In fact, the prospect that Elizabeth Warren gets the nomination on the Democratic side and becomes a serious contender to the Oval Office is very high. The irony is that it will ensure the stock market’s collapse and Trump’s defeat. He’s setting himself up for the worst possible outcome.

International Man: The Fed recently said it could increase its tolerance for inflation before it considers raising interest rates. It would be a major policy shift. What’s really going on here?

David Stockman: I think what’s going on is that they’re looking for another excuse to capitulate to Wall Street next time it has a hissy fit because it believes the Fed owes them another shot of stimulus and more liquidity.

Let’s address the underlying issue now. The 2% inflation target is absurd to begin with. There is no historical or theoretical evidence to suggest that inflation at 2% is better for growth and prosperity than inflation at 1.5%, 1%, or even -1%.

This is just made up, just like the money they created that’s been snatched from thin air, adopted as official policy in January 2012.

It becomes a rolling excuse for running the printing press and accommodating both the politicians in Washington, D.C., who want low interest rates so that debts are cheap to finance and the gamblers on Wall Street who want low interest rates because they result in higher asset values and cheaper costs for carry trade speculators.

The idea that we haven’t had enough inflation as it’s measured by one indicator—the Personal Consumption Expenditure (PCE) deflator—is kind of crazy for two reasons.

First, there’s a lot of other inflation measures that say we easily achieved 2% inflation.

The 16% trimmed-mean CPI is a very handy tool. It has the same CPI data at the product code level as that in the regular CPI, but in order to smooth out the monthly figure, it takes out the lowest and highest 16% of individual prices.

It’s probably more accurate than CPI because it removes the outliers but puts them back in as soon as they reach the center of the distribution.

The trimmed-mean CPI has averaged 2% since January 2012. During the last 12 months, it’s reached 2.34%, way over the Fed’s 2% target.

There are lots of issues here.

One of them is that there are many ways to measure inflation. Another issue is that you can’t scientifically measure inflation in a dynamic global economy like the one we’re in today.

It’s just an average in some arbitrarily-weighted product categories that are way too complicated, even for the bureaucrats at the BLS.

And third, even if you could measure it halfway accurately, which I seriously doubt, the Fed has no tools to achieve its targets anyway.

The big swings of inflation are from commodity cycles and the global trading system, evidenced in oil prices, metal and materials prices, food and grain prices, and so forth. The Fed can’t do much about that.

The point is, inflation targeting is one of the greatest efforts at misdirection that a government agency has ever concocted. This gives them a license to constantly intervene and meddle in the financial markets—pointlessly fiddling with the whole price structure of debt and equity assets.

The less inflation there is, the better.

They can’t target it to the second decimal point, and you can’t measure it anyway.

The fact that they’re now saying, "Well, we don’t mean to target inflation on a monthly basis or quarterly or annual basis, it’s a cumulative basis from a day one," indicates they are maybe starting from the Garden of Eden or something like that.

It just shows you that they’ve backed themselves into a corner of illogic and stupidity, from which I don’t think there’s any exit.

International Man: There are increasing calls for central banks to combat climate change. The IMF, the European Central Bank, and several others have chimed in. What does this mean, and why are central bankers suddenly so keen on this topic?

David Stockman: This is beyond stupid. What could the central banks possibly do to help the global economies adjust to climate change? Climate change may or may not be happening, and if it is, it’s due to planetary forces that central banks have absolutely no power to impact or counteract.

In my view, it’s one of the many hoaxes going on. It does remind you of how far out modern Keynesian central banking has become. They only have one tool: they can try to falsify interest rates, and they do that by injecting flat credit and liquidity into the market.

That’s all they can do. They have no other ability to drive the $85 trillion global economy, or the $21 trillion domestic economy.

They have a crude instrument. As they say, when your only instrument is a hammer, everything looks like a nail. That’s the case with the Fed.

The only thing they can do is inflate financial asset prices on Wall Street and other financial markets.

If they can’t even drive the macroeconomy to hit their inflation targets, how are they going to redirect the macroeconomy to use more green energy?

It’s so idiotic that it doesn’t merit any further discussion.

These central banks are the all-time champions at mission creep.

They have added mission after mission, including inflation at 2%, as they measure it, and now they want another mandate. They want another reason to enhance their power. When already, they are the most powerful state institutions in the world, and they’re in the process of wrecking prosperity everywhere.

International Man: If Rand Paul finally gets his audit of the Federal Reserve, what do you think they’ll find?

David Stockman: What he’s going to find is just more detail on the absurdities of what they’re doing already.

I think one that you would look into is this policy called Interest on Excess Reserves (IOER).

They targeted that number at 1.55% right now. There’s about $1.5 trillion of excess reserves in the banking system.

So, they’re paying out to the banks upwards of $23 billion a year in order to keep excess funds on deposit at the Fed, rather than putting it to work in the macroeconomy.

How stupid is that?

They are blindly fixated on commanding the money market rate. The Federal Funds Market has disappeared. Ben Bernanke basically destroyed that. There's nothing left there.

Since they know that the federal funds rate is pretty much nothing in the broad money markets—which are dominated by the repo markets, they have come up with IOER to show that they can make an interest rate happen.

It’s crazy. This is what you get from modern central banks.

We have to ask, why don't they just get out of the way and let those reserves either stay on deposit at the Fed, or let them flow into the repo market, the money market, or the commercial paper market?

So, that's one area that a thorough audit of the Fed could get at.

The second one that I think would be even more interesting, if it were done properly, is to recognize that they've created a bloated balance sheet. They’re back at it again—it peaked at $4.5 trillion from a base of $900 billion, at the time of the crisis in 2008.

They rolled it back a little bit under the short-lived Quantitative Tightening (QT).

The minute the stock market had a moderate hissy fit last fall and last Christmas, they immediately dropped the project, announced the end of QT in August, and started back the other way.

So, now they’re back up to $4 trillion and rising rapidly.

The reason I’m mentioning this is that you have $4 trillion of assets at work earning the interest rates that Uncle Sam is paying on 10-year paper, the interest rates that Freddie Mac and Fanny Mae are paying on their longer-term securities—all of this money is coming into the Fed.

The cost of their liabilities is practically nothing because they’ve been created from thin air by hitting the button on the digital printing press. Other than the $23 billion that they're paying out in this phony IOER scheme, basically, they have cost-free liabilities, and a $4 trillion balance sheet that is earning interest.

Now, the reason I’m bringing this up is it brings in a massive profit. A lot of it that gets cycled back to the Treasury, which is another circular scheme of stupidity. But it also gets used for a big fat, juicy payroll, for some 20,000 people—including several thousand economists.

It’s not only these people on the payroll, but there are all kinds of contract research they fund from the massive profits they generate from printing money. That means that a substantial share of the academic economists in the United States is on the payroll of the Federal Reserve.

They lick the boots of the guy who’s signing the checks.

The system is bad enough the way it is—between the political process, the dominance of statism, interventionism, and Keynesianism. But now, even the academic economists on the payroll are being paid to find that the Fed is doing a wonderful job and should be doing even more.

If we have an audit, we ought to find out the name and serial number of every damn economist that’s on their payroll or that’s getting contract research and ignore them—because they’re saying what the master wants to hear.

Editor's Note: What could be the greatest bubble in history is reaching its final days.

President Trump's call for a weaker US dollar and negative interest rates is a last ditch effort to keep the party going. The whole financial system could come crumbling down much faster than most people think.

Gold is just about the only place to be. Gold tends to do well during periods of turmoil—for both wealth preservation and speculative gains.

China 2020: Trade Risks Become Debt Risks

With trade risks receding, keeping China’s rickety financial system on the rails will dominate 2020

By Nathaniel Taplin



China’s terrible, no good, very bad year is finally drawing to a close. Next year is set to start off better, but there are some nasty icebergs lurking beneath apparently calmer waters.

Investors could find opportunities in trade-exposed equities, like Foxconn. But the risk of serious financial turbulence, which they barely avoided in 2019, is rising.

Though most investors didn’t notice, key sections of China’s economy were already on the mend by late 2019, particularly the auto sector—which was mired in a deep downturn for most of 2018 and 2019—and the electronics industry. Auto output rose on the year in November for the first time since June 2018. And electronics makers’ profits have also rebounded strongly in recent months as global smartphone and semiconductor sales have begun to rise again.

In addition, the trade detente with the U.S. reached this month should help ensure some the healing of the labor market, already under way thanks to the electronics rebound.

In two other key parts of the economy, things look far less rosy. Real estate profit growth is slowing rapidly—along with the housing market itself. That, in turn, is putting pressure on state-owned industrial companies, which are concentrated in construction-dependent sectors like steel. Real estate and government-owned industry, along with infrastructure, also happen to be the sectors where China’s debt burden is heaviest.

Foreign investors were spooked by rolling private-sector bond defaults in 2019. But because private Chinese firms make up a small percentage of corporate bond debt—only about 10%—wider damage to China’s debt markets was averted. That could change in 2020. Return on assets for state-controlled industrial companies was just 3.7% in the 12 months to October, the weakest since 2016—and far below average banking lending rates of nearly 6%.

At the same time, heavily indebted property developers, squeezed by the continuing crackdown on shadow banking, have become highly dependent on “preselling” houses before they are built. As the property market cools, that source of funding could start to dry up.


The Beijing skyline. Real estate profit growth is slowing rapidly—along with the housing market itself. Photo: Gregor Fischer/Zuma Press 


Beijing has managed to fight the U.S. to a draw in the trade dispute. The main risk for 2020 is that it declares “mission accomplished” and fails to act aggressively enough to ensure that weakened state industrial firms, local governments, and property developers can refinance their debts at reasonable rates. Compared with past easing cycles, average bank lending rates have barely fallen and credit growth has begun to falter again.

Weakening returns in the most indebted parts of the economy also come as many small banks, which are dependent on borrowing from their larger peers, face capital shortfalls and questions on their solvency. If interbank creditors also start questioning the value of their corporate bonds as collateral—as happened this summer following the state takeover of Baoshang Bank—small banks’ short-term borrowing costs could rise quickly, and some might find themselves unable to borrow at all without central bank help.

On the whole, 2020 seems likely to be a better year for China’s suffering, but highly competitive exporters. It could be a worse year for the ugly, indebted parts of the economy. And many small private companies, despite stabilizing demand for their products, are still struggling with high borrowing costs.

If this year was dominated by trade, next year will be about keeping China’s rickety financial system on the rails.