Avengers assemble

Iran retaliates for the killing of Qassem Suleimani

Rocket-fire will probably not slake the thirst for revenge against America



“WE WILL TAKE revenge.” The words were those of Major-General Hossein Salami, head of Iran’s Islamic Revolutionary Guard Corps (IRGC), speaking at the funeral of Qassem Suleimani, the head of the IRGC’s elite Quds Force.

The sentiment has pervaded the rhetoric of virtually every Iranian spokesman since General Suleimani’s assassination on January 3rd. At his funeral on January 6th his daughter warned that the families of American soldiers “will spend their days waiting for the death of their children”.

In the early hours of January 8th Iran struck its first blows, firing what it claimed were 22 ballistic missiles at two military bases in Iraq that host sizeable numbers of American troops—the Ain al-Asad base in western Iraq and another facility in Erbil, in the north. Experts analysing early footage said that some of the rockets appeared to be precision-guided Fateh missiles, capable of carrying over 200kg of explosives.

Despite the bloodcurdling rhetoric and mutual threats, however, both sides seemed keen to avoid a rush to war. Iran’s foreign minister, Javad Zarif, said on Twitter that Iran had “concluded proportionate measures in self-defence”. He added: “We do not seek escalation or war, but will defend ourselves against any aggression.” In fact, although Iranian state television said 80 “American terrorists” had been killed, Iran seems to have tried to limit or avoid casualties.

The office of the Iraqi prime minister said the Iranians had given advance notice of the missile strikes, and the Pentagon and Iraqi officials said there were no casualties. At a press conference later in the day President Donald Trump said that Iran appeared to be “standing down”. He threatened no retaliation for the attack and concentrated instead on the need for greater pressure on Iran from countries such as Britain, Germany and China, and from NATO.

But even if the attacks were intended as a largely symbolic reprisal to show the Iranian public that its government was taking action, they are unlikely to be the final word. Seeming to contradict his foreign minister, Ayatollah Ali Khamanei, Iran’s supreme leader, said that such military action was “not sufficient”. And he spelled out Iran’s long-term goal: “What is important is ending the corrupting presence of America in the region.”

Iran has a long history of violence against its enemies, often stretching halfway around the world—from Buenos Aires to Bangkok—to wreak vengeance. After the publicly acknowledged missile attack, it could revert to its long-standing practice of acting behind the cloak of secrecy, or at least of the militias it has sponsored around the region. Its global reach has been enabled in part by a Shia diaspora; there are large communities in South-East Asia, south-eastern Europe and even Latin America.

In exacting further retribution, Iran’s challenge will be to craft a response that befits the severity of its loss and the fury of the ruling clerics, without provoking America, and its mercurial president, into a spasm of such violence that it endangers the survival of a regime beset by economic sanctions and anti-government protests at home. And beneath that calculation lies a game of nuclear brinkmanship that has underpinned the crisis for years.

Iran has various means at its disposal: maritime disruption; cyber warfare; attacks on America’s forces in the region or on its Gulf allies and Israel; terrorism against civilians farther afield; or even the assassination of a figure of comparable stature to General Suleimani.

The naval option is limited. Iran has often threatened to close the Strait of Hormuz, through which much of the world’s oil exports must pass, if attacked. But Western military experts think that any closure could be reversed in weeks, given the weak state of Iran’s conventional military equipment.

In May 2019, in response to tightening American sanctions, Iran embarked on an undeclared campaign of harassment against international shipping. On January 7th America warned merchant shipping that Iran might take aim at American vessels. But it is now trickier for Iran to pull off such attacks. Since September an American-led naval coalition of seven countries—the International Maritime Security Construct—has been guarding the strait; a French-led European force will shortly begin its own patrols.

Without the need for deniability, Iran might simply hurl anti-ship cruise missiles at American warships, but these can also be parried through decoys and other countermeasures. Strategists have speculated that Iran could use its fleet of 3,000 to 5,000 speedboats to mount swarming attacks on larger warships in the confined waters of the Persian Gulf, though this concept remains untested.

Cyber-attacks have proved effective in the past. “Incidents involving Iran have been among the most sophisticated, costly, and consequential attacks in the history of the internet,” note Collin Anderson, a cybersecurity researcher, and Karim Sadjadpour, an expert at the Carnegie Endowment for International Peace, a think-tank, in a report published in 2018. In 2012 Iranian hackers succeeded in wiping out 30,000 computers of Aramco, Saudi Arabia’s national oil company.

Crowdstrike, a cybersecurity company, says that the financial, defence, and oil-and-gas sectors are the most likely targets of disruption. These could take the form of crude denial-of-service attacks, in which servers are bombarded with messages.

Yet Iran’s offensive cyber capabilities are probably of limited use against America, says a former British official with knowledge of the issue. “I don’t believe the Iranians have the capability to penetrate US classified systems or industrial-control systems and generally to cause them serious military harm,” he says. Iran “will feel over-matched on cyber and deeply vulnerable” to retaliation.

A little help from Friends

Naval potshots and cyber-skirmishing may not fit Iran’s present purposes of ridding the region of American forces. On January 5th Iraq’s parliament passed a non-binding resolution to expel foreign (ie, American) forces. A day later, a letter from the American military commander in Iraq, hastily withdrawn by the Pentagon, suggested that Americans were preparing to leave.

To try to push America out, Iran will look to its broad network of friends and allies across the region. This would also amount to a posthumous tribute: General Suleimani did more than anyone to deepen Iran’s ties with militia and rebel groups such as Hizbullah in Lebanon, Kataib Hizbullah in Iraq and the Houthi movement in Yemen, all of which have been battle-hardened in recent wars.

Though these groups do not blindly follow Iranian direction, the relationship between them is now so deep that Iran’s network has developed into a “sovereign capability to conduct remote warfare and influence operations”, concluded a detailed study published by the International Institute for Strategic Studies, a think-tank, in November. “It now tips the balance of effective force in the region in Iran’s favour,” said the report.

In the past year Iran has used its regional networks to turn up the heat on America and its allies. The Houthi movement in Yemen has lobbed increasing numbers of Iranian-made drones and missiles over ever-longer distances, sending them smashing into Saudi airports and Emirati radars. Iraqi militia groups have also increased their rocket fire against bases hosting American troops; the attack which killed an American contractor on December 27th, precipitating the current crisis, was the 11th such bombardment in the previous two months.

The missile attacks on January 8th are likely to presage a period of more intense pressure on American troops. One option would be to graduate from sporadic bombardment to return to a more sustained campaign of roadside bombs, as happened in the early years of America’s occupation of Iraq, or more spectacular assaults. In 1983 large suicide-bombs struck American and French barracks in Lebanon. They killed more than 300 people, including 241 American military personnel.

Though responsibility for the bombings are still debated, American officials now believe that they were conducted by the embryonic Hizbullah, with Iran’s support. The suicide-bombings, then a novelty in the Middle East, hastened the withdrawal of American and other peacekeeping forces from Lebanon. Decades later, relentless Hizbullah attacks also pushed the Israelis out of the country.

Iran has also been happy to blow up diplomats, intelligence officers and even ordinary civilians to make a point. In 1992, Hizbullah blew up the Israeli embassy in Buenos Aires in response to Israel’s assassination of the group’s leader, Abbas Musawi, a month earlier. Two years later, it bombed a Jewish community centre in Buenos Aires.

In 2012 Hizbullah was also blamed for a suicide-bombing of Israeli tourists in Bulgaria and botched assaults on Israeli diplomats in places as far afield as Thailand, India and Georgia. The attacks were thought to be reprisals for the assassination of several Iranian nuclear scientists in the preceding years, probably by Israel.

On January 5th Hassan Nasrallah, Hizbullah’s leader, insisted that his fighters would not go after civilians such as “traders, journalists, engineers, and doctors”. They “cannot be touched,” he insisted. This should be taken with a grain of salt: hostage-taking was a favoured tactic in the 1980s. Iran-backed groups captured journalists, preachers and aid workers.

The grisliest case involved William F. Buckley, the CIA’s station chief in Beirut, who was kidnapped by Hizbullah in 1984, tortured for 14 months and killed. America’s large expatriate population of businesspeople in the Gulf offer easy pickings.

Some former officials reckon that Iran has its sights on a figure of equivalent stature to General Suleimani. “The Iranians will probably feel it necessary to avenge the killing of Suleimani by attempting to assassinate a similarly ranked US official,” says Michael Morell, a former acting director of the CIA who now hosts the Intelligence Matters podcast. “They will do so at a place and time of their choosing, which could be months from now.”

Senior American military officers, both in war zones like Afghanistan, where an American general was shot and wounded in October 2018, and peacetime bases, like those in the Gulf and Europe, are likely to look nervously over their shoulder for the foreseeable future.

Fissile brinkmanship

For all their bravado, Iranian leaders harbour genuine fears over the consequences of a large-scale American aerial attack. The mass mobilisation in response to General Suleimani’s death suggests that a strike on Iranian military forces might well bolster popular support for the regime. But if America were to strike at the leadership in Iran, or the country’s power and energy infrastructure, serious political instability could yet ensue.

All this will strengthen the appeal of a nuclear shield. On January 5th Iran abandoned the last of several restrictions on uranium enrichment that it had accepted under the 2015 nuclear deal negotiated with the American administration of Barack Obama. Mr Trump repudiated it in May 2018, setting the stage for the present crisis. He began his press conference on January 8th by stating that Iran would never be allowed on his watch to acquire a nuclear weapon.

Though Iran has not formally left the pact, or booted out international inspectors, it is signalling that it is willing once more to expand its nuclear programme. This would gradually shorten its “break-out time”—how long it takes to produce a bomb’s worth of weapons-grade fissile material.

Should Iran reinstall centrifuges that it mothballed under the deal, add to its stockpile of enriched uranium and refine it closer to weapons-grade levels, its break-out time could shrink to months or even weeks before the year was out. That would force America and Israel back onto the horns of a dilemma they faced during the 2010s: attack Iran pre-emptively and risk setting the region ablaze, or accept the risk that the regime might quickly produce a bomb.

Yet even a full-scale air campaign would not settle the matter. A study published by former American diplomats and military officers in 2012 concluded that air strikes on Iranian nuclear sites could delay Iran’s programme by only four years, and would probably increase Iranian motivation for building a nuclear weapon in secret—in much the same way that Saddam Hussein’s Iraq redoubled its clandestine nuclear endeavours after the Israeli bombing of its reactor in 1981.

After America’s agony in Iraq, it is hard to imagine any American president considering a ground invasion of Iran. After all, Mr Trump was elected on the promise to get out of the Middle East’s forever wars.

So, in a cycle of Iranian reprisal and American escalation, it is far from clear who would have the upper hand in the nuclear crisis that will surely follow.

Eurozone reform deadlock reflects deep malaise over integration

The fiscal stalemate derives in part from the frictions in Franco-German relations

Tony Barber

web_Euro battles
© Ingram Pinn/Financial Times


A few weeks ago, Germany’s ruling Christian Democratic party put out a tweet that, depending on your viewpoint, was either naively sincere or shamelessly provocative. Above what looked like a pair of bondage items, the CDU said: “We have a small fetish: solid finances without new debts.”

Fiscal rectitude, the tweet went on to say, represents justice between older and younger generations and is a precondition of investments in society’s future. Here, in a nutshell, is everything that France, Italy and other eurozone governments find frustrating about Germany’s economic policies and its approach to reforming the 19-nation currency union.

Reform is much too slow on three fronts: a common eurozone budget, completing the banking union and strengthening the European Stability Mechanism, the area’s crisis-fighting instrument. It is unfair and inaccurate to blame Germany alone. Yet unless Berlin and other capitals break the deadlock, the eurozone will find itself little better equipped to tackle the next crisis, whenever that may come, than it was to handle sovereign debt and banking sector emergencies in 2010-12.

The stalemate is symptomatic of a deeper malaise in European integration. Whether it be migration policies, attitudes to Russia or the size and focus of the EU’s 2021-27 budget, the Europeans are divided. In some cases, it is west versus east; in others, north versus south; in still others, left versus right. The divisions cut through every national political system and society as well as between governments, making it a truly Herculean task to find solutions.

In staving off the last crisis, which threatened the eurozone’s survival, governments and banks relied to a great extent on the unconventional initiatives of the European Central Bank and Mario Draghi, its former president. This earned the ECB scant praise in Germany. For years, German politicians, bankers, economists and the press have lashed out at the ECB as a robber of savings, a breaker of EU treaties and a friend to profligate southern Europe.

Such criticisms skim over the political logic behind the ECB’s monetary easing policies and the lenient enforcement of EU fiscal rules that went with them. The thinking was that eurozone governments should use the time bought by this assistance to make fundamental improvements in the currency union’s architecture. In this way, the Europeans would be strong enough in the next crisis not to rely so much on the help of others, notably the US government, the Federal Reserve and the IMF.

Although the Europeans have taken some measures, a great deal remains to be done. For example, they have committed themselves to building a “budgetary instrument for convergence and competitiveness”, exclusive to eurozone countries. But resistance from Germany and its northern allies means that the small sum envisaged for 2021 to 2027 — and even this is not yet agreed — will never be enough to stabilise the eurozone economy in a downturn, as urged by France and its supporters.

Progress on banking union appeared possible in November after Olaf Scholz, Germany’s finance minister, proposed a common deposit insurance scheme. Although he attached strict conditions, there has been an encouraging response from the central bank of Italy, normally a country suspicious of Germany’s views on how to treat banks’ ownership of government bonds.

However, Mr Scholz’s initiative does not represent an agreed line of the Christian Democrat-Social Democrat “grand coalition” government to which he belongs. His political authority has suffered from being defeated in the contest for the SPD’s leadership, a race won by a pair of little-known regional leftwingers. As for the substance, disputes over deposit insurance are in turn tangled up with efforts to strengthen the ESM, with domestic Italian political rivalries playing a part in the muddle.

The eurozone’s deadlock also derives from the frictions in Franco-German relations since Emmanuel Macron was elected French president and the waning of Chancellor Angela Merkel’s authority in Germany. Mr Macron’s looser fiscal policy since last year’s gilets-jaunes protests, and the strikes and demonstrations against his pension reform proposals, have aroused doubts in Berlin about his commitment to budgetary discipline and domestic reform. Worse, the Germans see Mr Macron as impetuous and prone to unveiling grand initiatives without first consulting allies.

Conversely, Paris sees Ms Merkel’s government as stubbornly reluctant to engage with French ideas for eurozone reform. This caution is attributable partly to never-ending quarrels in the grand coalition, and to Germany’s deep-seated shared conservatism on economic policy encapsulated in the CDU’s tweet.

In some respects, the mood is changing. The BDI, Germany’s main business lobby, and trade unions are calling for a €450bn public investment programme. Impatience with the CDU’s “small fetish” for balanced budgets is growing, including at the Bundesbank. The grand coalition may give up the ghost before September 2021. A power shift in Germany is probably coming, and it may pave the way for a more energetic effort at eurozone reform. Whether it will be too late is another matter.

What Really Matters for the Surging Price of Gold

Real U.S. government bond yields mostly govern the direction of gold prices, and rallies based on geopolitical distress often fade quickly

By Mike Bird



Gold passed $1,600 per ounce in early Asian trading hours Wednesday, its highest price in nearly seven years.

The rally, sparked by Iranian missile attacks on bases in Iraq where U.S. troops are stationed, is likely to be short-lived unless the conflict begins to affect expectations for the American economy.

Gold’s role as a haven in times of escalating conflict and stress is famous, but over the longer term it’s a poor predictor of the price of the precious metal. Instead, U.S. real yields—the yield of Treasury bonds after stripping out expected inflation—have been the most significant force acting on the price of gold.

Gold rallies based on geopolitical distress usually fade quickly. Photo: neil hall/Reuters 


The relationship isn’t perfect, but the two have a notably close correlation. Every significant move north or south for gold since the financial crisis has been paired with real yields moving in the opposite direction.

The relationship makes intuitive sense: Real yields are a proxy for the risk-free interest rate. If rates increase, they make a speculative asset such as gold, that provides no income, less attractive.

Of course, real yields often indicate panic about something, somewhere in the international economic order. But they’re not always good at that. Last year, gold logged its best year since 2010, rising around 19% as real yields sank, while the S&P 500 rose at the fastest pace in seven years as recession fears dissipated. Gold provided almost no haven in 2008, when the S&P 500 fell by almost 40% and gold ended barely up for the year.

Jeffrey Currie, head of commodities research at Goldman Sachs, noted in research this week that gold rallied immediately after the Sept. 11, 2001, attacks, and in the run-up to both Gulf wars.

But it didn’t hold the gains meaningfully in any of those cases, precisely because the impact on the wider global economy—and real Treasury yields—remained limited.

If conflict between Iran and the U.S. is so severe that it materially affects the expected path of the U.S. and global economies, the move in gold could be sustained.

But that is the channel which will largely decide gold’s movements, not perceptions of geopolitical uncertainty or investor panics.

At practically zero, the yield on 10-year Inflation-indexed Treasurys is already low even by post-financial crisis standards. It can go lower, but investors should be wary of any unexpected change of course in U.S. monetary policy: Ben Bernanke’s unexpected discussions about slowly ending the U.S. QE program in 2013 sent real yields climbing and gold down.

For traders looking at the coming hours, days and weeks, gold may provide a way to trade their views of the short-term cycle of escalation and de-escalation.

For those eyeing a more distant horizon, real yields matter most.

3 Questions About Today's Strong Economy

by: Eric Parnell, CFA


Summary

- Talk is widespread about the strong U.S. economy.

- Is it really that strong?

- What are the implications for investors if it's not?


 
“The overall U.S. economy right now looks strong.”
 
--Judy Woodruff, Democratic Presidential Primary Debate, December 19, 2019
 
 
I'm hearing a lot about the strength of the U.S. economy lately. Just this afternoon, I heard one pundit on the radio describe the U.S. economy as “stellar.” Another said it's “booming.”
 
Knowing that the economy is an important determinant of market returns over time, it's worthwhile to take a closer look. Is the U.S. economy really so strong right now?
 
The economy is indeed solid. The unemployment rate is at cycle lows that mark the lowest levels in half a century. Homebuilding activity has been picking up as of late, and real personal consumption expenditures continue to increase at a respectable pace.
 
And while corporate earnings growth has certainly cooled in recent quarters, it's still projected (at least for now) to achieve mid-single digit growth on an annualized GAAP basis over the next couple of quarters.
 
All solid readings. But here’s the thing. All of the above descriptions about the U.S. economy were true at this same exact time last year in December 2018. I wrote as much in an article on Seeking Alpha from Dec. 22, 2018.
 
The only differences were that housing starts were trending weaker, corporate earnings growth was a lot stronger, and the latest reading on U.S. real GDP growth was marginally higher at 2.9% then vs. 2.1% today.
 
But the most notable difference between then and now is the following: last December, stocks were plunging to the downside and financial experts were sounding the alarm about the looming recession.
 
Today, stocks are surging to new all-time highs and financial experts are talking about the “stellar,” “booming” economy. A notable difference indeed.
 
This leads to three questions that I have about today’s strong economy.
 
First, if the U.S. economy is so strong, why did the U.S. Federal Reserve need to cut interest rates by a quarter point three times in the second half of 2019?
 
Presumably, if the U.S. economy was “booming,” the Fed should be raising interest rates, not lowering them. This should be particularly true today given how extraordinarily low interest rates were kept for extraordinarily long in the aftermath of the financial crisis.
Of course, the Fed had been on track in doing just that, having raised interest rates by a quarter point on nine different occasions from December 2015 through December of last year.
 
But then the Fed abruptly reversed its policy course in the wake of the 2018 Q4 stock market correction. This included shifting from raising to cutting interest rates and shrinking to expanding its balance sheet. Such a dramatic shift despite no discernible change in the underlying economic data.
 
Second, if the U.S. economy is so strong, why is the federal budget deficit ballooning to record levels last seen in the wake of the financial crisis? It's estimated that the federal budget deficit will approach $1 trillion in 2019, which is more than double the sizable-in-its-own right $441 billion deficit from just a few years ago in 2015.
 
Presumably, if the U.S. economy was “stellar,” the federal budget deficit should be shrinking in size, not expanding. Ideally, the strong economy should be leading to federal budget surpluses.
 
And with the total federal debt reaching a record high approaching $23 trillion that's also at an alarmingly big 105% of U.S. GDP, we not just want but urgently need these surpluses that today’s “stellar” economy should ostensibly be capable of providing.
 
 
 
Third, if the U.S. economy is so strong, where are the inflation pressures? Presumably, if the U.S. economy was so strong today, we would be seeing it in increased inflation expectations as an increasing amount of much money would be chasing an increasingly insufficient amount of goods.
 
Instead, forward inflation expectations remain toward the low end of the range over the past decade despite rebounding some in recent months.
 
 
The talk has resurfaced lately that the U.S. Federal Reserve is willing to let the economy run hot with inflation running at an above trend rate for an extended period in order to support economic growth.
 
This sounds great, but let’s see if the Fed can actually bring the inflation rate back to its long-term target, as inflationary pressures remain well below trend today.
 
Why do these questions matter to stock investors? Because many are at least theoretically allocating to stocks today based on fundamentals that are driven by the strength of the underlying economy. If the underlying economy is truly strong, then the gains generated by stocks should be sustainable. Conversely, if the underlying economy only appears to be strong but in reality is much more fragile, so too are the associated gains generated by stocks.
 
Is the neighbor with the big house, fancy sports car and high-end gas grill truly that wealthy and successful, or are they overextended on debt and living beyond their means? One is sustainable. The other is only a matter of time.
 
In the meantime, today’s market is a matter of perspective and liquidity. A year ago, under virtually the same if not arguably better economic conditions than today, the stock market was plunging and experts were fretting about recession risks.
 
Today, the stock market is surging and experts are celebrating the strong economy. The only key difference is that the Fed was raising rates and shrinking their balance sheet a year ago, whereas today they are cutting interest rates and expanding their balance sheet.
 
 
Know the stock market in which you are investing. Continue to participate in the gains that the stock market has on offer, but resist the delusion and complacency that recent gains are somehow justified by underlying economic fundamentals, because they are not.
 
That went out the window about 1500 or so S&P points ago. Instead, know that today’s stock market rally is just expansionary liquidity driven as last year’s stock market cascade was contractionary liquidity driven.
 
Also know that when the lights go out on the stock buyback craze of the last many years, which is likely to occur once the next recession finally arrives, that the direction of the S&P 500 Index is likely to be definitively and relentlessly down. Thought the decline last year at this time was jarring?
 
You ain’t seen nothing yet.
 
For if the retail and institutional investor has been steadily exiting this market throughout the entire past decade despite the fact that it has been steadily rising, they are certainly not going to start buying once corporations finally stop repurchases.
 
Stay long stocks. But resist hubris and complacency. Be prepared, watch the economic data, and most importantly monitor global liquidity conditions closely and carefully as we proceed through 2020.

Negotiating While the World Burns

The recent COP25 climate negotiations in Madrid ended in failure, and global greenhouse-gas emissions continue to increase. At the same time, however, the stunning technological progress during the 2010s makes it possible to cut emissions at a cost far lower than everyone dared hope a decade ago.

Adair Turner

turner64_JOSH EDELSONAFP via Getty Images_firefightercalifornia


LONDON – The 2010s may be remembered as the decade when the fight against harmful climate change was lost. In 2015, at the COP21 climate conference in Paris, 196 countries agreed to limit global warming to well below 2°C above pre-industrial levels. But global greenhouse-gas (GHG) emissions have continued to increase, atmospheric concentrations of carbon dioxide are at their highest levels in 800,000 years, and current policies will likely result in warming of about 3°C by 2100.

Moreover, the recent COP25 negotiations in Madrid ended in failure, with governments squabbling over the value and allocation of “carbon credits” held over from a discredited previous policy regime.

At the same time, however, stunning technological progress during the 2010s makes it possible to cut GHG emissions at a cost far lower than we dared hope a decade ago. The costs of solar and wind power have fallen more than 80% and 70%, respectively, while lithium-ion battery costs are down from $1,000 per kilowatt-hour in 2010 to $160 per kWh today.

These and other breakthroughs guarantee that energy systems which are as much as 85% dependent on variable renewables could produce zero-carbon electricity at costs that are fully competitive with those of fossil-fuel-based systems.

In addition, it is now clear that even the “harder-to-abate” sectors of the economy, such as heavy industry (including steel, cement, and chemicals) and long-distance transport (shipping, aviation, and trucking), can be decarbonized at costs which, although significant for any one company acting alone, are trivial in terms of the impact on people’s living standards.

In May 2019, the United Kingdom’s Committee on Climate Change estimated that achieving a zero-carbon UK economy by 2050 would reduce GDP that year by no more than 1-2%. Back in 2008, the same committee, which I then chaired, had estimated a similar cost to achieve only an 80% reduction in emissions.

Lower decarbonization costs and growing awareness of climate risks have in turn prompted an increasing focus on the possibility and necessity of meeting the zero-emissions goal by 2050. In July, the UK made a legally binding commitment to meet that objective, and the European Union agreed on the same goal earlier this month.

Furthermore, Maersk, the world’s largest container-shipping firm, the Swedish steel producer SSAB, and the Indian cement company Dalmia are among the growing number of leading businesses committed to being zero-carbon by 2050 or earlier.

To achieve the Paris agreement’s climate objective, all developed economies must become zero-carbon by around mid-century, and could do so at a minimal cost to living standards. And such efforts also must include China.
Today, China seeks to negotiate at climate-change conferences as a “developing country” in view of its current GDP per capita (in purchasing-power-parity terms) of about $18,000, or around 40% of the EU average. But the government’s stated ambition is for China to become “a fully developed rich economy” by 2050, with a higher GDP per capita than any European country today. And given the quality of China’s workforce, infrastructure, and management, and its increasing technological leadership in many sectors, that objective is entirely achievable.

How rapidly China reduces emissions is therefore crucial. The country currently accounts for almost 30% of global CO2 emissions, and its per capita emissions are due to overtake Europe’s declining figure within a few years. So, if China does not dramatically cut emissions by 2050, whether Europe reduces them by 80% or 100% will have minimal impact on the rate of global warming.

China should aim to be not only a fully developed economy by 2050, but also a zero-carbon one. Achieving this will of course require huge investments. The electricity production required to support rising living standards in China, and to achieve widespread electrification of transport, residential heating, and industry, could increase from 6,700 terawatt-hours today to 14-15,000 TWh by 2050. That implies a tripling of annual wind and solar investment in order to increase renewable capacity to almost 5,000 gigawatts by 2050, together with 230 GW of nuclear.

But as a recent Energy Transitions Commission report points out, even this enormous capacity increase, along with additional investment in energy transmission, distribution, and storage, would require an overall increase in Chinese investment of less than 1% of GDP – and this in a country that saves and invests over 40% of it. Moreover, the total impact on China’s GDP in 2050, and thus on consumer living standards, would be a similarly low 1% – and potentially far less, because the zero-carbon commitment would stimulate technological progress and improve productivity.

Following the failure in Madrid, attention will now focus on prospects for the COP26 conference in Glasgow next year. That gathering, too, could get bogged down in fruitless disputes as climate diplomats argue over minor tradeoffs in supposed “burden-sharing.” Instead, governments should concentrate on the huge potential benefits of building a zero-carbon global economy.

Developed economies, plus rapidly developing China, should therefore unilaterally commit to achieving zero emissions by 2050, confident that the cost to their economies will be very small. Emerging economies should commit to meeting the same target a decade later, confident that the technological progress involved in reducing emissions in developed countries will reduce the costs of decarbonization over time.

In addition, both developed and developing countries should focus on the globally important question that the International Energy Agency highlighted in its latest World Energy Outlook: how to unleash massive investment in renewable electricity in low-income economies. That applies particularly to Africa, a continent with the world’s best solar resources but currently less than 1% of its solar photovoltaic capacity.

If next year’s COP26 can successfully address these big opportunities and challenges, the 2020s might be the decade in which we start winning the climate-change battle.


Adair Turner, Chair of the Energy Transitions Commission, was Chair of the UK Financial Services Authority from 2008 to 2012. His latest book is Between Debt and the Devil.

Signs Of A 2020 Top: “Buyers Return to Riskiest Junk Bonds”

by John Rubino



If you’re managing money and need positive results in the year ahead, you’re in a tough spot.

Stocks are at levels that in the past have preceded cycle-ending crashes while high-grade bonds yield virtually nothing but could easily produce big capital losses if interest rates rise even a little.

What do you do?

Retire, if you care about your health. But if you choose to stay in the business, you’ll have to move waaayyy out on the risk spectrum. In fixed income, that means not just junk, but extreme junk. From this week’s Wall Street Journal:

Buyers Return to Riskiest Junk Bonds


Bonds with the lowest junk credit ratings have rallied in December, rebounding from a beating taken this fall, as fund managers prepare for 2020 by adding risk to their portfolios.

The junk-bond bounce comes as optimism about global growth and easing trade tensions stokes investor appetite for other risky assets such as copper.

“People are looking at their funds and thinking ‘what can generate performance next year?’” said Eric Hess, credit analyst at mutual-fund manager Newfleet Asset Management. With higher quality bonds trading near record highs, investors are dipping back into the riskiest patch of high yield, he said.

Bonds rated triple-C—one of the lowest ratings rungs in the below-investment-grade category—returned 4.7% this month through Dec. 23 counting price changes and interest payments, according to data from Bloomberg Barclays Indices. The rebound erased the 3.2% loss triple-C bonds posted from August to November, when fears of rising defaults prompted investors to dump riskier debt and buy the safest high-yield bonds rated double-B.

The flight to safety this autumn helped double-B bonds gain about 14.6% this year through Dec. 23, pushing yields of the safer debt to a near-record low of 3.5% from around 6.2% at the end of 2018, according to data from Bloomberg Barclays. The yields bonds pay investors drop when prices rise.


At such tight yields, double-B bonds are far less likely to outperform next year, analysts said.

“We don’t like them because there is nothing left there in terms of upside potential,” said Oleg Melentyev, high-yield strategist at Bank of America Corp. “The only pocket of opportunity left is in lower quality names.”


There’s just one little problem.

In a Bloomberg interview, economist David Rosenberg explains that record high corporate borrowing isn’t generating more capital spending; it’s just producing more leverage.

Think this through for a minute: Continued economic growth requires more credit creation, but only the riskiest sectors of the economy feature bonds that are attractive to investors.

The result: The weakest companies raise the most debt, and the financial system gets riskier without producing the wealth that’s necessary to offset the mounting risks.

2020, in short, is looking like a typical end-of-cycle year, just waiting for a pin to pop the bubble.