Australia is no longer the lucky country

Blessed by economic good fortune, it now faces a future blighted by climate change

Gideon Rachman

Australia
© James Ferguson


The book The Lucky Country was written about Australia in the 1960s, and since then the label has stuck. For anyone slogging their way through a British winter, the image of Australians on the beach seemed impossibly alluring.

On my first visit to the country, 25 years ago, a Sydneysider teased me: “You guys used to deport your convicts here. Now what do you think?”

Naturally, we were sitting outside at a barbecue with beers in our hands.In the decades afterwards, Australia’s luck seemed only to improve. Asia’s boom created huge demand for the country’s commodities.

For the past three decades, Australia has not suffered a single recession — a unique record in the developed world. With a population of just 25m to share the riches of an entire continent, prosperity seemed guaranteed long into the future.

While the US and the UK fretted about the erosion of middle-class lifestyles, the “Australian dream” powered ever onwards.

But by participating so eagerly in the mining boom, Australia might also have been helping to dig its own grave. Fossil fuels are driving climate change; and, as the government now accepts, global warming is a major factor behind the fires, water shortages and record temperatures that are ravaging the country.

The statistics of homes destroyed and lives lost are tragic but do not, in themselves, suggest that a whole society is at risk. Some 27 people have so far been killed and more than 1,800 homes have been lost. But the ecological toll is horrifying.

In the state of New South Wales alone, it is feared that more than 1bn animals may have been killed by the fires or have had their habitats destroyed, including a third of the state’s koalas — devastating an animal that has become a symbol of the country and its unique wildlife. The coral of the Great Barrier Reef, another of Australia’s great natural wonders, has already been severely damaged by climate change.

The fires have not ravaged the major urban areas, where the majority of Australians live. But daily life has been severely affected by the haze from the fires. Air quality in Canberra, the federal capital, was for a while the worst in any city in the world, causing the national art gallery to close, postal services to be suspended and some embassies to shut down. In Sydney last week, pools and tennis courts, those symbols of an Australian summer, were also temporarily closed. There is anxiety about the Australian Open — the first grand slam tennis tournament of the year — which is due to start in Melbourne on January 20. (Last year play had to be suspended for a time because of extreme heat, which touched 44C).

The fires could rage in Australia for a couple more months. But the greater fears must be longer term. Average temperatures in Australia are rising, with successive summers setting new records. Last year was the hottest and driest in the country’s recorded history, with rainfall 40 per cent below average. Australians, who used to look forward to the summer, are beginning to dread it — both because of the heat and because of the foreboding about the future that it inspires.

But these fears are by no means universal.

The last Australian election saw a victory for rightwing parties which had pooh-poohed the need for drastic action on climate change, portraying climate activism as a fetish of rich urban liberals, happy to deprive ordinary Australians of their jobs, pick-up trucks and Sunday roasts.

The political right’s complacent stance about climate change, along with a series of errors, has led to a backlash against Scott Morrison, the prime minister, who once waved a lump of coal around in parliament, urging his audience not to be frightened of the stuff.

But the fact that Australia is still so dependent on coal for its energy generation and exports no longer seems like something to laugh about. The country’s go-slow approach to international climate negotiations also looks increasingly like an act of self-harm, rather than a shrewd defence of the national interest.

The government responds to its critics by pointing to an inconvenient truth. Australia accounts for just 1.3 per cent of global carbon emissions. If you include the country’s coal exports in the calculation, the figure rises to 4 per cent. Still, it is clearly true that Australia could shut its entire coal industry down without having a transformative impact on global emissions.

Australians who want to see the country take more urgent action respond that if even rich Australia fails to change its ways, it cannot expect countries with lower living standards, such as China, to rein in emissions. That may well be true. On the other hand, even if Australia does take action, there is clearly no guarantee that others will follow its example.

In their different ways — and for understandable reasons — Australian climate activists and their opponents are indulging in forms of wishful thinking. Conservatives argue that the facts around climate change are still contested and that nothing much needs to change. Those on the left argue that if the country summons up the will to take drastic action, it can make the future less threatening.

But this Australian summer suggests that the future may already have arrived.

And it looks frightening.


Technically Speaking: This Is Nuts - Part Deux

by: Lance Roberts



Summary

- In this past weekend's newsletter, we discussed the exceedingly deviated price, and overbought conditions, not to mention valuations, as key reasons why we slightly reduced risk in our portfolios.

- We remain primarily long-biased in our portfolios, but given the extreme technical overbought, and deviated conditions, it was prudent to raise some cash and protect our gains.

- Given the current momentum of the market, combined with the Fed's ongoing liquidity interventions, we only expect a correction of 5-10% to reset the overbought, optimistic, and deviated markets.

     
- This idea was discussed in more depth with members of my private investing community,Real Investment Advice PRO. 
    
 
In this past weekend's newsletter, we discussed the exceedingly deviated price, and overbought conditions, not to mention valuations, as key reasons why we slightly reduced risk in our portfolios.

"On Friday, we began the orderly process of reducing exposure in our portfolios to take in profits, reduce portfolio risk, and raise cash levels. 
In the Equity Portfolios, we reduced our weightings in some of our more extended holdings such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), UnitedHealth Group (NYSE:UNH), Johnson & Johnson (NYSE:JNJ), and Micron (NASDAQ:MU). 
In the ETF Sector Rotation Portfolio, we reduced our overweight positions in Technology (NYSEARCA:XLK), Healthcare (NYSEARCA:XLV), Mortgage Real Estate (BATS:REM), Communications (NYSEARCA:XLC), Discretionary (NYSEARCA:XLY) back to portfolio weightings for now."
 
Not surprisingly, I received more than a few emails chastising me for "bailing on the bull market, which is clearly going higher."
 
Such is hardly the case. We simply reduced our weighting in some of the companies which have had substantial gains over the last year. We remain primarily long-biased in our portfolios, but given the extreme technical overbought, and deviated conditions, it was prudent to raise some cash and protect our gains.
 
However, it wasn't just the conditions we discussed which have us concerned about the markets in the short term. Investor positioning has also reached rather extreme levels. As Bob Farrell once wrote:

"When all experts agree, something else is bound to happen."
Currently, with investors all extremely long equity exposure, the risk of a correction has become elevated.
 
 
 
 
Our composite "fear/greed" indicator, which is comprised of investor positioning, shows much the same as "bullish sentiment" has become rather extreme.
 
 
 
 
Every week, we provide RIAPRO subscribers with the latest updated technical composite score as well. This composite gauge combines extension, deviation, and momentum into a single weekly measure. Readings above 90 (Currently 92.31) are always associated with corrective actions in the market.
 
 
 
With all of these conditions aligned, the "probability" of a short-term correction has increased.
 
Given that risk outweighs reward in the short term, we decided it was prudent to reduce the numerator of that equation.
 
Why We Reduced Risk
 
It may seem irrational that we would reduce our risk exposure as the market continue to rise. Less exposure to equities means less upside performance of the portfolio, or rather, "opportunity cost." As
 
I noted:
"While the markets could certainly see a push higher in the short-term from the Fed's ongoing liquidity injections, the gains for 2020 could very well be front-loaded for investors. Taking profits and reducing risks now may lead to a short-term underperformance in portfolios, but you will likely appreciate the reduced volatility if, and when, the current optimism fades."

However, the problem for the majority of investors is the inability to predict whether the next correction will be just a "correction" within an ongoing bull market advance or something materially worse. Unfortunately, by the time most investors figure it out - it is generally far too late to do anything meaningful about it.
 
By reducing risk now it provides us three benefits for the future.
  1. Less equity risk, and higher cash levels, lowers the volatility of the portfolio which will allow us to navigate a correction process and protect our investment capital.
  2. It gives us capital to reinvest back into positions we currently own at better prices; or,
  3. Buy new positions which have corrected in price.
 
While it is entirely true that "you cannot time the market," you can do some analysis and make deliberate changes to avoid problems.
 
As shown below, price deviations from the 50-week moving average have been important markers for the sustainability of an advance historically. Prices can only deviate so far from their underlying moving average before a reversion eventually occurs. (You can't have an "average" unless price trades above and below the average during a given time frame.)
 
 
 
 
Notice that price deviations became much more augmented heading into 2000 as electronic trading came online, and Wall Street turned the markets into a "casino" for Main Street.
 
At each major deviation of price from the 50-week moving average, there has either been a significant correction or something materially worse. Currently, the deviation from the 50-week moving average is the second-highest level in history, next to the 1999 "dot.com" mania.
 
How bad could it be?
 
Measuring The Mean Reversion
 
Given the current momentum of the market, combined with the Fed's ongoing liquidity interventions, we only expect a correction of 5-10% to reset the overbought, optimistic, and deviated markets. Such a correction can be used to increase equity exposure and bring equity holdings back to target weights.
 
However, there is a risk of a larger mean reverting event, yet this is a possibility completely dismissed by the mainstream media under the guise of "this time is different."
 
With the market trading more than 3-standard deviations above the 50-week moving average, historical reversions have tended to be more brutal. I have laid out support levels below.
 
 
 
At this juncture, a correction back to the 2018 lows would entail a 25% decline. However, if a "bear market" growls, the 2015-16 highs become the target which is 34% lower. The lows of 2016 would require a 43% draft, with the 2008 highs posting a 52% "crash."
 
That can't happen you say?
 
We had two 50% declines since the turn of the decade, and the next major market decline will be fueled by the massive levels of corporate debt, underfunded pensions, and evaporation of "stock buybacks," which have accounted for almost 100% of net purchases since 2018.
 
Then there is also the other possibility as noted by technical analyst J. Brett Freeze, CFA:
"The Wave Principle suggests that the S&P 500 Index is completing a 60-year, five-wave motive structure. If this analysis is correct, it also suggests that a multi-year, three-wave corrective structure is immediately ahead. We do not make explicit price forecasts, but the Wave Principle proposes to us that, at a minimum, the lows of 2009 will be surpassed as the corrective structure completes."
 
Anything is possible, and if he is right, such a decline will eclipse the 85% decline of the Dow following the 1929 peak when stocks last reached what seemed to be a "permanently high plateau."
 
We Play The Probabilities
 
The probability is that we will see the 5-10% correction which will be used to increase our exposure.

Just don't dismiss the possibilities.
"You play the probabilities; but prepare for the possibilities."
 
No one knows with certainty what the future holds which is why we must manage portfolio risk accordingly and be prepared to react when conditions change.
 
While I am often tagged as "bearish" due to my analysis of economic and fundamental data for "what it is" rather than "what I hope it to be," I am actually neither bullish or bearish. I follow a very simple set of rules which are the core of my portfolio management philosophy which focus on capital preservation and long-term "risk-adjusted" returns.
 
As such, let me remind you of the 15-Risk Management Rules I have learned over the last 30 years:
  1. Cut losers short and let winners run. (Be a scale-up buyer into strength.)
  2. Set goals and be actionable. (Without specific goals, trades become arbitrary and increase overall portfolio risk.)
  3. Emotionally driven decisions void the investment process. (Buy high/sell low)
  4. Follow the trend. (80% of portfolio performance is determined by the long-term, monthly, trend. While a "rising tide lifts all boats," the opposite is also true.)
  5. Never let a "trading opportunity" turn into a long-term investment. (Refer to rule #1. All initial purchases are "trades," until your investment thesis is proved correct.)
  6. An investment discipline does not work if it is not followed.
  7. "Losing money" is part of the investment process. (If you are not prepared to take losses when they occur, you should not be investing.)
  8. The odds of success improve greatly when the fundamental analysis is confirmed by the technical price action. (This applies to both bull and bear markets)
  9. Never, under any circumstances, add to a losing position. (As Paul Tudor Jones once quipped: "Only losers add to losers.")
  10. Markets are either "bullish" or "bearish." During a "bull market" be only long or neutral. During a "bear market" be only neutral or short. (Bull and Bear markets are determined by their long-term trend as shown in the chart below.)
  11. When markets are trading at, or near, extremes do the opposite of the "herd."
  12. Do more of what works and less of what doesn't. (Traditional rebalancing takes money from winners and adds it to losers. Rebalance by reducing losers and adding to winners.)
  13. "Buy" and "Sell" signals are only useful if they are implemented. (Managing a portfolio without a "buy/sell" discipline is designed to fail.)
  14. Strive to be a .700 "at bat" player. (No strategy works 100% of the time. However, being consistent, controlling errors, and capitalizing on opportunity is what wins games.)
  15. Manage risk and volatility. (Controlling the variables that lead to investment mistakes is what generates returns as a byproduct.)
The current market advance both looks, and feels, like the last leg of a market "melt up" as we previously witnessed at the end of 1999. How long it can last is anyone's guess. However, importantly, it should be remembered that all good things do come to an end. Sometimes, those endings can be very disastrous to long-term investing objectives.
 
This is why focusing on "risk controls" in the short term, and avoiding subsequent major draw-downs, the long-term returns tend to take care of themselves.
 
Everyone approaches money management differently. This is just the way we do it.

Palace Intrigue and Paranoia in North Korea

By: Phillip Orchard


Two years ago, during his annual New Year’s Day address to the nation, North Korean leader Kim Jong Un effectively declared that the North was ready to shed its moniker as the Hermit Kingdom.

The North, according to Kim, had “completed” its nuclear deterrent against the United States. Kim hinted at a new openness to diplomacy and economic integration with the outside world.

Three months later, he announced a landmark shift away from Kim Il Sung’s 1960s-era “byungjin” policy, which called for parallel development of the military and economy, in favor of one focused primarily on restoring national prosperity.

A string of historic summits with the South Korean and U.S. presidents quickly followed, as did a two-year freeze on nuclear and long-range missile tests. But, critically, what didn’t follow was relief from the crippling U.S.-led sanctions regime, much less an end to joint U.S.-South Korean exercises – nor even lower-hanging fruit like an official declaration ending the Korean War.

As a result, Pyongyang welcomed the 2020s by turning back the clock – but also by displaying signs that something wasn’t quite right in the capital.

In a speech at the Dec. 28-31 Workers’ Party of Korea’s Central Committee plenum, Kim restored the byungjin doctrine, announced the end of Pyongyang’s moratoriums on nuclear and long-range missile tests, boasted about a “new strategic weapon” and warned of hard times to come in the “long-term confrontation with the U.S.”

He also presided over a sweeping politburo reshuffle, reportedly dumping economic reformers and diplomats who had been central to negotiations with the United States in favor of figures whose backgrounds point to a renewed emphasis on weapons development and ties with countries like Russia.

Curiously, he then ghosted on his New Year’s Day address for the first time, drawing parallels to 1957, when his grandfather skipped the speech following a major purge of political opponents.

Kim then disappeared from what passes as the public eye in North Korea for more than a week – coincidentally, the same week that the U.S. killed Iranian Gen. Qassem Soleimani, the U.S. reportedly increased surveillance flights over the North, and reports emerged in South Korean media that the U.S. had deployed Reapers to the South ahead of purported decapitation strike drills in the fall.

North Korean state media barely mentioned the killing, something out of character for a propaganda machine wired to seize any opportunity to paint the U.S. as the demogorgon. All the while, the North's repeatedly threatened “Christmas surprise” – expected to be some kind of missile test if the U.S. didn’t meet Pyongyang's end-of-year deadline for progress in negotiations – never arrived.

The curious confluence of events fueled all sorts of regional speculation about chaos in Pyongyang. Had divides in the North over the path forward ruptured, leading to a paralyzing power struggle that sent Kim scrambling for cover? Had the Soleimani killing put Kim on notice? North Korean palace intrigue is simply too murky to say much definitively.

But Pyongyang has good reasons to think a window of opportunity to begin integrating with the international community has closed. Just don’t expect Pyongyang to be content with staying out in the cold for long.

Threats at the Door

To discern the state of play in Pyongyang, it’s worth examining each of the recent developments individually, starting with the hot topic of the day: Is a decapitation strike against Kim by the U.S. or its allies a real possibility?

The Kim regime is famously paranoid about assassination. This is partly why Kim Jong Un refused for six years to leave the North after taking power and still does so only swaddled in bubble wrap. It’s not completely unfounded; South Korea has for years been boasting about a plan known as “Kill Chain,” involving new capabilities to launch surgical preemptive strikes if war appears imminent.

And the Trump administration openly debated plans for a “bloody nose” strike against the North in 2017. Kim, meanwhile, likely ordered the execution of his uncle, Jang Song Thaek, in 2013 out of fear he might plot with Beijing to oust the young leader. Similar fears compelled him to dispatch a pair of unwitting, VX-toting femme fatales to take out his brother, Kim Jong Nam, at the Kuala Lumpur airport in 2017.

Shortly after Kim Jong Nam’s demise, evidence emerged of a foiled assassination plot against Kim Jong Un being staged out of Chinese and Russian border regions. Pyongyang, moreover, is no stranger to the assassination game itself; in 1983, it attempted to kill South Korean President Chun Doo-hwan during a visit to Burma.

The question really comes down to U.S. capability and interest. The U.S. could certainly use a number of precision-guided missiles to go after Kim. But succeeding would hinge on targeting intelligence that the U.S. is highly unlikely to have in all but a narrow set of circumstances. U.S. Reapers can’t just hang out above Ryongsong waiting for a kill shot the way they could in Baghdad.

And even if the U.S. did have an opportunity to take Kim out, it would be exceedingly risky to use it. To be sure, North Korea could experience a dramatic transformation following the death of Kim, whose cult of personality is central to the regime’s legitimacy. But taking out Kim wouldn’t do anything about the North’s nukes, nor the thousands of missiles and conventional artillery within range of Seoul. And it would risk kicking off a civil war in a nuclear state known for institutionalized paranoia and questionable command and control structures.

Either way, what matters most here is that Kim, like his father and grandfather, consistently behaves in ways that suggest he believes the threat of decapitation is real. This fear was illustrated by state media’s silence on Soleimani; the Kim regime evidently can’t even stomach public awareness of the fact that assassinations happen. And for any number of reasons, this has only deepened their conviction that regime survival requires both a viable nuclear arsenal and a willingness to use it if an attempt to end the Kim era appears nigh.

Threats From Within

The second question worth investigating is: Do the Central Committee purges, doctrine reversal, and evidence of internal divides suggest that pressure on Kim is approaching a breaking point?

Kim was taught from a young age that the best way to navigate the ruthless political environment in Pyongyang was to eliminate potential rivals long before they become an actual threat. As a result, shake-ups, purges, rehabilitations and executions at senior levels are fairly routine in Pyongyang.

Still, the fact remains that the North has failed to get out from under excruciating sanctions pressure, and it’s now facing contentious decisions on, for example, whether or how much of its nuclear and missile programs to bargain away in pursuit of relief – plus likely divides over Kim’s outreach to the South, his efforts to keep China and Russia at arm’s length, and his nascent steps toward economic liberalization.

As noted, the North Korean government’s legitimacy, and thus the fortunes of the North Korean elite, is deeply tied to the Kim family’s cult of personality.

And by assassinating his brother, Kim likely eliminated the only realistic replacement – though his sister, Kim Yo Jong, is worth keeping an eye on. She was promoted at the plenum and has reportedly been issuing orders to the military. The two siblings are believed to be close, with Kim Jong Un keeping her in the spotlight during high-profile summits with South Korean President Moon Jae-in and U.S. President Donald Trump, for example. Still, whether her promotion is evidence that the North Korean leader is merely tightening his inner circle and short on loyalists or that he’s unwittingly grooming a potential successor is impossible to say.

Most likely, the dynamic in Pyongyang is a more extreme form of the one surrounding Chinese President Xi Jinping, who has succeeded in intertwining his fate with that of the Chinese Communist Party more broadly. Kim probably cannot be ousted altogether, but he can be gradually stripped of powers and relegated to figurehead status.

If such a scenario comes to pass, managing relations with the North would become ever more complicated.

‘Eating Grass’ vs. Playing Hardball

The developments of the past few weeks likely point to a somewhat more mundane reality: Pyongyang is simply digging in for another spell of belt tightening in the endless campaign to “defeat imperialism” – or, as Vladimir Putin put it, “eating grass” if that’s what it takes to hold on to its nukes.

Absent a willingness to risk the staggering costs of attempting to eliminate North Korea’s nuclear program by force, the U.S. just doesn’t have the leverage to force Pyongyang to budge.

But Pyongyang likewise hasn’t demonstrated the capability to force the U.S. to give up its demand for complete, verifiable and irreversible dismantlement. And until the U.S. backs off from its maximalist demands, there won’t be much room for Pyongyang to open up to the world on its own terms or force other regional powers to play ball.

The North will push Russia and China to continue their nascent efforts to unwind U.N. Security Council sanctions. If the international sanctions regime were to collapse, the U.S. would likely keep its sanctions in place – not to mention its troops within striking distance. But with the North capable of finding relief elsewhere and holding a major military deterrent, it could live with a quiet impasse with the U.S. and refrain from provocations aimed at pushing Washington back to the negotiating table.

Thus, the U.S. may eventually be inclined to tacitly consent to such a move by Moscow and Beijing. But for the time being, Moscow and Beijing both have bigger fish to fry with the U.S. and are unlikely to act on Pyongyang’s behalf unless doing so strengthens their position somehow in other negotiations with Washington.

The North will also continue probing for ways to deepen the wedge between South Korea and the U.S. (One official who survived the recent politburo reshuffle was an architect of the North’s outreach to the South.) Reunification is an imperative for both Koreas, and Seoul has been openly frustrated at the lack of progress on cross-border economic measures aimed at coaxing Pyongyang out of its shell.

But meaningful reconciliation with the South would be exceedingly fragile even in the best of circumstances. As it stands, the South remains unwilling to defy the U.S. by embracing Pyongyang too closely, and it needs the leverage it derives from its alliance with the U.S. to manage the rapprochement.

Perhaps the only real card the North has to play, then, is a resumption of long-range missile testing. There are any number of plausible explanations for why Pyongyang stood pat over the holidays. It’s possible that the lack of a test is the result of internal divides. It’s possible that Pyongyang thought twice about provoking the U.S.

It’s possible that it felt it succeeded in getting Washington's attention – or that it received a small concession from, say, China in exchange for holding off. It’s also possible that the “new strategic weapon" just isn’t ready for testing yet. (The North has far more ambitious goals for its missile program than the Hwasong-15 intercontinental ballistic missiles it tested in 2017, and systems like solid-fuel long-range missiles, particularly submarine-launched ballistic missiles, are an order of magnitude more difficult to develop.)


Missile Launches in North Korea, 1984-Present
(click to enlarge)


Whatever the case, don’t be surprised when North Korea starts back down this road.

The foremost risk of crossing the U.S. red line by testing another ICBM is that it provokes a U.S. military response. Just how big this risk is depends on how willing you think the U.S. is to go to war with a country that would, at minimum, impose staggering casualties on U.S. and allied troops – and that may very well be capable of plopping nukes down on U.S. bases around the region and beyond.

The game has changed since the days of endless fruitless negotiations with the “ferocious, weak and crazy” country led by Kim’s father. To be clear, war with the U.S. is a big enough risk that the North likely won’t jump straight to ICBM tests.

The primary goal for the time being will remain getting the U.S. to put sanctions relief on the table in exchange for a permanent freeze. So expect it to toe the line with, say, shorter-range tests or other demonstrations of new capabilities before crossing it.

Even then, it would leave the U.S. room to convince itself it need not retaliate, for example by leaving doubt about whether it has finally mastered the all-important issue of ICBM reentry and targeting systems. But the lesson from 2017 for the North was that high-profile tests are the only way to get the U.S. to the table. And it won’t be content to eat grass forever.

Trump’s Iranian Precipice

Under President Donald Trump, the United States has no clear objectives regarding Iran, and hence no clearly defined strategy. In the Middle East, the US should have learned by now, that is a recipe for disaster.

Javier Solana

solana113_JIM WATSONAFP via Getty Images_trump iran


MADRID – The new year began with yet another senseless foreign-policy decision by US President Donald Trump. The assassination of General Qassem Suleimani, who led the extraterritorial operations of Iran’s Revolutionary Guard, was a reckless, provocative, and shortsighted move.

Suleimani no doubt had an extremely pernicious influence in the Middle East. But he also was the leader of an armed branch of the Iranian state and enjoyed obvious personal popularity in his country, no matter how much Trump pretends otherwise.

Once again, the United States has acted excessively and set a dangerous precedent that its adversaries could use as an excuse to carry out similar operations. After the attack on Suleimani, Trump went so far as to threaten Iran repeatedly with the destruction of some of the country’s precious cultural sites, which would constitute a war crime.

Although Trump seems to have reconsidered, his chronic impetuosity only highlights the lack of proper planning. The assassination of Suleimani was a sensationalist move, probably intended mainly for domestic consumption. Yet, in the long term, will it be effective?

Obviously, the answer will depend on Trump’s objectives vis-à-vis Iran. His administration has argued that the president’s drastic intervention will have a deterrent effect on the Iranian regime, to which Suleimani was an absolutely indispensable asset.

That assumption is questionable. Although Iran’s retaliation – in the form of missile attacks against two Iraqi bases that house US troops – has so far been relatively subdued, the regime will stick to its guns. Nor can it be supposed that the loss of Suleimani, for all his importance, will be insurmountable for the regime, which has already named Suleimani’s trusted deputy as his successor.

The crux of the problem for the US is that it has no clear objectives regarding Iran, and hence no clearly defined strategy. In the Middle East, the US should have learned by now, that is a recipe for disaster. Today’s tensions do not imply that either Trump or Iran’s leaders are seeking war.

Yet, on many occasions, states have stumbled into unwanted conflicts, especially when overconfidence makes them reckless. With his wild swings, Trump has managed to force not only Iran into a corner (which could prompt its leaders to adopt a more aggressive stance), but has also painted himself into one.

In the absence of a plan, it is no surprise that his administration constantly contradicts itself.

Just when Iran was feeling the effects of a wave of brutally repressed domestic protests, the US relieved the pressure on the Iranian leadership. The huge crowds that turned out to mourn Suleimani do not lie. With Iran’s legislative elections just a few weeks away, the US offered the most conservative and anti-American elements in the country a golden opportunity.

Now, however, the spotlight has returned to the Iranian regime, owing to its own mistakes. After Iran’s leaders admitted – following three days of official denials – that Iranian missiles accidentally downed a Ukrainian civilian airplane, killing all 176 people aboard, the regime has once again become the target of popular outrage. The way the situation has played out serves as a reminder of Iranian citizens day-to-day troubles, which reflect the effects of domestic and foreign negligence.

The anti-regime protests roiling Iran are being echoed in other Middle Eastern countries where it wields notable influence. Overcoming their respective religious differences, both Lebanese and Iraqis have in recent months risen up against Iran’s meddling, much of which was orchestrated by Suleimani himself.

But Trump ignored Napoleon’s famous maxim: “Never interrupt your enemy while he is making a mistake.” Now, the Iraqi parliament has demanded (albeit symbolically) the withdrawal of US troops stationed in the country – which would be in Iran’s interest. The Trump administration has responded chaotically, by mistakenly announcing a troop withdrawal and then denying that a pullout was imminent.

Nonetheless, the possibility that Trump might end the US military presence in Iraq is not to be dismissed, even though the withdrawal would likely be rather undignified. For now, NATO forces fighting the Islamic State have suspended their operations, and some US allies have begun to evacuate their troops from Iraq.

But this does not mean that the US is leaving the Middle East: on the contrary, the number of American troops in the region has increased by 15,000 over the last six months. And while US energy dependence on the Middle East may have diminished, the “pivot” toward Asia, announced by the Obama administration, hasn’t happened yet. Obviously, a larger conflict with Iran would hamper US efforts to contain China, America’s main global competitor.

To the long list of US follies must be added the perverse incentives that Trump has highlighted with his latest blow against Iran, which has raised an uncomfortable question: Would the US have acted the same way toward nuclear-armed North Korea?

Iran fulfilled, to the letter, the 2015 nuclear deal signed by the main global powers – formally known as the Joint Comprehensive Plan of Action (JCPOA) – and continued to fulfill it for a year after Trump unilaterally withdrew the US from the pact. And yet, while Trump held amicable meetings with North Korean leader Kim Jong-un, his administration subjected Iran to crushing economic sanctions – treatment that is unlikely to encourage the Kim regime to stake its future on denuclearization.

Although Iran has announced that it will now stop abiding by the JCPOA’s restrictions on its nuclear program, it has not closed the door on the possibility of salvaging the deal. Moreover, US-Iranian tensions seem to have diminished slightly in recent days. But this may be a mirage: the downing of the Ukrainian plane has added a new element to the equation, which the Trump administration appears all too eager to exploit. Furthermore, Trump has not abandoned his intolerable demands and continues to pressure the JCPOA’s other signatories to abandon the agreement.

In the end, the US will have to recognize an indisputable reality: in situations as critical as this one, which was created unnecessarily, diplomacy is not an option, but an obligation. To avoid catastrophe, which should be the top priority for all parties involved, this is without doubt the road that must be taken.


Javier Solana, a former EU High Representative for Foreign Affairs and Security Policy, Secretary-General of NATO, and Foreign Minister of Spain, is currently President of the Esade Center for Global Economy and Geopolitics and Distinguished Fellow at the Brookings Institution.