The House Of Cards Is Ready To Collapse

Bert Dohmen


Summary

- Bullish enthusiasm has gone on a parabolic trajectory in the month of August, guaranteeing a volatile election season for the stock market.

- Economic indicators no longer paint an optimistic picture - now, they are showing a deceleration in the recovery, coinciding with a deterioration in sentiment.

- Investors relying on the Fed to "stimulate" the markets with loose policy are being roped into a trap.

Note to readers: We published this article on September 1st, prior to the selloffs on the 3rd and 4th.


Despite new signs that the U.S.'s economic growth will be slow and painful, the euphoria we've seen take hold of markets over the past few months has now started to accelerate. Investors who are already overexposed to the stock market are loading themselves up with even more risky assets, even as we closely approach a volatile election season.

Bearish Divergences

The Put/Call ratio, which measures the ratio of bearish versus bullish options bets on the stock market, has fallen to record 2-year lows repeatedly over the past several months. This reflects the fact that speculative activity is the highest it has ever been over this period as SPY (orange line) has climbed to new record highs:



This confirms everything we've written over the past several weeks. It is increasingly important that investors consider the psychology and behavior currently driving the markets higher, and why it is unsustainable.

This week, one analyst on TV said, "We have to be comfortable in being uncomfortable. You have to stay fully invested." A major CEO of an investment firm said that he has "no doubt that by next year, the economy will be as strong as last year."

Attitudes like the ones above tempt fate and will ultimately lead investors to ruin if they increase their exposure in this market. The major indices continue to depict a distorted image of what's really going on for the vast majority of companies.

The divergences in market breadth we've previously highlighted have grown substantially larger during the month of August. Below, we have an hourly chart of the S&P 500 (red line) compared to its "equal-weighted" counterpart (candlesticks):



The two have veered off in different directions, with the "equal-weighted" version making a clear top and holding in a steady downtrend since August 12th.

Divergences of this sort typically signal that the markets are currently in a period of distribution. Large Wall Street firms have slowly and carefully unloaded their positions over the last 2 and a half months onto retail investors, who are walking into a trap.

A similar "distribution" trap was set earlier this year, just before the February plunge. A warning sign emerged when the S&P 500 began to diverge from its equal-weighted counterpart only a few weeks ahead of the crash.

Illusions of a Strong Stock Market and Economy

The narrative of a strong stock market rests upon a handful of the largest companies. The largest 10 constituents of the S&P 500 by market cap now make up over 29% of the index.

What's less known is that the largest 10 companies in the NASDAQ 100 make up over 50% of the QQQ's holdings.

While an upcoming bear market is likely to be triggered by technical weaknesses like the one discussed above, it will be prolonged by the real outlook for the U.S. economy.

Economic indicators no longer paint an optimistic picture - now they are showing a deceleration in the recovery, coinciding with a deterioration in sentiment.

The most concerning factor of all, however, is a reduction in stimulus. The Peterson Institute for International Economics estimated that fiscal aid to U.S. households will plummet by $500 billion if Congress is unable to craft a new rescue package. The result? A further 4-5% decrease in GDP.

With the last government stimulus payments being exhausted after July, the decline we're already seeing in the economic indicators will become even more severe. The effect will be felt throughout the entire stock market, although some will be hit harder than others.

In our latest Wellington Letter, we discuss various sectors of the economy which have seen the largest demand declines due to COVID-19. Many pessimistic forecasts at the outset of the pandemic predicted that airlines, commercial real estate, resorts and other hard-hit sectors would not recover until the end of the year.

Now, more than 5 months after the plunge, we know for certain the recovery will be much longer and worse than even the most pessimistic forecasts in March. Already, the number of large corporate bankruptcies has put 2020 on pace for the highest annual count on record, as shown below:



Chart showing that Covid-19 has triggered a record wave of corporate bankruptcies

The Fed's Impact

Monetary policy has grabbed everyone's attention since Chairman Powell announced the adoption of "average inflation targeting." The yield curve has steepened, money is flowing back into gold after several weeks of consolidation, and now everyone is discussing the prospects of big inflation down the road.

Is this really viable? One important factor to consider is the money velocity. This is the rate at which dollars exchange hands in the economy and is a critical factor driving inflation. The Fed, however, has very limited control over it.

The velocity of the money supply not only witnessed a steady decline over the past two decades, but saw a massive drop of over 20% in the second quarter of 2020, as shown on the chart below:




Trends like this are indicative that inflation won't be going significantly higher anytime soon.

Bulls continue to hope that the economy will recover in the same way the stock market did, which is nearly impossible. Central banks can exert their powerful influence, but that only works until investors realize that artificial credit is not a substitute for genuine economic growth.

In the meantime, we will closely watch markets for when this inevitable turning point emerges.

China’s Middle East strategy comes at a cost to the US

Beijing gains in oil and influence as successive presidents in Washington withdraw

Jamil Anderlini

Ingram Pinn illustration of Jamil Anderlini column ‘China’s Middle East strategy comes at a cost to the US’
© Ingram Pinn/Financial Times



Critics of the 2003 US invasion of Iraq have always believed the real motivation was taking control of the world’s second-largest proven oil reserves.

Even the architects of Operation Iraqi Freedom were convinced Iraqi oil revenues would quickly fund reconstruction of a US client state that would help redraw the contours of the Middle East in America’s favour. But if oil and influence were the prizes, then it seems China, not America, has ultimately won the Iraq war and its aftermath — without ever firing a shot.

Today China, the world’s largest importer of crude oil, is Iraq’s biggest trading partner. Only Russia sells more oil to Beijing. In the first half of this year, Iraqi oil shipments to China increased almost 30 per cent from a year earlier and accounted for more than a third of Iraq’s total exports. During a visit to Beijing last year, Adel Abdul Mahdi, then Iraq’s prime minister, described Sino-Iraqi relations as poised for a “quantum leap” and his electricity minister wrote “China is our primary option as a strategic partner in the long run.”

Meanwhile, Iraqi oil exports to the US nearly halved in the first half of the year and the Pentagon plans to reduce its remaining troops in Iraq by a third in the coming months.

A similar dynamic is playing out in Afghanistan, as America’s longest war finally draws to a close. Afghan and Pakistani officials tell the Financial Times that Beijing is effectively in control of the peace process and is promising the Taliban lavish energy and infrastructure investment once the US has left for good.

China’s influence is rapidly growing across the Middle East at a time when American commitment is being questioned by regional allies and US politicians alike. Beijing is the biggest foreign investor in the region and has sealed strategic partnerships with all Gulf states apart from Bahrain. Most investment has gone to traditional US allies, many of them also eager customers of Chinese military technology.

China’s first ever overseas military base was established in Djibouti three years ago. But Beijing is also investing heavily in commercial ports that could easily be converted to naval use in other strategic locations, including Pakistan’s Gwadar and Oman’s Duqm port on either side of the Gulf of Oman.

Along with the Strait of Malacca between Malaysia and Indonesia’s island of Sumatra, China considers the Strait of Hormuz and the Bab al-Mandab Strait as critical to its economic and military survival since the bulk of its energy imports are shipped through these strategic chokepoints.

As Sino-US relations deteriorate, Beijing’s goal of increasing control of these waterways and reducing America’s ability to cut them off in a conflict has taken on greater urgency. It is the main reason why China has built a navy that is now bigger, if not more advanced, than that of the US.

Until recently, Beijing had followed a hands-off policy in the Middle East of being a friend to everyone but allies with none. The success of this has been on display as it negotiates a $400bn investment and security pact with Iran while assisting Iran’s enemy Saudi Arabia with its nuclear programme. And it fully supports the Palestinian cause while charming Israel into sharing state of the art technology and leasing key strategic ports to Chinese state enterprises.

But perhaps the most powerful sign of China’s rising influence in the region is the fact that almost every Muslim-majority country has supported the incarceration of as many as 2m Muslims in re-education camps in western China. In public statements and joint letters to the UN, countries including Saudi Arabia, Egypt, Kuwait, Iraq and the UAE have all praised the camps and suppression of Islam in the region of Xinjiang as necessary “counterterror and deradicalisation” efforts that have brought “happiness, fulfilment and security”.

In the US, two successive presidents have been elected on promises to extricate the country from Middle Eastern entanglements. In the wake of the shale oil revolution, with America now virtually self-sufficient in energy, the rationale for pouring more blood and treasure into the sand looks thin.

Washington’s resistance to playing regional policeman while other countries, particularly China, reap all the benefits has been evident for a while. It was Barack Obama’s administration that first proposed the “pivot to Asia” to refocus American diplomatic and military might on the Asia-Pacific and counter China’s rise as a regional hegemon. President Donald Trump has accelerated that strategy.

But what seems like a compelling case for American retreat from the Middle East is now complicated by China’s rapid advances there. If the US goal is to contain China’s ambitions in Asia and shore up close allies Japan, South Korea and Taiwan, pulling out of the Middle East is the last thing it should do.

Most Asian countries are even more dependent on ship-borne oil than China. Ceding control of the key waterways around the Arabian Peninsula to Beijing would force all countries in Asia to rethink their strategic alliances and make them far more susceptible to the kind of coercive diplomacy China is using all over the world.

Whoever wins the US presidential election in November will face the uncomfortable reality that competition with and containment of China now runs through the Middle East.

China Exports Are Booming and Trade Surplus Is Widening—Why Is the Yuan So Weak?

Many factors are at work to push the yuan higher, but its climb has been sluggish

By Mike Bird


PHOTO: PAUL YEUNG/BLOOMBERG NEWS



China’s August exports were up 9.5% from a year earlier, beating expectations, while import numbers declined. That prompts a nagging question in currency markets: With a widening trade surplus, why isn’t the Chinese yuan rising more?

It’s true that at 6.83 to the dollar the currency is at its strongest level in over a year, but that mostly reflects a weaker greenback, not a stronger yuan. The ICE Dollar Index, which tracks the dollar’s value against a basket of currencies, is down more steeply this year and this quarter than the dollar is against the yuan specifically.




The yields on China’s 10-year government bonds exceed those on their U.S. equivalents by 2.4 percentage points, a larger gap than in the aftermath of the global financial crisis, making the yuan-denominated debt an attractive investment opportunity.

The gap speaks to the relative austerity of Beijing’s response to the pandemic: The year on-year-growth in China’s money supply lags behind those of the U.S., the U.K., the eurozone and Japan.

The inability of the vast majority of would-be Chinese tourists to leave the country is an advantage too, since China is a net importer of tourism services: Its residents spend more abroad than visitors spend in China.

Though the reliability of official Chinese data is partial, there is little sign the government is intervening in the currency market to suppress the yuan’s value. Foreign-exchange reserve figures ticked up slightly in July, but have been largely quiescent. Alternative measures of intervention haven’t indicated any major activity, though it can’t be entirely ruled out.


So why isn’t the yuan stronger? Goldman Sachs analysts offer at least one good reason: Currency settlement data suggests that only 32% of the net proceeds of July’s goods trade was repatriated, meaning less impact on currency markets.

Though foreign holdings of Chinese government bonds have risen, the increase this year is minor and tentative in the grand scheme of global capital flows: a little more than $40 billion, equivalent to roughly two thirds of August’s trade surplus in goods.

Other news on Monday offered an insight into one less quantifiable factor that may be holding the yuan back. The U.S. is weighing import controls against China’s largest chip maker, Semiconductor Manufacturing International —a fresh symbol of trans-Pacific turmoil, heaping additional risk on the ownership of Chinese assets.

Even with a trade surplus, fewer tourists exchanging yuan to travel overseas, and an advantage in yields, the now-constant threat of commercial Cold War will hang over Chinese assets. And with that in place, the currency will likely continue to be weaker than other fundamentals might warrant.

miércoles, septiembre 23, 2020

THE END OF HOPE IN THE MIDDLE EAST / FOREIGN POLICY

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The End of Hope in the Middle East

The region has always had problems—but it’s now almost past the point of recovery.

BY STEVEN A. COOK

A soldier runs for cover in Libya.
A soldier of the U.N.-backed Government of National Accord takes cover from Libyan National Army snipers on a front line in Tripoli, Libya, on Feb. 17. AMRU SALAHUDDIEN/CHINE NOUVELLE/SIPA/SHUTTERSTOCK


Summer always seems to be the cruelest season in the Middle East. The examples include the June 1967 war, Israel’s invasion of Lebanon in 1982, the hijacking of Trans World Airlines Flight 847 in 1985, Saddam Hussein’s invasion of Kuwait in 1990, and the Islamic State’s rampage through Iraq in 2014. The summer of 2020 has already joined that list.

But the world should also be attuned to another possibility. Given how widespread bloodshed, despair, hunger, disease, and repression have become, a new—and far darker—chapter for the region is about to begin.

A little more than a decade ago, analysts imagined a region in which political systems were reliably authoritarian and stable. Since the Arab uprisings in 2011, the narrative has shifted to one of instability but with an expectation of an imminent new wave of democratization and further economic and political progress.

Those hopes are now gone. The Middle East has long faced challenges—foreign intervention, authoritarian leaders, distorted and uneven economic development, extremism, wars, and civil conflict. But this year has added to the mix a global pandemic and a wrenching global recession, resulting in a scale of crisis that exceeds any other time in history.

The region has become a dystopia marked by violence, resurgent authoritarianism, economic dislocation, and regional conflict, with no clear way out. There were times in the not-so-distant past that developments in the Middle East rendered even the most optimistic despairing, but those were moments when crises seemed to come one at a time. When they abated, there always seemed the possibility that better days would come. Not anymore. For the first time, it is entirely reasonable to feel hopeless about the Middle East.

A store is hit by airstrikes in Yemen.

A store is hit by airstrikes in Yemen.
A worker reacts as he stands on the wreckage of a store hit by Saudi-led airstrikes in Sanaa, Yemen, on July 2. KHALED ABDULLAH/REUTERS


The litany of horrors is long. There is Yemen, the poorest country in the region, where a multisided civil-cum-proxy war has laid waste to hospitals and wedding halls and school buses packed with children amid an uncontrolled outbreak of cholera—the largest in epidemiologically recorded history—and now COVID-19, which the head of health for the International Committee of the Red Cross stated would be “impossible to manage” in the country.

Not unlike Yemen, Iraq is a country in terminal collapse with little hope of reversing its fortunes. That’s because Iraqi political institutions manage to generate corruption while inviting manipulation from neighboring Iran. Sometimes state failure is a more chronic condition, as with Egypt, and since coming to power in a popularly supported coup in 2013, President Abdel Fattah al-Sisi has not only overseen a multiyear assault on society but initiated the bloodiest and most repressive period in contemporary Egyptian history.

Then there are the Palestinians, who seem fated to live in a bizarre and macabre existence, locked into the Gaza Strip or living in the West Bank with the trappings of statehood and an elaborate facade of ministries, protocol, and bureaucracy.

But Yemenis, Iraqis, Egyptians, and Palestinians are not the region’s only sufferers nor its most emblematic. The cases of Lebanon, Syria, and Libya deserve deeper consideration. In these places, the continuing grind of dystopia is most visibly on the verge of unprecedented collapse.

In Lebanon, Syria, and Libya, the continuing grind of dystopia is most visibly on the verge of unprecedented collapse.

Lebanon, whose capital of Beirut is oft-cited as the “Paris of the Middle East,” has experienced one shattering blow after another. Last fall, the government tried to impose a 20-cent daily tax on WhatsApp communications. It was an odd move until it became clear just how desperate the government had become to raise revenue in the shell game that had become Lebanon’s finances.

It worked so long as private banks attracted dollar deposits through the promise of high interest rates and then turned around and loaned the money to the government. In mid-2019, however, dollar deposits decreased, but a skittish Lebanese public began demanding more dollars. In order to maintain the illusion of currency stability—critical to attracting greenbacks—Lebanon’s central bankers maintained the lira’s exchange rate to the dollar at about 1,500 to 1.

That’s when the black market took over, shattering the illusion of the lira’s stability, leading to a sharp depreciation in the Lebanese currency. This produced the worst of all possible worlds: runaway inflation, a government unwilling or unable to undertake reform, and mass protests against the WhatsApp tax that quickly transformed into demands for the end of the government. In March, Lebanon defaulted on its debt.

The coronavirus pandemic has only added to the misery of Lebanon’s financial crisis. Although the incidence rate and case fatality rate (roughly 1 percent) are low in comparison to other countries in the region, authorities have imposed lockdown measures that have had a multiplying effect on the economic well-being of the Lebanese.

Now people who have been thrown out of work due to the health crisis are contending with the parallel effects of a precipitous slide in the value of the currency. The lira is worth 80 percent less than it was in the fall of 2019, rendering goods and services more expensive. The World Bank estimates that poverty will almost double in 2020, enveloping perhaps as much as 50 percent of the population.

The Lebanese, like the Syrian and Palestinian refugees in their midst, are now experiencing food insecurity. Bartering has increased throughout the country as people desperately try to secure enough supplies to survive on a daily basis. People who lived through the civil war say the economic situation is much worse now than it was then.


A helicopter puts out a fire at the scene of an explosion at Beirut’s port on Aug. 4. STR/AFP VIA GETTY


Even if the International Monetary Fund had enough resources to help Lebanon, it is not clear who would have the authority to go to the fund or whether they would have any capacity to implement painful reforms. The state has collapsed and along with it the credibility and authority of Lebanon’s political groups and factions, including Hezbollah.

The root cause of the parlous state of affairs is an old and recurring story. The country’s confessional political order that was intended to create a rough, but uneven, balance to ensure a modicum of stability was little more than a system of spoils for Maronite, Sunni, and Shiite leaders who plundered the country. Protesters rightly want to tear it all down, but in favor of what?

Vague generalities will not cut it in the contested space that Lebanon has become, where groups are armed, external actors have compelling interests, and the competition over who gets to control whatever is left of state resources is intense.

Observers have often averred that it is unlikely that Lebanon would ever fall into the kind of violence that engulfed the country between 1975 and 1990. The historical memory was too great.

Too much progress had been made putting the country back together. Warlordism was a thing of the past that had been tamed in the postwar political game.

This is comforting on one level, but under present circumstances, Lebanon was a tinderbox for much of the summer. And then the explosion at Beirut’s port happened, throwing the country into further turmoil and leading—mercifully—to the resignation of the government.

Of course one can conjure any number of scenarios for Lebanon, but it would be naive to seriously entertain any of the positive ones. In the aftermath of the explosion, the Lebanese people have been the lone bright spot banding together to help each other and clean the streets of debris, but as time goes on and the collapse of the country means even more hardship, people will be left to themselves to find relative safety and succor.

Where does anyone believe they will find it? Most likely where they have found it before: within their own faith and ethnic communities.

Adding to this misery is Lebanon’s collapse in a regional context. There are any number of external and internal actors who might want to use the country’s tribulations to squeeze their enemies and rivals, Hezbollah included. Perhaps the Israelis, Saudis, Iranians, and others will exercise atypical restraint, but it seems unlikely given the incentives to pursue regional proxy fights in precisely those places where the state either does not or barely exists. The future is unknowable, but Lebanon’s general trajectory is almost assuredly profoundly and distressingly negative.

Men are questioned in Deir Ezzor, Syria.
Men who fled the last area of Islamic State control wait to be questioned about their links to the terrorist group by coalition forces in Deir Ezzor, Syria, on Feb. 7, 2019. IVOR PRICKETT


At least the Lebanese have not been forced to endure what their Syrian neighbors have experienced over the last almost decade. Bashar al-Assad’s regime has become a machine of death and dispossession. Its onetime peaceful opponents who wanted the opportunity to build a better society gave way long ago to an array of militias, extremists, and outside powers waging war against Assad and each other for their own reasons—and always at the expense of Syrians.

The near-total disregard for human life throughout the conflict has rendered the well-known statistics meaningless. Even so, they bear repeating even if they are unbearable: The conflict in Syria has killed an estimated 585,000 people, including tens of thousands of children.

More than 12 million Syrians—a stunning 57 percent of Syria’s prewar population—have fled their homes. Among those who fled, 5.6 million now live as refugees in every condition imaginable with little chance of ever returning home.

Not long ago, the thinking in Western and Arab capitals was that Assad had prevailed, in no small measure because of Russia’s military intervention and diplomatic support, yet the war continues. In places that were once believed to be pacified, there are new protests and new regime violence.

With Syria’s economy continuing to deteriorate with the collapse of Lebanon and in the absence of any possible reconstruction, Assad’s supporters have grown ornery as their expected economic rewards of victory have failed to materialize.

The imposition of new U.S. sanctions through the Caesar Syria Civilian Protection Act—which specifically targets members of Assad’s inner circle, regime supporters, and entities that do business with them—promises to accentuate the Syrian government’s economic problems and international isolation.


A woman and child stand at the fence in the foreigners section of al-Hol detention camp in northern Syria on March 28, 2019. IVOR PRICKETT


No doubt, there will be cheers throughout the world if the Assad regime falls, but they will be fleeting. Assad’s demise would likely lead not to an end of the struggle for Syria but to a new phase in the fight.

The idea that the combatants would lay down their arms and negotiate a way forward after so much bloodshed is as unrealistic as the idea—often asserted in the early days of the Syrian uprising—that it was only a matter of time before Assad fell.

Whatever comes to pass, those Syrians who remain in the country will continue to be caught in the middle, forced to exist in a shattered land fought over by people whose cruelty knows no bounds, with no end to the violence in sight.


Fighters of the U.N.-backed Government of National Accord take positions during clashes with Libyan National Army forces at the As-Sawani front line in Tripoli on March 4. AMRU SALAHUDDIEN/XINHUA VIA GETTY


Libya’s demise has received far less attention than Syria’s. In 2011, when Muammar al-Qaddafi fled Tripoli, some Western analysts thought Libyans were best positioned in the region to build a democratic and prosperous future because it was, as they said, a “clean slate.” Except that it wasn’t and the country quickly fragmented.

As Libya split along geographic and tribal lines, a dizzying array of militias and extremist groups stepped into the breach, and in time two different governments claimed a mandate to lead the country.

The country tipped into full-scale civil war when Gen. Khalifa Haftar sought to overthrow his Tripoli-based rivals in the spring of 2019. In this effort, the former Qaddafi loyalist had the support of Egypt, the United Arab Emirates, France, and Russia, all of which harbored a confluence of concerns that converged on Haftar and his Libyan National Army.

As Libya split along geographic and tribal lines, a dizzying array of militias and extremist groups stepped into the breach.

Haftar’s march on Tripoli has been beaten back only recently with help from Turkey and Turkish-aligned Syrian militia members. Ankara’s interests in Libya are a combination of Turkish domestic politics, principle, a bid for Islamist leadership, animus toward Egypt and the UAE, and geostrategic calculation.

Like their adversaries, the Turks care little about the well-being of Libyans and have sought to extend the war despite Haftar’s string of defeats and sudden willingness for negotiations. Turkish bravado may be misplaced; Haftar is weakened but not defeated. If Turkish President Recep Tayyip Erdogan overplays his hand, he and his allies in Tripoli may confront newly galvanized opponents in the eastern part of the country.

Thus all the questions in Washington and European capitals during early summer about the prospect for war between Turkey and Egypt. The Turks demonstrated significant military capacity in helping the internationally recognized government turn almost certain defeat into potential victory.

But this has roused Egyptian ire. Since 2013, Turkey has led the effort to delegitimize and undermine Sisi’s regime. Ankara welcomed the Muslim Brotherhood to Turkey after the coup that toppled Mohamed Morsi and brought Sisi to power. The two countries are on opposite sides of major conflicts in the region including in Syria, Gaza, and, of course, Libya.

The Egyptians have never successfully projected military power beyond their border, but Libya is Egypt’s backyard. And with increased Turkish naval activity in the Eastern Mediterranean, including a maritime economic exclusion zone agreement with the Libyans, Egyptian security planners are no doubt alarmed. In the third week of June, Sisi declared Tripoli’s intention to retake Sirte with Turkish help a “red line.”

It may have been a bluff, but for all of the Egyptian military’s technical weakness in comparison to the Turkish armed forces—the second largest in NATO—the Egyptians can mobilize a lot of soldiers, armor, and F-16s against the Turks, who are far from home. Any conflict involving these two armies would further fragment Libya, perpetuating the civil conflict and setting the state for the country’s actual split.

Given these circumstances, it seems that Qaddafi’s son Saif al-Islam was correct when, in February 2011, he warned fellow Libyans that, unlike Tunisians and Egyptians, they would fight against each other for the next 40 years, though it is unclear whether he understood how much help killing each other they would get from outsiders.

Some relief for Libyans came in the form of a cease-fire proposal from the Tripoli government in August. It was good news that the Egyptians, Emiratis, and speaker of the eastern-based House of Representatives, Aguila Saleh Issa, all welcomed it. Yet Haftar did not sign on, and his forces continue to battle near Sirte. Even if he is compelled to lay down his arms, it seems unrealistic after a decade of conflict to expect Libyans to come to some kind of durable agreement about what kind of political system they want.

In the absence of such an understanding, the fragmentary pressures on Libya will continue to fuel violence. This would be bad enough, but now the interests of outside powers are fully engaged in Libya, where Russians, Turks, Qataris, Egyptians, Emiratis, French, and Italians are playing out regional power struggles that extend from the Persian Gulf to Europe’s Mediterranean shores. This is a toxic brew of issues that does not lend itself to peace and security for Libyans.


Palestinians put out a fire that broke out in a market in the Nuseirat refugee camp in central Gaza Strip on March 5. MOHAMMED ABED/AFP VIA GETTY IMAGES


It is a challenge to establish some common cause for the Middle East’s downward spiral. Lebanon is different from Libya. Iraq is nothing like the West Bank and Gaza Strip. There are no parallels to what ails Yemen or to Egypt’s problems.

Yet at a level of abstraction, there are some commonalities. All of these places have contested sovereignty, contested identities, and perpetually bad governance that constitute a vicious feedback loop from which there does not seem to be an escape.

For all the problems buffeting the region, it is impossible to know exactly what will happen in the Middle East. The situation in a variety of countries seems so dire that it is hard not to imagine that additional and significant ruptures are in the offing. Yet it also seems possible that Middle Easterners will experience more of the same, allowing leaders to muddle through.

That is hardly a comforting thought, however, since muddling through—or the idea of muddling through—fails to capture how dynamic the region has become. Struggles over identity, sovereignty, legitimacy, and individual as well as communal rights are entangled in ways that are remaking the region.

Among a number of imaginable outcomes, further deterioration, violence, and authoritarianism seem most likely. If authoritarian stability was once a hallmark of the Middle East, the future may well be authoritarian instability.

Protests in Baghdad
Young men climb scaffolding to reach the upper levels of an unfinished building overlooking mass protests in Tahrir Square in Baghdad on Nov. 1, 2019. IVOR PRICKETT


In countries that are at or near collapse and where violence continues, there is no reason to believe that the combatants have reached a hurting stalemate necessary to lay down their arms.

What seems plausible in Libya, Yemen, Syria, and Iraq is the shearing off or further fragmentation of these countries. An Egyptian intervention in Libya certainly raises the prospect of institutionalizing the split between the government in Tripoli and the government in the east, both of which claim legitimacy.

Yemen’s southern separatists have recently declared that they will cooperate with the internationally recognized government of President Abed Rabbo Mansour Hadi, but will they keep their promise?

Given the fact that there were two Yemens for a significant portion of the 20th century, this seems a more possible outcome than a negotiated solution to the end of the multiparty wars currently raging. In Syria, Turkey is determined to carve out a sphere of influence that will preclude the emergence of a Kurdish state on its southern border, and now that the Turkish military is in Syria, it is unlikely to leave.

Analysts have predicted Iraq’s split many times before, and it has not happened. That means very little, however. Hosni Mubarak’s rule was durable until the day it wasn’t. It is clear that the fragmentary pressure on Iraq, a factor that is baked into the country’s political system in unintended ways, will continue to undermine any efforts to establish political stability short of an overthrow of the order, which is itself obviously destabilizing.

When it comes to other states, it is true that life can be grim and at times brutal, but that does not mean that change will come or be quick. The national security states of the region are supposedly better and more efficient than they were a decade ago. Governments have armed themselves with the tools to engage in society-wide surveillance that diminishes the possibility that a coalition can emerge to challenge the primacy of present rulers.

That does make it harder for oppositionists and activists to challenge regimes, but to focus on these groups is to be looking for politics in all the wrong places. Struggles within and among power centers are often the source of politics, rather than conflict with those pushing from below. This is why for all the attention paid to activists in Saudi jails, Crown Prince Mohammed bin Salman has been locking up members of the royal family and nonroyal elites.

If politics is the competition over the control and distribution of resources, it is the people who were held at the Ritz-Carlton in November 2017 and rival branches of the royal family that are the greatest threat to the crown prince’s agenda and interests.

The mythical “street” is often responding to (or manipulated by) leaders who are engaged in struggles at the summit of the state. This is why Mohammed bin Salman has shrewdly sought to alter Saudi social mores and norms. He is building a reservoir of support from below among those young Saudis who like movies, WWE, and concerts should he confront a serious challenge to the consolidation of his rule.

This is not to suggest that Saudi Arabia is stable or unstable—that is difficult to judge—but that for those Saudis hoping for positive change, if only as a result of the crown prince’s overreach, it seems quite unlikely. In this way, the Saudi leader has a certain advantage over Egypt’s Sisi, who is more directly vulnerable to the competition among those vying for power.

It is romantic to believe that the Egyptian people brought down two leaders in the span of 18 months. It was actually the work of generals who accomplished these feats while claiming—not disingenuously—a popular mandate to do so.

The subsequent disdain Egyptian leaders have evinced for their own people means that they neither have nor seek support from the citizenry, rendering it easier to use batons, tear gas, and live fire to maintain control. People may rebel or there could be a(nother) coup signaling a possible rupture, but it is hard to predict when or how that would happen and what the result might be. In the meantime, as Sisi seeks to balance the competition among power centers in Egypt, he tightens his grip on Egyptians.

A convoy drives in eastern Syria.
A convoy of trucks carrying people who had fled the last Islamic State-held area in eastern Syria drive through the desert on their way to camps farther north on Feb. 11, 2019. IVOR PRICKETT


The dystopian nature of the Middle East is not caused but is certainly greatly aided by a permissive international environment. It is not just that liberal democracy is on the defensive but that liberal democracies have concluded that human rights and democratization are not worth being on their agenda.

Few people paid much attention to Yemen before the journalist Jamal Khashoggi was dismembered by Saudi agents; Syria is a problem because of the refugees it has produced affecting politics in Europe; Iraq is an afterthought; and the West left Libya to demons after everyone discovered that building democracy from the alleged clean slate there was nonsense.

It would be a mistake to take even the region’s last remaining vestiges of stability for granted. New depths of turmoil are still possible to achieve.

None of this is to suggest that Arabs are fated to live under the condition in which they find themselves forever. After all, forever is a long time. Rather, in thinking about the Middle East’s many problems, it is worth remembering that things can always still get worse. It would be a mistake to take even the region’s last remaining vestiges of stability for granted. New depths of turmoil are still possible to achieve.

There is no guarantee that the region’s boundaries will remain the same or that its rulers won’t find new methods of inducing injustice and despair. When it comes to the former, external or non-Arab powers are already staking claims to parts of Arab countries—whether it is the Russians in Syria and Libya, the Turks in the same two countries, or Iran in Syria, Lebanon, and Yemen. And then there is the United States with its network of bases in and around the Persian Gulf.

All this confronts U.S. policymakers with the challenge of not just understanding what is happening in the region but developing a response. In this case, the best response by Washington might be none at all. The issue here isn’t the Middle East’s intractability but the evident drift in the U.S. approach to the region.

If policymakers in Washington do not know what they want in the region, they risk making things worse by wading into the Middle East’s struggles. No doubt, working to ensure that Egypt and Turkey do not go to war in Libya is well within U.S. competence, but solving Libya’s internal tribulations after a decade of fracture is well beyond it. That only underscores the other reason why the United States must limit the way it approaches the Middle East—those who live in it must solve the problems of the region.


Steven A. Cook is the Eni Enrico Mattei senior fellow for Middle East and Africa studies at the Council on Foreign Relations. His latest book is False Dawn: Protest, Democracy, and Violence in the New Middle East.

The Pandemic’s Most Treacherous Phase

The most dangerous phase of the COVID-19 crisis in the US may actually be now, not last spring. If the economy falters a second time, whether because of inadequate fiscal stimulus or flu season and a second COVID-19 wave, it will not receive the additional monetary and fiscal support that protected it in the spring.

 Barry Eichengreen

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BERKELEY – April marked the most dramatic and, some would say, dangerous phase of the COVID-19 crisis in the United States. Deaths were spiking, bodies were piling up in refrigerated trucks outside hospitals in New York City, and ventilators and personal protective equipment were in desperately short supply. The economy was falling off the proverbial cliff, with unemployment soaring to 14.7%.

Since then, supplies of medical and protective equipment have improved. Doctors are figuring out when to put patients on ventilators and when to take them off. We have recognized the importance of protecting vulnerable populations, including the elderly. The infected are now younger on average, further reducing fatalities. With help from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, economic activity has stabilized, albeit at lower levels.

Or so we are being told.

In fact, the more dangerous phase of the crisis in the US may actually be now, not last spring. While death rates among the infected are declining with improved treatment and a more favorable age profile, fatalities are still running at roughly a thousand per day. This matches levels at the beginning of April, reflecting the fact that the number of new infections is half again as high.

Mortality, in any case, is only one aspect of the virus’s toll. Many surviving COVID-19 patients continue to suffer chronic cardiovascular problems and impaired mental function. If 40,000 cases a day is the new normal, then the implications for morbidity – and for human health and economic welfare – are truly dire.

And, like it or not, there is every indication that many Americans, or at least their current leaders, are willing to accept 40,000 new cases and 1,000 deaths a day. They have grown inured to the numbers. They are impatient with lockdowns. They have politicized masks.

This is also a more perilous phase for the economy. In March and April, policymakers pulled out all the stops to staunch the economic bleeding. But there will be less policy support now if the economy again goes south. Although the Federal Reserve can always devise another asset-purchase program, it has already lowered interest rates to zero and hoovered up many of the relevant assets. This is why Fed officials have been pressing the Congress and the White House to act.

Unfortunately, Congress seems incapable of replicating the bipartisanship that enabled passage of the CARES Act at the end of March. The $600 weekly supplement to unemployment benefits has been allowed to expire. Divisive rhetoric from President Donald Trump and other Republican leaders about “Democrat-led” cities implies that help for state and local governments is not in the cards.

Consequently, if the economy falters a second time, whether because of inadequate fiscal stimulus or flu season and a second COVID-19 wave, it will not receive the additional monetary and fiscal support that protected it in the spring.

The silver bullet on which everyone is counting, of course, is a vaccine. This, in fact, is the gravest danger of all.

There is a high likelihood that a vaccine will be rolled out in late October, at Trump’s behest, whether or not Phase 3 clinical trials confirm its safety and effectiveness. This specter conjures memories of President Gerald Ford’s rushed swine flu vaccine, also prompted by a looming presidential election, which resulted in cases of Guillain-Barré syndrome and multiple deaths. This episode, together with a fraudulent scientific paper linking vaccination to autism, did much to help foster the modern anti-vax movement.

The danger, then, is not merely side effects from a flawed vaccine, but also widespread public resistance even to a vaccine that passes its Phase 3 clinical trial and has the support of the scientific community. This is especially worrisome insofar as skepticism about the merits of vaccination tends to rise anyway in the aftermath of a pandemic that the public-health authorities, supposedly competent in such matters, failed to avert.

Studies have shown that living through a pandemic negatively affects confidence that vaccines are safe and disinclines the affected to vaccinate their children. This is specifically the case for individuals who are in their “impressionable years” (ages 18-25) at the time of exposure, because it is at this age that attitudes about public policy, including health policy, are durably formed. This heightened skepticism about vaccination, observed in a variety of times and places, persists for the balance of the individual’s lifetime.

The difference now is that Trump and his appointees, by making reckless and unreliable claims, risk aggravating the problem. Thus, if steps are not taken to reassure the public of the independence and integrity of the scientific process, we will be left only with the alternative of “herd immunity,” which, given COVID-19’s many known and suspected comorbidities, is no alternative at all.

All this serves as a warning that the most hazardous phase of the crisis in the US will most likely start next month. And that is before taking into account that October is also the beginning of flu season.


Barry Eichengreen is Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His latest book is The Populist Temptation: Economic Grievance and Political Reaction in the Modern Era.