The financial markets in an era of deglobalisation

Why the global volume of foreign-exchange trading is shrinking

FOR more than two decades after the early 1980s, it seemed as if the financial markets were moving in only one direction. More and more money was flowing across borders; capital markets were becoming increasingly integrated.

Since the 2008 financial crisis this particular aspect of globalisation has stalled, and even partly retreated. The reversal is illustrated by the triennial survey of foreign-exchange markets, conducted by the Bank for International Settlements (BIS). Daily turnover in April was $5.1trn, down from $5.4trn in April 2013.

That is still a huge number compared with the turn of the century, when daily turnover was around the $1trn mark. But it is a sign that markets are getting a little less frenetic; spot (or instant) currency trading has fallen by 19% in three years.

Other data from the BIS confirm the trend. Cross-border banking claims peaked in the first quarter of 2008 at $34.6trn. By the second quarter of 2010, they had dropped to $27.9trn, and they have never recovered their pre-crisis levels. In the second quarter of this year (the most recent data), claims were $28.3trn. Part of this may be a consequence of events in the euro zone, where the sovereign-debt crisis caused banks to cut back their lending to weaker economies. Add up all financial flows, including direct investment, and in 2015 cross-border volumes were only half 2007’s level, according to McKinsey, a consultancy (see chart).

This is not necessarily bad news. After all, as Asian countries found out in the 1990s, too much “hot money” flowing into an economy can be destabilising. It can drive exchange rates out of line with economic fundamentals, making a country’s exporters less competitive. A rising currency may also tempt domestic companies to borrow abroad. Then, when the hot money flows out and the exchange rate collapses, those borrowers will struggle to repay their debts. The result can be a financial crisis.

The implications of deglobalisation depend on why the slowdown is happening. There may be a link to economic fundamentals. World trade volumes were regularly growing at an annual rate of 5-10% in the run-up to the crisis; in recent years they have managed only 2% or so. In 2015 exports were a smaller proportion of global GDP than they were in 2008. If trade is growing less rapidly, so is the demand for credit to finance it.

However, as the BIS points out, trade accounts for only a small proportion of capital flows. The downturn is mainly because of events within the financial sector itself.

Before the crisis, cross-border banking activity was closely correlated with measures of risk appetites. When the economic outlook was good, banks were happy to lend abroad; in the face of shocks, they retreated back to their home base. Research by the Bank of England shows that the picture changed after the crisis; there was simply a more general retreat by the banking sector from foreign commitments.

Part of this may reflect a lack of demand for loans from companies and individuals that had overstretched during the boom years. But the biggest reason is probably the weakness of the banking sector. It has been deprived of some sources of funding (money-market mutual funds, for example) and has been forced by the regulators to rebuild its balance-sheet.

In the currency markets, the BIS says, there has been a shift in the type of people that are participating. Institutional investors such as pension funds and insurance companies are being more active. They may decide to buy, say, Japanese equities without wanting to be exposed to fluctuations in the yen, so they will hedge this exposure in the currency markets. In contrast, there has been a reduction in risk-taking activity by hedge funds and bank trading desks, which suffered a big shock in January 2015 when the Swiss National Bank suddenly abandoned its policy of capping the franc’s exchange rate. The sharp jump in the value of the franc that followed caused turmoil for some brokers, forcing them to raise their fees and cut their client lists.

A market less in thrall to speculators might seem like an unalloyed boon. But the retreat of banks from currency trading (and from market-making in other instruments such as corporate bonds) may not be quite such good news. In a crisis, the banks may not be around to trade with investors seeking to offload their positions; the BIS notes signs of “volatility outbursts and flash events”. Lots of investors and companies want to hedge their currency exposure. They need an institution to take the other side of the trade.

It Is The Holiday Season And One Present Speculators Are Not Buying Is Gold

by: Hebba Investments

- For the sixth week in a row, gold speculators have sold their positions which is the longest streak since December of 2015.

- Gold is now at some of the lowest net speculative long positions of the past decade.

- Silver speculators have not been selling silver at the same rate as gold and are holding positions at higher relative levels.

- Since we think gold has a very good fundamental picture moving forward, we believe that this is a great contrarian time to buy as negative sentiment is extremely high.

- Silver's picture is less bullish than gold simply based on speculative net long levels, but we believe that silver will still move up with gold.

For a sixth week in a row, investors saw net speculative long gold positions decline and gold dropped for a seventh straight week during the Commitment of Traders (COT) report trading week (Tuesday to Tuesday). During the COT week, gold dropped by a chunky 2.84% and the seven down weeks for gold in a row would be the longest losing streak for the metal since September 2014.
Obviously, speculators are very negative on gold, but we will also look at the Chinese Shanghai Gold Exchange (SGE) and Indian gold premiums to get a feel for what is going on in the physical markets. Strong physical demand would be the best way to reverse speculator negativity, so that is something we pay close attention to.
We will give our view and will get a little more into some of these details, but before that let us give investors a quick overview into the COT report for those who are not familiar with it.
About the COT Report
The COT report is issued by the CFTC every Friday to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.
Though there is never one report or tool that can give you certainty about where prices are headed in the future, the COT report does allow the small investors a way to see what larger traders are doing and to possibly position their positions accordingly. For example, if there is a large managed money short interest in gold, that is often an indicator that a rally may be coming because the market is overly pessimistic and saturated with shorts - so you may want to take a long position.

The big disadvantage to the COT report is that it is issued on Friday but only contains Tuesday's data - so there is a three-day lag between the report and the actual positioning of traders. This is an eternity by short-term investing standards, and by the time the new report is issued it has already missed a large amount of trading activity.
There are many different ways to read the COT report, and there are many analysts that focus specifically on this report (we are not one of them) so we won't claim to be the experts on it. What we focus on in this report is the "Managed Money" positions and total open interest as it gives us an idea of how much interest there is in the gold market and how the short-term players are positioned.
This Week's Gold COT Report
This week's report showed a drop in speculative gold positions for a sixth straight week as longs decreased their positions by a chunky 10,223 contracts on the week. On the other side, speculative shorts increased their own positions by 4,771 contracts on the week.
Moving on, the net position of all gold traders can be seen below:
The red line represents the net speculative gold positions of money managers (the biggest category of speculative trader), and as investors can see, the decline in speculative traders continues. Wow - what a sudden spectacular drop in speculative positions!

We are now at some of the lowest speculative levels of the past decade, though we haven't yet hit the lows we saw at the end of 2015 before gold's spectacular rise earlier this year. Sentiment wise, speculators want nothing to do with gold and are stampeding out.
As for silver, the week's action looked like the following:
The red line, which represents the net speculative positions of money managers, showed a drop in speculative positions for the week which should be no surprise since silver tends to track gold.
But as we have noted over the past few weeks, silver speculators are nowhere near as bearish as gold speculators as the net long position in silver is still relatively high compared to its ten-year chart. As silver investors, that makes us a bit nervous as we would like to see much lower levels of silver speculators, just like we see in gold. But we would still maintain our silver positions as we believe that its gold correlation would bring it up with gold if gold moves up, which we as contrarians believe will happen.
Indian and Chinese Gold Premiums
Gold and silver's weak performance over the past few months can clearly be attributed to speculative selling, just as its strong performance earlier this year was also due to speculators jumping (just look at the rise and fall in speculative positions for 2016). As contrarians, we are looking for reasons why another reversal could occur. One important one is that physical demand would pick up in the traditional gold strongholds, namely India and China.
Now is a very good time to pay close attention to what is going on over there in terms of gold and silver to get an idea what the physical demand picture looks like.

Let us first look at India.
As investors can see in the chart above, gold premiums have dropped a bit from the highs seen in early December. Of course, the Indian economy is still adjusting to the demonetization move by Prime Minister Modi so we expect quite a bit of volatility as we move forward and Indians adjust to the demonetization. At this point, Indian premiums are relatively neutral and don't give us too much of an insight into physical gold demand, but last month's surge in Indian gold demand does suggest that demonetization so far has not hurt gold demand.
Moving over to China we see gold premiums spiking to some of the highest levels since 2013:
We are not sure what is truly going on in China's economy, but whatever it is, it is causing gold premiums to spike and we suspect physical gold demand is fairly strong. We will be eagerly awaiting the Swiss gold import numbers when they come out for November and December - but unfortunately they are a few months behind.
Our Take and What This Means for Investors
One of the great quotes from Rick Rule is "You are either a contrarian in commodities or a victim" in reference to the cyclicality of the commodities and precious metals industry. It is a market full of human emotions that manifests itself in prices, and right now it is clearly based on speculative trader positioning, that we are on the negative side of gold sentiment.

The speculative gold net long position is at some of the lowest levels of the past decade despite what we believe is a very constructive fundamental picture for gold (which we will detail in out 2017 outlook piece).
While gold speculators have been selling hand over fist, silver speculators have been selling at a much lower clip and their positions remain at much higher relative levels to their ten-year averages. That is a bit of a negative, but we still like silver as we believe its correlation with gold (which we believe will move up) will outweigh this fact.
Despite the six weeks in a row of price drops for gold, we are very bullish of gold and think investors should take this opportunity to buy the drop. As a contrarian, investors should be accumulating gold and the ETFs such as the SPDR Gold Trust ETF (NYSEARCA:GLD), the ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL), and quality precious metals miners and explorers. While silver's speculative positions are less bullish than gold, we still think it will track gold and thus being bullish on gold means being bullish on silver and the iShares Silver Trust ETF (NYSEARCA:SLV),

Barron's Cover

Donald Trump’s Worst Idea: Trade Barriers

New trade restrictions would decimate global supply chains, stunting manufacturing worldwide.

By Gene Epstein          

The ghosts of Reed Smoot and Willis Hawley are haunting the presidency of Donald J. Trump, even before it begins. To avoid the risk of recession, an exorcism of sorts is urgently required. Sen. Smoot and Rep. Hawley co-sponsored America’s infamous Smoot-Hawley Tariff Act of 1930, which hiked tariffs on imports to record levels. A global trade war resulted, as other countries responded in kind. U.S. foreign trade plunged by 40%, which helped drag the economy into the Great Depression. More than 1,000 economists sent a petition to then-President Herbert Hoover urging him, without success, to veto the act, correctly arguing that it would “injure the great majority of our citizens.”
In homage to those 1,000 economists, Barron’s petitions incoming President Trump to appreciate the case for free trade in the hope of averting a similar injury to the nation’s great majority. In fact, Trump should take steps to make U.S. trade policy freer than it is now, after a noticeable backslide over the past 15 years. Distressing echoes of Hawley and Smoot were heard from candidate Trump, both during his campaign and since his election. Even before putting his feet up on the desk of the Oval Office, he has killed the Trans-Pacific Partnership (“a terrible deal”), which had been agreed to by 12 Pacific Rim countries, and he has condemned the 22-year-old North American Free Trade Agreement with Canada, the U.S., and Mexico, on the shaky argument that it’s costing American jobs.
In even more Smoot-like fashion, Trump has urged draconian across-the-board tariffs of 35% and 45%, respectively, on imports from Mexico and China, America’s largest sources of imports in dollar terms. Such tariffs, says Cato Institute trade expert Dan Ikenson, “would be devastating to the U.S. and global economies and would destroy the international trading system.” The result would be a global recession and a bear market in stocks.

If President-elect Trump wants to tweak America’s 14 trade agreements to make them more favorable to U.S. exporters, there can be no great objection, though he might be surprised to find that negotiators on the other side of the table have legitimate grounds for pushing in the opposite direction.

As Ikenson points out, any aggressive move by the White House to hike tariffs will get pushback from a Republican-dominated Congress that has traditionally supported trade liberalization. Even greater pushback would come from business interests whose global supply chains depend on keeping trade barriers in check.

Unlike the days of Smoot-Hawley, when imports were mainly end-products sold to consumers, half of all U.S. imports today are intermediate products sold to businesses, says Ikenson. The cheap imports help make it profitable for these businesses to operate—and to provide jobs to American workers.

Similarly, U.S. service industries—including tourism, entertainment, and financial management—have a stake in the huge trade surplus the nation maintains in services. This critical mass of businesspeople who benefit directly from foreign trade will likely make their voices heard on Capitol Hill, if not at the White House.

In response to Trump’s repudiation of the Trans-Pacific Partnership agreement, China is already forging a similar agreement with its trading partners in Asia. Other responses by trading partners could diminish U.S. trade, and harm the economy, in even more serious ways.

Our tariffs would not just have the intended effect of reducing our imports. If we import less, foreigners will have fewer dollars to buy our exports. “Countries cannot permanently buy from us unless they are permitted to sell to us,” wrote those 1,000 economists to President Hoover, “and the more we restrict the importation of goods from them by means of ever higher tariffs, the more we reduce the possibility of our exporting to them.”

Even more devastatingly, other countries might respond with tariffs of their own, unleashing a trade war that would truly bring a replay of Smoot-Hawley.

“IN EVERY COUNTRY,” wrote Adam Smith in The Wealth of Nations, “it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest, that it seems ridiculous to take any pains to prove it.” Smith went on to observe that this self-evident proposition could not “have been called in question, had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind.”

The evolution of U.S. trade has run according to Smithian script. America’s trade in goods was in approximate balance from the 1950s through 1980, but started to move into deficit as cheap labor from abroad began to out-compete more costly domestic labor. The process accelerated with the advent of technology that made it far cheaper to ship goods across oceans and deliver them to ports, and by liberalizing trade agreements starting in the 1950s and 1960s under the General Agreement on Tariffs and Trade and later under the World Trade Organization, which supplanted GATT in 1995.

The process further accelerated in the 1990s with the end of the Cold War, making it possible to employ workers in former Communist countries of Eastern Europe and Asia; with the North American Free Trade Agreement of 1994; and with China’s entry into the WTO in 2001. Since 2001, nearly 80% of the growth of America’s trade deficit in goods can be attributed to the ballooning goods gap with China.

The result has been a bonanza of cheap goods for U.S. consumers and businesses. Meanwhile, the excess dollars earned by those who sell us more goods than they buy from us mainly come back as purchases of U.S. stocks and bonds, or as direct investment.
Globalization has also brought America a growing surplus in services trade. When candidate Trump quoted a “trade deficit” of “nearly $800 billion” in the “last year alone,” he was focusing on the deficit in goods, not the overall tally for goods and services. Over the past four calendar quarters, the U.S. ran a merchandise trade deficit of $763 billion, in part offset by a surplus in services trade of $268 billion, bringing the total shortfall to about $500 billion.

Consider, too, that the overall trade deficit averaged 3.0% of gross domestic product over the current expansion, down from 5.1% during the expansion of 2002-07, when GDP gains were more rapid. Similarly, the goods deficit cited by our incoming president has declined to 4.2% of GDP during the current expansion from 5.6% during the expansion of 2002-07 (see chart).

These are inconvenient truths for those who subscribe to the myth that trade deficits bring slow growth.

Protectionists seem to forget that, while many Americans are workers, all are consumers—and that the central purpose of any market economy is to serve consumers’ needs. As a candidate, Trump declared that globalization has brought “nothing but poverty.” But for the tens of millions of consumers who buy from Wal-Mart, which is a huge seller of cheap imports, globalization has brought nothing but enrichment, although most of Wal-Mart’s customers are probably not aware of this. Wal-Mart’s 1.5 million U.S. employees are also on the winning end.

While Adam Smith was correct that “the great body of the people” benefit from free trade, those who lose their jobs to foreign competition do not. These displaced workers deserve compassionate treatment, and if they end up in financial distress, aid can be offered. But if we singled them out for special treatment, we would be unfairly ignoring the more than 95% of job losers who get displaced as a result of domestic competition.

The highest estimate for jobs lost to foreign competition in merchandise trade puts it at four million over the 12 years from 2001 to 2013, or 333,000 per year. That sounds like a lot, but it’s just 2.7% of the 12.5 million jobs lost each year in the private sector over the same 12-year period, according to the Business Employment Dynamics survey of the Bureau of Labor Statistics. (The number of new jobs created by the private sector over that same period averaged 12.8 million.)

Update these figures and you get similar results. Since 2013, job losses have diminished and job gains have increased. Over the three years through March 2016, jobs destroyed averaged 10.3 million per year and jobs created 12.7 million. Even assuming that annual jobs lost to foreign competition have increased to 400,000, that’s still less than 4% of the 10.3 million annually destroyed.

CRITICS OFTEN COUNTER with the strange argument that jobs lost domestically have very different consequences from jobs lost to competition from abroad. In their version of the dynamic, if workers are displaced in one region of the country, they can always move to the region where the businesses that took their jobs are providing more employment. They can’t, however, move to China.

But many, if not most, jobs lost domestically are casualties of automation or of industries losing market share, which in itself can be a consequence of technology. Automation is the reason manufacturing’s share of all employment fell from a peak of 32.5% in 1947 to 21.6% in 1979, well before significant inroads were made by cheap labor from abroad. Once-dominant bricks-and-mortar bookseller Barnes & Noble has had to decimate its workforce as its business has been lured away by the cheaper and more convenient services of Amazon.com. Bank tellers have been replaced by ATMs. And jobs in print journalism have been eliminated as a consequence of the massive transfer of advertising revenue to the Internet.

Protectionists often invoke U.S. history—citing, in particular, the high tariffs in the nation’s past—as proof that such levies are needed for economic development. They are right on the facts about high tariffs in the U.S. of the 19th century, but wrong on every other count. In fact, this country is a good example of how free trade fuels economic growth. 
Critics forget that America at that time was a vast and unparalleled free-trade zone, operating with virtually no restraint. Protectionists couldn’t stop the textile industry in the South from supplanting that industry in the North, or the auto industry in Detroit from destroying the horse-and-buggy business. The creative destruction that free trade helped unleash spurred economic development. The tariffs, which special interests pushed through, were a drag that was more than offset by domestic free trade.

Indeed, the U.S. remains one of the world’s largest free-trade zones, measured according to the dollar value of goods and services crossing state lines. Happily, the protectionists have not urged that New York stop trading with California, although they would impede trade with Canada and Mexico.

One source of domestic employment from trade comes from investment by foreigners in the U.S. A trade deficit with the rest of the world of $500 billion means that the equivalent of that sum must go somewhere. As noted above, most of the dollars come back as purchases of U.S. stocks and bonds or as direct investment. In 2015, new foreign direct investment in the U.S. alone exceeded $300 billion.

Early this month, The Wall Street Journal reported that President-elect Trump had proudly brokered a deal whereby the Japanese multinational SoftBank Group agreed to invest $50 billion in the U.S. and create 50,000 jobs. One wonders if Trump realized that this deal, in effect, left $50 billion unavailable to buy U.S. exports.

The Fraser Institute’s economic freedom index reveals a clear relationship between openness to trade and economic prosperity. One of the institute’s five main components of economic freedom is “freedom to trade internationally,” which tracks a broad array of constraints that affect international trade. With the ratings measured on a scale of 0 to 10, a high rating means “low tariffs, easy clearance and efficient administration of customs, a freely convertible currency, and few controls” on capital movement.
In the institute’s annual publication, its researchers rank countries according to its summary economic freedom index for all five components of the index. The data are sorted into quartiles from highest to lowest, and then compared with various measures of economic growth and well-being.

At Barron’s request, consulting economist Robert Lawson of Southern Methodist University did the same exercise, but ran the quartiles according to each country’s rating on “freedom to trade.” In each case, the freedom-to-trade rating was averaged over the period from 1990 to 2014, the most recent year for which data are available, to capture each country’s policy over the past quarter-century.

If the protectionists are right, then the results should indicate that openness to trade correlates with “nothing but poverty,” in Trump’s words. The opposite happens to be true. The charts on this page reveal that countries with greater openness to trade have substantially higher per-capita incomes and more-rapid economic growth. The share of income earned by the poorest 10% of people in a given country is unrelated to openness to trade. And the income of the poorest 10% in lands with the greatest openness to trade is more than 11 times higher than in countries with the least openness.

WHERE DOES THE U.S. FIT IN? Its index of freedom to trade is in the top quartile over the period from 1990-2014, but only because of relatively high figures from 1990 through 2000. Since 2000, America’s freedom-to-trade index has fallen, during both the Bush and Obama administrations.

In 2014, the U.S. scored 7.56 on a scale of 0 to 10. Among the 159 countries the Fraser Institute now tracks, the U.S. now ranks 60th with respect to freedom to trade, which means it has fallen to the second quartile among nations. Among its key trading partners, America is ahead of China (6.78), about comparable with Mexico (7.48) and Japan (7.67), and somewhat behind Canada (7.83).

And while it is way ahead of such countries as Argentina (3.44), Iran (2.97), India (5.56), Pakistan (5.81), Russia (5.84), and Venezuela (3.13), it lags behind Chile (8.35), Denmark (8.51), Finland (8.16), Ireland (8.73), New Zealand (8.65), Sweden (8.32), the United Kingdom (8.28), and more than 50 other nations.

As international trade attorney Scott Lincicome notes, the U.S. levies hefty tariffs on highly lobbied products, including tuna (35%), light trucks (25%), wool sweaters (16%), various dairy products (20%), and peanuts (a whopping 131.8%). This country also maintains restrictive quotas on products including sugar, cheese, and cotton.

The U.S. has 14 liberalizing trade agreements with 20 countries and is a longtime member of the World Trade Organization. But it has gotten many of its high-lobbied products exempted from those agreements. If President-elect Trump wants to renegotiate America’s trade agreements, giving up those exemptions could be a good place to start. 

The Balance of Weakness in the Syrian Civil War

We examine the three main actors that control territory in Syria.


Retaking Aleppo is a major accomplishment for the Syrian regime, and in the future this victory could help it consolidate its position in the western half of the country. At present, however, the regime is too weak to re-establish its control in the eastern parts. Furthermore, the impotence of the Syrian rebels, an incoherent group to begin with, is clear by the loss of Aleppo. Beyond the Syrian regime, the Islamic State (IS) and the Kurds are the only other significant indigenous forces controlling substantial chunks of territory in Syria. Turkey could alter this balance, but it would have to increase its intervention in the country and overhaul the rebel landscape in order to do so.

• Retaking Aleppo represents a remarkable comeback; however, the regime of President Bashar al-Assad remains weak.

• The loss of Aleppo has exposed the rebels as overrated and incoherent.

• Three main players now have significant territorial holdings in Syria: the regime, IS and the Kurds.

• Until the rebels are able to revive the war against the regime, IS will be the country’s main battle.


President Bashar al-Assad’s regime has retaken Syria’s largest city and is reportedly in full control of Aleppo. The battle was led by the Syrian army and carried out by a task force of 10,000 fighters supported by Russia and Iran. According to The Wall Street Journal, roughly half of this task force consists of paramilitary forces, indigenous militias and foreign militias. The regime has succeeded in evicting the rebels from the eastern half of the city, and they departed in disarray. The regime now has a significant window of opportunity to strengthen its position in Aleppo as it will be quite some time before the rebels can regroup and pose a further threat.

The Current Shape of the Battlespace

The rebels still control much of the neighboring Idlib province in addition to enclaves near Damascus and areas further south along Syria’s borders with Jordan and Israel. Even so, the regime will benefit from the rebels becoming an increasingly divided and scattered phenomenon. Damascus, however, cannot overlook the fact that IS represents a significant opponent that remains ensconced in a large part of eastern Syria. While the regime celebrates what is indeed a major achievement, it faces the simultaneous embarrassment of IS forces once again taking the historic city of Palmyra.

The loss of Palmyra shows that even though the regime scored a crucial victory in Aleppo, there are limits to how far it can project its power beyond current holdings. According to the latest reports, IS has moved beyond Palmyra and laid siege to Tiyas air base despite massive pressure being brought on the jihadist regime by a U.S.-led international coalition, with airstrikes in Syria and a ground assault on Mosul. The IS’ ability to take the historic city when IS is in defensive mode underscores how difficult it will be to uproot it from its core turf.

Though IS is the regime’s primary challenger, the jihadist movement is not the only problem Damascus faces. Syria’s main Kurdish group, the Democratic Union Party (PYD), along with its armed wing, the People’s Protection Units (YPG), also represent a significant force. After being suppressed for decades by the Assad regime, the Kurds rebelled and seized control of large swaths of territory in the north, along the border with Turkey. Clashes have occurred over the years between the regime and Kurdish forces, but cooperation on the battlefield also has been reported. Overall, the Kurds have been a useful entity in that they have kept IS in check while the regime was preoccupied with rebels. The PYD-YPG also countered Turkish efforts to topple the Assad regime.

Since August, Turkey has sought to play a much bigger role in Syria than it had after its southern neighbor descended into civil war five years ago. In what Ankara has dubbed “Operation Euphrates Shield,” Turkish troops are now backing certain rebel factions with the goal of creating a corridor that would both prevent the Kurds from linking their main holding in the northeast with a smaller one in the northwest, and serve as a launch pad for a major assault on IS. While it’s not a major undertaking at this stage, this Turkish intervention corridor will likely expand as Ankara assumes a greater role in the fight against IS. The Syrian imperative is to ensure that the Turks and their allies do not reverse the gains Damascus has made against the rebels.

In a Reality Check article published last February, Geopolitical Futures showed that the Syrian state (along with the Iraqi state) has changed beyond recognition and will not return to its former status. In its place is a fluid balance of power involving the country’s three principal actors: the Assad regime, IS and the Kurds. Sunni Arab opposition rebels backed by Turkey are a fourth actor. However, this fourth force is much smaller than the others, not only because of Turkish domestic issues that constrain Ankara, but also the massive incoherence that is the rebel landscape.

The world continues to treat Syria as a sovereign state, the Syrian Arab Republic. In reality, the nation-state area of Syria consists of at least three different polities. While this complex partition of Syria represents a fluid battlespace, there are limits to how far the country can be reshaped in the foreseeable future. In order to understand how this map can change, we must consider the imperatives, capabilities and constraints of each of the conflict’s four actors, beginning with the regime.

The Syrian Regime: What’s Next After Aleppo?

The war in Syria has not unfolded as most observers expected it to. Contrary to conventional wisdom, the Syrian regime has not just survived – it has staged a comeback. Of the three Arab states that have experienced a major armed insurrection and lost large amounts of territory, Syria is the only one to regain territory. A number of factors have shaped its resilience.

First and foremost, its military establishment did not fracture despite defections and losses due to attrition. The size of the armed forces has shrunk to less than half its pre-civil war strength of 300,000 personnel, but the military has survived because its officer corps has largely remained intact. Scholar and researcher Kheder Khaddour, in two separate recent assessments for the Carnegie Middle East Center, explains that the Assad regime’s efforts to entrench the army’s 12 divisions in specific territorial sectors across the country helped in this process.

In addition, the regime displayed considerable ability in mobilizing the National Defense Forces (NDF), a paramilitary organization that has done the heavy lifting during the civil war’s infantry missions. In essence, the NDF compensated for the loss of weak non-commissioned ranks that were gutted due to defections. The NDF units are better paid and, more importantly, they are raised locally.

Therefore, they had greater motivation to defend their respective areas from the rebels. That said, the quality of the NDF fighters varies, with some forces being highly effective and others being ineffective.

A third auxiliary force consists of other militias that support the Syrian regime. A study by Cody Roche and Vincent Hayek, published on investigative news website Bellingcat, shows the existence of dozens of these militia groups, both Syrian and foreign. The latter are heavily composed of foreign Shiite fighters from Iran, Iraq, Lebanon, Afghanistan and Pakistan, and they have been mobilized by advisers from the overseas operations arm of Quds Force, Iran’s elite Islamic Revolutionary Guards Corps. Just as IS and al-Qaida are fighting for transnational causes, these pro-regime fighters from overseas are also motivated by a transnational impulse that is driven by Shiite sectarian identity.

While this three-layered force has greatly helped the Syrian regime in undermining the rebellion, it also represents an Achilles’ heel. First, this is a force that can help on the battlefield but cannot help the Syrian regime to consolidate its hold over reclaimed territories, especially ones as large as Aleppo, because these militias are not trained to administer areas. Many of the militias are foreign or Shiite Muslims. Second, it shows the inherent dependence of the Syrian regime on external militia forces, and hence its weakness – the regime’s armed forces could not have taken on the rebels alone.

Half of the task force that retook Aleppo is composed of irregulars, demonstrating that there is a limit to how much territory the regime can regain. The rebels are not a spent force, and they could regroup in the countryside outside Aleppo. If this happens, they will pose a threat to the regime’s hold on the city. Additionally, Idlib is a rebel stronghold dominated by Jabhat Fatah al-Sham, formerly known as Jabhat al-Nusra, the new face of Al-Qaida in Syria. This could pose a formidable challenge to the Syrian regime. While the regime currently has the upper hand, it has a long way to go before it can declare victory against the rebels.

Sunni Arab Opposition

Losing Aleppo is a major setback for the Syrian rebels. But this outcome is not surprising. The Sunni Arab opposition has from the beginning been a fragmented landscape. Throughout the war, a dizzying array of groups – most of whom subscribe to one form of Salafist jihadism or another – have continuously fragmented into smaller groups or joined different coalitions.

The rebels’ internal weaknesses and the regime’s advantage of Iranian and Russian assistance explain the rebel defeat in Aleppo. Although the rebels received no serious assistance from the United States and its European allies, they were supported by regional players Turkey, Saudi Arabia, Qatar, the United Arab Emirates and Jordan. However, assistance is only effective to the extent that the proxy itself is a capable entity.

Just as their proxies are tied together only by the goal of toppling Assad, the patrons also have divergent interests in Syria beyond regime change and have supported different proxies. As a result, the patron countries have exacerbated the divisions within the rebel landscape. It is noteworthy that the Syrian regime has been able to marshal miscellaneous actors into a cohesive fighting force whereas those supporting the rebels have failed to assemble a coherent movement.

The internal rebel situation has gone from bad to worse. In the last few days, a major division has erupted within Ahrar al-Sham, the biggest Syrian rebel group with an estimated 20,000 fighters. This division is between pro-Turkish factions and those who want to align with Jabhat Fatah al-Sham.

Divisions reportedly exist even within Fatah al-Sham. Meanwhile, the Free Syrian Army, a much-touted moderate Syrian nationalist group of 40,000 fighters, is not the significant nationalist rebel force that it appears to be; rather, it is an umbrella term applied to numerous independent factions.

While the Syrian civil war has morphed into a regional conflict between Sunni powers and the Iran-led Shiite bloc, the significant number of Sunni Syrians (who account for at least 65 percent of all Syrians) that have remained loyal to the Assad regime has been a key but underappreciated element in the rebels’ failure. If a critical mass of Sunnis had rebelled, the Alawite-dominated regime would have fallen a long time ago. However, this didn’t happen because Sunnis constitute a majority in Syria’s civil and military bureaucracy. In a May 2015 article in the CTC Sentinel, published by the U.S. Military Academy, Chris Zambelis underscores how many Sunnis, especially those in urban areas, have remain aligned with the regime because they deem the worldview of their co-religionists as dangerous and see the regime as a guarantor of stability.

Because of their many differences, it will be a difficult process to reinvent the rebels as a single coherent movement. However, it is an imperative shared by both Tukey and the U.S., the powers that have a stake in Syria. Turkey seeks to be the rebels’ principal patron as it deals with Kurdish separatism and IS. The U.S., whose main partner on the ground against IS in Syria is the Kurdish Syria Democratic Forces, also realizes that it will need a Sunni Arab force if its effort to seize, hold and govern IS-controlled Raqqa will be successful.

The Kurds

If there is one group in Syria that has come close to realizing its objective, it is the Kurds. They currently control much of their envisioned Rojava (Western Kurdistan), and they exercise self-rule.

They have some support from the U.S. as well because they lead the country’s only anti-IS force, the Syrian Democratic Front. The Syrian Kurds seek to exploit the fight against IS as a way to consolidate their autonomous region within whatever future Syria emerges.

Turkey stands in their way because it wants to severely curtail the extent of self-rule that the Syrian Kurds hope to enjoy. Since the Syrian Kurds have close ties with Turkey’s Kurdish rebel group, the Kurdistan Workers’ Party, Turkey cannot allow Kurdish empowerment in Syria the way it accepted an Iraqi Kurdistan. For Turkey, the key to rolling back Syrian Kurdish ambitions is to limit the amount of territory the PYD-YPG controls. To do this, Turkey will need to greatly increase its involvement in Syria and take the lead in the fight against IS.

That said, Turkey wants to limit its own military exposure in Syria. This can only happen if it is able to raise a formidable Sunni Arab fighting force. Currently, Turkey is working with factions of the Free Syrian Army and other Islamist outfits to take the northern Syrian town of al-Bab from IS. The goal is to curb Kurdish ambitions by creating a corridor in the area encapsulated between Azaz, al-Bab, Manbij, Jarabulus and al-Rai.

In addition, seizing control of this area would create a launch pad for future Turkish-led military offensives against IS’ core turf in Raqqa. While the Turks would eventually like to unseat Assad, they realize that this is not possible anytime soon in light of the rebels’ loss of Aleppo. Therefore, while the rebels regroup in order to build pressure around Aleppo, Ankara needs to steer some of the rebels towards fighting IS and pushing back the Kurds. Until that happens, however, there won’t be much change in the scope of Syrian Kurds’ territorial holdings.

The Not-So-Weak Islamic State

While it faces a formidable force in Iraq, where it is slowly losing control of Mosul, IS appears to be in a relatively secure position in Syria. There isn’t a physical force that can successfully mount an assault on its capital in Raqqa, and IS opponents continue to disagree among themselves, making the possibility of a joint attack remote. IS has recently demonstrated that it is able to carry out offensive attacks in Syria, as evidenced by its recapture of Palmyra and its push to take the nearby T4 air base.

Between the loss of Palmyra and a fluid situation in Aleppo, the Syrian regime is not currently in a position to threaten IS. The Kurds, whose territories have the longest border with IS-held areas, are also incapable of threatening IS. Furthermore, they have little interest in expending too many resources on a mission that only offers limited purchase vis-à-vis their strategic goal of self-governance. Being wary of Turkish moves is a higher priority for the Kurds than fighting IS.

That leaves the Turks and their rebel allies as the only potential threat to IS, but we have already shown that they need quite a bit of time before they will be in a position to take on IS’ core. For now, IS must continue the difficult task of countering any moves the Turks make in al-Bab. In addition, given the proximity to Aleppo, IS could try to strike at regime forces attempting to settle in the city.

This would allow IS to potentially align with some of the rebel groups that are currently in disarray. The bottom line is that while it is weakening due to losses in Iraq, IS does not yet face a serious threat to its core turf in Syria.

Pro-government forces watch buses pass during an evacuation operation of rebel fighters and their families from rebel-held neighborhoods in the embattled city of Aleppo, Syria, on Dec. 15, 2016. YOUSSEF KARWASHAN/AFP/Getty Images


Three main actors control territory in Syria: the Assad regime, the Kurds and IS. Although they may lose or gain territory in small areas, all three remain vulnerable. Any significant change in the geography of their holdings is unlikely to occur in the near future.

China’s Grand Goals and Limited Options

Beijing is developing its naval capabilities, but to what end?

By Jacob L. Shapiro

China’s People’s Liberation Army (PLA) Navy said in a statement on Dec. 15 that a Chinese carrier battle group, centered around the CNS Liaoning ship, carried out its first ever live-fire exercises. On Tuesday, the Center for Strategic and International Studies published a report that provided satellite images indicating China was placing anti-aircraft guns and probable close-in weapons systems on Chinese outposts in the Spratly Islands, though the specific systems could not be identified based on the images. On Dec. 14, an editorial published by the Global Times, an English-language Chinese newspaper, said, “It might be time for the Chinese mainland to reformulate its Taiwan policy, make the use of force as a main option and carefully prepare for it.”

China’s response to U.S. President-elect Donald Trump’s phone call with Taiwan’s president was measured at first. China cautiously observed developments and expressed its displeasure, but overall China went out of its way not to stir the pot too much. The above incidents suggest that China is beginning to find its voice again. Fielding a carrier battle group for the first time might on the surface suggest a large step forward in Chinese naval capabilities. New anti-air and anti-missile weapons systems in the Spratlys might suggest significant advances in Chinese defensive capabilities. And the ominous quote in the Global Times might be a sign that China is making the preparations necessary to seize Taiwan by force. The reality is much less exciting in all three cases.

This file photo taken on Sept. 24, 2012 shows China's first aircraft carrier, a former Soviet carrier now called the Liaoning, docked after its handover to the People's Liberation Army (PLA) Navy in Dalian, in China's Liaoning province. STR/AFP/GettyImages

China’s Liaoning aircraft carrier is a refurbished Ukrainian ship that was commissioned in September 2012. That China has officially begun live-fire training exercises with Liaoning is a step forward in China’s technical capabilities. The problem for China is that it is a step forward from a starting point of essentially zero when it comes to fielding carrier battle groups. The Liaoning was not domestically built. The carrier China is currently building domestically will not be completed for years and will not represent a significant step forward in the Liaoning’s capabilities. By comparison, the U.S. has 10 carrier strike groups, five of which are currently underway. The Liaoning is significantly smaller than U.S. aircraft carriers and can host fewer combat aircraft – it can support around 36 aircraft; the typical U.S. carrier can host around 70.

China’s more serious problem is that this is its first live-fire exercise with a carrier battle group. According to the U.S. Department of Defense, China only graduated its first cohort of domestically trained pilots to fly China’s carrier-borne J-15 fighter jets in 2015. The Office of Naval Intelligence points out that China is still at least “several years” away from fielding fully integrated carrier air regiments. It also has not yet developed the kinds of ships that make up a strong carrier battle group, like guided missile destroyers, frigates and replenishment-at-sea ships. China has made some progress in producing these types of ships, but not enough. Beijing also does not have any experience integrating these complex parts into a unified strike group (the fact that the Chinese reports and pictures from the exercises did not indicate the specific types of other ships involved is perhaps notable in that regard). It is possible to be impressed with China’s progress while keeping in mind that what China has done this week equates to riding a bicycle with the training wheels on for the first time.

The publication of new satellite imagery of various anti-air and anti-ship defense mechanisms in the Spratly Islands is also overhyped, and not just by China. The head of the U.S. Navy’s Pacific Command said on Wednesday that the U.S. would not allow sea lanes to be closed by China, “no matter how many bases are built on artificial features in the South China Sea.” The first thing to keep in mind is that China cannot afford to have sea lanes shut – exports are still the lifeblood of the Chinese economy, and China is not going to take an aggressive action that causes those sea lanes to be closed. Like the Liaoning, Chinese reclamation of these reefs and islands is more about prestige and image than about a meaningful increase in capability relative to the U.S.

From a strictly tactical point of view, China’s building projects in the Spratlys do not challenge the balance of power between China and the U.S. in the region. The RAND Corporation noted in a recent study that even if China is able to station military aircraft at Fiery Cross Reef and place surface-to-air missiles elsewhere, such facilities would not be a significant factor in a serious military conflagration between the U.S. and China. The U.S. could take out many of these targets with precision-guided munitions, and because the reefs are so small, China would be unable to keep enough stocks of fuel and munitions on the reefs should any conflict escalate.

For a country like the Philippines, China’s activities in these areas are unnerving and might even pose a significant challenge – but they do not represent a challenge to U.S. naval superiority in the Pacific or the South China Sea.

Lastly, the article regarding use of force and Taiwan in the Global Times, which is connected to the Communist Party’s People’s Daily newspaper, indicates where China might be headed.

China may indeed begin the process of preparing to use force. However, it will be many years, perhaps even decades, before China develops the types of capabilities needed to conduct an offensive operation aimed at reunifying Taiwan with the mainland. Taiwan has a significant military force of its own, and the superior power of the U.S. Navy would be brought into any potential conflict. China would not be able to achieve supremacy at sea or in the sky, both of which would be necessary for a successful amphibious assault or even a blockade of Taiwan for that matter.

Furthermore, amphibious assaults are extremely complex and difficult to execute successfully. China has little experience managing such operations, and a relatively small percent of PLA ground forces have gone through amphibious training. At the most basic level, China does not have the ships necessary to transport sufficient numbers of troops to a target like Taiwan. As recently as 2007, estimates were that the PLA Navy could only transport one mechanized division of troops over sea.

Using force to achieve “reunification” would likely involve at least eight divisions, and that is a generous estimate that does not take support personnel into account. Since 2007, four ships of the new Yuzhao class have been commissioned, and while these represent a step forward in amphibious capability, it is far too small a step to suggest that China could conquer Taiwan.

Any suggestion by China that it can take over Taiwan by force in the next decade is little more than a bluff.

China is involved in a prestige offensive. It wants to give the impression that it is much more powerful than it is. China happens to be very good at this. What China has achieved in a relatively short time is impressive, and China is a significant regional power that is constantly improving its capabilities. But China remains constrained by its lack of current capabilities and experience. A spokesperson for the Chinese Defense Ministry responded to a query about Chinese facilities in the Spratlys by insisting it was all for self-defense, saying “if someone was at the door of your home, cocky and swaggering, how could it be that you wouldn’t prepare a slingshot?” That is actually a pretty good way of thinking about both China’s perspective and its current abilities.

Russia Does Something It Has Not Done In 2 Years With Its Gold Reserves As Speculators Remain Uncertain On Gold

by: Hebba Investments

- Speculators added to both their long and short positions in gold during the past week.
- The result was a second-straight week of increases in the gold net long positions.
- Despite the increase, the gold net long position remains fairly low compared to its historical average. 
- The Russian central bank decided not to purchase any gold in December for the first time since early 2015.
- The short-term gold picture may be slightly bearish, but long-term we remain very bullish. 

The latest Commitment of Traders (NYSE:COT) report showed another positive week for gold as the net long position increased for the second straight week. We saw an increase in both long and short positions as speculators remained uncertain regarding gold direction after the strong rally to start the year.
We also saw the latest gold reserve report from Russia and it was certainly interesting. In the month of December Russia purchased no gold, which was the first time since early 2015 that they didn't choose to add to their gold reserves.
We will get more into some of these details but before that let us give investors a quick overview into the COT report for those who are not familiar with it.
About the COT Report

The COT report is issued by the CFTC every Friday, to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.
Though there is never one report or tool that can give you certainty about where prices are headed in the future, the COT report does allow the small investors a way to see what larger traders are doing and to possibly position their positions accordingly. For example, if there is a large managed money short interest in gold, that is often an indicator that a rally may be coming because the market is overly pessimistic and saturated with shorts - so you may want to take a long position.

The big disadvantage to the COT report is that it is issued on Friday but only contains Tuesday's data - so there is a three-day lag between the report and the actual positioning of traders. This is an eternity by short-term investing standards, and by the time the new report is issued it has already missed a large amount of trading activity.
There are many different ways to read the COT report, and there are many analysts that focus specifically on this report (we are not one of them) so we won't claim to be the exports on it.
What we focus on in this report is the "Managed Money" positions and total open interest as it gives us an idea of how much interest there is in the gold market and how the short-term players are positioned.
This Week's Gold COT Report
This week's report showed a rise in speculative gold positions for the second week in a row as longs increased their positions by 8,192 contracts on the week. On the other side, speculative shorts increased their own positions by 2,655 contracts on the week.
It is a bit unusual to see both longs and shorts add to their positions during a week, but it does happen. For us that tends to signal that there is some major uncertainty in the market so traders aren't confident what happens next so both sides either add or close positions. With a new US president and a lot of uncertainty on future policy decisions, to us it makes a lot of sense that traders want to watch and see.
Moving on, the net position of all gold traders can be seen below:
Source: GoldChartsRUS
The red-line represents the net speculative gold positions of money managers (the biggest category of speculative trader), and as investors can see, we saw the net position of speculative traders increase as the net long position increased from 54,000 contracts to 60,000 net speculative long contracts.
Despite the rise we remain fairly low in terms of the historical net long position.
As for silver, the action week's action looked like the following:
Source: GoldChartsRUS
The red line which represents the net speculative positions of money managers, showed another slight increase in speculative positions for the week of around 4,500 contracts. The net speculative long position in silver remains fairly high in terms of its historical average, so from this data point gold looks like a more attractive investment than silver.
Russian Gold Reserves
Before we conclude for the week we wanted to take a look at the recently released data from the Russian central bank on its gold holdings.
Source: GoldChartsRUS
As we mentioned earlier, Russia chose not to add any gold to its reserves during the month of December which was a significant move to the previous two months where it bought more gold than in any period since our data began in the early 1990's.
While we have no comment from the Russian central bank, the most obvious reason for this abrupt stop in Russian gold purchases would be the potentially warming of relations between Russia and the United States. President Trump has mentioned numerous times his desire to create closer national ties with Russia, and we would imagine that the Russian government is taking a wait and see approach with the Trump administration. That means that, at least politically, the US Dollar may have gained some attractiveness for the Russians, so gold's attractiveness as a dollar alternative may have lost some shine.

We emphasize that it is one month of data (that was proceeded by two extremely large months of gold purchases) so it is early for confident conclusions, but it certainly is worth monitoring for investors.
Our Take and What This Means for Investors
In a week highlighted by the US presidential inauguration, gold traders continued to add to their net long position in gold for a second straight week as the metal continued its strong 2017 run. But despite the increase in the speculative net long position, we did also see an increase in total shorts (both longs and shorts increased their gold positions on the week) which tells us that traders are not confident in where gold is going next.
This week we also saw the release of Russia's most recent gold holdings data. It showed the Russian central bank's lack of gold purchases during the month of December, which is the first month since early 2015 where it did not make any gold purchases. After two strong months of Russian gold purchases, it may be the central bank has hit its desired gold purchase target for 2016. Or maybe the Russian government has decided to take a wait-and-see approach with the new US administration, and if US-Russian relations warm-up, then the central bank has less incentive to diversify away from the US Dollar. It is still too early to tell though.
While it would be a negative for gold to see Russian gold purchases slow or even cease as its political reason to diversify into gold lessens, the case for gold based on economic and monetary fundamentals remains strong.
But from a COT perspective, our short-term view is as lackadaisical as that of gold traders as the total net long position in gold remains fairly low (bullish) but after four weeks of rising gold prices (bearish) and two weeks of net speculative additions, a pull-back would be very normal.
For short-term traders, it makes sense to lighten up on the more speculative gold positions (e.g. leveraged miners) or use one of our favorite strategies to switch out of higher-beta silver into lower-beta gold.
Either way for short-term traders it may make sense to book some early 2017 profits on some gold positions such the SPDR Gold Trust ETF (NYSEARCA:GLD), iShares Silver Trust (NYSEARCA:SLV), and ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL). Silver remains less attractive to us, but it does provide much more upside, thus more aggressive traders would want to own the silver ETF's such as

Of course, for longer-term traders none of this changes our bullish view on gold. President Trump is a very bullish figure for gold as he has promised major infrastructure spending coupled with lower taxes, which will undoubtedly create higher government deficits. Additionally, the United States seems to be moving away from its 30 years plus stance of being for globalization, into a more US-centric, bring-jobs-home approach to trade. Protectionism begets protectionism, and with less international trust gold becomes a much more desired asset as countries become reluctant to hold reserves.

Donald Trump and the Overinflated Presidency

The president-elect will inherit an executive branch whose power has ballooned far beyond its constitutional bounds.

By Jeffrey Rosen

The framers of the Constitution set out to create a presidency energetic enough to lead national initiatives but constrained enough not to threaten liberty, writes Jeffrey Rosen. Illustration: Stephen Webster

In an interview in early December, Speaker of the House Paul Ryan said that President-elect Donald Trump is committed to respecting the constitutional prerogatives of Congress. “We’ve talked about…the separation of powers,” he told “60 Minutes.” “He feels very strongly, actually, that under President Obama’s watch, he stripped a lot of power away from the Constitution, away from the legislative branch of government, and we want to reset the balance of power so that [the] people and the Constitution are rightfully restored.”

If history is any guide, Mr. Ryan’s optimism is misplaced.

During the election of 1912, the Progressive candidate, Theodore Roosevelt, articulated a populist defense of virtually unchecked executive power, declaring that the president is a “steward of the people” who can do anything that the Constitution does not explicitly forbid. Roosevelt’s rival, the Republican incumbent William Howard Taft, defended a far more constrained view of executive power, holding that the president could only do what the Constitution explicitly authorized.

Ever since the presidency of Franklin D. Roosevelt, Republican and Democratic presidents have embraced Theodore Roosevelt’s view, asserting ever more expansive visions of the president’s ability to do whatever he likes without congressional approval. Both George W. Bush and Barack Obama aggressively deployed executive power to circumvent Congress, and their partisans accepted it. During his own campaign, Mr. Trump declared, “I am your voice” and “I alone can fix it.” This is not the rhetoric of a president who intends to defer to the legislative branch.

Teddy Roosevelt’s populist vision is hard to reconcile with the vision of the framers of the Constitution, who set out to create a president energetic enough to lead national initiatives but constrained enough that he would not threaten liberty. Alexander Hamilton yearned for a monarchical president, but the Constitutional Convention of 1787 designed a presidency with strikingly few enumerated powers—stronger than a state governor but much weaker than the hated tyrant King George III.

President Theodore Roosevelt—shown speaking to a crowd in Evanston, Ill., circa 1902—took an expansive view of presidential power. Photo: Getty Images

Article II of the Constitution assigns to the president a few explicit powers—command of the armed forces, a veto on legislation, the power to make appointments and treaties with the Senate’s consent—but the text doesn’t specify whether the president has any general powers beyond those specifically listed. It fell to George Washington to fill in some of the gaps—establishing, for example, the president’s power to recognize foreign governments and initiate treaty negotiations without formally consulting the Senate.

From George Washington to Abraham Lincoln, presidents were sensitive, by and large, to Congress’s constitutional prerogatives, which Congress asserted vigorously. President Washington, for instance, was concerned enough about “the insidious wiles of foreign influence” in American politics that he issued a proclamation threatening criminal prosecution of any U.S. citizen who took sides in the war pitting revolutionary France against the rest of Europe. But he also thought it important, after the fact, to persuade Congress to endorse this policy of neutrality.

When President James K. Polk moved troops to the Mexican-American border in 1846 in response to what he claimed was the emergency of a Mexican invasion, a Whig congressman from Illinois named Abraham Lincoln introduced his famous “spot” resolutions. He demanded that Polk identify the precise spot where blood had been shed, to prove it was on U.S. soil. (The resolutions earned him the nickname “Spotty Lincoln.”) Beginning in 1859, President James Buchanan repeatedly asked Congress to approve his request to deploy troops to Central America; when Congress refused, he meekly submitted.

As a wartime president himself, Lincoln authorized his generals in 1861 to suspend the writ of habeas corpus, which allows prisoners to challenge the constitutionality of their detentions. Although the Constitution gives Congress the power to suspend the writ, Congress wasn’t in session, and Lincoln felt that he needed emergency action to keep military rail lines open. But Lincoln then called Congress back into session and persuaded it to approve his suspension of habeas corpus. As President Taft would later note in a lecture on the powers of the presidency, “Congress subsequently expressly gave [Lincoln] this right, and the Supreme Court sustained his exercise of it under the act of Congress.”

Taft was a judicially minded president who would achieve his life’s ambition only after leaving the White House, when he became chief justice on the Supreme Court. Throughout his years in public life, he approached all decisions by asking whether they comported with the Constitution. Appointed governor of the Philippines in 1900, for example, Taft stopped in Japan, where the empress presented his wife Nellie with a tapestry. Always honest to a fault, Taft insisted that she return the gift, on the grounds that the Emoluments Clause of the Constitution prevented him from accepting gifts from foreign governments. Mrs. Taft eventually appealed to President William McKinley, who ruled against her husband and sided with her.

William Howard Taft, president from 1909-13, objected to Theodore Roosevelt’s sweeping conception of executive power. Photo: Everett Collection

As president from 1909 to 1913, Taft took a constitutionally constrained view of his own powers. “The thing which impresses me most is not the power I have to exercise under the Constitution, but the limitations and restrictions to which I am subject under that instrument,” he declared.

Taft was appalled in August 1910 when Theodore Roosevelt, his predecessor in the White House, delivered his famous “New Nationalism” speech in Osawatomie, Kan. In his autobiography, published in 1913, Roosevelt elaborated on what he meant in that speech by declaring that “the executive power” was “the steward of the public welfare.” Roosevelt explained, “My belief was that it was not only [the president’s] right but his duty to do anything that the needs of the nation demanded unless such action was forbidden by the Constitution or by the law.” As he dramatically concluded, “I did not usurp power, but I did greatly broaden the use of executive power.”

Taft strongly disagreed. “The true view of the Executive functions is, as I conceive it, that the President can exercise no power which cannot be fairly and reasonably traced to some specific grant of power,” he wrote in “The President and His Powers,” published in 1916.

Although Presidents Calvin Coolidge and Herbert Hoover subsequently embraced Taft’s constitutionalist vision of the presidency, all presidents since FDR have accepted some version of Theodore Roosevelt’s vision of the president as the powerful “steward of the public welfare.” During Franklin Roosevelt’s long tenure, for example, he exercised extraordinary powers across many domains: detaining Japanese Americans in California prison camps, trying and executing accused Nazi saboteurs, disregarding U.S. neutrality by implementing the Lend-Lease program and ultimately constructing the New Deal administrative state. He did all of this, it should be noted, with the tacit or explicit approval of Congress and the Supreme Court.

When the historian Arthur Schlesinger Jr. wrote “The Imperial Presidency” in 1973, what he had in mind was the office’s further expansion during the Cold War. In confronting the Soviet Union and its allies, Schlesinger argued, presidents had asserted a range of extraconstitutional powers in foreign affairs. Because Congress had declined to push back, these powers had expanded to include domestic policy as well. President Harry Truman sent troops to Korea in 1950 without congressional authorization and two years later asserted his military powers as commander-in-chief to seize U.S. steel mills, claiming that he needed to avert a national strike that would harm the war effort.

When presidents have acted imperially without the support of Congress, the Supreme Court has tended to rebuke them. The court repudiated Truman’s attempt to seize the steel mills under his military authority. It rejected President Richard Nixon’s attempt to invoke executive privilege to resist a special prosecutor’s demands for the Watergate tapes. And the justices also rejected President George W. Bush’s attempt, after the attacks of 9/11, to designate certain citizens and noncitizens as enemy combatants, to hold them indefinitely without trial and to try them in military commissions created without congressional approval.

As a presidential candidate in 2008, Barack Obama promised to repeal Mr. Bush’s executive orders on constitutional grounds. “The biggest problems we’re facing right now,” he said, “have to do with George Bush trying to bring more and more power in to the executive branch, and not go through Congress at all.”

And yet, as president, Mr. Obama came to embrace—and even expand—the use of executive orders. In fact, in December 2011, he literally endorsed Theodore Roosevelt’s populist vision of the presidency, traveling to Osawatomie and invoking the New Nationalism speech to justify his own use of unilateral executive action. “Today,” Mr. Obama said, “we are a richer nation and a stronger democracy because of what [Theodore Roosevelt] fought for in his last campaign: an eight-hour workday and a minimum wage for women, insurance for the unemployed and for the elderly, and those with disabilities; political reform and a progressive income tax.” President-elect Trump is now drawing on that same populist tradition as he pledges to undo many progressive achievements by executive fiat.

In 2014, Republicans won a majority in both houses of Congress, and Mr. Obama spent his final two years in office trying to circumvent congressional inaction or opposition. He issued a series of executive orders that critics said expanded the domestic reach of the imperial presidency. In areas such as immigration, greenhouse-gas emissions and gun control, Mr. Obama proposed policies, Congress refused to endorse them, and he then enacted the policies on his own.

Overall, according to the Congressional Budget Office, Mr. Obama independently enacted 560 major regulations during his first seven years in office—nearly 50% more than during the two terms of the George W. Bush administration. The Supreme Court has repudiated or questioned some of Mr. Obama’s efforts to circumvent Congress, including his immigration orders, which the court effectively blocked by a 4-4 vote last June.

Now Mr. Obama’s constitutional shortcuts may come back to haunt him. Mr. Trump has the power to repeal Mr. Obama’s executive orders with the stroke of a pen, just as Mr. Obama repealed those of his predecessor. Indeed, Mr. Trump has signaled that he may use his executive powers to dismantle key parts of Mr. Obama’s legacy—deferred deportation for undocumented immigrants, the Education Department’s Title IX regulations concerning gender identity on campuses, the Iran nuclear deal and the lifting of sanctions on Cuba.

With the support or acquiescence of a Republican Congress, Mr. Trump could end up wielding even more sweeping powers. And he does not need congressional support to deploy troops abroad for limited periods.

The Supreme Court might check Mr. Trump if he tried to carry out promises that are clearly unconstitutional—such as his threats to take away the citizenship of those who burn the American flag, to repeal libel laws or to deport people based on their religion. It might even check Mr. Trump in national-security cases—if he tried, for example, to reinstate waterboarding or sweeping surveillance without congressional approval.

Mr. Trump’s international business interests and his children’s role in the White House may raise legal and constitutional challenges of their own. But unless a Republican Congress actively resists him, the conservative populist could enjoy sweeping powers, expanding the imperial presidency in ways that might make the progressive populist Theodore Roosevelt look constrained.

Over the past century, presidential power has grown enormously in both foreign and domestic affairs. The only real check has occurred when the people themselves say that they have had enough—protesting in the streets, reshaping the parties and throwing the rascals out. In the end, only the American people, exercising their rights of speech, voting and association, can rein in a presidency that congressional Democrats and Republicans alike have allowed to grow far beyond the original bounds of the Constitution.

Mr. Rosen is the president and CEO of the National Constitution Center in Philadelphia. His new book is “Louis D. Brandeis: American Prophet,” and he is working on a biography of William Howard Taft.