Music to the Market

Doug Nolan

October non-farm payrolls expanded a stronger-than-expected 128,000 (expectations 85k), in a month when the GM strike reduced payroll growth by upwards of 42,000 and another 20,000 positions were lost to a shrinking census workforce. September’s job gains were revised 44,000 higher to 180,000, and August payrolls were revised up 51,000 to 219,000. At 3.6%, the unemployment rate is near a 60-year low. Average hourly earnings were up 3.0% y-o-y, versus a ten-year average of 2.3%. And at 34.4 hours, Average Weekly Hours were right at the 10-year average (as well as the average from boom-times 2006-2007).

October 30 – Financial Times (Brendan Greeley and Colby Smith): “The Federal Reserve cut US interest rates by 25 bps for the third time this year but signalled that it has finished easing monetary policy for the time being, pending clearer economic data. The US central bank… said that uncertainty on the economic outlook justified its latest cut but chairman Jay Powell said that a preliminary US-China trade deal and lower risk of a no-deal Brexit had the potential to increase business confidence… After a two-day meeting in Washington, the Fed’s rate-setting committee made two significant changes to the language of its monetary policy statement. It said it would ‘assess the appropriate path’ for rates instead of saying it would ‘act as appropriate to sustain the expansion’… ‘This is a hawkish cut,’ said Peter Tchir, the head of macro strategy at Academy Securities.”

With a “hawkish” rate cut and stronger-than-expected October job growth, one might have expected some pressure on bond prices. Ten-year Treasury yields did rise (3bps) to 1.85% on the release of the Fed statement, only to reverse sharply lower during Chairman Powell’s press conference to end the session at 1.77%. Yields then dropped eight bps Thursday and rose only two bps on better payrolls data - to end the week down nine bps to 1.71%.

Modest adjustments to the FOMC’s policy statement could be interpreted as leaning “hawkish.” An hour-long discussion with the Fed Chair was decidedly “dovish.” Powell made it clear the bar to raise rates in the foreseeable future is being set at a height that would challenge the world’s leading pole vaulter.

Somehow, “inflation” was spoken 53 times during the course of an hour, testament to the degree contemporary policy doctrine has hopelessly diverged from reality.

From the Chairman’s prepared statement: “Inflation continues to run below our symmetric 2% objective. Over the 12 months through August, total PCE inflation was 1.4% and core inflation was 1.8%… We are mindful that continued below-target inflation could lead to an unwelcome downward slide in long-term inflation expectations.”

Question (New York Times’ Jeanna Smialek): “You’ve previously sort of compared this rate cutting cycle to the insurance cuts in the '90s, and in both of those instances, the Greenspan Fed took those cuts back after a while. They raised rates again fairly quickly. And, I guess I’m just curious what the onus is for doing that in this cycle. What would make you guys decide it’s appropriate to raise interest rates again?”

Powell: “…The reason why we raised interest rates is because, generally, is because we see inflation as moving up or in danger of moving up significantly, and we really don’t see that now… So, we really don’t see that risk, and inflation expectations have also kind of moved down and sideways both surveys and market based over the course of this, of really the recent months. And… we think that inflation expectations are very important in driving actual inflation, and we’re strongly committed to achieving our 2% inflation objective on a symmetric basis. We think it’s essential that we do that. So, we’re not thinking about raising rates right now.”

Question (The Wall Street Journal’s Nick Timiraos). “You described the recent slide, Chair Powell, in inflation expectations as unwelcome. You said that inflation expectations are very important. What, if anything, would the Committee be prepared to do to address this slide in inflation expectations if it continued?”

Powell: “As I mentioned, we do think that inflation expectations are, they’re quite essential, quite central in our framework of how we think about inflation. We need them to be anchored in a level, at a level that’s consistent with our symmetric 2% inflation goal. And, we think that we need to conduct policy in a way that supports that outcome… We’re also, as part of our review, looking at potential innovations, changes to the way we think about things, changes to the framework, that would lead us, that would be more supportive of achieving inflation on… a symmetric 2% basis over time… We’re in the middle of thinking about ways that we can make that symmetric 2% inflation objective more credible by achieving symmetric 2% inflation. And, it comes down to using your policy tools to achieve 2% inflation, and that is the thing that must happen for credibility in this area.”

Responding to a question from Fox Business’s Edward Lawrence on the possibility of rate hikes next year in the event that some current uncertainties are “cleared up,” the Chairman stated: “You come back to the question of raising rates, so that’s really about inflation, and you know, we haven’t yet, we’ve just touched 2% core inflation to pick one measure.”

And Powell’s response to the risk of “Japanification” posed by Japanese journalist Naoatsu Aoyama: “…There are significant disinflationary pressures around the world. …We don’t think we’re exempt from those pressures, and we are, therefore, strongly committed to having inflation expectations anchored at the level that is consistent with the symmetric 2% inflation objective. That’s what we’re committed to, and we’ll use our tools to achieve. So, we take the risk very seriously… The risk is that what we’ve seen is other economies getting on a disinflationary path, but it’s been very hard for them to get off. Once inflation expectations start sliding down, inflation moves down… …We think that the right thing to do is to do what we can now to hold and really move inflation expectations up…”

Music to the Markets. If markets maintain high confidence in one specific outcome, it would be that the trend of global disinflationary pressures continues (and likely worsens). At this point, everything points to the Fed and global central bankers fixating on consumer-based inflation, leaving the likelihood of any tightening of monetary policies over the short- and intermediate- term as remote.

At the same time, markets see the probability of central banks being disappointed by below-target inflation rates as high. Further aggressive monetary stimulus is anticipated. And with global policy rates already so low, this ensures the future will see even greater reliance on QE. And, clearly, central bankers are determined to ignore excesses. The chorus: Music to the Markets.

And if Powell suggesting the prevailing focus on higher inflation wasn’t specific enough, the downgrading of the financial stability (mentioned only six times) mandate was surprisingly direct.

Question (Market News’ Jean Yung): “I wanted to ask about financial stability risk. Recently, the IMF and some other global policy makers have been expressing concerns over the high level of risk in corporate debt. So, as rates get lower in the U.S. and around the world, are you more worried about financial stability reach for yield?

Chairman Powell: “So, we monitor financial stability risks very carefully all of the time. It’s what we do since the financial crisis… Currently, we don’t see large imbalances. This long expansion is notable for the lack of large financial imbalances like the ones we’ve seen certainly before the crisis happened. So, we have a four-part framework, I’ll quickly mention.

The first is leverage in the financial system which is low by historical standards. The second is funding risk which is the risk of runnable funding, and that risk is also quite low for banks but also for the nonbanking financial sector. If you look at asset prices, we see some high asset prices, but not broadly across a range.

We don’t see bubbles in that kind of thing. And, that leaves the fourth which is leverage in the nonfinancial sector and that’s households and businesses. So, with households, again, we don’t see leverage. We see them actually getting in very good shape financially in the aggregate. Obviously, plenty of households are not in great shape financially, but in the aggregate, the household sector’s in a very good place. That leaves businesses which is where the issue has been. Leverage among corporations and other forms of business, private businesses, is historically high.

We’ve been monitoring it carefully and taking appropriate steps. That’s what I would say, but it’s corporate debt is one part of a larger part of our framework, and it is something that we’re paying quite a bit of attention to, and it’s been part of the last couple of shared national credit exams, and we’ve been monitoring it carefully and taking appropriate action.”

“This long expansion is notable for the lack of large financial imbalances…” “Leverage in the financial system… is low by historical standards…” “…Funding risk which is the risk of runnable funding, and that risk is also quite low…” “We don’t see bubbles…” As for the household sector, “we don’t see leverage”; “very good shape financially”; and “in a very good place.” “That leaves businesses which is where the issue has been.”

Sound analysis would today have central bankers downplaying consumer price inflation, while elevating financial stability as the overarching priority.

It’s Music to the Markets that the Fed apparently sees no stability risk on the horizon that would pressure the Fed into pulling back on monetary stimulus.

This is a momentously misguided.

The mortgage finance Bubble period was dominated by the rapid expansion of household mortgage debt. There were huge excesses involved in both the financial sector’s intermediation of mortgage risk and with speculative leverage.

Today’s “notable… lack of large financial imbalances” completely ignores federal government debt said this week to have reached $23 TN, up from about $9.5 TN to end 2008.

Moreover, there’s overwhelming analytical support for the view that today’s global sovereign debt markets are history’s greatest episode of asset inflation, distorted markets and speculative price Bubbles.

We’re now a decade into the “global government finance Bubble.” Fundamental excesses have unfolded in sovereign debt and central bank Credit. When Chairman Powell states, “That leaves businesses…”, he is using a conventional analytical framework ignoring the government sector and the central bank.

Both have employed unprecedented leverage during this cycle, a massive Credit expansion that continues to support the purported soundness of the household and financial sectors. In contrast to the previous Bubble, the nucleus of the current Credit boom is money-like instruments (i.e. Treasuries and central bank Credit) that have been issued in outrageous quantities without the need for risk intermediation through the financial sector.

From a conventional “financial stability” standpoint, this Credit cycle may appear virtually pristine. Yet Credit Bubbles survive only with unrelenting debt growth. Today’s mirage of “financial stability” depends on ongoing massive federal deficits coupled with aggressive monetary stimulus.

A further rebuttal to Powell’s sanguine commentary on leverage and funding risks is appropriate. Is not recent “repo” market upheaval testament both to problematic leverage and funding issues? Have we already forgotten acute market fragilities unmasked less than a year ago?

It’s clear that speculative securities leverage is a huge facet of the current Bubble, much of it domiciled in “offshore financial centers” and securities funding markets (and derivatives) internationally. Moreover, I’ve used the concept of “moneyness of risk assets” (expanding the previous cycle’s “moneyness of Credit”) as an overarching facet of the “global government finance Bubble.”

Dr. Bernanke unleashed central bank inflationary activism to instill the perception of liquidity and safety upon risky financial instruments (equities, corporate Credit, derivatives, etc.), in the process empowering Wall Street opportunism and innovation. The Fed – and global central bankers more generally – are deluding themselves when they downplay the risk of a crisis of confidence and resulting run on the ETF complex and other perceived safe and liquid instruments and strategies (including “repos”!).

And while on the subject of runs…

November 1 – Bloomberg: “It started with an unverified rumor from an obscure social media account: Yichuan Rural Commercial Bank was insolvent. Within hours of the post on Tuesday, more than 1,000 worried customers had lined up to withdraw their money. By Wednesday, a run on the bank had prompted local authorities to arrange more than 30 billion yuan ($4.3bn) of liquidity injections. As branch staff sought to restore confidence, they displayed stacks of cash to convince depositors that there was enough to go around. While the panic appeared to subside on Friday, the episode marked the latest test of faith in more than 2,000 rural Chinese lenders that collectively control $5 trillion of assets. Confidence in their financial strength has dwindled since May, when the government seized a bank for the first time since 1998 and imposed losses on some of its creditors.”


October 29 – Bloomberg: “A Chinese company’s bond default is causing market concern that trouble may spread to other firms in the province. Shandong-based steelmaker Xiwang Group Co.’s failure to repay 1 billion yuan ($142 million) of bonds last week, saw investors dump neighboring firms’ notes on contagion fears as companies in this province are well known for providing guarantees for each other’s debt. China Hongqiao Group Ltd.’s dollar bond due 2023 and Shandong Sanxing Group Co.’s 2021 dollar bond have both dropped to their lowest levels after Xiwang’s default… ‘Xiwang’s default onshore has raised concerns that other privately owned enterprises in Shandong, particularly those from the same locality, may have been associated with the firm,’ said Wu Qiong, executive director at BOC International Holdings…”

And a curious development…

October 30 – Bloomberg: “A sell-off in China’s sovereign notes is weighing on its corporate bond market. The yield spread between the country’s top-rated three-year corporate bonds over government securities of the same tenor widened this week to its highest in four months… That’s after the 10-year sovereign bond yield rose to the highest in five months. It’s also hit sales of new company bonds, with the most amount of cancellations this month since June.”

China’s 10-year sovereign yields rose three bps this week to 3.27%, trading earlier in the week at the high (3.33%) since May. With bank failures and corporate defaults poised to significantly escalate going forward, a major expansion of China central government debt should be expected.

I continue to ponder the amount of leverage that has accumulated in relatively high-yielding Chinese Credit instruments (government, corporate and financial). A “phase 1” trade deal and associated truce have reduced the odds of trade war escalation becoming a near-term catalyst for upheaval and crisis. At the same time, the risk of acute financial and economic instability in China remains highly elevated.

I suspect China happenings put some downward pressure on global yields this week. And lower yields continue to support equities and corporate Credit markets. One could look at various negative developments (i.e. China, impeachment proceedings, Brexit, global unrest, etc.) and question the rationality for the risk markets’ vision of nothing but blue skies ahead.

It’s not entirely irrational. Trouble in China ensures additional Beijing stimulus, along with heightened disinflationary risks that will keep the Fed, PBOC, ECB, BOJ and others pushing monetary stimulus.

Impeachment risk? Doesn’t that virtually guarantee President Trump will strike a deal with the Chinese, while avoiding policies, comments and tweets that might upset the applecart?

October 31 – Bloomberg (Margaret Collins): “President Donald Trump resumed his attacks on the Federal Reserve and its Chairman Jerome Powell, a day after it cut interest rates for the third time this year. ‘People are VERY disappointed in Jay Powell and the Federal Reserve,’ Trump tweeted… ‘The Fed has called it wrong from the beginning, too fast, too slow.’”

With the Fed having cut rates three times in three months, while expanding its balance sheet by $239 billion in seven weeks, one would think the President might back off.

November 1 – Wall Street Journal (Michael S. Derby): “The Federal Reserve Bank of New York added $104.583 billion in temporary liquidity to financial markets Friday, when it also added permanent reserves to expand its balance sheet. The Fed’s intervention came in two parts. One was through repurchase agreements that expire Monday, in which the Fed took in $73.133 billion in securities; the other was a 13-day repo operation that took in $31.45 billion. The Fed also bought $7.501 billion in Treasury bills.”

Concluding his prepared comments, Chairman Powell addressed operations to expand Federal Reserve Credit through the purchase of T-bills (to expand bank reserves): “These actions are purely technical measures to support the effective implementation of monetary policy as we continue to learn about the appropriate level of reserves. They do not represent a change in the stance of monetary policy. In particular, our Treasury bill purchases should not be confused with the large-scale asset purchase programs that we deployed after the financial crisis. In those programs, we purchased longer-term securities to put downward pressure on longer- term interest rates and ease broader financial conditions. In contrast, increasing the supply of reserves by purchasing Treasury bills only alters the mix of short-term assets held by the public and should not materially affect demand and supply for longer-term securities or financial conditions more broadly.”

That the Fed would move to expand its balance sheet by hundreds of billions with the stock market at record highs, financial conditions loose, and the economy in expansion, clearly conveys, once again, that the Federal Reserve has no tolerance for market adjustment or correction.

Why do we need a multi-trillion “repo” market, anyways?

Is it compatible with a financial stability mandate that the Fed openly nurtures speculative leveraging?

Silly me: with consumer prices slightly below target – and the U.S. economy “in a good place” – no need to be concerned with egregious speculative leverage at the heart of the financial system.

Nothing but Music to the Markets.

The Triumph of the Autocrats

What the Syrian Debacle Means for the Middle East and Europe

Now that the U.S. has withdrawn from northern Syria, a trio of autocrats is dividing the country up between them. But with Putin, Erdogan and Assad now having the say in the region, dangers are on the horizon for Europe. By DER SPIEGEL Staff

When a global power withdraws, it apparently doesn't leave a whole lot behind: some sand-colored tents with camouflage nets in the desert, three red-and-white radio masts, a few toilets, some ice chests and oil barrels, and a diesel engine that's still running. That's what the former United States military base looks like near the city of Manbij in northern Syria.

The Americans are gone. And it didn't take long for a new master to arrive. The Russians arrived the day after the Americans left the base.

It's Tuesday of this week and armored vehicles with Russian flags flapping in the wind are rolling toward Manbij. One of the first to enter the abandoned U.S. base is Oleg Blochin, a stocky, bearded man wearing a black baseball cap.

Blochin isn't a soldier, he's a reporter for the pro-Kremlin Russian wire service Anna News. In a video he uploaded to his Facebook page, he looks like a cheerful tourist who has accidently stumbled into a war. He is apparently embedded with a unit of Russian mercenaries tasked by President Vladimir Putin with preventing Turkish troops from becoming established here. Blochin is, if you will, the advance team.

In the video, you can see him, camera in hand, walking past a black trash bin full of cola cans. He moves toward the entrance of a tent and steps inside. There's a can of chicken breast on the shelf. His foot strikes something on the ground -- a football. Other videos recorded at the military base show a Gameboy near a few boxes of Krispy Kreme donuts and a package of Pringles. There's a plate on a table that's still half full of food.

"Now we're going to the American soldiers' quarters," says Blochin. As his camera pans, several cots with blankets still on them come into view, making it look as though the Americans had just left to go out on patrol. "The air conditioning is still on," Blochin says. "It's hot outside, cool inside."

The Americans didn't have much time to leave the camp. A Pentagon spokesman told Newsweek magazine that they tried to take as much equipment as possible, but the rest had to be left behind. Any "sensitive equipment" that couldn't be moved was destroyed, the spokesman said.

Rarely has a single act in global politics triggered such a rapid chain of events as the U.S. pullout from Syria last week. Only hours after the Americans began leaving, Turkish soldiers marched into the northeast of the civil war-torn country. This prompted the Kurdish YPG militia, which had previously controlled the region jointly with the Americans, to call for help from Syrian dictator Bashar Assad and his most important patron, Russian President Vladimir Putin.

This marks the beginning of what is likely to be the last, decisive round after eight years of this brutal civil war. And even if the situation on the ground seems chaotic, the Turkish military has thus far limited its operations to the 100-kilometer stretch between the cities of Tal Abyad and Ras al-Ayn. Meanwhile, Syrian soldiers have taken up positions in many places along the Turkish-Syrian border, flanked by Russia. And it would be extremely dangerous for the Turks to attack them.

Such is the current situation in Syria: The Americans have pulled out, the Turks have gone in, the Kurds have fled and the Russians are trying to slow the Turks' advance. And the dictator in Damascus must be pleased, because it has now become even more likely that, with Moscow's backing, the man responsible for what is perhaps the greatest mass murder of the 21st century will soon have all of Syria back under his control. What does this portend for Syria, the Kurds and Europe? Will the Islamic State (IS) terror militia take advantage of the chaos to regroup?

Initially, Turkish President Recep Tayyip Erdogan indicated that he intended to continue with his offensive, no matter the cost -- until the last Kurdish fighter was driven out of the border area. It even looked as if Erdogan was prepared to risk a split with NATO over the invasion. In response, U.S. President Donald Trump threatened to "destroy" the Turkish economy if Turkish soldiers pushed deeper into Syria.

Following a meeting with Erdogan on Thursday evening in Ankara, U.S. Vice President Mike Pence made the surprise announcement that Washington and Turkey had agreed on a cease-fire, with Turkey now pledging to give the YPG 120 hours to vacate the border area. This is likely to temporarily ease tensions in Turkish-American relations, but it is unlikely to change the situation on the ground much, given that the Kurds probably won't completely withdraw from the area. But that didn't stop Trump from touting the cease-fire deal as an "incredible outcome" that would save the lives of "millions of people."

Dozens of civilians have been killed in the latest battles, and around 100,000 have lost homes and are now fleeing the violence. Might Europe be facing a new refugee crisis if, as Erdogan has threatened to do several times in the past, Turkey retracts on its deal with the EU and allows Syrian refugees in Turkey to continue their journey onward to Europe?

One thing is already becoming increasingly clear: A changing of the guard is taking place in Syria. The West has surrendered. The Europeans and the Americans have repeatedly condemned the atrocities in Syria, but they have done little to prevent them. Meanwhile, the despots -- Assad, Erdogan and Putin -- are emerging as the victors. And the consequences will be felt far beyond the Middle East.

The End of a Global Power

The disaster all began with a phone call between Trump and Erdogan on Sunday, October 6. Afterward, the White House sent out a skimpy, six-sentence press release stating that Turkey would march into northern Syria and U.S. troops would withdraw from the area and not be part of the operation. In other words: The West was pulling out and leaving Erdogan to do whatever he wants.

There are competing versions of what took place during that phone call. Trump's critics claim the U.S. president was hoodwinked by Erdogan because the Turkish president presented the invasion as being inevitable, leaving Trump with no alternative, according to this interpretation, but to accept it.

Another version of events is that Trump's advisers had asked him to implore the Turkish president not to invade and to threaten massive sanctions if his troops did march into Syria. But that Trump did nothing, or very little, of the sort.

Instead, say critics, the president deviated from the script and surprised his advisers by pledging to Erdogan he would withdraw American soldiers from the border area. Up to that point, the U.S. units had served as a protective buffer between the Kurdish militia and Turkey.

Shortly after the call, a frenzy broke out in Washington. Trump's announcement surprised and horrified European allies, including France and Germany. Members of the Republican Party even denounced the 180-degree about-face as a "betrayal" of the Kurds. Republican Senator Lindsey Graham, one of Trump's most loyal backers, warned that the Syria decision was "a disaster in the making."

Later, he would be even blunter. "The worst thing any Commander in Chief can do is to give land back to the enemy that was taken through blood and sacrifice," he tweeted. And: "I fear this is a complete and utter national security disaster in the making, and I hope President Trump will adjust his thinking."

The agitation among Trump's closest allies is reflective of the enormous impact of his decision. Trump has touched on one of the paradoxes of American foreign policy: On the one hand, Washington exploited the Kurds for several years as helpers in the fight against the IS terrorist militia in Syria, backing them with money, weapons and military assistance and taking for granted the deaths of 11,000 Kurdish fighters in battles against the Islamists. On the other, the U.S. was seeking to deepen relations with NATO partner Turkey and cozy up to Erdogan, even though Ankara considers YPG to be a terrorist group.

Trump hasn't shown any indication that he thinks there was anything wrong with his decision. He boasted about the withdrawal of the U.S. troops the same morning of his phone conversation with Erdogan. "The United States was supposed to be in Syria for 30 days, that was many years ago," he tweeted. Islamic State has been defeated, and "it is time for us to get out of these ridiculous Endless Wars."

'America First' Indeed

The Syrian decision is an example of just how domestically driven Trump's foreign policy is. "America First" was a key promise of his 2016 election campaign and, to the cheers of his fans, he has condemned the deployment of the U.S. military and ridiculed the foreign and security policies of his predecessors in the White House as "stupid" and "expensive." Trump played on the feeling, widespread among many Americans, that military deployments abroad don't do much more than cost human lives and a lot of money.

It is becoming clear that he plans to deploy that strategy again during his re-election campaign. And it may turn out to be relatively easy for him to peddle the withdrawal from Syria to his supporters as a success. But the decision also shows what Trump is capable of now that there is virtually no one in the White House or in his administration to oppose his isolationist bent.

Trump had already ordered the withdrawal of U.S. troops from Syria one before. Even then, last December, his argument was that IS had been defeated, making the ongoing U.S. presence there superfluous. Then-Secretary of Defense James Mattis resigned in protest and Trump postponed the pullout -- at least for the time being.

A sense of bitterness permeated Mattis' resignation letter, which also offered a scathing critique of U.S. foreign policy under Trump. In it, Mattis wrote that the president has "the right to have a Secretary of Defense whose views are better aligned with yours." In other words: If Trump wanted to plunge the Middle East into chaos, then he was the wrong man.

Internally, it is said that Mattis repeatedly warned against abandoning the Kurds in northern Syria, and in his letter, the general explicitly reminded the president of the importance of alliances for America. "One core belief I have always held is that our strength as a nation is inextricably linked to the strength of our unique and comprehensive system of alliances and partnerships." He continued that the U.S. "cannot protect our interests" without "maintaining strong alliances and showing respect for those allies."

The general's anger and the negative headlines his resignation created for the president apparently had some impact on Trump. John Bolton, who was still the president's national security adviser at the time, succeeded in dissuading Trump from his Syria decision. Bolton warned Trump strongly that an American withdrawal from Syria could result in the resurgence of Islamic State.

With Bolton now gone, Trump has surrounded himself with like-minded ideologues and sycophants in both the White House and Pentagon. Although they should know better, Secretary of State Mike Pompeo and new National Security Adviser Robert O'Brien have shown little interest in trying to rein in their stubborn boss.

The result is that there is only one force on the Republican side that is still seeking to contain Trump: GOP foreign policy experts in Congress. They are people like Lindsey Graham, but also Representative Liz Cheney, the influential daughter of Dick Cheney, who served as vice president during the administration of George W. Bush.

Since Trump announced his decision to pull out, she and other Republicans have been protesting the president's move almost daily. "Withdrawing U.S. forces from northern Syria is a catastrophic mistake," Cheney said, expressing her anger in a statement. On Wednesday, the House of Representatives passed a resolution rebuking Trump for his decision to pull American troops out of Syria by a majority of 354 to 60. A total of 129 Republicans voted against their own president.

It appears that Trump underestimated the headwinds he would face within his own party. His reaction -- a mixture of defiance and knee-jerkisms -- has only served to make his foreign policy appear more erratic and a once-proud world power even more ridiculous. In a fit of rage, he called on Erdogan to cease fighting in Syria and announced he would slap fresh sanctions on the country, including an increase of punitive tariffs on Turkish steel to 50 percent. At the same time, though, he has sought to justify his decision to withdraw by distancing himself from the Kurds.

Speaking from the Oval Office on Wednesday, Trump said the Kurds are perfectly capable of defending themselves. "They know how to fight." Besides, he said, the Kurds are "no angels." He then repeated himself: "As I said, they are not angels."

It all seemed to come to a climax with the bizarre letter Trump sent to Erdogan last week, three days after his decision to pull out. The letter is only a few lines long and it is written in the Twitter-friendly vernacular that has become Trump's hallmark. "Let's work out a good deal!" the president writes to Erdogan. Don't be a fool," he writes, before closing it with: "I will call you later."

For Trump, the Syrian crisis may be less threatening than the Ukrainian scandal, but general doubts about his sanity continue to grow.

Even the Wall Street Journal, owned by media czar and Trump loyalist Rupert Murdoch, fired a clear warning shot at the president. Trump should be careful, the paper's editorial board wrote in an op-ed. More and more Republicans "are questioning his judgement as Commander in Chief." It adds: "With impeachment looming, he can't afford to alienate more friends."

Europe's Helplessness

A dinner at the Élysée Palace, in Paris' chic 8th Arrondissement: German Chancellor Angela Merkel likely has less appealing events on her schedule than this one. Still, the meal she shared with French President Emmanuel Macron last Sunday was likely a frustrating one.

European leaders have been calling their German and French counterparts nonstop in recent days to consult with them about Erdogan's march into Syria. The Europeans are opposed to the actions taken by Turkey, and they are worried about deaths, mass displacement and the possibility of a new refugee crisis. But they either lack the will or the ability to do anything to counter Erdogan.

Merkel spent an hour on the phone with Erdogan trying to coax the Turkish president to abandon his campaign against the Kurds, but it didn't help. It was, once again, Luxembourg's Foreign Minister Jean Asselborn who openly admitted: "As Europeans, we are not in a position to stop this." There is "no European country that will now send soldiers into this corridor," he told DER SPIEGEL.

The Europeans have spent years discussing stronger cooperation in foreign and security policy, including a flexible deployment force, joint armed forces and arms procurement. But when they are called upon to act in the interest of stability, as is now the case in Syria, they are not even able to agree on a joint political stance, let alone take any action. Instead, they leave it to others to get their hands dirty -- which is one reason why the criticism of Trump feels so hypocritical this time around.

France is withdrawing its special forces, 200 elite troops, from Syria. And EU member states haven't even managed to agree on a coordinated stance toward Erdogan. Turkey is the source of conflict for them, but the country is also a NATO ally and, at least on paper, a candidate for membership in the EU.

The country is also home to more than 3 million Syrian refugees, which Ankara is hosting with considerable financial support from the EU. With Erdogan threatening to pull out of the refugee deal, Europe faces a possible return of the predicament it found itself in back in 2015. Where would all those people go?

We're now seeing just how vulnerable to blackmail Europe made itself by leaving it to the Turks to come up with a solution for the refugee problem. Whenever Erdogan feels people are being too critical of him, he can always threaten to open the borders to the EU. Erdogan has justified his invasion of Syria in part by saying he wants to offer Syrian refugees a safe home again. The dilemma is that Europe has little it can do to counter him.

On Monday, the 28 EU foreign ministers agreed to halt new weapons exports to Turkey. But they failed to push through a general arms embargo. It's also highly improbable that the EU will impose sanctions against Ankara, due in part to the fact that Erdogan maintains the best of relations with, for example, the Poles and the Hungarians.

Annalena Baerbock, the co-chair of Germany's Green Party, considers the arms export ban a "farce." Instead of standing up to Erdogan, she argues, the German government has been too soft on him for too long and points out that Germany has considerable leverage over Turkey through its economic ties with the country. "It should stop safeguarding Turkey's economic activities by providing investment guarantees," she says.

So far, Erdogan has deflected any criticism from the West. It's not Turkey, but countries like the U.S. and Saudi Arabia that are massacring civilians, he claims. After German Foreign Minister Heiko Maas rebuked the Turkish government for its Syrian offensive, Erdogan called him a dilettante. "If you knew anything about politics, you wouldn't be talking like that," the Turkish president said.

In the foreseeable future, it is clear, the power vacuum left behind by the Americans in Syria won't be filled by the Europeans. It will be filled by others. The Russians above all.

Putin's Ingenious Strategy

On that fatal Sunday, when Trump spoke with Erdogan on the phone and gave Turkey the green light for an invasion, Putin was on a hiking trip in Siberia. He had something to celebrate: It was the day before his 67th birthday.

Following Trump's capitulation, Putin no longer has much need to get involved in the Syrian conflict; everything is going according to plan as it is. Through clever diplomacy and scrupulous warfare, he has managed to keep Assad in power.

And now that the U.S. has withdrawn, Russia is the last remaining major power present in Syria. That leaves Putin in a position where he can simply sit back and play off the remaining actors in the conflict zone against each other.

Whereas the U.S. managed to infuriate its own allies in Syria, Russia has been able to achieve just the opposite over the years. Putin has long since developed strong ties to Assad and Iran, but now, the Turkish leadership is also growing closer to Moscow.

And the Kurds, meanwhile, have no other choice following the Turkish invasion than to pin their hopes on Russian intervention. It is up to Putin and Russian Foreign Minister Sergey Lavrov, a tactician who is as brilliant as he is shameless, to decide who gets control of what regions in Syria.

Over the course of the war, Putin and Lavrov never put all their eggs in the Assad basket, even helping out Turkey and the Kurds on occasion. In early August, at the 13th round of the Astana Process in the capital of Kazakhstan, Moscow's negotiators laid the groundwork for the decisive move. The talks proceeded according to Russia's will and desire, with Iran and Turkey present at the meeting and the U.S. and Europe absent.

A conference participant, who did not want to be quoted by name, told DER SPIEGEL that during the meeting in Astana, Russia pressured Turkey to finally carry out its long-threatened invasion of the Kurdish areas in northern Syria. Putin's goal is clear, said the participant: "The Russians are doing all they can to pull Turkey out of NATO."

It's not the success of Turkey's invasion that is in Russia's interest, but its failure. Putin and Lavrov, though, frequently take the less obvious approach -- and over the past week, things could hardly have gone better. In contrast to Erdogan, Putin anticipated that once the Americans withdrew and the Turks attacked, the Kurds would turn to Assad.

And the area under Assad's control has suddenly become much greater as a result. There aren't just lucrative oil wells in northern Syria, but also hundreds of thousands of Syrians over whom Assad once again has control, without having had to fire a single shot.

On October 13, the two senior-most Kurdish military leaders signed a "memorandum of understanding" that essentially amounted to a capitulation. It confirmed that the Syrian army would be returning to northern Syria, defined several zones of responsibility and guaranteed that the region would henceforth pay homage to Assad.

It is a bizarre document -- so much so that after its existence became known, the Kurdish leadership spent an entire day denying its authenticity. It also has nothing to say about two vital questions: What will happen with the YPG, the military arm of the Kurds? And will Assad's secret service, an agency that has been little more than a death squad in recent years, be returning to the Kurdish areas?

According to the statement of one Kurdish functionary, Damascus has told the Kurds that they will be allowed to hold on to their YPG units provided they soon join the fight against thelast remaining rebel stronghold in Idlib. That is likely something the Kurds won't be opposed to, given the Kurdish resentment at the fact that the rebels fought alongside the Turks during their advance into the Kurdish areas.

And Putin can continue with his finely tuned and highly flexible approach, one that involves talking with all parties involved, exerting pressure when needed and taking advantage of animosities -- and ultimately emerging with control over the victor. It is a strategy that has allowed Russia to increase its control over Assad's fiefdom step by step.

Russian companies have taken over contracts for natural gas fields and for ports, and they have managed to elbow the Iranians aside. Assad is becoming Moscow's puppet dictator.

Not only that, but Erdogan has also become dependent on Putin's goodwill.

Erdogan's Megalomanía

Erdogan is a gifted populist and can rally his supporters like no other, but there is one thing the Turkish president isn't good at: diplomacy. And nowhere is his overconfidence coming back to haunt him as it is in the Syrian conflict. Erdogan and Assad were once friends and even vacationed together on the Mediterranean coast in Turkey.

But in the 2011 Arab Spring, Erdogan saw an opportunity to take on a leadership role in the region and armed select Islamist groups for their fight against the Assad regime. For years, militia fighters were able to freely move back and forth across the border from Syria to Turkey.

Erdogan's imperialist ambitions, described by observers as "Neo-Osmanism" or "Neo-Ottomanism," were never fulfilled. Instead, the Turkish president was forced to stand by and watch as Assad consolidated his power with the help of Russia and Iran.

So, Erdogan revamped his Syria policy: He was no longer focused on getting rid of Assad. His main goal became that of destroying the YPG.

The U.S. values the YPG as an important ally in the fight against Islamic State. Erdogan, by contrast, sees the militia -- not inaccurately -- as the Syrian offshoot of the banned Kurdish Workers' Party (PKK), which spent years in armed conflict against the Turkish state.

Erdogan has repeatedly stated over the years that he would not accept a Kurdish state under YPG/PKK leadership as a neighbor. So, when Trump withdrew American troops from the region, Erdogan saw his opportunity and Turkish troops began their advance.

The Turkish military has already been involved in two battles in Syria, the first being the 2016 fight against Islamic State in Jarabulus, while the second was against the YPG in Afrin. But the current operation, dubbed "Peace Spring," is by far the most risky and consequential.

Erdogan wants to establish a 500-kilometer-long and around 30-kilometer-deep buffer zone stretching from the Euphrates River in the west to the Iraqi border in the east. That is essentially the region from which YPG fighters will have to withdraw if they choose to adhere to the plan agreed to between U.S. Vice President Mike Pence and Erdogan.

According to Ankara's plan, 10 cities and 140 villages are to be established in the area, where up to 2 million Syrian refugees currently in Turkey could be settled. The area is to be secured by the self-styled National Army, a militia alliance made up of fighters from the former Free Syrian Army and Islamist groups.

With the offensive against the Kurds, Erdogan has largely isolated Turkey internationally. But he doesn't seem to care. In Ankara, it is said that Erdogan is even willing to accept the possible negative consequences for the Turkish economy that could result from "Operation Peace Spring."

Ever since his Justice and Development Party (AKP) suffered a stinging defeat in Istanbul elections in June, Erdogan has been under domestic pressure he has never before felt. Istanbul's new mayor, Ekrem Imamoglu, dominated the political agenda for months and leading AKP officials are even preparing to establish their own party. The invasion of Syria has granted Erdogan a bit of a respite. War, after all, is good for autocrats, and large parts of the country have now united behind Erdogan. Even opposition leader Kemal Kilicdaroglu says that he now recognizes just a single political party: the Turkish flag. At an appearance in Turkish parliament this week, Erdogan was welcomed with a standing ovation.

Whether Erdogan's invasion proves successful is not entirely up to him. Now that YPG and the Assad regime have allied against Turkey, the future of "Operation Peace Spring" will be decided less on the battlefield and more in Damascus -- and, by extension, in Moscow.

According to Erdogan confidants, the Turkish president was surprised by the deal between the Kurds and Assad. But he knows that without Putin's support for his activities in Syria, there is little he can do.

Next week, Erdogan is planning to head to Moscow for talks with Putin. Ankara is hoping that Putin will at least give Erdogan a small piece of Syrian territory as a "buffer zone." But if the Russian president insists that control over all of Syrian territory be returned to Assad, Erdogan could be in store for a humiliation: Because he won't be interested in sending his military into a hopeless conflict against Syrian, Russian and Iranian troops, he would likely have no other choice than to put his tail between his legs and withdraw from Syria.

The Betrayed People

The ups and downs in the life of Mazloum Kobani are inseparably intertwined with the fate of the Kurds. So tightly, in fact, that hardly anyone knows his given name of Ferhat Abdi Sahin anymore, just his nom de guerre of Mazloum Kobani, a name he chose because he comes from the Syrian-Kurdish city of the same name.

Kobani is now in his 50s. As a young man in Syria, he got to know Abdullah Öcalan, the co-founder of the PKK, a man who Kobani calls his friend. Today, Kobani is commander of the Syrian branch of the PKK, the YPG. Like many Kurds, Kobani dreams of establishing a Kurdish state in the Middle East.

Together with the U.S., his militia was successful in defeating Islamic State in Syria, and Kobani took advantage of the situation to conquer roughly a third of the territory belonging to Syria. The Kurds also established control of cities and municipalities like Manbij, the population of which is primarily Arab.

Human rights organizations accused him of forcibly recruiting underage fighters, but the YPG was able to establish an autonomous region, called Rojava, that was relatively stable and within which women and minorities enjoyed more rights than elsewhere in Syria.

With the Turkish invasion in northern Syria, the existence of Rojava is now threatened, and Kobani is doing what he can to save whatever he can. He negotiated the deal with the Assad regime and Russia on behalf of the Kurds, despite having been locked away and tortured in Syrian prisons on more than one occasion himself and despite knowing full well that the regime will never accept Kurdish autonomy. "If we have to choose between compromises and the genocide of our people, we will surely choose life for our people," he wrote in a recent op-ed for Foreign Policy.

According to the International Organization for Migration, some 190,000 people in northeastern Syria are already fleeing the Turkish advance. And the routes they are taking are just as convoluted as the war itself. Some want to make their way to Iraq, but most are heading to southern Rojava, where the situation is currently a bit quieter.

Sultana Suleyman, 75, is sitting at a gas station in the middle of the plain together with her nine-person family and dozens of bags, sacks and suitcases. They are waiting for a bus to take them to Damascus. Back home to the dictatorship that has treated the Kurds as second-class citizens for decades. But, she complains: "Erdogan's terrorists are bombing us!"

The Return of the "Caliphs"

In his most recent audio message, circulated in September from his unknown hideout, Abu Bakr al-Baghdadi, head of the terrorist militia Islamic State, issued an order to his followers. They are, he demanded, to free those jihadis who are being held by the Kurds. "Your brothers and sisters, do your utmost to free them and tear down the walls restricting them," he urged.

In the West, few took the appeal seriously at the time. IS appeared to have been defeated after losing its final stronghold of Baghouz in spring and its fighters are either all dead, have fled or are sitting in Kurdish prison facilities in northeastern Syria. The YPG is thought to have captured some 80,000 IS followers, including around 11,000 fighters and more than 70,000 women and children, many of them from abroad, including from Germany, France, Tunisia and elsewhere.

Now, though, the confusion of the suddenly renewed fighting could make Baghdadi's appeal reality. Indeed, those imprisoned have largely been left to their own devices, with their Kurdish guards having headed to the front or fled the Turkish bombardment.

That, at least, was the situation in the Ayn Issa camp, where around 800 women and children were being held. Two liberated IS women told DER SPIEGEL: "There was an announcement from the guards over the loudspeakers that they were no longer responsible for the camp.

Then they jumped into their cars and drove away." The prisoners, the women said, then called relatives or human traffickers to come pick them up. The former camp leader says that 40 families were willingly transferred to another camp further to the south. "And every day, others are picked up as they wander through the area," he says.

But stories of an insurrection in the Ayn Issa camp, with prison walls being destroyed by grenades and hundreds of fighters liberated: All that is just PR from Kurdish politicians. Ayn Issa is only surrounded by barbed wire and there were no men held in the camp.

Currently, though, the greatest danger is facing those female prisoners who have long since renounced Islamic State. A German prisoner confirms what Charlie Winter, a terrorism and insurgency expert with the International Centre for the Study of Radicalisation (ICSR) in London, has reported: Namely that in the largest camp of al-Hawl, a radical faction among the female prisoners has been keeping a list of "defectors" who are to be executed.

A few days ago, in fact, the child of a supposed turncoat was murdered. "I am praying that the guards stay," a German prisoner told DER SPIEGEL via WhatsApp. "Otherwise, the others will come and cut us to pieces or light our tents on fire."

IS remains one of the wealthiest terrorist organizations in the world, with assets estimated by UN experts to be has high as $300 million. And Baghdadi hasn't given up his dream of establishing an Islamic State "caliphate." He is apparently hoping that once his fighters are freed from prison, they will regroup and ultimately launch another offensive.

The terror chief also seems convinced that time is on the side of the jihadists. In an April video, his only one in five years, Baghdadi advised his followers to wage a war of attrition from the underground, with the aim of exhausting the enemy in preparation for the decisive jihadist offensive.

Victory of the Autocrats

Already, it is clear that even an end to violence in Syria will not mean that a solution has been found. It Will merely result in generations of hatred, devastation and waiting for revenge. Huge sections of Homs, Aleppo and the suburbs of Damascus have been little more than rubble for years now. Half of the country's population has fled, around half a million people have lost their lives and it is estimated that Syria's gross domestic product has plunged to just a quarter of what it was prior to the violence. Reconstruction would cost hundreds of billions, a sum that -- according to Moscow's wishes -- is to come from the West.

And the horrific conclusion is still to come. Three million people live in Idlib, the last remaining rebel bastion. Fighting there in the coming months is likely to form the bloody finale of a war in which Assad and Putin have already broken all the taboos -- from the use of chemical weapons and the targeted bombing of hospitals to the starving out of entire cities. The lethargy of the international community has given Assad no cause for restraint.

Just as he has chosen violence over reform from the very beginning -- because every negotiation, every concession would have meant an erosion of his power -- reconstruction and reconciliation are not in his interest either. Those who don't completely submit themselves to his regime are not welcome to return. The hopes of some European politicians that Assad can be convinced to reform with money is naïve. Even as his regime was facing ruin, it made no concessions, preferring instead to unleash terror to escalate the conflict.

The reasons for the 2011 protests -- oppression, and corruption -- haven't gone away. On the contrary. And the fears of the people have only grown. And that is the key to Assad's power. He must foment that fear if he wants to domineer his people.

Under Trump's leadership, the Americans have abandoned their middleman role in the Middle East. And the Russians have filled the resulting vacuum. Rulers from Ankara to Cairo will carefully consider with whom they will cooperate in the future. Putin, Assad and Erdogan will establish the postwar framework in Syria. And there will only be room for those of whom the three despots approve.

By Christian Esch, Julia Amalia Heyer, Katrin Kuntz, Roland Nelles, Maximilian Popp, Christoph Reuter, Raniah Salloum, Christoph Scheuermann and Severin Weiland

Who can trust Trump’s America?

Donald Trump’s betrayal of the Kurds is a blow to America’s credibility

It will take years to mend


THE PITHIEST summary of Donald Trump’s foreign policy comes from the president himself. Referring to the mayhem he has uncorked in Syria, he tweeted: “I hope they all do great, we are 7,000 miles away!” Mr Trump imagines he can abandon an ally in a dangerous region without serious consequences for the United States. He is wrong. The betrayal of the Kurds will lead friends and foes to doubt Mr Trump’s America. That is something both Americans and the world should lament.

His decision to pull out 1,000 American troops has rapidly destroyed the fragile truce in northern Syria (see article). The withdrawal created space for a Turkish assault on the Kurds that has so far cost hundreds of lives; at least 160,000 people have fled their homes. Hordes of Islamic State (IS) backers, once guarded by the Kurds, have escaped from internment camps. With nowhere else to turn, the Kurds have sought help from Bashar al-Assad, Syria’s blood-drenched despot, an enemy of America.

Mr Trump campaigned on bringing troops home. He has argued that America must rid itself of “endless wars”. When he says Russia, Iran and Turkey can deal with the mess in Syria, many of his voters will agree. After almost two decades at war, they have tired of America acting as the world’s policeman. Some Democrats would like to pull troops out of the Middle East, too, including Elizabeth Warren, a leading contender to replace Mr Trump.

However understandable the frustration, the thoughtless abandonment of the region would be self-defeating. It undermines America’s credibility around the world, which means that the United States will have to work harder and spend more to get its way on issues that are vital to its people’s prosperity and their way of life.

Mr Trump’s exit from Syria fails the trust test on many levels. One is seriousness. The president seemingly neglected the briefing papers warning of the dire consequences of a power vacuum created by withdrawing the 1,000-strong tripwire force. The abruptness of the decision took nearly everyone by surprise, including his own officials. The Kurds were startled and appalled. British troops woke up to discover that their American brothers-in-arms were packing up. No one had time to prepare.

The policy also fails on loyalty. Kurdish troops in Syria fought beside American special forces and air power to crush IS’s “caliphate”. Some 11,000 Kurdish fighters lost their lives; five Americans also perished. The superpower had fused its matchless intelligence-gathering with a local ally to drive out the world’s worst terrorists at a relatively modest cost in blood and treasure.

Worst of all, the policy fails on strategy. Not just because of the potential revival of IS and the fillip to Mr Assad. But also because Iran, a bitter foe of America and ally of Mr Assad, will benefit from America’s withdrawal. Russians, too, are taking gleeful selfies in abandoned American bases. Vladimir Putin, Mr Assad’s backer, is claiming America’s mantle as the guarantor of order in the Middle East, a role the Soviet Union lost in the 1970s. In order to extract from Syria a small force that was sustaining few casualties, America has needlessly unleashed a new cross-border conflict, empowered its enemies and betrayed its friends.

Alas, shallowness and impulsiveness have become the hallmarks of Mr Trump’s foreign policy. After Iran attacked an American drone, he blocked retaliation at the last minute; after Iran or its proxies attacked Saudi oil facilities last month, he stood back. As if superpower diplomacy was an extension of domestic politics, governed by the same hyperbole and showmanship, he has ditched painstakingly negotiated treaties, noisily launched trade wars and, in places such as Venezuela and North Korea, promised transformations that never seem to bear fruit. Mr Trump takes momentous decisions on a whim, without pondering the likely fallout or devising a coherent strategy to contain it.

Mr Trump seems to think that he can use America’s titanic commercial clout as a substitute for hard power. Economic sanctions have become his answer to every problem—including that of Turkey’s invasion.

Yet when vital interests are at stake, states rarely seem to give ground. Just as Russia still occupies Crimea, Nicolás Maduro runs Venezuela and Kim Jong Un has his nukes, so Turkey has vowed to fight on in Syria. As China’s economy develops, sanctions may also be a wasting asset. Even today, pressed by America to cut ties with Huawei, a Chinese telecoms giant, many countries are reluctant to comply.

The Syrian debacle shows how all this could harm America. In Europe even before the assault, Turkey was at loggerheads with NATO over its purchase of Russian air-defence missiles. Because the invasion has led to sanctions and arms embargoes against Turkey, the cracks in NATO will only deepen. Mr Putin may be tempted to test America’s commitment to defending the Baltic states, tiny NATO allies on Russia’s border.

In Asia the Taliban will redouble their efforts, reasoning that if Mr Trump can dump the Kurds, he can dump Afghanistan, too. China will take note, bide its time and steadily press its territorial claims against its neighbours. Taiwan, an admirable democracy, has just got a little less secure. Around the world, America’s allies—of which it still has more than any nation in history—will have more reason to arm themselves, possibly fuelling regional arms races. Will South Korea or Saudi Arabia, fearful of being abandoned, be tempted to acquire nuclear weapons to guard themselves from North Korea or Iran?

Taken together, these concerns represent the unravelling of the order that America worked hard to build and sustain in the decades since the second world war, and from which it benefits in countless ways. If it pulled back it would still have to invest in arms and soldiers to protect its people and firms—and without so much support from allies.

More important, distrust, once earned, could not be confined to military affairs. Other countries would be less keen to strike long-term trade deals with America. They would hesitate to join in countering Chinese industrial espionage or rule-breaking that harms the United States. Most important, America would undermine its own values.

Human rights, democracy, dependability and fair dealing, however patchily honoured, are America’s most powerful weapon. If China and Russia had their way, might would be right.

For the West, that would be a profoundly hostile world.

Saudi Aramco

The message from the world’s biggest and wildest IPO

The oil industry may decline, but it won’t go quietly

THE DRILLING of the first modern well in Pennsylvania in 1859 set oil on a path that led to the heart of economics and geopolitics. Oil fuelled the rise of the West’s consumer culture; it helped determine who won the second world war and prompted a global economic crisis in the 1970s.

Over the past 20 years China has become the second-biggest consumer of crude, while America’s fracking revolution has meant it is close to being a net energy exporter for the first time since the 1950s.

Now a new chapter in oil’s story is unfolding: the prospect of stagnating or falling demand as the world shifts to cleaner energy. As in the past, this era promises startling economic and geopolitical change.

Consider the imminent stockmarket flotation of Saudi Aramco, which produces 10m barrels of oil a day, or 11% of the global total. As well as Arabian super-light, Aramco pumps out superlatives and controversy. Worth well over $1trn, it could, once listed, be the world’s most valuable public firm, squeezing past Apple.

The initial public offering has been delayed several times; a big Aramco processing plant was hit by a missile strike in September and the firm is ultimately controlled by Muhammad bin Salman, an autocratic royal with blood on his hands. But take a moment to look beyond this. Aramco’s underlying strategy is to be the last oilman standing if the industry shrinks, pointing to the upheavals to come.

The term “peak oil” was coined in 1956 by M. King Hubbert, a geologist worried about the stuff running out. Today the phrase is back but for the opposite reason: the prospect of dwindling demand. That may seem odd given that this has grown by 1.4% a year since 2008.

But the people running energy companies have long horizons, and on that timescale the picture for oil is darkened by urban pollution and climate change. Oil is responsible for a third of global energy use and a similar share of carbon emissions.

Many oil firms still say that production will creep up over the next decade, to slightly above today’s level of 95m barrels per day (b/d), and then plateau. But output will need to drop to 45m-70m b/d by 2050 if the world is to stop temperatures rising more than 1.5-2°C above their pre-industrial level. It would help, too, if there was a shift to cleaner oilfields, whose crude emits a fifth less than the dirtiest ones.

Though oil bosses insist, in public at least, that oil remains the planet’s indispensable fuel, they can feel the growing stigma. Public opinion is shifting in the West, heralding tighter rules on emissions. And, in a sign of jumpiness, some Western firms have favoured short-term projects rather than sink their capital in decades-long bets on oil’s future.

If demand does fall, some products and producers are more vulnerable than others. Over a third of all oil is used in cars and lorries which could eventually be fitted with electric engines.

It is harder to find a substitute for the oil in petrochemicals and plastics. Common sense suggests that the highest-cost and dirtiest oil firms will tend to go out of business first. If so, an industry that has become gargantuan over 160 years will shrink to a core of producers that fulfil the world’s residual demand at the lowest financial and environmental cost.

Many environmental activists fear this energy transition will never happen. But, in fact, it fits with Aramco’s strategy and pitch to investors. The firm spends just $3 to lift a barrel from beneath the desert, less than almost anyone else. The emissions from extracting Saudi oil are rock-bottom, too.

Aramco is expanding in petrochemicals and locking in customers in Asia—in August it bought a $15bn stake in the chemicals arm of Reliance, an Indian giant. Saudi Arabia has promised investors they will get steady dividends whatever the weather. Implicit in the kingdom’s approach is that, if and when oil demand falters, Aramco will be the producer of last resort.

A cleaner planet is in everyone’s interests. But a shrinking oil industry could mean more, not less, turbulence for energy markets and geopolitics. Take energy markets first. The optimistic case is that supply and demand will taper down in tandem, and that the price of oil will fall along with the cost of producing the last barrel needed to satisfy ebbing demand.

But downsizing an industry with $16trn of capital and at least 10m employees is never going to be smooth. Because oilfields naturally deplete, a drought in capital spending could cause a price spike.

Each firm and country, including Saudi Arabia, will face a choice between holding back supply so as to bolster profits and tax revenues and opening the taps to grab market share and use up reserves, whatever the price, before it is too late. The OPEC cartel, which combines high- and low-cost producers, could implode. And as production focuses on fewer fields, the risk of disruption from terrorism or accidents will rise.

The political implications are just as big. Twenty-six countries rely on oil income for 5% or more of their GDP, says the World Bank (the average for them is 18%). If economic logic prevails, producers with the dearest and dirtiest oil—including Algeria, Brazil, Canada, Nigeria and Venezuela—should wind down output, but that would be painful and, for some, devastating. America, meanwhile, remains wedded to oil, which meets 40% of its energy needs. Its thirst has been satisfied by the fracking boom, especially in the Permian basin in Texas.

Yet fracking is dirty and new projects need an oil price of $40-50 a barrel to break-even, at least twice the level Aramco requires. For the sake of the climate and efficiency, the fracking industry should eventually shrink. That, though, would make America more reliant on foreigners, just as its politics have turned inward.

Till kingdom come

And then there is Saudi Arabia itself. Aramco’s pitch to investors will boast of its abundant, cheap and relatively clean oil. That much is true. But it will not dwell on the country’s jobless youth or opaque court politics. Perhaps the proceeds of the IPO will help modernise the Saudi economy; perhaps not.

Investors betting on Aramco as the last oil major standing in 30 years’ time will have to consider the risk of revolution or invasion. Aramco’s flotation is a sign that the end of oil could be in sight. But it is also a reminder that the black stuff’s capacity to cause economic and political havoc will be undiminished for decades to come.

The High Price of Trump’s Great Betrayal

The abandonment of Kurdish forces in northern Syria has reinforced already existing doubts in the region and around the world that the United States remains a reliable ally. Those doubts are well-founded, because the isolationism underlying the move is widely shared by the American public.

Richard N. Haass

haass106_Jabin BotsfordThe Washington Post via Getty Images_trumpmicrophonesshadow

NEW YORK – There are several reasons why US President Donald Trump’s decision to withdraw American forces from northern Syria, and leave the region’s Kurds vulnerable to neighboring Turkey’s military incursion, was a terrible one. The Kurdish forces in control of the region had been the principal US partner in the struggle against the Islamic State (ISIS). Trump’s abandonment of them reinforced already existing doubts in the region and around the world that the United States remains a reliable ally.

The decision also created conditions enabling hundreds, and potentially thousands, of ISIS terrorists in Kurdish-run prisons to go free – and presumably resume terrorist activities as soon as they are given the opportunity. It is more a question of when, not if, US forces will need to return to Syria to contend with a reconstituted ISIS (most likely without a local partner to bear the brunt of the fighting).

In the meantime, the Kurds have turned to the Syrian government for protection against Turkish forces, a move that has allowed President Bashar al-Assad’s brutal regime (backed by Russia and Iran) to reassert its control over much of the country. For its part, the US has lost most of what leverage it had to influence a political outcome in Syria.

Trump’s flawed decision seems to stem from his desire to make good on the promise he made during the 2016 election campaign to withdraw the US military from Syria and the Middle East more broadly. But this raises a larger question: given the negative impact of the move, why would he believe that it would prove to be popular at home?

One explanation is that Trump is confusing “endless wars” with an open-ended military presence. This confusion is costly. What the US was doing in northern Syria was smart and efficient. Kurdish forces assumed the bulk of the combat role against ISIS; the US contribution was modest and largely confined to advising and providing intelligence support.

Moreover, the US presence restrained the actions of the Turks, Syrians, Russians, and Iranians. With the withdrawal of US troops, that restraint disappeared overnight.

More fundamentally, Trump’s decision taps into an old American tradition of isolationism, which has a lineage traceable to America’s Founding Fathers. It was in remission during the Cold War, but it has recently reemerged, fueled by the “intervention fatigue” triggered by the long and expensive wars in Afghanistan and Iraq.

It gains additional traction from the widespread view in the country that many domestic needs – from infrastructure to health care and education – are going unmet. A lack of emphasis on foreign policy and the world in US schools and media is also contributing to this inward turn.

Trump’s “America First” slogan is premised on the idea that the costs of US world leadership far outweigh any benefits. The resources spent on activism abroad, according to this view, would be better spent at home.

However appealing such arguments may sound, the notion that the US can safely turn its back on the world and still thrive even as global order declines is seriously misguided. Trump has repeatedly claimed that Syria is not critical to America’s security, noting that it is thousands of miles away.

But Americans learned the hard way on September 11, 2001, that distance is no guarantee of safety. Similarly, infectious disease, the effects of climate change, and efforts to subvert elections do not stop at national borders.

The costs of America’s global role are considerable by any measure. The defense budget alone now totals $700 billion annually, and intelligence, foreign aid, diplomacy, and maintaining a nuclear arsenal bring overall national security spending to over $800 billion.

But as a percentage of GDP, this is well below the Cold War average. And history shows that the US economy nonetheless flourished even with this high level of spending.

To be sure, the US has many domestic shortcomings, from public education to health care, but for the most part these problems are not the result of a lack of spending. The country spends over twice the OECD average on health care, but Americans do not lead longer or healthier lives.

Similarly, high spending on education does not yield better results than in countries that spend less. How money is spent is always more important than how much is spent.

But such facts are nearly irrelevant when it comes to the political debate. Many of the candidates seeking the Democratic nomination to challenge Trump for the presidency in 2020 share at least some of his isolationist views, and opinion polls reveal that many Americans do, too.

Trump is as much a reflection of America’s mood as its driver, and a certain degree of Trumpism – a desire to pull back from global commitments in general and military ones in particular – is likely to outlast the man.

At some point, things will change. History suggests that periods of retrenchment often end owing to some great geopolitical shock, followed by periods of exertion. The problem is that such shocks tend to be costly in terms of human lives and resources.

But for now and the foreseeable future, the US is unlikely to conduct a foreign policy commensurate with its interests and strength.

Richard N. Haass, President of the Council on Foreign Relations, previously served as Director of Policy Planning for the US State Department (2001-2003), and was President George W. Bush's special envoy to Northern Ireland and Coordinator for the Future of Afghanistan. He is the author of A World in Disarray: American Foreign Policy and the Crisis of the Old Order.

The Tale Of Gold's 200-Day Trend Line

by: Clif Droke

- Its lateral trading range was necessary to allow it to consolidate the rally.

- Central bank demand will keep gold price stable until the next breakout.

For many investors, gold’s extended trading range since late August has been agonizingly long.
Gold bulls have patiently waited for the next rally phase of the metal’s price to commence. And while there are fundamental signs which favor the continuance of gold’s bull market, the wait for the next extended rally will likely continue a while longer.
In this report we’ll review the factors which point to gold enjoying strong underlying support, but also needing additional time to consolidate its June-August rally before commencing another major climb.
One of the biggest arguments that gold bulls have made for a renewed rally phase in the metal is the sharp drop in the greenback this past month.
In recent reports I, too, have made the case that the improvement in gold’s currency component will help keep the metal’s price buoyant in the coming weeks.
Indeed, the weaker U.S. dollar index (DXY) is the reason for investors to remain positive on the gold outlook since gold tends to move inversely to the dollar.
Yet the dollar’s weakness alone isn’t sufficient to allow gold to launch a sustained rally, e.g. one lasting several weeks to months.
This is especially true given the fact that while the dollar has dropped considerably in recent weeks, it’s sitting on a trend line that has reversed previous declines.
I’m referring of course to the widely watched 200-day moving average.
Shown below is the dollar index in relation to its 200-day trend line. In the recent past, the 200-day MA has served as an inflection point for declines in DXY.
This was certainly the case in January and June of this year, as the dollar reversed a major decline in both instances.
However, regardless of whether the 200-day MA will act as a support to keep the dollar from further weakness, the extent of dollar’s decline in October should be enough to give gold at least a temporary shot of adrenaline and give the bulls a short-term advantage.
U.S. Dollar Index Source: BigCharts
Yet while a short-term rally is certainly possible on the back of the dollar’s recent weakness, there are other factors preventing an extended intermediate-term-oriented gold rally from taking place just yet.
What gold enjoys in the way of its improving currency component, for instance, is somewhat negated by the loss of its safety bid.
While there are still reasons for investors to own gold as a safety hedge against various geopolitical concerns – including Brexit – the biggest catalyst for gold buyers in late 2018 until this summer was the U.S.-China trade war.
But now the bellicose rhetoric that characterized the tariff dispute for much of 2019 has been replaced by a more diplomatic tone.
This cooling of passions has diminished the demand for safety while increasing investors’ tastes for riskier assets.
This explains the lateral trading range in the gold price since its late August peak.
A more mundane explanation for gold’s low-volatility consolidation phase in the last two months can best be explained with a graphic illustration.
Shown below is the one-year gold price graph along with its 200-day moving average.
The 200-day MA is a commonly used technical tool by traders and money managers alike, and its widespread use as a longer-term trend identifier also gives it a psychological significance.
By virtue of being closely watched by millions of participants the world over, the 200-day MA often takes on a life of its own.
Computer trading algorithms are programmed to sell or buy when the 200-day MA is either broken or successfully tested.
As you can see in the following chart, the gold price became drastically over-extended from its 200-day trend line during the big run-up in June to August.
Whenever price becomes distended from the 200-day MA, it sends the message to technically oriented traders that the market is potentially “overbought” and therefore vulnerable to a bear raid.
For that reason, many participants take profits or sell outright whenever the distance between price and the underlying moving average becomes conspicuous.
Gold Continuous Contract Source: BigCharts
The last time a gold rally outstripped its underlying 200-day moving average by a comparable degree was back in 2016.
An extended rally in gold in the first half of 2016 put the gold price well above the 200-day MA.
Subsequently, it was followed by a major decline later that year.
It wasn’t until the gold price overshot the 200-day MA on the downside in late 2016 that buyers were once again attracted to the metal and a rebound then followed in 2017.
The above graph shows that even after two months of a sideways drifting pattern, gold is still somewhat over-extended from this trend line.
For this reason, the metal could use some additional consolidation before its next extended rally phase begins.
The closer in line the gold price comes to its 200-day MA, the more technically healthy the market will be.
For this reason, investors shouldn’t be overly concerned by the amount of time that gold has spent in its trading range.
Trading ranges are often a cause for concern among participants because of the fear that a narrow, trendless market is used to disguise a distribution campaign (i.e. informed selling).
There are, however, good reasons for believing that gold remains in strong hands right now and that no significant selling pressure is plaguing the market.
One of the reasons for assuming that gold’s support is still strong is that central bank demand has been exceptionally high in the last several months.
Heading the list of sovereign gold buyers, China’s gold reserves have increased by more than 100 tons since last December.
The People’s Bank of China raised its gold holdings to 62.64 million ounces in September alone, according to various news reports.
Ever since central banks began heavily accumulating gold in the past two years, gold has acquired a major underlying support that should keep its price from declining significantly during downward phases of its short-term market cycles.
.China Central Bank Gold Inflows     Source: Bloomberg
Turning our attention to the immediate-term (one-to-four-week) outlook, the iShares Gold Trust (IAU) still hasn’t confirmed a bottom signal following its September-October “correction.”
Earlier this week it looked as if this popular gold-tracking ETF would confirm a bottom and reversal signal by closing two days higher above its 15-day moving average.
However, the 2-day higher close above the 15-day trend line was immediately reversed the next day.
This effectively invalided what was a preliminary breakout signal.
Thus, we’re back to waiting for the next buy signal in this gold trading vehicle.
iShares Gold Trust Source: BigCharts
While I still anticipate that the fourth quarter will be a productive one for gold and gold mining shares, patience is still required on the part of investors.
Until the gold price becomes less over-extended from its underlying 200-day moving average, its lateral trading range will likely continue a little while longer.
It may take a return of the inevitable global economic fears among investors at some point later this fall before gold gets its second wind and recovers its “fear factor.”
For now, though, investors can maintain intermediate-to-longer-term holdings in gold and gold-tracking funds.
On a strategic note, I’m still waiting for both the gold price and the gold mining stocks to confirm a breakout signal per the rules of my technical trading discipline.
Accordingly, I haven’t yet initiated a new short-term trading position in the VanEck Vectors Gold Miners ETF (GDX).
GDX is my preferred trading vehicle for the gold mining stocks and the ETF I refer to most frequently in this report.
I’m currently in a cash position in my short-term trading portfolio.