Category Archives: Global Economics

Sunny with a Chance of Turbulence

coins and flagMy Comments: Many of us were blindsided by the severity of the pullback that happened in 2008-09. Many of us are still trying to get back to where we were and are fearful of it happening again soon. Some on TV are pushing the idea that it’s just around the corner.

It’s not. The chance of a massive collapse like happened a few years ago is virtually non-existent, short of an asteroid falling on us somewhere. Scott Minerd has a great understanding of financial dynamics, and his comments are always worth reading.

June 25, 2015 by Scott Minerd, Chairman of Investments, Guggenheim Partners

It seems summer brings out the sunny disposition in everyone. Despite the fact that returns across U.S. investment categories are pretty dismal year to date, markets are pricing optimistically and it seems the sunshine has brought growth back to the U.S. economy. Recent data from the Bureau of Labor Statistics showed a 280,000 increase in employment in May. Additionally, building permits rose 11.8 percent in May, better than the 3.5 percent decline forecast by economists, while the pace of existing home sales hit its fastest rate since late 2009. Taking everything into account, the likelihood that the U.S. economy will suffer a recession in the next year or two would appear to be extremely remote.

Still, seemingly isolated events could yet sour the mood. Since the euro crisis erupted back in 2010, the possibility of a “Grexit” has been a recurring issue. A number of commentators have painted the possibility of a Greek exit from the euro zone as the equivalent of a Lehman Brothers-style event, a view I’m not so certain is correct. With that said, seemingly minor occurrences have in the past set the stage for larger economic events, such as the collapse of the Thai baht, a seemingly contained event that ultimately proved to be the first domino to fall in the 1997 Asian crisis. While we cannot discount the consequences that a Greek exit could potentially herald, I believe a solution to paper over this seemingly never-ending crisis is likely to calm markets in the near term.

As for developments at the Federal Reserve, while some commentators have suggested that the Fed is leaning toward December, I can see no reason why the Fed would consider delaying a rate rise beyond September. Either way, I don’t think it matters: The bottom line is that a rate hike is coming. Personally, I consider the bond market to be in fairly good shape and capable of handling the beginning of “normalization” without a rerun of the 2013 taper tantrum, but only time will tell.

Lastly, despite the generally positive environment, it disturbs me how low returns have been across almost every asset class year to date. This tells me that markets may be getting fully priced for the near term, and that investors have already placed their bets on how they see major events of the day playing out. With all the chips on the table, new market inflows are likely needed in order to push prices higher, but I don’t envision significant inflows occurring until the fourth quarter. As evidence, the S&P 500 has not had a weekly move of more than 1 percent in either direction in two months, which is the longest such streak in over two decades. During this period, breadth has broken down in a meaningful way. For now, it doesn’t appear that investors are being compensated for the risks they are taking.

Despite poor year-to-date performance, the majority of forecasters have yet to alter their year-end S&P 500 price targets. In fact, the dispersion around analysts’ predictions is as tight as it’s been since 2009. This tells me the market doesn’t really feel like there’s a lot of uncertainty, which is concerning, because such high levels of complacency usually foreshadow some form of financial accident. I am not talking about a financial crisis, or a recession—we certainly have no indications of either yet—but there have been a number of periods of prolonged expansion where complacency climbs high and we wound up in an extremely turbulent period. Think about 2011, when there was a severe summer pullback in U.S. equities. Similar to today, at that time investors had basically put their bets on the fact the recovery was in place, and that stocks were going higher. Those bets turned out to be correct, but only after we narrowly avoided a 20 percent pullback.

With complacency as high as it is today, I fear we could be in for meaningful turbulence this summer. For this reason I would encourage investors to consider accumulating cash reserves or Treasuries in order to insulate themselves against any potential summer squalls during the next few months.

Economic Data Releases – U.S. GDP Revised Up in Final Estimate; Consumer Spending Records Fastest Growth in Nearly Six Years
• First-quarter GDP was revised up in the final estimate, but was still negative at -0.2 percent annualized. Better consumer spending helped revise the growth number upward.
• Existing home sales beat expectations in May, rising 5.1 percent to an annualized pace of 5.35 million homes. The percentage of first-time buyers rose to 32 percent.
• New home sales increased 2.2 percent in May, up to 546,000 after a positive revision to April’s data.
• Durable goods orders, excluding transportation, met expectations in May, up 0.5 percent. Nondefense capital goods orders excluding aircraft rose 0.4 percent, missing expectations after falling in April.
• The Federal Housing Free Agency House Price Index rose 0.3 percent in April, matching the previous month’s gain
• Personal spending jumped 0.9 percent in May, a stronger showing than the 0.1 percent gain in April and ahead of market expectations of a 0.7 percent increase.
• Personal income climbed by 0.5 percent in May, matching the upwardly revised increase seen in April.
• In the 12 months through May, the personal consumption expenditures (PCE) price index rose 0.2 percent. The core PCE price index, excluding food and energy, rose 1.2 percent in the 12 months through May

Euro Zone PMI Data Releases Continue to Point toward Growth
• Euro zone consumer confidence was unchanged in the initial June survey, remaining at -5.6.
• China’s HSBC manufacturing purchasing managers index (PMI) improved in June, but remained in contraction at 49.6.
• The euro zone manufacturing PMI showed a slight acceleration in activity in June, rising to 52.5 from 52.2. The services PMI rose to 54.4, a more than three-year high.
• Germany’s manufacturing PMI was better than forecast in June, rising to 51.9 vs. expectations of 51.2. The services PMI also rebounded after declining for the past two months.
• The French manufacturing PMI returned to expansion in June at 50.5, the highest reading in 14 months. The services PMI also made a multi-year high.
• Germany’s IFO Business Climate Index fell more than forecast in June, with both the current assessment and expectations worsening.

Bond Crash Across the World As Deflation Trade Goes Horribly Wrong

Interest-rates-1790-2012My Comments: You can call me an alarmist if you like, I really don’t care. We are long overdue for a market correction, from both a stock value perspective and interest rate perspective. If you don’t believe it’s coming, I have some nice real estate just east of Daytona Beach I can sell you for peanuts.

By Ambrose Evans-Pritchard / 10 Jun 2015

The global deflation trade is unwinding with a vengeance. Yields on 10-year Bunds blew through 1pc today, spearheading a violent repricing of credit across the world.

The scale is starting to match the ‘taper tantrum’ of mid-2013 when the US Federal Reserve issued its first gentle warning that quantitative easing would not last forever, and that the long-feared inflexion point was nearing in the international monetary cycle.

Paper losses over the last three months have reached $1.2 trillion. Yields have jumped by 175 basis points in Indonesia, 160 in South Africa, 150 in Turkey, 130 in Mexico, and 80 in Australia.

The epicentre is in the eurozone as the “QE” bet goes horribly wrong. Bund yields hit 1.05pc this morning before falling back in wild trading, up 100 basis points since March. French, Italian, and Spanish yields have moved in lockstep.

A parallel drama is unfolding in America where the Pimco Total Return Fund has just revealed that it slashed its holdings of US debt to 8.5pc of total assets in May, from 23.4pc a month earlier. This sort of move in the staid fixed income markets is exceedingly rare.

The 10-year US Treasury yield – still the global benchmark price of money – has jumped 48 points to 2.47pc in eight trading sessions. “It is capitulation out there, and a lot of pain,” said Marc Ostwald from ADM.

The bond crash has been an accident waiting to happen for months. Money supply aggregates have been surging all this year in Europe and the US, setting a trap for a small army of hedge funds and ‘prop desks’ trying to squeeze a few last drops out of a spent deflation trade. “We we’re too dogmatic,” confessed one bond trader at RBS.

Data collected by Gabriel Stein at Oxford Economics shows that ‘narrow’ M1 money in the eurozone has been growing at a rate of 16.2pc (annualized) over the last six months. You do not have to be monetarist expert to see the glaring anomaly.

Broader M3 money has been rising at an 8.4pc rate on the same measure, a pace not seen since 2008. Economic historians will one day ask how it was possible for €2 trillion of eurozone bonds – a third of the government bond market – to have been trading at negative yields in the early spring of 2015 even as the reflation hammer was already coming down with crushing force.

“It was the greater fool theory. They always thought there would be some other sucker to buy at an even higher price. Now we are returning to sanity,” said Mr Stein.

M3 growth in the US has been running at an 8pc rate this year, roughly in line with post-war averages. The growth scare earlier this year has subsided, as was to be expected from the monetary data.

(If you want to see the charts associated with this article, go HERE)

The economy has weathered the strong dollar shock and seems to have shaken off a four-month mystery malaise. It created 280,000 jobs in May. Bank of America’s GDP ‘tracker’ is running at a 2.9pc rate this quarter.

Capital Economics calculates that hourly earnings have been rising at a rate of 2.9pc over the last three months, the fastest since the six-year expansion began.

Bond vigilantes – supposed to have a sixth sense for incipient inflation, their nemesis – strangely missed this money surge on both sides of the Atlantic. Yet M1 is typically a six-month leading indicator for the economy, and M3 leads by a year or so. The monetary mechanisms may be damaged but it would be courting fate to assume that they have broken down altogether.

Jefferies is pencilling in a headline rate of 3pc by the fourth quarter as higher oil prices feed through. If they are right, we will be facing a radically different economic landscape within six months.

This has plainly been a bond market bubble, one that is unwinding with particular ferocity because new regulations have driven market-makers out of the business and caused liquidity to evaporate. Laurent Crosnier from Amundi puts it pithily: “rather than yield at no risk, bonds have been offering risk at no yield.”

Funds thought they were on to a one-way bet as the European Central Bank launched quantitative easing, buying €60bn of eurozone bonds each month at a time when fiscal retrenchment was causing fresh supply to dry up. They expected Bunds to vanish from the market altogether as Berlin increases its budget surplus to €18bn this year and retires debt.

Instead they have discovered that the reflationary lift from QE overwhelms the ‘scarcity effect’ on bonds. Contrary to mythology – and a lot of muddled statements by central bankers who ought to know better – QE does not achieve its results by driving down yields, at least not if conducted properly and if assets are purchased from outside the banking system. It works through money creation. This in turn lifts yields.

The ECB’s Mario Draghi has achieved his objective. He has (for now) defeated deflation in Europe. After six years of fiscal overkill, monetary contraction, and an economic depression, the region is coming back to life.

How this now unfolds for the world as a whole depends on the pace of tightening by the Fed. Futures contracts are still not pricing in a full rate rise in September. They are strangely disregarding the message from the Fed’s own voting committee – the so-called ‘dots’ – that further rises will follow relatively soon and hard.

The Fed is implicitly forecasting rates of 1.875pc by the end of next year. Markets are betting on 1.25pc, brazenly defying the rate-setters in a strange game of chicken.

The International Monetary Fund warned in April that this mispricing is dangerous, fearing a “cascade of disruptive adjustments” once the Fed actually pulls the trigger.

Nobody knows what will happen when the spigot of cheap dollar liquidity is actually turned off. Dollar debts outside US jurisdiction have ballooned from $2 trillion to $9 trillion in fifteen years, leaving the world more dollarised and more vulnerable to Fed action than at any time since the fixed exchange system of the Gold Standard.

Total debt has risen by 30 percentage points to a record 275pc of GDP in the developed world since the Lehman crisis, and by 35 points to a record 180pc in emerging markets.

The pathologies of “secular stagnation” are still with us. China is still flooding the world with excess manufacturing capacity. The global savings rate is still at an all-time high of 26pc of GDP, implying more of the same savings glut and the same debilitating lack of demand that lies behind the Long Slump.

As Stephen King from HSBC wrote in a poignant report – “The World Economy’s Titanic Problem”- we have used up almost all our fiscal and monetary ammunition, and may face the next global economic downturn with no lifeboats whenever it comes.

The US is perhaps strong enough to withstand the rigours of monetary tightening. It is less clear whether others are so resilient. The risk is that rising borrowing costs in the US will set off a worldwide margin call on dollar debtors – or a “super taper tantrum” as the IMF calls it – that short-circuits the fragile global recovery and ultimately ricochets back into the US itself. In the end it could tip us all back into deflation.

“We at the Fed take the potential international implications of our policies seriously,” said Bill Dudley, head of the New York Fed. Yet in the same speech to a Bloomberg forum six weeks ago he also let slip that interest rates should naturally be 3.5pc once inflation returns to 2pc, a thought worth pondering.

Furthermore, he hinted that Fed may opt for the fast tightening cycle of the mid-1990s, an episode that caught markets badly off guard and led to the East Asia crisis and Russia’s default.

The bond reductions this week are an early warning that it will not be easy to wean the world off six years of zero rates across the G10, and off dollar largesse on a scale never seen before. Central banks have no safe margin for error.

US Should Not Negotiate Free Trade Behind Closed Doors

global tradeMy Comments: Recently I was reminded that I appear to have strong opinions. This is usually accompanied by a rolling of the eyes, and to which I now hang my head, but without shame. On this topic, I’ve not had an opinion worth talking about until now. I hate it when people bitch and moan but can’t be bothered to offer an alternative which might be an improvement. (See GOP arguments against the Affordable Care Act)

Since I don’t have a visceral dislike of Barack Obama and voted for him twice, I’m inclined to give him the benefit of the doubt when he talks about the need for and benefits of the Trans Pacific Parnership or TPP. If he says it will be good for the US, I’m inclined to believe him.

But I’m also not inclined to ignore the push being made by the likes of Robert Reich, of Elizabeth Warren and Bernie Sanders. I think of them as credible advocates for what is in our best interests going forward.

We do need trade deals to keep the US current with what is happening globally in the 21st century. And we need to make sure that they are focused first on what is best for you and I as citizens America and not just what is best for corporate America. Since the Supreme Court has declared that corporations are people, then it seems reasonable that we not be discriminated against just because our pockets are not as deep.

The TPP needs a new start with full transparency since, in my opinion, the idea is valid and NOT a total waste of time.

Mark Wu / May 26, 2015 / The Financial Times

Many Americans who think free trade can be good for them nevertheless doubt whether the same can be said for the international trade agreements that are actually being written, often in conditions of secrecy.

The Trans-Pacific Partnership, an agreement that the US is negotiating with 11 Pacific Rim countries, is a case in point. Beyond the few paragraphs on the White House website, most Americans have little idea what it contains. Even members of Congress have to go to a secure room in the basement to read the latest negotiating text.

The White House argues that a period of secrecy is necessary, to afford negotiators flexibility to cut deals. Once we have an agreement, officials say, there will be plenty of time for the public to debate its merits — and Congress can reject it. Yet sceptics are not convinced; last week Democratic lawmakers tried to prevent the Senate from so much as discussing a law that would give President Barack Obama broad authority to negotiate a deal.

It does not help that some Americans have greater insight into what is happening than others. The US trade representative consults with about 700 people while negotiations are in progress; most are from the private sector. This advisory system fuels fears that trade deals benefit corporate interests at the expense of ordinary Americans.

As a former trade negotiator, I know that so-called trade promotion authority and some degree of secrecy is vital for getting a deal done. But the current level of secrecy may be going too far. Instead of dismissing critics as misguided, the White House should strike a better balance between retaining flexibility for negotiators and keeping the public informed during the process.

Here are three proposals — developed with my colleague John Stubbs, a former senior adviser to the USTR — that would help restore this balance.

First, the administration should provide better accounts of US negotiating objectives. The EU does this already, publishing a two-page summary of its aims for each chapter of a trade deal, and sometimes releases its own negotiation proposals. By contrast, the USTR publishes only a terse paragraph for each chapter. It should be more forthcoming.

Second, the government should release information about proposals under consideration, provided our negotiating counterparts agree. It should solicit public comments on contentious proposals (there is no need to say which government put forward which proposal). This provides a mechanism to seek input from the broader public, rather than just select advisory group officials.

Finally, government reports of the economic benefits and losses associated with trade deals depend heavily on economic models. While the final reports of government economists are made public, the data and assumptions underlying these models often are not. Why not make that information available as well? Outside experts can re-run the model to show how the economic effects change under different conditions.

None of these proposals would hamper the ability of trade negotiators to do their jobs. Yet all three can help erase worries that the government is hiding something, and restore trust that deals are being negotiated in the broader public interest.

Outdated trade rules need to be revised. But America’s process for formulating trade policy is outdated, too. Citizens should be able to make informed decisions over whether a deal allows Americans to share broadly in the gains from trade. Supporters of trade deals need to realise that they too need to support greater transparency, if they are to rebuild a broader coalition in favour of trade.

America Could Have Been One Giant Sweden — Instead It Looks a Lot Like the Soviet Union

My Comments: This is a long, uncomfortable article that predicts how the world might evolve economically and politically over the next several decades.

My generation will have passed on soon, but regardless of your political stripes today, it will be different. If you want to take back America, or at least preserve what we have, you had better get in touch with your socialist side. Either that, or kiss your basic freedoms goodbye. Life simply does not stand still; never has and never will.

By John Feffer / May 26, 2015

Imagine an alternative universe in which the two major Cold War superpowers evolved into the United Soviet Socialist States. The conjoined entity, linked perhaps by a new Bering Straits land bridge, combines the optimal features of capitalism and collectivism. From Siberia to Sioux City, we’d all be living in one giant Sweden. It sounds like either the paranoid nightmare of a John Bircher or the wildly optimistic dream of Vermont socialist Bernie Sanders.

Back in the 1960s and 1970s, however, this was a rather conventional view, at least among influential thinkers like economist John Kenneth Galbraith who predicted that the United States and the Soviet Union would converge at some point in the future with the market tempered by planning and planning invigorated by the market. Like many an academic notion, it didn’t come to pass. The United States veered off in the direction of Reaganomics. And the Soviet Union eventually collapsed. So much for “convergence theory,” which like EST or cold fusion went the way of most crackpot ideas.

Or did it? Take another look at our world in 2015 and tell me if, somehow we haven’t backed our way through the looking glass into that very alternative universe — with a twist. The planet currently seems to be on the cusp of a decidedly unharmonic convergence.

Consider what’s happening in Russia, where an elected autocrat presides over a free market shaped by a powerful state apparatus. Similarly, China’s mash-up of market Leninism offers a one-from-column-A-and-one-from-Column-B combination platter. Both countries are also rife with crime, corruption, growing inequality, and militarism. Think of them as the un-Swedens.

Nor do such hybrids live only in the East. Hungary, a member of the European Union and a key post-Communist adherent to liberalism, has been heading off in an altogether different direction since its ruling Fidesz party took over in 2010. Last July, its prime minister, Viktor Orban, declared that he no longer looks to the West for guidance.

To survive in an ever more competitive global economy, Orban is seeking inspiration from various hybrid powers, the other un-Swedens of our planet: Turkey, Singapore, and both Russia and China. Touting the renationalization of former state assets and stricter controls on foreign investment, he has promised to remake Hungary into an “illiberal state” that both challenges laissez-faire principles and concentrates power in the leader and his party.

The United States is not exactly immune from such trends. The state has also become quite illiberal here as its reach and power have been expanded in striking ways. As it happens, however, America’s Gosplan, our state planning committee, comes with a different name: the military-industrial-homeland-security complex. Washington presides over a planet-spanning surveillance system that would have been the envy of the Communist apparatchiks of the previous century, even as it has imposed a global economic template on other countries that enables enormous corporate entities to elbow aside local competition. If the American tradition of liberalism and democracy was once all about “the little guy” — the rights of the individual, the success of small business — the United States has gone big in the worst possible way.
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What Oil Price Is Sustainable?

oil productionMy Comments: Buying gas for your car at the pump is now an adventure fraught with uncertainty. Is the price going up or is it going down? What can I expect the next time I need to fill the tank? Is there a station on the other side of town willing to lower their price to get more customers? Does it make sense to drive all the way over there to save 3 cents on every gallon?

Some people simply don’t give a damn, or have enough money that the question is irrelevant. But for many, it’s a weekly quiz that surfaces every time the needle on the gauge moves toward the empty side.

So as someone who understands the dynamics of supply and demand, the two primary drivers of price, this lengthy explanation helped me better understand what is going on as I stand with hose in hand, watching the dollars add up.

There is no simple explanation. The article presented has lots of charts and lots more text to wade through. So if this is your cup of tea, you can get to the source and finish it there.

May. 8, 2015 by The Value Portfolio

Summary
• The cost of oil production represents a lower limit on prices for the long term.
• Many major oil producing countries need higher oil to balance their budgets.
• Lower oil prices will lead to faster-than-anticipated growth in demand, leading to a quicker recovery.

Introduction
While many of my articles talk about individual oil companies, lately, I have been writing more about oil markets as a whole. After my article about the potential effects of the release of Iranian oil, the goal of this article is to try and provide a bottom limit for long-term oil prices.

To those wondering what to do with this information, it simply means if oil goes below this bottom limit, buy it.

15-05 Crude Oil per gallonAs many of you know, the last year has not been kind to oil prices or commodities in general. After hitting highs of near $110 a barrel for Brent a year ago, prices fell by over 50% to lows near $50 in January. Prices then bounced back before bouncing down again in mid-March to ~$55 a barrel. Since then, prices have shown a nice recovery towards $65 per barrel.

Simply put – part of the world’s oil supply was not profitable at $50 a barrel. However, now that prices have recovered, the goal of this article is to determine what is a lower-end cut-off for oil prices – what is the lowest point at which the world’s oil production is profitable.

Balancing The Budgets

Unlike the United States, most other countries in the world are not trillions in debt. This is especially true for oil countries. Thinking of countries like Saudi Arabia and the United Arab Emirates, one thinks of the enormous wealth generated by oil production.

Still, the lavish spending of these countries means that they need high oil prices to balance their budgets. Looking at the above graph, for the 35 million barrels per day produced by these countries (roughly 40% of the world’s oil budget), only Kuwait and Qatar can balance their budgets with current oil prices. In fact, many of these countries rely on oil prices of around $100 to cover their costs.

What does this mean? Traditionally, Saudi Arabia along with OPEC as a whole was seen as an oil price controller. When prices went down, OPEC would step in through cutting production in order to help keep prices higher. This is part of the reason why oil prices recovered so quickly in 2008.

However, this time is different. This time, Saudi Arabia does not want OPEC to cut production, they want prices to remain low. Saudi Arabia is hoping to use its significant financial assets to drive on competing U.S. producers while keeping oil prices low.

Drawing a conclusion from the data, we see that in the long term, the need of OPEC to balance its budgets mean that oil prices of roughly $100 are necessary, with $80-$90 representing an overall lower bound.

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Iraq’s Least Worst Options

asstooheavyMy Comments: If I had to personally make definitive decisons about the US role in the middle east, I have absolutely no idea what would be in our best interest. That’s why they don’t pay ME the big bucks.

But history has made us the world’s only policeman. Since I have no idea about what I’ll have for lunch tomorrow, knowing how any definitive decision will play out is also an unknown. You might have a clue, but you do not “KNOW”.

I’m willing to accept that Bush and/or Cheney had “honest” reasons for taking us into Iraq. If the reasons WERE “honest”, however, then their judgement as leaders is seriously in question. There was either bad judgment or their reasons were “dishonest”.

Today, the self styled Islamic caliphate called ISIS needs to be destoyed to the extent possible. But short of killing hundreds of thousands of people, military action is not going to do much good. The ones we don’t kill will be permanently pissed off, further jeopardizing our men and women and our future treasury. Money can be replaced, but not lives.

So I worry about it. But I don’t want to condemn or praise those seeking higher office today because they might have voted differently. What’s done is done. I’d much rather worry about what is in our best interest as a nation going forward.

The other evening I witnessed a fascinating dialog between Barney Frank and Chris Hayes. The conclusion I heard was an agreement that from time to time, intervention IS in our best interest and should be made. On the other hand, in hindsight, invading Iraq was a mistake.

Virtually all the “candidates” in the GOP fail to answer the basic questions posed to them about what we did in Iraq. Their confused answers means they are simply not ready for prime time. They had to have rehearsed their possible answers and yet still came across like deer caught in the headlights. Surely we can do better than that.

“If we want to defeat ISIS, we are going to have to accept some outcomes we don’t like.”   By Fred Kaplan / May 19 2015

The fall of Ramadi, the strategic center of Iraq’s Anbar province, doesn’t necessarily signal the triumph of ISIS, but it does mean that President Obama and various regional leaders can no longer dodge some uncomfortable choices.

Iraqi Prime Minister Haider al-Abadi’s decision to let 3,000 Shiite militia men amass outside Ramadi to prevent ISIS from moving further eastward toward Baghdad (and even possibly charging into the conquered city to battle the jihadists head-on) is the clearest sign yet that there is no longer a viable Iraqi army. Its ranks have been whittled away by corruption, incompetence, sparse pay, and lack of allegiance to the Baghdad government.

Obama and his top generals have warned Abadi not to rely so heavily on Shiite militias, which are controlled by Iran. In the battle for Tikrit in March—in which ISIS forces were ousted by a coalition of Iraqi soldiers, Sunni militias, Shiite militias, Kurdish peshmerga, and U.S. bombing runs—American commanders threatened to withhold their air power unless the offensive was led by Iraqi soldiers and no Iranians were on the battlefield. The players complied (though they still quarrel over which faction was responsible for the victory).

But in Ramadi, where Iraqi troops and Sunni militias swiftly folded under fire, the pretense won’t hold. Shiite militias, mainly the Badr forces, will lead the way by default, and Obama will have to decide whether to hold back, out of some principle, or hold his nose and send in the smart bombs.

Before deciding what to do about Ramadi, Obama—or any other leader with a stake in the fight—first has to decide what outcome he prefers. Since all plausible outcomes are lousy, this means deciding which outcome sickens him the least.

Obama and the leaders of every nation in the region want to see ISIS crushed or contained. But they’ve gone about it half-heartedly because they dread the side effects of doing it with gusto. ISIS is as strong as it is, only because its leaders know and exploit its foes’ dilemmas.

For instance, one potent way of fighting ISIS would be to energize and unify the armies of Iran, Turkey, Syria, and the Kurds. These are the forces that fear ISIS the most and could fight it most effectively. But there are serious obstacles to forming this alliance. The United States and the Sunnis in the region (including Turkey, the Kurds, Saudi Arabia, Egypt, Jordan, and the Gulf States) do not want to help Iran expand its influence. Nor do they want to bolster Bashar al-Assad’s regime in Syria; in fact, they want to see Assad toppled (preferably by the U.S. military, so they don’t have to bother). Meanwhile, the Turks don’t want to let the Kurds swell with too much swagger.

Finally, ISIS itself is a Sunni organization; it has thrived, especially in Iraq, by co-opting local Sunni tribes, whose leaders fear domination by Shiites (including Iraq’s Shiite-led government) even more. To beat ISIS requires neutralizing its sectarian appeal, and that means driving a wedge between the ISIS jihadists and their less militant Sunni enablers. But a coalition that includes Iran or Syria might push Sunnis more firmly into ISIS’s corner—and might keep such Sunni-led nations as Turkey, the Gulf States, and Saudi Arabia from joining the alliance to begin with.

Analysts have noted that mobilizing Shiite militias to fight ISIS in Ramadi would intensify sectarian tensions. This is true, but every option that involves fighting ISIS would intensify sectarian tensions. The real question is which options stand a chance of hurting ISIS the most while sharpening sectarian tensions the least. Or, from the standpoint of the United States and the anti-ISIS leaders in the region: Which options might hurt ISIS the most while raising the specter of side effects—the expansion of Iranian influence, the swelling of Kurdish separatism, the bolstering of Assad’s regime—the least?

A more basic question: How would these leaders rank the range of outcomes, including “ISIS wins,” “Iran controls southern Iraq,” “Assad survives,” “Assad is overthrown” (but by whom?), and the rest? Which outcomes are intolerable, which are merely disgraceful, and could the leaders live with some of the latter in order to preclude the former?

“Assad survives” is probably the biggest nonstarter, not least because he may be on the verge of falling. One word from President Vladimir Putin or Ayatollah Ali Khamenei, and Assad would be gone. The challenge is to give Putin or Khamenei an incentive to pull the plug. Secretary of State John Kerry’s recent meeting with Putin in Sochi was held, in part, to explore possible terms of such an arrangement. The handshake must have been unpleasant, maybe even disgraceful, but if it leads to the ouster of Assad, which in turn would prod the Turks and Saudis to crack down harder on ISIS, it would have been worth the nausea.

The Middle East is a mess—the product, in part, of the post–Cold War disintegration of borders that were imposed by colonial powers nearly 100 years ago in the wake of World War I. The rise of ISIS, its ability to thrive even though it’s surrounded by powerful nations that dread its aspirations, is a symptom of this mess.

Those who believe that Obama caused these troubles, or that they can be solved by a few thousand American ground troops, are so naive and shallow that we can only hope that none of them wins the White House or advises the candidate who does. For one thing, “a few thousand ground troops,” in fact, means many more: They would need air support (including transport planes and helicopters), bases, supply convoys, and a headquarters, plus additional troops to protect the troops, bases, convoys, and headquarters.

For another, what are these troops supposed to do? And which would have the larger effect—the additional firepower that they could bring to bear against ISIS or the additional recruits that ISIS could rally to kill Americans in the name of jihad?

Logistics, intelligence, airstrikes to help local anti-ISIS forces on the ground—this is what the United States can best offer. Officers and analysts on the ground say that airstrikes terrify many ISIS fighters, who tend to attack in swarms, which provide concentrated targets for a bomb. These sources confirm a report in the New York Times that ISIS launched its crucial attack on Ramadi during a major sandstorm, when pilots (of airplanes or drones) could not have seen its movements on the ground below.

But even in clear weather, airstrikes alone aren’t sufficient. ISIS mingles with the locals (in some cases, they are the locals), making it hard for pilots to distinguish friends (or neutral innocents) from foes. Ground assaults are needed, too—by other locals, who are more likely to speak the language, understand the situation, and wrest away the allegiance of those in the ISIS’s grip or sway.

ISIS isn’t that mighty. It apparently took control of Ramadi with 400 fighters. The surrounding nations could easily rid the region of this gnatlike pestilence if they overrode their short-term fears with their long-term interests. This is easier said than done, of course. But there is no other solution.

The Left Is So Wrong On Trade

flag USMy Comments: When I first heard about the TPP (Trans-Pacific Partnership) and understood the broad outlines of the idea, I had no problem with it. Then along came Robert Reich, someone whose intellect I respect, saying it was terrible and should be scuttled. So I started looking a little closer, mindful I didn’t have access to the actual language.

The issue has now given the GOP another imaginary arrow to put down the White House. To my mind, Elizabeth Warren and Bernie Sanders are a breath of fresh air, but are pandering to their base just like Ted Cruz is pandering to his base. I’ve concluded, as an economist and financial professional, that it will be, on balance, a good thing. Does it have flaws? Most certainly. Should they be fixed? Maybe.

The 21st Century is evolving rapidly, and there will be unintended consequences, but to argue that not advancing the TPP will somehow miraculously result in jobs returning the US is nuts. Maybe some CEOs will make hundreds of millions; so what? My professional gut tells me the left has overlooked the benefits and the real chance to boost economic growth in this country, in a way that has to happen. They are just as fixated on their personal bias as are those on the right.

May 14, 2015 / Froma Harrop

The left’s success in denying President Obama fast-track authority to negotiate the Trans-Pacific Partnership is ugly to behold. The case put forth by a showboating Sen. Elizabeth Warren — that Obama cannot be trusted to make a deal in the interests of American workers — is almost worse than wrong. It is irrelevant.

The Senate Democrats who turned on Obama are playing a 78 rpm record in the age of digital downloads.

Did you hear their ally, AFL-CIO head Richard Trumka, the day after the Senate vote? He denounced TPP for being “patterned after CAFTA and NAFTA.” That’s not so, but never mind.

There’s this skip on the vinyl record that the North American Free Trade Agreement destroyed American manufacturing. To see how wrong that is, simply walk through any Walmart or Target and look for all those “made in Mexico” labels. You won’t find many. But you’ll see “made in China” everywhere.

Many of the jobs that did go to Mexico would have otherwise left for low-wage Asian countries. Even Mexico lost manufacturing work to China.

And what can you say about the close-to-insane obsession with CAFTA? The partners in the 2005 Central American Free Trade Agreement — five mostly impoverished Central American countries plus the Dominican Republic — had a combined economy equal to that of New Haven, Connecticut.

(By the way, less than 10 percent of the AFL-CIO’s membership is now in manufacturing.)

It’s undeniable that American manufacturing workers have suffered terrible job losses. We could never compete with pennies-an-hour wages. Those low-skilled jobs are not coming back. But we have other things to sell in the global marketplace.

In Washington state, for example, exports of everything from apples to airplanes have soared 40 percent over four years, to total nearly $91 billion in 2014, according to The Seattle Times. About 2 in 5 jobs there are now tied to trade.

Small wonder that Sen. Ron Wyden, a liberal Democrat from neighboring Oregon, has strongly supported fast-track authority.

Some liberals oddly complain that American efforts to strengthen intellectual property laws in trade deals protect the profits of U.S. entertainment and tech companies. What’s wrong with that? Should the fruits of America’s creativity (that’s labor, too) be open to plundering and piracy?

One of TPP’s main goals is to help the higher-wage partners compete with China. (The 12 countries taking part include the likes of Japan, Australia, Canada, Chile, Mexico, and New Zealand.) In any case, Congress would get to vote the finished product up or down, so it isn’t as if the public wouldn’t get a say.

But then we have Warren stating with a straight face that handing negotiating authority to Obama would “give Republicans the very tool they need to dismantle Dodd-Frank.”

Huh? Obama swatted down the remark as wild, hypothetical speculation, noting he engaged in a “massive” fight with Wall Street to get the reforms passed. “And then I sign a provision that would unravel it?” he told political writer Matt Bai.

“This is not a partisan issue,” Warren insisted. Yes, in a twisted way, the hard left’s fixation over big corporations has joined the right’s determination to undermine Obama at every pass.

Trade agreements have a thousand moving parts. The U.S. can’t negotiate with the other countries if various domestic interests are pouncing on the details. That’s why every president has been given fast-track authority over the past 80 years or so.

Except Obama.

It sure is hard to be an intelligent leader in this country.