Monday, May 23, 2016

Monday, May 23, Night Wall Street Roundup: Stocks Dip, Yields Inch Up On Fed Rate Hike Talk

May 23, 2016

Global stock markets edged lower while short-dated U.S. Treasury yields held near two-month highs on Monday as investors weighed the possibility that U.S. interest rates could soon rise.

Commodities were mostly lower. Oil prices fell for a fourth session in a row as investors worried about global supply, while gold declined to a 3-1/2-week low.

In the United States, an imminent rise in interest rates was looking more probable. The Federal Reserve will likely tighten policy a bit more quickly in 2017 than this year, by perhaps one or two more rate hikes, San Francisco Fed President John Williams said on Monday.

St. Louis Fed President James Bullard said a relatively tight labor market in the United States may put upward pressure on inflation, boosting the case for higher interest rates.

The Fed surprised investors when the central bank's meeting minutes released last week opened the door to a rate hike as early as in June.

Topping the agenda this week is whether U.S. economic data adds to the likelihood of a June or July rate increase.

MSCI's all-country world stock index .MIWD00000PUS was down 0.2 percent while U.S. stocks also ended slightly lower.

"The market needs to be coddled and gently eased into a slightly higher interest-rate environment, and that appears to be what the Fed is doing," said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.

"Rates need to normalize, and the Fed needs to give itself room to lower again in the event of another financial crisis," Ghriskey said.

The Dow Jones industrial average .DJI closed down 8.01 points, or 0.05 percent, at 17,492.93, the S&P 500 .SPX lost 4.28 points, or 0.21 percent, to 2,048.04 and the Nasdaq Composite .IXIC dropped 3.78 points, or 0.08 percent, to 4,765.78.

The pan-European FTSEurofirst 300 index .FTEU3 of leading regional stocks ended down 0.5 percent.

Shares of Monsanto (MON.N) closed up 4.4 percent at $106 after Bayer unveiled a $62 billion bid for U.S. seeds company Monsanto. Bayer AG (BAYGn.DE) fell 5.7 percent during the European session.

Short-dated U.S. Treasury yields edged up, with the two-year yield hovering at its highest in two months on Fed rate-hike bets.

The two-year Treasury yield US2YT=RR hit 0.905 percent, nearing the two-month peak of 0.920 percent set last Thursday, while benchmark 10-year Treasury notes US10YT=RR were up 4/32 in price with a yield of 1.835 percent, down 1 basis point from Friday.

Investors also digested economic data that showed euro zone private-sector growth in manufacturing and services slowing a little in May, even though Germany continued to power ahead.

In currency markets, the U.S. dollar tumbled nearly 1 percent against the yen on Japanese trade data and U.S. resistance to currency intervention by Tokyo.

The dollar was last down 0.9 percent at 109.19 yen JPY=, while the dollar index .DXY, which measures the greenback against a basket of six major rivals, was last down 0.12 percent at 95.223.

Oil prices slid after Iran vowed to ramp up output and as a slump in the number of rigs drilling for crude in the United States stalled. Brent's front-month LCOc1 fell 37 cents to settle at $48.35 in a fourth straight day of losses, matching a similar streak in mid-April, while U.S. crude CLc1 fell 33 cents to $48.08 a barrel.

In the metals market, Gold dipped to a 3-1/2-week low on the Fed rate hike expectations, but prices came off their lows as late-day short-covering entered the market. Spot gold XAU= was down 0.1 percent at $1,250.96 an ounce after falling earlier to $1,242.63 an ounce, the lowest since April 28.

Article Link to Reuters:

Democrats, Seeking Unity, Give Sanders Say In Party Platform

By Jonathan Allen
May 23, 2016

The Democratic Party said on Monday it will give U.S. presidential contender Bernie Sanders a prominent say in writing its platform this year, a gesture that could ease tensions between Sanders' camp and party leaders, whom Sanders has accused of favoring rival Hillary Clinton.

Sanders has remained steadfast in his long-shot battle with Clinton for the Democratic nomination for the November presidential election, even though he lags her in the delegate count with only a few state contests remaining. The divisiveness among the Democrats stands in contrast to the Republicans, whose party leaders are slowly rallying behind Donald Trump, their presumptive nominee.

Sanders' tenacity appeared to be paying off: The U.S. senator from Vermont will be allowed to name five members to the 15-member committee that writes the platform at the Democratic Party's national convention in late July in Philadelphia even if he is not the nominee. Clinton will name six.

The party said in a statement the split was based on the results of state votes to date "in an effort to make this the most representative and inclusive process in history."

The party's chairwoman, Debbie Wasserman Schultz, will name the committee's final four members.

The Democratic Party's rules allow the chair to name all 15 members, suggesting that the party was trying to accommodate Sanders and his fervent supporters, who still pack rallies by the thousands as he campaigns in California, which will hold its primaries on June 7.

Sanders did little to dispel the acrimony between himself and the party, which he joined only last year after more than two decades in Congress as an independent, when he said over the weekend that he was endorsing Wasserman Schultz's Democratic opponent in her Florida congressional district.

On Monday, he repeated some of his criticisms of Clinton, whom he has suggested is vulnerable to influence by corporate donors to her campaign, which she denies.

"We believe that we will have the representation on the platform drafting committee to create a Democratic platform that reflects the views of millions of our supporters who want the party to address the needs of working families in this country and not just Wall Street, the drug companies, the fossil fuel industry and other powerful special interests," Sanders said in a statement.

The Clinton campaign said it was pleased to see Sanders represented, describing the party as a "big tent."

"Hillary Clinton is committed to continue welcoming different perspectives and ideas," spokesman Brian Fallon said in a statement.

Sanders, who has criticized Clinton for being too biased toward Israel, has named a pro-Palestinian activist and a prominent environmentalist among his picks for the committee.

Clinton Turns Attention To Trump

Clinton has said she now considers herself the de facto Democratic nominee. Increasingly, she has turned her attention to attacking Trump as a "bully" when speaking at campaign events while urging Sanders supporters to rally to her side.

She told labor union members in Detroit on Monday that, if elected, she would embrace issues important to Sanders' supporters, including reform of campaign financing and reducing income inequality.

Trump, meanwhile, is steadily escalating his criticism of both Hillary and Bill Clinton's relationship with women, using rhetoric that has little precedent in U.S. presidential politics.

On Monday, Trump circulated a new online video that shows images of Bill Clinton, the former president, as voices of women play on the soundtrack saying he had assaulted them, before ending with the sound of Hillary Clinton, his wife, laughing.

Though none of the women are identified in the video, one of the voices is that of Juanita Broaddrick in an NBC interview from 1999 in which the former nursing-home manager accused Bill Clinton of raping her in a hotel in Little Rock, Arkansas, in 1978.

The Clintons' lawyer, David Kendall, said in 1999 that the accusation was false. The Clintons have declined to discuss the accusation and are ignoring his personal attacks, with Hillary Clinton saying instead she will defend vulnerable Americans from the consequences of Trump's proposals.

"Trump economics is a recipe for lower wages, fewer jobs, more debt," she told the union members on Monday. "He could bankrupt America like he bankrupted his companies. I mean, ask yourself: How can anybody lose money running a casino, really?”

Article Link to Reuters:

Can The Voters Be Saved?

By Noah Rothman
May 23, 2016

How do you solve a problem like the voters? This question, one laced with a thinly veiled veneer of contempt for the ignorance of the enfranchised multitudes, once thoroughly vexed progressives. This was the premise at the heart of the ur-text on the subject: Thomas Frank’s What’s the Matter with Kansas. The question-begging assumption therein is the Marxian supposition that zombie-like hordes of sedated voters head to the polls every election cycle to cast a ballot against their own interests. At the heart of the great liberal lament is not a question of whether voters are wise enough to manage their affairs. Rather, it is whether progressives should even be forced to sell their self-evidently righteous agenda to an obdurate, unthinking public. Rejected by their erstwhile allies on the right, some principled conservatives who were once hostile toward this manner of condescension find themselves drawn to the same sad barstool where progressives parked themselves in the last decade. “What is to be done about the voters?” they ask. Though a tempting one, this is the wrong question.

Author and conservative columnist David Harsanyi explored some conservative frustrations with the voters in a column published in the Washington Post. The piece, which he surely knew would induce spasms of scenery-chewing denunciations in our brave new populist era, argues that voters should have to demonstrate that they retain a minimal understanding of the pillars of American self-governance before they are allowed into the voting booth. Some of the modestly challenging questions prospective voters might be made to answer range from knowing a few of the original 13 American states to stating one of the freedoms enshrined in the First Amendment.

Prebutting the predictable accusation that he was arguing for a kind of intellectual poll tax on the electorate, Harsanyi argued that requiring a demonstration of this rudimentary knowledge of the workings of American government is a threshold that nearly everyone should be expected to cross. No argument there. A society that fetishizes ignorance isn’t an entirely healthy one. There is, however, a difference between encouraging intellectual engagement and mandating it. Stigmatizing civic and historical illiteracy is the duty of all thinking individuals, particularly those who intend to exercise the franchise. But nothing is more attractive than that which is prohibited. Just as hiking the drinking age created a reckless subculture of illicit over-imbibing teenagers, even the perception that the authorities frown upon the enfranchisement of the ill-equipped will move a few to act out of spite. Harsanyi’s recommendations will never become real, but a backlash against them might.

Harsanyi’s proposal is, in a way, a mirror image of the left-progressive impulse to augment the pool of eligible voters as a means of seeing preferred policy enacted. A growing number on the left regard modest barriers to participation in elections such as registering with the state, knowing where your local polling place is, and holding elections on weekdays as vestigial and disenfranchising. The liberal vision is one of compulsory voter registration and mandatory participation. “You start getting 70-80 percent voting rates, that’s transformative,” President Barack Obama beamed while praising Australia’s mandatory voting laws. The liberal theory is that a new influx of previously disinterested voters will support liberal politicians and policies, and that is an assumption supported by the polling. The unspoken liberal conceit in this assertion is that the current electorate, a more consistent and civically minded electorate, is stubbornly antagonistic toward their preferred agenda. Rather than convincing these existing voters of the value of liberal policy prescriptions, why not simply dilute their influence?

If the far left wants the electorate to more closely resemble a mob, the far right often flirts with exclusionary policies intended to impose strict limits on the number of eligible voters. Many conservatives believe that the Founders’ wise hostility toward democracy has been ill-advisedly weakened over the centuries. A franchise that was once limited to white male property owners is now extended to almost everyone. Presidents and senators who were originally selected by elected representatives are now elected representatives themselves.

As James Kirchick observed in a dispatch for COMMENTARY on the racially aggrieved, reactionary pro-Trump online activists, evangelists of the Dark Enlightenment (which is exactly what it sounds like) are overtly hostile toward the expansion of voting rights. Middle aged computer programmer and proudly authoritarian activist Curtis Yarvin, a prophet of the so-called “alternative right,” rejects popular democracy, although Kirchick noted that he has reluctantly embraced extending voting rights only to homeowners. Though Yarvin’s racial paranoia would turn off many conservatives, his antipathy toward the voting masses likely would not.

What these two poles of the American political spectrum share is a grudging acceptance of the fact that their side has lost the argument. Rather than adapt their contentions, they’ve determined that they need a friendlier audience. The notion that voters don’t know what’s good for them has long been a point of progressive pride. It would be a pity to see that adopted by conservatives in one of their movement’s darkest moments.

“It isn’t that voters are not profoundly ignorant, it’s just that making them less ignorant isn’t really going to help much on Election Day,” wrote National Review’s Kevin Williamson, “because political preferences are not, in the main, a function of knowledge.” As Williamson has frequently observed, making a talisman of the act of voting is no substitute for genuine civic engagement. For the majority of Americans, that truly satisfying form of civic participation is usually a small-scale and local act. Therefore, the devolution of authority away from the reclaimed swampland on the Potomac and back to states and local municipalities may go a long way toward making electoral politics boring again. It is boring, predictable, circumspect government that inspires the most trust among the governed.

Voting isn’t “sexy,” and the impulse among activists to augment youth participation in elections by equating the practice of voting to coitus cheapens and demeans both acts. Not voting is a privilege, too. Dropping out of a society is a freedom not widely protected in totalitarian states. Self-selection and free association are the hallmarks of a classically liberal society. The freedom not to vote most certainly should not be abridged by the left’s self-assured social engineers, but nor should prudent non participation in electoral politics be disparaged. Rather than determining to resolve the problem of voter participation rates, perhaps left and right alike would be better served to refine their arguments in order to win over the existing electorate.

Article Link to Commentary:

Opening Vietnam, Again

By Max Boot
May 23, 2016

Having visited Vietnam a couple of times in the last four years, most recently in March, I fully approve of the steps that President Obama is taking to build on Bill Clinton and George W. Bush’s efforts to convert Vietnam from an erstwhile enemy into a present-day ally. The most recent such step is Obama’s announcement, amid a visit to Hanoi, that the U.S. will lift its arms embargo.

With a population of 90 million and an economic growth rate of around 7 percent per annum, Vietnam is a rapidly rising economic and strategic power in Southeast Asia. While Hanoi remains somewhat sleepy and backward – and, thus, also a better tourist draw because there is more history preserved — Ho Chi Minh City (nee Saigon) is a dynamic mega-city. Its streets are no longer thronged with bicycles and cyclos (three-wheeled, peddled contraptions that serve as primitive taxis). Instead, there are cars and motorbikes everywhere. New stores and businesses appear to be opening everywhere. The largely young population has long forgotten the Vietnam War and is welcoming toward Americans. English long ago replaced French as the second language of choice, and cafes are full of American iconography, including pictures of New York City.

Vietnamese are more than happy to turn a page in their history and eager to associate more closely with the United States, which they view as a defender against the growing threat of Chinese power. Having spent centuries chafing under Chinese domination, and most recently having fought a war against China in 1979, the Vietnamese are eager to assert their independence from their gigantic neighbor.

That danger was highlighted in 2014 when China constructed an offshore oil rig near the Paracel Islands inside of Vietnam’s exclusive economic zone. Hanoi said that “Chinese ships repeatedly rammed and used water cannons against Hanoi’s patrol vessels in the South China Sea.”

The U.S. should be all means now sell Vietnam the weaponry it needs to defend itself. As Richard Fontaine of the Center for a New American Security noted: “Hanoi’s acquisition of radars, surveillance drones, reconnaissance aircraft and other systems would enhance its maritime domain awareness and its ability to secure its littoral areas.”

But in reaching a realpolitik alliance with Vietnam, the U.S. should not forget the fate of the Vietnamese people that it abandoned in 1975. While freer than it used to be – and, in some ways, less repressive than China (for instance, I could access Twitter and Facebook in Vietnam, but not in China) — Vietnam remains very much a one-party dictatorship.

Vietnam held its version of elections just before Obama’s arrival. As the New York Times revealed, a number of independent candidates tried to run for one of the 500 parliamentary seats that were being “contested.” Every single one of them was disqualified. In other words, democracy in Vietnam means about as much as democracy in Iran: in both cases, it is a stage-managed sham where only “approved” candidates are permitted to run.

Amid the blossoming U.S.-Vietnam alliance, it will be tempting for President Obama to forget the fate of the Vietnamese who hunger for freedom. It will take courage to raise uncomfortable human-rights issues. But it is the right thing to do. President Nixon’s “opening” to China should serve as a reminder of the dangers of trying to create a long-term partnership with an illiberal state. Sometimes it can work but, because Chinese and American interests have diverged so greatly since Nixon’s 1972 visit to Beijing, American-Sino relations remain tense.

The only way to create a truly close and long-lasting alliance between the U.S. and Vietnam — something that is in both parties’ interests — is for Vietnam to gradually become a freer and less despotic place. The U.S. should use its leverage to gently nudge Vietnam in that direction.

Article Link to Commentary:

No, Russia Isn't Trying to Make Nuclear War Easier

The evidence that Moscow plans to "escalate to de-escalate" is weak.

The National Interest
May 23, 2016

Somehow, the notion that Russia has lowered its nuclear threshold has become a truism in recent years. Analysts and officials alike repeat the conventional wisdom that Russia’s doctrine is one of “escalate to de-escalate.” They reference Russian development of small-scale nuclear weapons, or nuclear “scalpels,” and Russian modernization more generally as evidence of the danger Russia poses. These arguments are used often, if not always, to indicate that the United States and its NATO allies should also consider lowering their nuclear threshold and/or developing new, smaller, more usable nuclear systems.

Having spent the last two decades studying the Russian armed forces, including Russia’s nuclear capabilities, I have been surprised by these statements. They do not track with what I know of Russian nuclear strategy, nor with how Russians talk about it, for the most part. De-escalation strategies were all the rage in Russia in the late 1990s, but they’d largely gone away in recent years. So why do so many of my colleagues in the U.S. believe in them? I decided to figure out what was actually going on.

With some help from Brina Malachowski, I traced the sources of these arguments and also sought to unpack what we do and do not know about Russian nuclear intentions. I wrote this up in a short report, available on the CSIS website. My conclusion is that the evidence for either “escalate to de-escalate” or micro-nukes is weak. Russia is certainly keen to remind the world (and especially the United States) that it is a nuclear power, and some of its politicians and pundits do this rather crudely at times, and intentionally so, but there is little evidence that Russia does not take nuclear weapons seriously, or that its threshold for nuclear use has truly been lowered. And if Russia is more eager to remind us all that it is a nuclear power, this stems not from its strength, but from its weakness, and specifically from its fear of U.S. and NATO conventional superiority. All of this argues not for lowering Western thresholds, which would suggest that the West doesn’t share Russia’s faith in its capabilities, but for playing to U.S. and NATO strengths.

What is an “escalate to de-escalate” strategy? In the late 1990s, Russian analysts wrote about the small-scale use of nuclear weapons to demonstrate credibility and resolve in conflict and thus convince an adversary to stand down. This is neither an inherently nefarious or a new idea. It echoes Herman Kahn’s writing on nuclear deterrence, to say nothing of some past U.S. doctrines. From Russia’s perspective, it was a strategy of conventional weakness. Russian planners worried then, as they worry now, that a conventional conflict could escalate to nuclear use. They sought something lower down on the escalation ladder to show resolve, and, lacking conventional capacity, posited that smaller-scale nuclear use might just do the trick. This approach was tested in the 1999 Zapad military exercise, notably with a strategic bomber in a tactical role. It went no further. Reportedly, then President Boris Yeltsin left the exercise indicating that its scenario was implausible, that Russia would not use nuclear weapons in this way. Shortly afterward, Russia, now under a new president, Vladimir Putin, took steps to start rebuilding its conventional capabilities.

Russia’s conventional rebuilding moved in fits and starts, until Moscow’s dissatisfaction with its performance in the Georgia war finally provided some real impetus for reform. And in the meantime, Russia tended to point to its nuclear capability as, at the least, a sign of its status and global importance, just as it had for years. More recently, in early 2010, there was talk that Russia would, indeed, drop its threshold for nuclear weapon use, and possibly allow for “preemption.” A new military doctrine was due, and officials hinted that it would include provisions for “preventive” nuclear strikes and deterring conventional attack. But when the doctrine was issued, the threshold actually went up, not down. Russia’s doctrine then, and now, as this language was reaffirmed in 2014, allows for nuclear weapon use “in response to the use of nuclear and other types of weapons of mass destruction against it and/or its allies, as well as in the event of aggression against the Russian Federation with the use of conventional weapons when the very existence of the state is in jeopardy.”

Doctrine may not always define what countries actually do. But it seems relevant that a higher threshold was put in place in 2010, when debates suggested a lower one might come, and remained in place in 2014, when Russia revised its doctrine in response to a worsening relationship with the United States and its NATO allies. This is not to say that de-escalation is entirely out of the picture for Russia. In fact, it has its proponents. But the fact that Russian analysts and even the occasional official advocate for it publicly indicates to me that it is not, in fact, current policy.

Official Russian doctrine, not “de-escalation,” also tracks best with the exercises that Russia carries out that involve its nuclear weapons. Almost all involve strategic, not tactical systems, and not strategic systems in a tactical role. They seem designed to test readiness and command and control, to maintain the capacity to deter a strategic attack. Two exceptions are particularly worth noting. Western sources report that Zapad 2009 involved a tactical nuclear strike on Poland. Russian sources do not say this, but it is worth recalling that this exercise took place before the 2010 doctrine was issued—and right in the midst of the debate over dropping the threshold. More recently, a NATO report indicated that Russian forces staged a “mock nuclear attack” by medium-range bombers on Sweden in 2013. This is mysterious and worrying, but without knowing more about the exercise and the event, difficult to judge.

Russian nuclear modernization is also proffered as evidence that Russia is planning on using nuclear weapons. Russia continues to modernize its strategic force. So does the United States. This does not indicate a drop in threshold. Russia has also seized on Western concerns about the dual-capable nature of many of its newer systems, such as the Iskander missile, and started to play them up (indeed, many of Russia’s systems are dual-capable). But as of now, Russia’s nonstrategic nuclear munitions are, for the most part, stored far from delivery vehicles. In the meantime, these new systems, many of which have been in the works for decades and are only just now rolling off the assembly line, are being deployed in their conventional roles. And as for rumors of “nuclear scalpels,” those can be traced to some comments about possible future developments made at the turn of the century by former Russian Minister of Atomic Energy Viktor Mikhailov, who died in 2011. Russia, like the U.S. and China, is working on hypersonic weapons, and these may have a nuclear component. But little is known about the specifics of these systems, and their implications, as yet.

This is not to say that I don’t worry about Russian nuclear weapons and posture. I do. I worry about three things. First of these is that Russian strategic posture continues to rely heavily on less survivable silo-based ICBMs. This, combined with its weakened early warning system, suggests to me a higher risk that Russia, which fears a surprise U.S. attack, might erroneously think one is coming and launch those systems, which it would otherwise lose. This is a terrifying proposition.

Second, I worry that while Russian officials and military personnel almost certainly take nuclear weapons seriously, they are also taking advantage of Western concerns about dual-use capabilities to keep their potential adversaries (that is, the United States and its allies) off-balance and uncertain. This limits transparency and awareness and increases the risk of miscalculation. Finally, and relatedly, I worry that Russia’s continuing emphasis on its nuclear status, its saber-rattling rhetoric and its general brinkmanship could contribute to a crisis, particularly if Western countries respond in kind.

These concerns will be heightened, not alleviated, by Western policies that emphasize nuclear weapons. One thing that is clear from Russian behavior is that Moscow pays attention to what upsets the United States, and works to play on it. If the United States wants less Russian nuclear recklessness, at least one part of the equation is not rising to the bait. Another is recalling that Russia itself is worried about NATO conventional superiority. NATO and the United States should ensure that they, too, remain confident in that superiority—and that the Russians know it.

Article Link to the National Interest:

Assertive Engagement: An Updated U.S.-Japan Strategy For China

Tokyo and Washington must work together.

By Dennis Blair and Hiroko Maeda
The National Interest
May 23, 2016

China’s phenomenal economic growth of the past quarter century has been both enabled and welcomed by the United States and Japan. However, with the economic influence and greatly increased military capability funded by that growth, China has developed the power and influence to assert its claims and interests at the expense of other countries in the region and beyond. A combination of historical grievances and authoritarian impulses has fueled China’s persistent and increasingly insistent campaign to expand its current territory and influence around the world. The current American and Japanese strategy of encouraging common economic and diplomatic interests with China, while maintaining military deterrence against direct aggression, is no longer adequate to protect both countries’ interests against Chinese activities such as gray-zone aggression and intellectual-property theft. The U.S.-Japan alliance needs to adopt a more active strategy of its own—“Assertive Engagement”—to protect bilateral interests, while still cooperating with China in forging common responses to common concerns, and equitable and peaceful compromises where interests conflict.

The Current Strategy

The current strategy of the United States and Japan was first announced in the April 1996 Joint Declaration on Security by Prime Minister Ryutaro Hashimoto and President Bill Clinton. Although it has been given different names, the strategy has been remarkably consistent. It has emphasized the concepts of institutionalization and reassurance to channel Chinese behavior, along with internal and external balancing to prepare for stronger opposition to Chinese actions, should that prove necessary. The United States and Japan have employed a mix of cooperation in economic, diplomatic and even some minor military areas—modest military modernization and redeployment of forces and declarations of military red lines on select issues and efforts with like-minded states to strengthen rulemaking in the Asia-Pacific in ways that shape China’s choices.

The objective of this mixed strategy has been to encourage China’s economic development and elicit its participation in solving common geopolitical issues, but limit China’s inclination to expand its power and influence through military coercion or conquest. This strategy of the past two decades has been largely successful: Japanese and American companies have made large profits in China, China has cooperated on selected geopolitical issues such as Iranian sanctions, and China has not expanded its borders. However, the current strategy is inadequate for dealing with China in the future.

Underlying the past strategy was an implicit expectation that in time China would decide decisively to follow one of the two paths. Instead, however, we have seen a clear American and Japanese bias towards interpreting Chinese behavior as following the preferred path of development. A typical example was the final paragraph of President Obama’s remarks following President Xi’s visit to the White House in September 2015: “President Xi, I want to thank you again for expanding your commitment to cooperation between our nations. I believe that it’s another reminder that as we work to narrow our differences, we can continue to advance our mutual interests for the benefit not only of our two peoples, but for the benefit of the world.” Two months later, a trilateral summit among Japan, China and the Republic of Korea resulted in no fewer than six communiqués concerning joint cooperation.

The American and Japanese reactions rarely go beyond the rhetorical, and their policies have strongly emphasized “institutionalization” and “reassurance” as levers to attempt to channel Chinese actions into existing norms, and to assuage Chinese fears of containment and ideological subversion.

But China has become so large, economically successful and militarily capable that it has simply outgrown current American and Japanese policies of cooperation and deterrence.

A Fresh Approach: Assertive Engagement

The current strategy requires substantial reinforcement if it is to accomplish the objective of providing both positive and negative incentives for China to play a cooperative and positive role in the region and the world. There are at least five major areas in which the United States and Japan need to strengthen current strategies for the future:

1. Better-Integrated American and Japanese Policy Towards China

The president and prime minister should formally update the 1996 Clinton-Hashimoto Security Declaration to include the concept of “assertive engagement” recommended in this paper. The new declaration must include both a ringing endorsement of the common values of liberty, democracy, free markets and free trade that both countries are based upon. It must include a much more specific treatment of China than the 1996 version, covering a common assessment of Chinese capabilities and describing bilateral economic, diplomatic and military policies towards that country. As both nations revise their national security strategies in future (Japan’s first comprehensive national security strategy was issued in December 2013, and the latest American national security strategy in 2010), the strategy towards China must be consistent.

2. Stronger American and Japanese Economies
The second set of improvements that should be made in the current strategy is to improve the economic fundamentals in both the United States and Japan. Resumed solid American and Japanese growth, along with reduced Chinese economic growth, would undercut the Chinese influence and leverage that it has gained from its recent years of explosive growth.

There are of course powerful domestic reasons for leaders in both countries to improve their economies through bold action. Leaders in both countries should educate their citizens that increasing Chinese influence over the global economic system threatens American and Japanese prosperity over the long run, and that only if their two economies are strong and growing can they maintain the ability to uphold the international rules of fair economic competition that will allow their businesses to compete and prosper, provide jobs and increase prosperity.

In the economic sphere, no issue is more important than rapid ratification of TPP. The economic benefits to both the United States and Japan are modest but positive, but it will ensure that in the most dynamic economic region of the world, the economic principles that the United States and Japan believe in set the foundation for international business relations.

3. Realistic Economic Relations with China

While working to improve their own economic performance, the United States and Japan need to take an updated approach to economic relations with China.

There are still international economic organizations and arrangements in which it is worthwhile to encourage Chinese participation. Once the current round of TPP negotiations is complete, China should be actively encouraged to join by meeting its requirements. It is worth bringing China more closely into the Organization for Economic Cooperation and Development, if not as a full member, then in some status that would allow it, for example, to join the International Energy Agency, where it could cooperate on the security and resilience of the worldwide energy market.

In addition, Japan and the United States can play a much more positive role towards the Asia Infrastructure Investment Bank recently announced and led by China. There is no question that Asia needs additional capital for economic development, and the United States and Japan can better work to ensure that the AIIB meets international lending standards from within the organization rather than from outside.

However, there are areas in which the United States must contest Chinese activities with far more powerful measures than WTO cases and diplomatic complaints. Chinese companies have brazenly profited from intellectual property pilfered from American and Japanese companies, and the United States and Japan need to take concerted action to use access to their own markets as a penalty against Chinese companies that have conducted or benefited from intellectual property theft. Once guilty Chinese companies have been identified, their exports to the United States and Japan can be confiscated, their use of the banking systems halted, their attempts to sell equity in American and Japanese stock markets halted, and other penalties can be levied.

4. Stronger Combined Military Capability of the United States and Japan

Both the United States and Japan need to continue to modernize their forces. Japan has arrested the decline of its defense budgets with modest increases in the past three years, but it must do more. It is Japanese interests that are under the greatest direct threat from Chinese military modernization, and Japan’s defense expenditures are only a quarter of those of the United States, as a percentage of gross domestic products. If American defense budgets stabilize and Japanese defense budgets increase, there is no objective reason that the United States and Japan cannot maintain the current relatively stable maritime and air balance in the region, denying China a high-confidence ability to take and hold Taiwan, the Senkakus or other islands in the South and East China Seas.

The United States and Japan should continue to engage China’s armed forces in exercises such as the multilateral RIMPAC exercise and operations to meet common challenges, from antipiracy patrols to the Ebola outbreak, tsunami responses and the full range of peacekeeping operations. In addition, there is scope for an array of confidence-building measures such as hotlines, exercise notifications and observer exchanges, protocols for seamanship and airmanship when encountering ships and planes of the other country, and others.

5. Countering Chinese Aggression in the South China Sea

In the South China Sea, China has been challenging international laws by unilaterally drawing the so-called “nine-dashed line” to claim most of the South China Sea as its territorial waters. Currently, Chinese support of its territorial claims in the South China Sea is taking place primarily below the level of military confrontation. Japan and the United States need to formulate an effective response to the series of Chinese actions by civil agencies, backed up by military forces that seek to establish de facto jurisdiction over the entire South China Sea.

First, the United States and Japan should encourage, even facilitate, at least the elements if not the exact shape of a settlement for South China Sea territorial and EEZ claims, including those of China. Such an action should attract the support of all countries involved except for China, which would denounce it and refuse to participate. This action would further isolate China as the outlier to a reasonable solution, generally acceptable by international standards. However, it could also reassure China. China has some strong claims, and any reasonable adjudication would award to China a healthy EEZ in at least the northern part of the South China Sea. Establishing this settlement would provide a positive diplomatic vision around which all countries except China and its few subservient friendly countries could throw their support.

Second, once there is in place a general scheme for a reasonable settlement of all the conflicting claims—although one not accepted by China—then the United States and Japan should encourage all parties to take actions that are their right and responsibility on their islands, and within their territorial seas and EEZs. The United States and Japan should recognize these actions as legitimate, rather than the current policy of simply calling for restraint and moratoria by all claimants. As they have in the Senkakus, the United States and Japan would have a basis on which to conduct military actions to support or oppose specific moves by China and the other claimant countries.

Third, the United States and Japan need to conduct traditional military activities such as exercises, reconnaissance, and survey air and sea operations with enough frequency and in enough strength to establish precedent and prerogative.

Fourth, in addition to these diplomatic and military actions, the United States and Japan can provide economic and other assistance to claimant countries to build their capacity to enforce maritime security in their claimed territorial waters and EEZs.

Article Link to The National Interest:

What Trump Supporters Get Right

By Clive Crook
The Bloomberg View
May 23, 2016

Theories of the rise of Donald Trump too often rely on the anger, bigotry and general backwardness of his supporters. This grounding isn't much questioned, even by commentators who think they're questioning it. The inferiority of those people (formerly known as we the people) is widely taken for granted.

This points to the real driver of Trump's success: the armor-plated complacency of the politicians, commentators and other political professionals he's running against.

To many liberals and more than a few conservatives, support for Trump proves your unfitness for civilized society. Articles that purport to offer a somewhat deeper analysis -- promising, for instance, to blame the country's elites for Trump's success -- often wind their way back to the same premise. Blame the elites for failing to respond sympathetically to the understandable rage of desperate losers; or for manipulating their bigotry to gain political advantage; or for failing to do what elites in democracies are supposed to do, which is shield a correctly constituted government of laws from the rabble.

I don't doubt there are plenty of angry stupid bigots in the U.S., much as you'd find anywhere else. And as a loudmouth insurgent, Trump presumably gets more than his fair share of support from that part of the electorate. Still. Polls currently give Trump 40 percent or more of the vote in much of the country. It's far from impossible that he might win in November. Are the vicious brainless masses really as numerous as that?

It seems unlikely. If all those declared supporters (together with the people who don't like him but tell you confidentially, "Well, he does have a point") are as worthless and benighted as the political establishment appears to believe, then the case for democracy would seem to need rethinking, Trump or no Trump. Alternatively, one could ask a better question: why so many decent, reasoning, responsible people -- citizens deserving of respect, if democratic self-government means anything -- are saying they'll vote for this outrageous man.

The Trump supporters I know aren't bigots or fools. They're protesting, in part, against the condescension of the country's self-appointed upper orders. Economic stress is certainly a factor, though I wonder if too much is made of this; the Trump supporters I know are getting by, and the last thing they are is sorry for themselves.

What seems most important is that they think they've little to lose in smacking down politics as usual. They're tired of being ignored and want that understood. Washington is broken, incapable of action and apparently content to stay that way, so why not declare, in unmistakable terms, that enough is enough?

I only wish it were harder to quarrel with their assessment. National politics in the U.S. has all but collapsed to a gusher of money, a source of rotating employment and a platform for ideological self-affirmation -- a forum for graft and posturing and endless impotent argument but seldom for solving problems. Even before things got this bad, would-be presidents often promised to shake up Washington. Trump is different, as his critics point out: He might actually do it.

As Trump kept on winning, the stunned incomprehension of Republican leaders and thinkers was especially eloquent. Evidently they lacked the faintest notion of what many of their own supporters actually think. In one way, you can sympathize: In no sense is Trump a conservative, and he might just as well be a Democrat as a Republican. Many of his policy ideas, such as they are, put him to the left of Hillary Clinton. So what were those Republican voters thinking? Consider what's spent on polling, focus groups and market research -- had nobody thought to ask? Apparently, the party's leaders neither knew nor cared.

It isn't just presidential politics. Congress too is widely viewed with disdain. Asked whether they approve or disapprove of the way Congress is doing its job, fewer than 20 percent say approve. The number keeps on sinking, and rarely any longer arouses comment. It's as though the public's verdict is of no concern. Congress to voters: "We hear you and we don't care."

Enter Trump. Disenchantment with politics as usual might have bred mere disengagement -- why bother to vote? -- but the risk of more serious consequences was always there. Many voters like the idea of an anti-politician, which is what Trump claims to be. In fact, that's almost the whole of his pitch. Things have got to the point where it may be enough.

Today the U.S. is riven by two kinds of political divide. In addition to the familiar left-right kind, with Sanders at one end and Ted Cruz at the other, there's a divide between people who live for politics and people who are sick of politics. Civic as opposed to ideological polarization, call it. On both axes, the moderate middle has been hollowed out.

Liberals and conservatives who make a living from politics, or love it as an end in itself, pronounce tirelessly on liberty and social justice and the deep constitutional principles at stake in federal bathroom policy. The rest of the country doesn't care about this permanent war of ideas, and worries more about holes in the road, what's going on in the schools, depleted retirement savings, and the latest hike in health-insurance deductibles.

The two divides are linked. Ideological polarization has shut Washington down, separating it from the concerns of many if not most citizens and rendering it useless in their eyes. That's driven new extremes of civic polarization, with the politically engaged talking exclusively to and past each other, leaving the disenchanted to seethe in silence about their smaller concerns. The result is Trump.

I could never vote for the man. He isn't a would-be dictator and even if he were the Constitution would stop him. But he has some unusually bad ideas, and in foreign policy he'd have more freedom of action. He seems totally uninformed, intellectually unanchored and completely unpredictable. Who knows what he might do, or try to? It's a frightening prospect. The view that you can safely vote for Trump because things really couldn't be any worse is just wrong. He's the man to prove they could be.

Believing otherwise, however, doesn't make his supporters idiots or racists. As to whether politics as usual has failed the country and something needs to change, I'd definitely start paying attention to those people. On that important point, they're absolutely right.

Article Link to the Bloomberg View:

Poland Is Testing The EU's Commitment To Democracy

By Noah Feldman
The Bloomberg View
May 23, 2016

At the moment, Europe’s attention is focused on Austria’s presidential election, where a far-rightist was defeated by a razor-thin margin on Monday. But in Poland, where I spent the last several days, the consequences of a far-right government can already be felt. The European Union has given the ruling Law and Justice Party, known as PiS, until Monday to repeal its effort to hamstring Poland’s constitutional court. PiS has answered with a resounding “No.” A full-blown domestic constitutional crisis is brewing, which could have major implications for democracy in Europe.

This state of play is the result of elections last year that gave an absolute majority to PiS in the legislature, even though it won 37.6 percent of the vote on a turnout of 51 percent. The party’s leader, Jaroslaw Kaczynski, effectively combined conservative social policy with populist economic policy. (Sound familiar?)

The weird twist is that Kaczynski is the twin brother of the former Polish President Lech Kaczynski, who died in 2010 along with his wife and a large number of other senior figures in an airline accident in Smolensk, Russia.

The national trauma was significant: A somber, black marble monument to the dead stands in front of the presidential palace. The individual trauma also seems to have had its effect. The surviving Kaczynski reportedly blames the accident on an unlikely conspiracy of Vladimir Putin and the previous Polish government.

Propelled to power partly on the strength of Kaczynski’s appeal, PiS moved quickly to pass laws that make it more difficult for the highest court, the Constitutional Tribunal, to overturn any of the government’s decisions.

The constitutional court itself refused to follow the new laws, which it said were unconstitutional. The president of the court -- in essence, its chief justice -- has refused to assign cases to three judges whom he and his colleagues say were named unlawfully.

Ordinarily, governments undertake such court-packing only after a court has struck down their legislative initiatives. But the reversal of the usual order is only apparent, pro-democracy activists told me. While in power in the 2000s, conservatives were frustrated by the independence of the constitutional court. This time they resolved to thwart the court before it could stand in their way.

PiS says the court’s actions are illegitimate. The government insists that it hasn’t violated the Polish constitution, but only appointed new judges and passed legislation that changes the tribunal’s voting procedures.

Some municipal officials around Poland say they intend to follow only the judgment of the court. The central government, controlled by PiS, rejects the court’s position.

The textbook definition of a constitutional crisis is when different parts of the government can’t agree on what the constitution requires -- or who gets to decide.

The path to resolution isn’t clear. The tribunal president’s is serving the final year of his term. When he steps down -- assuming that he does -- the constitution authorizes the Polish president, a former member of PiS, to appoint a new one. Anyone he chooses will presumably give cases to the controversial judges and purport to speak on behalf of the court.

So far there’s been no violence. But KOD, a new pro-democracy movement, put an estimated 200,000 people on the streets for a protest in early May. Its leaders say they are worried that it’s only a matter of time before blood is spilled.

The EU reacted to all this with concern. Its Venice Commission, which focuses on constitutional rights and the rule of law, issued a report condemning the moves. And the European Commission itself told the government that if it didn’t fix the problem, European authorities would take the next step of a formal investigation that could lead to recommending that Poland lose its vote on the powerful EC.

As a threat, it’s not clear how strong this is. The relevant European treaty says a country can lose its vote only if no other country vetoes the measure. But Viktor Orban, Hungary’s rightist prime minister, with whom PiS has close ties, has signaled that Hungary would veto any attempt to sanction Poland. Small wonder, since Orban has engaged in his own gradual attempt to hollow out democracy in Hungary by formally legal means.

So the EU’s leverage over PiS is limited. Reflecting that view, PiS staged a vote last week in the parliament declaring that Poland was “sovereign” and therefore would not be bullied by the EU.

It’s hard to imagine that the language of the unrepentant PiS vote wasn’t affected by the rhetoric of the movement pushing for the U.K. to leave the EU, which emphasizes that membership, particularly in the European Commission, compromises British sovereignty.

Another echo is the recent insistence by President Recep Tayyip Erdogan of Turkey that the EU can’t tell him how to govern his country.

Of course, Turkey isn’t part of the EU. Erdogan was reacting to EU efforts to suspend the refugee deal negotiated with Turkey if Erdogan won’t change a tough anti-terrorism law that can be used to target even democratically mined opponents.

PiS has its own pending anti-terror and surveillance bills that will expand the domestic reach of the Polish intelligence services.

Erdogan has gradually been reversing two decades of democratic progress in Turkey, much of it accomplished because the EU productively linked increased integration to political reform. That’s worrisome.

But what’s really scary is the thought that the EU’s leverage to insist on democracy may be limited even within Europe. If more far-right politicians come to power, that leverage will be more necessary than ever.

Article Link to the Bloomberg View:

Trump's Golf Course Believes in Global Warming

By Editorial Board
The Bloomberg View
May 23, 2016

Donald Trump says he’ll run the country the way he runs his business -- which sounds more like a threat than a boast. At least when it comes to climate change, he ought to keep his word.

Trump has long aligned himself with climate change deniers, calling the issue a “hoax” and worse. But in Ireland, Trump International Golf Links has asked to build a sea wall to protect a waterfront resort against “global warming and its effects.” So which is it?

A politician talking out of both sides of his mouth hardly qualifies as news, but Trump’s recognition of the threat climate change poses to his business is noteworthy because it mirrors a growing consensus within the private sector.

A new report by the World Bank finds that by 2050, natural disasters related to climate change will threaten 1.3 billion people -- and $1.6 trillion in economic assets. Over the past several years, business leaders have increasingly started to assess their exposure to these risks and press for bolder government actions to mitigate them.

Whether it’s climate change or market volatility, hedging against risk is standard practice in the business world. No executive or board of directors can afford to ignore variables that carry potentially catastrophic consequences for their holdings. Whatever their personal political views, preparing for and mitigating climate change is simply smart business.

Trump recognizes that in Ireland. It would be nice if he’d acknowledge it in America, too.

Article Link to The Bloomberg View:

Republicans Cannot Give Up On #NeverTrump

Conservatives must admit Donald Trump is a greater evil than Hillary Clinton.

By Brian Beutler
The New Republic
May 23, 2016

Back in February, when online conservatives first began their unsuccessful campaign to deny Donald Trump the GOP presidential nomination, #NeverTrump meant different things to different people.

To its most cynical adopters, like Senator Marco Rubio, the mantra was little more than a rallying cry for his own ailing campaign—an attempt to harness genuine anti-Trump sentiment on the right less for the purposes of making Trump’s unfitness for the presidency evident, than to press a momentary advantage against Ted Cruz and other Republican rivals. #NeverTrump: because only one person can be the nominee, and I want to be that person!

Other conservatives interpreted (and continue to interpret) #NeverTrump as a statement of personal ideological boundaries: Trump isn’t a true conservative, and therefore, as a conservative, I can’t support him.

But to the extent that #NeverTrump captured the public imagination at all, it was thanks to a different, largely unspoken, but potentially profound reading of the term: the implicit acknowledgment that Hillary Clinton’s candidacy isn’t abnormal, reckless, or morally irresponsible in the way that Trump’s is. Some of the most influential conservatives in the country were essentially conceding that whatever ideological and moral redlines liberalism confronts them with, Trump losing would be the lesser evil in an election that pitted him against her.

#NeverTrump is now widely considered to be a lost campaign. Not only have anti-Trump activists been unable to recruit a conservative candidate to run on a third-party protest ticket, they’ve failed to convince rank and file Republicans that Trump is a dangerous aberration. On the New Republic podcast “Primary Concerns,” former Jeb Bush spokesman Tim Miller, an adviser to the anti-Trump Our Principles PAC, acknowledged that his group’s efforts would likely cease after the Republican convention in July. Citing a groundswell of lobbyist, donor, and official party support for Trump, Politico declared, “The Never Trump moment is over.”

Perhaps it was destined to fail. But as long as anti-Trump conservatives were unwilling to be forthright about the meaning of the #NeverTrump cause, it never stood a chance.

In his requiem for the anti-Trump movement last week, New York Times columnist Ross Douthat noted that the original argument for the third-party idea was premised entirely on the the amoral, strategic view that Trump would be an electoral disaster for Republicans across the country. “When the idea was first kicked around months ago, the main case for a third-party candidate was that the G.O.P. could actually benefit institutionally from an independent anti-Trump campaign—that it would help rescue down-ballot Republicans by giving anti-Trump conservatives a reason to turn out, and it might even help save the Republican brand from being permanently tarnished, permanently Trumpified.”

In hindsight, Douthat notes correctly that this strategic argument didn’t hold up to either the collective action problem (everyone might hope for a sacrificial lamb, but nobody wants to be that lamb) or to the party reunification challenge (the Trump faction would feel robbed and betrayed if thwarted by a third party). But an evident part of the problem is that conservatives disjoined the strategic and moral cases for an anti-Trump protest candidacy—or even a robust anti-Trump conservative movement—and to the extent that they’ve articulated a moral case at all, it is a maddeningly oblique one.

Set aside the gaming-out of post-November scenarios and simply ask the question: Is it a good thing for the country, or for that matter for the world, that our only options in November are Hillary Clinton and Donald Trump? It’s clear that the answer for a great many people remains a resounding “heaven help us, no.”

By “people” here I don’t just mean Bill Kristol or Bernie Sanders’s campaign team or anyone else with a professional stake in stopping Trump or Clinton. I mean the extraordinary numbers of Americans who regard both parties’ likely nominees with a mix of fear, exhaustion and disgust, and whose entirely reasonable sentiments will make Trump-versus-Clinton a battle of the two most reviled nominees in modern presidential history.

The presumption here is that a great disaffected middle despairs at the thought of a binary choice between Clinton and Trump, and that the former is as much a source of the despair as the latter. In reality, and for the most part, this dread consumes only one party. Even absent her ongoing primary campaign against Bernie Sanders, it’s true that Clinton would have unusually high unfavorables for a major party nominee, but nearly all of it would be attributable to a 25 year build up of Republican antipathy. At both the elite and rank and file level, Democrats are overwhelmingly content with the thought of a Clinton presidency, and will become more so as the Democratic primary winds down. In the other party, the story’s much different. Rank and file Republicans may be coming home to their nominee, but nearly the entire GOP elite, including the segment of the elite making peace with Trump, is aghast at his nomination.

The proper case for a robust #NeverTrump effort thus has nothing to do with a weariness about presumptive nominees that transcends ideology. It isn’t about giving the disaffected public a candidate they can vote for in good conscience, but about insuring against the risk that the electorate makes a world historical error. The strategic and moral elements of this case are identical: #NeverTrump is a conservative imperative because Trump can’t be allowed to win the presidency by mistake. Even if denying him the presidency makes Clinton the president-elect by default.

Douthat relegates this central purpose of the anti-Trump movement to an aside between two em dashes. “If you believe that either choice risks too much, for the republic or the world—or if you merely think that Trump risks too much and that in a head-to-head race he might find a way to win—then by leaving the voters with only those options you are effectively choosing to leave grave evils unopposed.” Hillary Clinton is an unopposed evil only if you believe liberalism is itself an evil and a threat to the constitutional order on par with Trump himself. Some conservatives surely believe that, and are now convinced the country is destined for peril one way or another. But for the sizable faction of the conservative elite that recognizes Clinton is a conventional Democrat, and that the country can survive four or eight more years of Democratic rule, they owe it to the public to be crystal clear about the fact that Trump is a unique threat: Clinton represents the dashed hopes of a conservative policy course correction, but she’s a fundamentally capable steward of the government and Trump is not.

Other conservatives have similar difficulty prosecuting the #NeverTrump case head on. In beseeching his former political bête noire Mitt Romney to run for president again, conservative Erick Erickson writes, “More and more Americans are horrified and disgusted at the thought of voting for either Trump or Clinton,” without betraying the slightest hint that nearly all of these Americans are reliable Republicans—that this is a problem only Republicans can solve. GOP strategist, and #NeverTrump PAC adviser Rory Cooper comes much closer when he acknowledgesthat Trump would be a more destabilizing force in America and the world than Clinton, and quotes Alexander Hamilton’s maxim, “If we must have an enemy at the head of Government, let it be one whom we can oppose, and for whom we are not responsible, who will not involve our party in the disgrace of his foolish and bad measures.”

But even this shades the point too much. The Hamilton allusion is as much an argument for surrendering to Clinton as for preserving the purity of conservatism in exile should Trump ultimately win. Perhaps nobody on the right would’ve run interference against Trump under any circumstances, but none of the potential third-party contenders were ever presented a clear-eyed argument for taking on the task. That argument might go something like this: The GOP elevated a hopelessly unfit strongman to be its presidential nominee; he can’t be allowed to win, under our party’s auspices or any, even if his defeat means Clinton becomes president. We’re unfortunately complicit in 20 years’ worth of right-wing efforts to paint Clinton as a scheming crook, so we must now either confess that we painted a caricature, or figure out a way to launder our role in her victory. A third-party candidate at least gives anti-Clinton dead-enders a more appealing alternative to voting for her or staying home.

The moment for that has probably passed, but the anti-Trump right’s moral obligation to interfere against him hasn’t. How they go about it from this point forward is for them to decide. If it’s too late to put a Romney-type on key state ballots, they can run anti-Trump ads, pressure vulnerable Republicans to speak out against Trump, or press the case that Clinton at the head of divided government is a better outcome for conservatives than a Trump sweep. But as long they continue to approach the challenge in such a muddied, blinkered way, their efforts will be largely wasted.

Article Link to The New Republic:

Big Banks' Risk Does Not Compute

By Mark Buchanan
The Bloomberg View
May 23, 2016

In his new book The End of Alchemy, former Bank of England Governor Mervyn King makes a bold argument: No matter how fine-tuned our regulations, no matter how sophisticated our risk management, they cannot properly address the hazards that the financial system in its current form presents.

As it happens, mathematical analysis points to the same conclusion.

Prior to the 2008 financial crisis, so-called global regulators required banks to assess the riskiness of their investments with a measure known as "value at risk” -- an estimate of how much, given recent price history, they might lose on a very bad day (say, the worst one in a hundred). As of 2019, they will have to use a new measure, known as expected shortfall, that is supposed to do a better job of capturing the kind of severe losses than can happen in a crisis.

Calculating either measure entails gathering historical data on the investments in question -- be they stocks, bonds or derivatives -- and assuming that the future will look something like the past. This is a flaw in itself, because regulations, technology and political and economic conditions keep changing, making the future invariably new and different.

But there's a deeper mathematical problem: Too little data.

Mathematicians Jon Danielsson and Chen Zhou have examined how much data would be required to get reliable estimates of either value-at-risk or expected shortfall, even in a world where the future is like the past. Suppose you wanted a reasonably accurate reading of expected shortfall -- say, an estimate likely to fall within 5 percent of actual losses. For the complex portfolios of large financial institutions, this would require decades of price history on hundreds or thousands of different assets -- something that simply doesn't exist for many of those assets (many firms don't even stay in business that long, for example). With less data the result would be illusory, offering no meaningful sense of the risk present at all.

To be clear, this isn't an issue with the definition of expected shortfall. All such summary measures suffer from the same shortcoming. Given that the entire point is to help banks and regulators control risk by giving them a clear view of it, this is a fundamental failure. Newer measures may be harder for banks to manipulate, but this is a pointless improvement if the numbers bear no relation to risk in the first place.

This line of mathematical research also has implications for a central concept of asset management: portfolio optimization, the idea that, by choosing the right combination of assets, an investor can get the same return with less risk. Because it depends on price histories to figure out what the right mix would be, the method suffers from the same data inadequacy problem. In a series of works over the past decade (see here, most papers from 2007 onwards), physicist Imre Kondor and colleagues have shown that optimizing a portfolio of dozens or hundreds of assets is often simply impossible.

In short, the measures of risk used by the world's largest financial institutions may be so far from optimal as to be useless. Which suggests that Mervyn King is probably right on another point: Achieving a resilient financial system -- one that won't pose a threat to the economy -- will require much more radical change than policy makers have contemplated so far.

Article Link to the Bloomberg View:

The 2020 Primary Has Started

By David Byler
Real Clear Politics
May 23, 2016

Many readers may have rolled their eyes when reading that headline (one editor literally groaned when this story idea was pitched), but it’s true. Elites in both parties have kicked off the next primary process by looking at, and in some cases attempting to revise, rules for the 2020 nominating contest.

This rulemaking process can seem opaque. It involves a large number of state and national politicos making an even larger number of decisions -- but it has a powerful effect on the primary. So here is an outline of some of the most important choices that will be made – involving delegate allocation, insider control, the calendar and voter access -- and how those choices could shape the next nomination contest.

Delegate Allocation: Sacrificing Democracy for Speed (or Not)

Delegate allocation -- how the results of each state contest translates into delegate counts -- is one of the most important features of any modern primary. And, as the 2012 and 2016 primaries show, different choices on delegation allocation can lead to widely different results.

Republican leaders spent most of the 2012 primary biting their nails. Their preferred candidate, former Massachusetts Gov. Mitt Romney, polled behind longshot boom-and-bust candidates Herman Cain, then-Texas Gov. Rick Perry and Newt Gingrich for much of the previous year. And during the actual primary contests, Romney had trouble putting away Gingrich and Rick Santorum -- both arguably weaker candidates.

The GOP elite sought to solve that perceived problem in 2016 by tilting the rules toward the front-runner. They set up a short proportionality window and then allowed states to hold winner-take-all contests. This created a front-runner-friendly environment where the top finisher would get a disproportionate share of the delegates, even if he or she won with only a plurality of support.

But the GOP elite wrongly assumed that a Romney-esque consensus candidate would wrap up the nomination quickly. Donald Trump -- who, at the time, was loathed or at best tolerated by many GOP leaders -- won a disproportionate share of the delegates with only a plurality of the vote. This let him build up a big delegate lead early, which helped him fight off his competitors and eventually lock up the nomination.

This illustrates the central tradeoff in delegate allocation – front-runner-friendly rules can end bruising primaries more quickly than proportional rules, but they increase the risk that a factional or controversial candidate will run the table.

GOP leaders who dislike Trump might be tempted to slow down this process and create rules that encourage (or even mandate) states to allocate their delegates proportionally. But this system has its own disadvantages -- just ask Hillary Clinton (or Romney in 2012) if she enjoys competing in a drawn-out primary against an unlikely opponent.

Insiders: How Much Power Should They Have?

Both Republicans and Democrats face questions regarding how much power party insiders should wield.

On the Democratic side, these questions revolve around superdelegates who are able to support any candidate at the convention, regardless of their home state’s primary result. On the Republican side, the argument centers on delegate selection -- the long series of state-, county- and district-level caucuses and meetings that, in most states, choose the flesh-and-blood delegates to the convention.

Critics of the superdelegate system or the byzantine GOP delegate selection process typically argue that these processes are undemocratic. Superdelegates can vote for whomever they want, regardless of the popular vote, at the convention, and in most Republican contests the actual delegates’ names don’t appear on the primary ballot. Additionally, not all of the delegates are completely in touch with the party rank-and-file. Many state-level Republicans favored Texas Sen. Ted Cruz, who proved to be a far-right factional candidate. And super-delegates are supporting Clinton at a much higher rate than primary voters have. So the critics make a good point -- there are undemocratic parts of both parties’ systems.

But there are some benefits to having more insider control.

On the Democratic side, the superdelegates can serve as cool-headed mediators in the event of an intense convention floor fight. For instance, if three candidates were to finish the primary season with 40 percent, 35 percent and 25 percent of the pledged delegates, respectively, the superdelegates could pick a consensus candidate and avert a drawn-out convention fight. On the Republican side, the delegate selection process usually rewards party faithful, letting GOP volunteers who spend their free time knocking on doors, stuffing envelopes and phone-banking for the party participate in a highly televised, national political process.

Regardless of whether the costs of including insiders outweigh the benefits, their influence might diminish in 2020. The Maine Democratic Party has already voted to allocate superdelegates proportionally in 2020, and Bernie Sanders hopes other states follow that example. Trump also expressed frustration with the GOP delegate selection process in April, and as the nominee he could try to exercise influence to change some of these rules.

The Calendar: Which States Vote When? Who Gets the Delegates?

Almost every primary is heavily influenced by the calendar -- that is, which states vote when and how many delegates each state is allotted. And while individual states have a lot of control over when they hold their contests, they have less direct say regarding how many delegates each is assigned.

While there are a few party rules about the order of primary contests (e.g. Iowa goes first, New Hampshire is second), states are mostly responsible for figuring out when to hold their contests. They’ll be making those decisions over the course of the next few years, and the order could have a profound influence on the eventual result.

For example, imagine if the Texas and Florida Republican primaries were switched so that Florida voted on March 1 and Texas voted on March 15. Trump, who won the Sunshine State, might have pushed Florida Sen. Marco Rubio out of the race two weeks earlier than was the case. This would have given Cruz more time to attempt to unite the party around himself, and get a potentially larger haul from his home state (which would have been outside the proportionality window). Trump may have still won the nomination in that scenario, but even small switches like this can alter the course of a primary.

The Republican delegate apportionment system is a little complicated, but the basic idea is that each state gets some minimum number of delegates based on population, some extra delegates based on strength of the GOP in that state, plus three delegates per congressional district. That final part gave the handful of Republicans running in very blue states and districts more leverage than Republicans running in GOP-friendly areas.

These blue-state GOP voters played a large and unexpected role in the primary. Many analysts thought these voters were more moderate than their red-state counterparts and would support an establishment-friendly candidate (e.g. Jeb Bush, John Kasich or Rubio). Instead, many of them favored Trump. So it wouldn’t be surprising if some anti-Trump delegates attempted to change this rule and shift more power to red states (some of which voted for Trump, but some of which did not).

One possibility would be to make the system more like the Democrats’, where each state gets delegates basically in proportion to its overall population and how Democratic it voted in recent past elections. Congressional districts that lean further left also got more delegates. This system doesn’t do much to encourage primary candidates to do outreach in typically hostile areas, but it does give more partisan areas more influence.

Access and Type: Who Should Be Allowed to Vote?

Finally, primary results are heavily influenced by how voters are allowed to cast their ballots. In the Republican nominating contest, Trump did better in open primaries, where Independents and sometimes Democrats were allowed to vote for GOP candidates. And Clinton did better in closed primaries where only Democrats (and not Independents, who favored Sanders) were allowed to vote for the Democratic candidates.

This issue looks like it will be contentious on both sides. Sanders has called for all Democratic primaries to be open, arguing that Democrats should allow the growing number of Independents to participate in the party’s presidential primary process. Cruz, who will have hundreds of loyal delegates at the July convention, has expressed his desire to make all Republican primaries closed to only those registered with the GOP.

The contest type also influences turnout and the make-up of the electorate. Most states hold primaries, where voters typically go into a “booth” and make their choice as they would in a November election. But some are caucuses, which involve town-hall-style meetings. Caucuses tend to have much lower turnout because the process takes longer, and candidates with energetic, activist bases -- such as Sanders and Cruz -- tend to perform well there.

States will likely make decisions on contest type over the next few years. But those decisions will pre-shape the electorate -- and that in turn will shape the final outcome.

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Juan Williams: Electoral Map Looks Grim For Trump

By Juan Williams
The Hill
May 23, 2016

Donald Trump is getting good news in the polls.

Last week, a Fox News poll saw him take a 3-point lead over Hillary Clinton in a national survey. That’s within the margin of error.

But step back and take the long view. Clinton led by seven points in April. If this is a horse race, Trump is clearly coming on fast.

Even after last week’s surprising polls, Clinton still leads in the RealClearPolitics nationwide average by 3 points. But that makes the race a toss-up — her big lead is gone.

The strength of Trump’s rise in national polls is also evident in swing states. A Quinnipiac poll, released two weeks ago, showed him leading Clinton by four percentage points in the swing state of Ohio. Meanwhile, Clinton’s lead in two other critical states is razor-thin. In both Florida and Pennsylvania, the poll gives her a one-point lead — 43 to 42.

These national and swing state polls are pure joy to Trump’s supporters. But there is reason to be cautious. The polls are hiding some hard truths about what it will take for Trump to win the White House. The electoral college battlefield is forbidding for him.

A Trump-Clinton matchup will dramatically expand the electoral playing field beyond Ohio, Florida and Pennsylvania — in Clinton’s favor. The most recent polls show a statistical dead-heat between Trump and Clinton in red states, like Arizona and even Georgia, which have reliably voted for the GOP nominee in recent presidential elections.

In 2012, GOP nominee Mitt Romney won 206 electoral votes to President Obama’s 332 electoral votes. This was an improvement over 2008 when the Republican candidate, John McCain, won only 173 electoral votes and Obama won a whopping 365.

To win the 270 votes needed to claim victory in the electoral college, Trump will have to keep every single state won by Romney — including Arizona and Georgia — and find 64 more electoral votes somewhere.

The question is where? If Trump holds all the Romney states and carries Virginia, Pennsylvania and Florida, he still loses.

“Every preliminary electoral-map forecast this spring paints a bleak picture for Donald Trump in his effort to win the presidency against Hillary Clinton,” Dan Balz recently wrote in the Washington Post.

Balz pointed to separate forecasts from three veteran political handicappers who make the same prediction: Trump is going to get crushed by Clinton in an electoral college landslide.

Larry Sabato, Charlie Cook and Stu Rothenberg all predict a big Clinton victory. For example, Sabato projects Clinton to win 347 electoral votes to Trump’s 191.

“Trump has proved to be largely impervious to attack in the primaries, but he’s now facing a much different electorate,” Balz concluded in depicting voters beyond the GOP base as younger, more racially diverse, more educated and more balanced in terms of gender. “If he isn’t ready for what is coming at him, the opening phase of the general election could prove decisive.”

In Arizona, where 30 percent of the voters will be Hispanic, McCain is telling supporters that his own reelection “may be the race of [his] life.” Over 2 million Hispanics live in the Grand Canyon State.

McCain privately told supporters recently: “If you listen or watch Hispanic media in the state and in the country, you will see that it is all anti-Trump. The Hispanic community is roused and angry in a way that I've never seen in 30 years.”

Trump galvanized support during the overwhelmingly white GOP primary by smearing Mexican immigrants as “rapists,” calling for construction of a border wall and promising to stop remittances to Mexico.

Last month, a poll of registered Latino voters from America’s Voice and Latino Decisions nationwide found that 87 percent had an unfavorable opinion of Trump – 79 percent of those were “very unfavorable.” Non-white voters, especially Hispanics, could make the difference statewide.

McCain is perhaps the most surprising example of an incumbent Republican senator whose own reelection is jeopardized by having Trump at the top of the ticket. But he is not the only one.

Ohio’s Rob Portman, New Hampshire’s Kelly Ayotte, Wisconsin’s Ron Johnson, Pennsylvania’s Pat Toomey and Illinois’ Mark Kirk are at great and growing risk of being swept out of office on an anti-Trump wave.

It is almost impossible to imagine any electoral college scenario where Trump is elected without carrying at least one of those states. It is also hard to imagine moderate and independent voters splitting their ticket — voting against Trump for president but reelecting senators who back him.

Now, here’s an ironic twist. After the bitter 2000 presidential election and the famous Florida recount which made George W. Bush president, newly elected Sen. Hillary Clinton (D-N.Y.) called for doing away with the electoral college entirely.

“We are a very different country than we were 200 years ago,” she said back then. “I believe strongly that in a democracy, we should respect the will of the people and to me that means it’s time to do away with the electoral college and move to the popular election of our president.”

One can only assume that today’s Clinton is glad that Congress did not follow her advice then.

Trump Leaving Neocons In Dust

By Kristina Wong
The Hill
May 23, 2016

The rise of Donald Trump is threatening the power of neoconservatives, who find themselves at risk of being marginalized in the Republican Party.

Neoconservatism was at its height during the presidency of George W. Bush, helping to shape the rationale for the U.S. invasion of Iraq.

But now the ideology is under attack, with Trump systematically rejecting each of its core principles.

Whereas neoconservatism advocates spreading American ideals through the use of military force, Trump has made the case for nationalism and a smaller U.S. military footprint.

In what Trump calls an "America First" approach, he proposes rejecting alliances that don't work, trade deals that don’t deliver, and military interventionism that costs too much.

He has said he would get along with Russian President Vladimir Putin and sit down with North Korean dictator Kim Jong Un — a throwback to the “realist” foreign policy of President Nixon.

As if to underscore that point, the presumptive GOP nominee met with Nixon's Secretary of State and National Security Adviser, Henry Kissinger, earlier this week, and delivered his first major foreign policy speech at an event last month hosted by the Center for National Interest, which Nixon founded.

Leading neoconservative figures like Bill Kristol and Robert Kagan have assailed Trump’s foreign policy views. Kagan even called Trump a “fascist” in a recent Washington Post op-ed.

"This is how fascism comes to America, not with jackboots and salutes (although there have been salutes, and a whiff of violence) but with a television huckster, a phony billionaire, a textbook egomaniac 'tapping into' popular resentments and insecurities, and with an entire national political party — out of ambition or blind party loyalty, or simply out of fear — falling into line behind him," wrote Kagan, who is a senior fellow at the Brookings Institution.

Other neoconservatives say Trump’s foreign policy stances, such as his opposition to the Iraq war and the U.S. intervention in Libya, are inconsistent and represent “completely mindless” boasting.

“It’s not, ‘Oh I really feel that the neoconservatism has come to a bad end and we need to hearken back to the realism of the Nixon administration,’ ” said Danielle Pletka, senior vice president for foreign and defense policy at the American Enterprise Institute.

“Do you see anybody who voted for Donald Trump saying that? Absolutely not,” she said. “I don’t think Donald Trump believes in anything but Donald Trump, and that’s why the right label for his movement is Trumpism — nothing else.”

Michael O'Hanlon, a senior fellow at the Brookings Institution, agreed, saying that to associate Trump to such a clear school of thought as realism "would be being a little bit generous."

"[Neoconservatives] are concerned for good reason," said O'Hanlon, a Democratic defense hawk "These people don't think that Trump is prepared intellectually to be president."

"It's not just that their stance of foreign policy would be losing .. .all foreign policy schools would be losing influence under Trump with very unpredictable consequences," he added.

Despite the opposition he faces in some corners of the GOP, polls indicate that Trump’s message is in line with the public mood.

A recent Pew poll found that nearly six in 10 Americans said the U.S. should "deal with its own problems and let other countries deal with their own problems as best they can," a more isolationist approach at odds with neoconservative thought.

John Mearsheimer, a preeminent scholar in realist theory, says there's a parallel in history to the way America turned inward after the Vietnam War.

"There's no question that Richard Nixon and Henry Kissinger went a considerable ways to pursue a less ambitious foreign policy, and they talked about allies doing more to help themselves, and they began to pursue detente with the Soviet Union."

"And this was all a reaction to Vietnam. Vietnam of course was a colossal failure. The body politic here in the United States was deeply disenchanted with American foreign policy, especially in its most ambitious forms and the end result is we ended up backing off for awhile," he said. "We have a similar situation here."

Experts say the isolationist sentiment is prevalent in the Democratic Party as well.

“The [Bernie] Sanders supporters charge Hillary Clinton with never seeing a quagmire she did not wish to enter, and basically with not just complicity, but a leading role in contriving some of the worst disasters of American foreign policy in this century,” said Amb. Chas Freeman, a senior fellow at Brown University’s Watson Institute for International and Public Affairs, and a former Nixon and George H.W. Bush official.

"This is the principle reason that Hillary Clinton is having so much trouble putting Bernie Sanders away," said Mearsheimer, who supports the Vermont senator. "Sanders is capitalizing on all that disenchantment in the public, and Hillary Clinton represents the old order."

But the ideological battle over foreign policy is playing out more forcefully in the GOP.

While some members of the Republican foreign policy establishment are coming to terms with Trump becoming their party's nominee, including lawmakers like Sens. John McCain (R-Ariz.) and Lindsey Graham (R-S.C.), neoconservatives remain staunch holdouts.

Some experts say neoconservatives are fighting hard because they have the most to lose.

"They're losing influence inside the foreign policy establishment in general, and they have definitely lost influence inside the Republican party, which was their home base," Mearsheimer said.

Some neoconservatives are even throwing in their lot with likely Democratic nominee Hillary Clinton, most prominently Kagan and Max Boot, a senior fellow at the Council on Foreign Relations.

With Republican foreign policy figures split, influential Republican donors such as Charles and David Koch are trying to shape the GOP’s new direction.

The Charles Koch Institute recently launched a daylong conference that featured Mearsheimer and another prominent realist Stephen Walt that questioned U.S. foreign policy since the end of the Cold War.

"This has meant the frequent use of force, a military budget the size of the next seven to eight countries combined, and an active policy of spreading American power and values," said William Ruger, vice president of research and policy at the Charles Koch Institute.

"After a quarter century of this approach, it’s time to ask: Has our foreign policy been working? Is it making America safe? Should we continue on this path? And if not, what do alternative approaches look like?"

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