Friday, June 3, 2016

Friday, June 3, Night Wall Street Roundup: Weak Jobs Report Weighs On Wall Street, Bank Shares

By Lewis Krauskopf
June 3, 2016

Wall Street finished lower on Friday, led down by financial shares, after a surprisingly weak jobs report prompted doubts about the U.S. economy and its ability to sustain a near-term interest rate hike.

The U.S. economy created the fewest number of jobs in more than 5-1/2-years in May as manufacturing and construction employment fell sharply. Nonfarm payrolls increased by only 38,000 jobs last month, well below economists' forecast for an increase of 164,000.

Traders significantly cut bets that the Federal Reserve will raise rates at its meetings in June and July. Such sentiment was reflected in the weakness in the financial sector .SPSY, which is seen as benefiting in a rising rate environment.

The group dropped 1.38 percent, its worst fall in about two months, with declines in shares of Bank of America (BAC.N) and Citigroup (C.N).

Utilities .SPLRCU, a high-dividend-paying group whose appeal declines when rates go up, rose 1.66 percent.

"I think this puts into serious question if the Fed is going to do anything for the year," said Mark Grant, managing director and fixed-income strategist at Hilltop Securities in Fort Lauderdale.

The Dow Jones industrial average .DJI fell 31.5 points, or 0.18 percent, to 17,807.06, the S&P 500 .SPX lost 6.13 points, or 0.29 percent, to 2,099.13 and the Nasdaq Composite.IXIC dropped 28.85 points, or 0.58 percent, to 4,942.52.

Six of 10 S&P sectors finished lower. The Nasdaq snapped a seven-day winning streak.

Stocks had fallen more steeply during the morning but pared back losses by the afternoon, encouraging some investors. The S&P 500 ended within 1.5 percent of its record closing high.

The jobs report created an initial "emotional stir," said Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.

But "when you step back and say 'how scared should I be about this one-off job number,' I think ... investors that have a little longer horizon go, probably not so much."

Following signals by the Fed last month, global markets have been bracing for a near-term interest rate increase. The U.S. central bank raised rates in December for the first time in nearly a decade.

Investors will now turn to Fed Chair Janet Yellen's speech on Monday for clues about the bank's next move.

The S&P 500 is up about 2.7 percent in 2016 after a gloomy start to the year amid jitters about the global economy and a volatile oil market.

Among the few bright spots on Friday, Broadcom (AVGO.O) rose 4.9 percent to $162.56 after the chipmaker reported better-than-expected quarterly profit and revenue.

About 7 billion shares changed hands on U.S. exchanges, slightly above the roughly 6.9 billion daily average for the past 20 trading days, according to Thomson Reuters data.

Advancing issues outnumbered declining ones on the NYSE by 1,644 to 1,376, for a 1.19-to-1 ratio on the upside; on the Nasdaq, 1,743 issues fell and 1,077 advanced for a 1.62-to-1 ratio favoring decliners.

The S&P 500 posted 35 new 52-week highs and 1 low; the Nasdaq recorded 48 new highs and 29 lows.

Noonan: A Party Divided, And None Too Soon

Beltway Republicans will have to come to terms with how they lost Middle America.

By Peggy Noonan
The Wall Street Journal
June 3, 2016

This first month of summer I see movement and no-movement.

No movement: Donald Trump. He’s like someone caught in the first act who lurches into a second act—a solid, prepared speech, a subdued interview—then scrambles back to first-act antics. It’s easy to guess he’s surrounded by friends and supporters who know more is needed than popping off about “Crooked Hillary” but are afraid to mess with his swing. They fear taking the tang out of his secret sauce. Another guess: He’s not sure he can pull off a change of style—he’s afraid he’ll be boring if he’s serious, afraid he’ll bore himself if he knows what he’s going to say next. So he continues to rant, not to reassure fence sitters. Hillary Clinton hasn’t entered a second act either, but it’s partly situational: She’s trapped in a primary battle. When it comes to Mr. Trump she tries various attack lines—“divisive,” “dangerous,” “dangerously incoherent”—to see what resonates, as they say. She is plodding, unimaginative, stolid. She wishes she had secret sauce.

Closer to home I see movement. Friends who’d been for John Kasich or Marco Rubio now sunnily and without a headache declare themselves for Mr. Trump. An intellectual friend, previously disapproving, confided she’s for him too. But two friends who had been early, enthusiastic Trump backers now seem to be having doubts: They’ve lost their oomph, talk about him less. Nothing’s set in concrete this year, not that anything was.

A central predicament of 2016 continues. GOP elites and intellectual cadres may be clueless about America right now, but they have an informed and appropriately elevated sense of the demands of the presidency. They fear Mr. Trump’s temperament and depth do not meet its requirements. Trump supporters have a more grounded sense of America and its problems but too low a sense of what the presidency can demand in regard to personal virtues. If this problem is to be resolved, it is Mr. Trump who will resolve it. He shows little interest. This space said in February that his political fortunes would hinge on whether America came to think of him as a good man and a fully stable one. It is still true.

The Beltway intelligentsia of the conservative movement continues to be upset about Mr. Trump’s coming nomination and claim they’d support him but they have to be able to sleep at night. They slept well enough through two unwon wars, the great recession, and the refusal of Republican and Democratic administrations to stop illegal immigration. In a typically evenhanded piece in National Review,Ramesh Ponnuru writes of conservative infighting. Most back Mr. Trump, but others, “especially among conservative writers, activists, and think-tankers,” vow they’ll never vote for him. “This debate splits people who have heretofore been friends with similar views on almost all issues, and who on each side have reasonable arguments to hand. It is therefore being conducted in a spirit of mutual rage, bitterness, and contempt.”

That’s witty and true—I’ve seen it—but the division is also promising. Too much has long been “agreed on.” At some point conservative intellectuals are going to take their energy and start thinking about how we got here. How did a party that stood for regular people become a party that stood for platitudes regular people no longer found even vaguely pertinent? During the Bush administration, did the party intelligentsia muscle critics and silence needed dissent, making the party narrower, more rigid and embittered? What is the new conservatism for this era? How did the party of Main Street become the party of Donors’ Policy Preferences?

An anecdote. Two years ago at a birthday party for a mutual friend, I bumped into a hedge-fund billionaire who turned to me angrily and lashed out over something I’d written that seemed to him insufficiently conservative. I listened, merely blinking with surprise I’m sorry to say, and removed myself from his flight path. Afterward I thought about how he must have come to view himself. He is, as I said, vastly wealthy, but also generous, giving time and money to think tanks, groups, candidates. He must view all this, I thought, as a targeted investment. Maybe he sees himself as having . . . a controlling investment. Maybe he thinks he bought conservatism. I felt in a sharp new way that my criticisms of the donor class had been right. Inevitably they see to their own enthusiasms and policy priorities. This was how the GOP became the party of We Don’t Care What Americans Think About Illegal Immigration. Who do those Americans think they are—they think they own the place?

A great party needs give. It needs a kind of capaciousness and broadness. On that, the best example of movement I’ve seen in some time is what I discovered this week: a sophisticated, rather brilliant and anonymous website that is using this Trumpian moment to break out of the enforced conservative orthodoxy of the past 15 years.

It is called the Journal of American Greatness. Its contributors ask questions that need asking and makes critiques that sting.

They describe themselves as “aghast at the stupidity and corruption of American politics, particularly in the Republican Party, and above all in what passes for the ‘conservative’ intellectual movement.” Who are they? “None of your damned business.” Why? “Because the times are so corrupt that simply stating certain truths is enough to make one unemployable for life.”

Where they stand: “We support Trumpism, defined as secure borders, economic nationalism, interests-based foreign policy, and above all judging every government action through a single lens: does this help or harm Americans? For now, the principal vehicle of Trumpism is Trump.”

They explore essential questions. “When—and why—did free trade become a sacred ritual of the Republican right?” They give neoconservatism its intellectual due but explore the “unwisdom” of the “Middle East democracy agenda.” Neoconservatives seem “incapable of learning from their mistakes or changing their minds.” The contributors hilariously score NeverTrumpers who claim to be standing at great cost on principle while others are “in the tank” for Mr. Trump: “Of all the opinions that require little courage to express, opposition to Trump is the lead one.” In the past two decades, they observe, “a new conservative intellectual superstructure,” including magazines, journals and think tanks, was built on the new base of the Republican Party. It “routinized the production of its self-justification.” But “the base no longer wants the superstructure.” Voters have their own ideas of what conservatism is.

I contacted JAG by social media and asked about their work. “If we had to characterize ourselves, we would like to think that our writing is informed by a mix of pragmatic experience and theory. What brings us together is our dismay at the stultification of political ideas in the United States. We see ourselves as challenging the intellectual rigidity that has come to characterize, in our view, so much of what passes for self-described ‘serious thinking’ today.”

Their reach and the reactions they’ve received “have thus far significantly exceeded our expectations.”

It’s encouraging they’re doing what they’re doing, and that there is a market for it.

Article Link to The Wall Street Journal:

Trump And The World: What Could Actually Go Wrong

The definitive guide to the global risks of a Donald Trump presidency.

By Ian Bremmer
Politico Magazine
June 3, 2016

To hear Hillary Clinton tell it, letting Donald J. Trump anywhere near the Oval Office would be tantamount to inviting a nuclear apocalypse. The address she delivered from San Diego Thursday opened up a new front in the 2016 campaign: whether Trump can be trusted as leader of the free world. Calling Trump’s ideas “dangerously incoherent,” she presented herself a sure-handed, sober-minded alternative to the erratic billionaire. “He is not just unprepared,” she said, “he is temperamentally unfit to hold an office that requires knowledge, stability and immense responsibility.”

It’s powerful political rhetoric, and Trump is certainly an unknown quantity—perhaps even a radical disruption to the current order. But what are the actual global risks that a Trump presidency would pose?

His campaign has already raised any number of potentially destabilizing questions. Might President Trump send U.S. ground troops after ISIL? Confront Vladimir Putin, or let him run loose? Sanction Mexico or Japan? Bomb China’s artificial islands in the South China Sea? Wage trade war on China? Attack Iran or North Korea? Would he tear up existing trade deals? Pull the U.S. out of NATO if allies don’t pay more? Use U.S. debt as negotiating leverage? What risks might any or all of these actions pose for Americans?

My firm, Eurasia Group, specializes in analyzing large-scale global hazards, and each year we publish a list of what we see as the top geopolitical risks of the year. This year, there is so much uncertainty surrounding a Trump presidency that I’ve worked with Politico Magazine to apply this model to the specific question of a Trump presidency, with the goal of separating sound arguments from hype, and looking at the full-risk implications of a Trump foreign policy.

Mapping those implications is a challenge, in part because Trump’s habit of issuing contradictory statements on the campaign trail make it tough to predict what he would actually do in office. Both Trump and Clinton are shrewdly evasive candidates, but Clinton’s tenure as Barack Obama’s secretary of state gives her a clear track record we can study. She also has a campaign website that offers detailed foreign policy proposals. Trump has no foreign policy history and few clearly stated plans. It’s also much easier to guess whom Clinton might invite to join her team, and who might accept. Not so for Trump on either count; he has alienated much of the Republican foreign-policy establishment, depriving him of a reservoir of expertise he would normally be able to rely on.

Compounding the problem, Trump’s positions change pretty quickly. Clinton flip-flops as well, but her shifts develop more slowly than Trump’s and involve carefully crafted, if sometimes convoluted, justifications. Trump’s are a magician’s quicker-than-the-eye sleight of hand, and they often come with little or no explanation. Would Trump really try to ban all Muslims from entering the United States? That was a pledge, and then it was a “suggestion.” How could this ban be legal? How would it be enforced? He hasn’t said, and his supporters don’t seem to care.

That said, we have to assume that Trump’s “America First” philosophy will guide his choices. That’s a term I bear some responsibility for: When I observed earlier this spring that Trump’s worldview amounted to an “America First” foreign policy, I didn’t mean it as a compliment, and I was startled to see him grab that label with both hands. In addition, Trump prides himself on being a tough negotiator, and he wants to show U.S. taxpayers and foreign governments that he’s no chump.

He won’t be guided by ideology. He doesn’t appear to have one. He’s a gut-feel guy, a zero-sum strategist, and a bottom-line businessman. He won’t approach problems as if the world’s sole superpower can afford to be generous, to do more so that others can do less. He sees no special responsibility to be magnanimous, or even patient. Being No. 1 doesn’t mean playing the role of provider. It's about winning. It means being the toughest, smartest son of a bitch at the table. In short, Trump will probably try to remake U.S. foreign policy in his own (self-)image.

One caveat: I think Trump is unlikely to be president. A Democratic Party more unified after its convention will probably generate enough votes to lift Hillary Clinton to victory. And the nuclear threat, though it tops many people's list of visceral fears, is the ultimate red herring: Trump himself may be reckless, but we're well past the days of the Cold War and Cuban Missile Crisis. That's well outside what even he would be willing to gamble on.

But that doesn’t mean we can afford to dismiss the risks of a Trump foreign policy. He has hit on a message that resonates with millions of Americans, and it won’t be easy for future presidential candidates, of either party, to ignore the electoral potential of this formula. Even if Trump falls short, his America First approach to foreign policy deserves a close look because it will survive his candidacy. And if he does manage to pull of the upset, the implications of an America First foreign policy directed by Trump himself will be far reaching.

Here are the “Trump Top Risks,” the most worrisome implications of a Trump foreign policy, and a few red herrings we won’t need to worry about.

1. The Bolt from the Blue

Despite their best-laid plans, all presidents face storms they didn’t expect. For Bill Clinton it was the war in Yugoslavia. George W. Bush had 9/11. Barack Obama got the Arab Spring, a civil war in Syria, and the conflict in Ukraine. What’s the best way to handle the unexpected? In an off-the-record briefing with reporters in 2014, President Obama described his foreign policy doctrine as “Don’t do stupid stuff,” a “first, do-no-harm” approach to crisis management. “Don’t do stupid stuff is not an organizing principle,” as Hillary Clinton later noted, but it can help presidents avoid making a bad situation worse.

With Trump, the biggest risk comes from the way he’d handle a crisis that no one saw coming, whether from China, Putin, North Korea, a cyberattack, terrorists, or something else. As a candidate, he thrives on surprise. Restraint and strategic patience don’t figure among his strengths, and Trump might well respond to a bolt-from-the-blue crisis with a shot of bravado, a threat of escalation and tactics designed to keep antagonists, and maybe U.S. allies, off guard.

In addition to the risk of what will actually happen in a crisis, his approach creates another kind of risk, one that exists even without a crisis to trigger it. An improvised foreign policy based on maintaining the element of surprise might make policymakers and a few citizens feel more powerful, but it invites rivals and enemies to test U.S. intentions to find out what Washington will and will not defend. A clear policy, and predictable outcomes, help shape the behavior of the world’s bad actors. Mixed signals and big surprises, on the other hand, increase the risk of miscalculation on all sides—and increase the chances the U.S. will be provoked.

2. The Dollar

The U.S. benefits enormously from the dollar remaining the world’s reserve currency, the vital asset for central banks and commercial transactions of all kinds around the world. The dollar remains the safest port in any storm, because investors and other governments have confidence that it’s a reliable store of value. That keeps international demand for dollars high, holds inflation in check, and keeps U.S. interest rates relatively low, despite the expansion of the U.S. national debt.

An unpredictable foreign policy, the product of either an administration that likes surprises or a temperamentally erratic commander in chief, will undermine that confidence quickly. Worse, any hint from the president that the U.S. might deliberately default on its debt, for any reason, will inflict damage that can’t be undone, and it will push foreign governments to look more urgently for an alternative. Trump appeared to learn that lesson a few weeks ago when he had to quickly reverse course after hinting he might want to renegotiate debt. But that sort of threat is consistent with the brash and impetuous image Trump has cultivated throughout the campaign, and these sorts of doubts, once raised, are hard to erase. It’s damaging for a presidential candidate to say such a thing, much more so for a president.

This risk is unprecedented for a credible presidential candidate: No one else has said the things Trump is saying about debt and America’s global relationships. The impact has been mitigated for the moment by the reality that there is no viable dollar alternative. Investors in sovereign debt aren’t ready to bet more heavily on the longevity of the euro. China’s financial system is still too underdeveloped, its economy too opaque, and its military power too much in question to support the growth of the yuan as a global reserve currency. Even within a well-diversified basket of currencies, there aren’t yet other viable options. Demand for dollars will remain high for now, but the search for alternatives will continue, and a Trump presidency would sharply accelerate the process.

3. U.S.-led alliances and institutions

The Obama administration has confused a lot of U.S. allies, who no longer know what sort of leadership Washington is willing and able to offer. European allies aren’t clear on what role the U.S. will play in the Middle East or how far it will go to face down threats from Russia. Both Israel and Saudi Arabia are unsure how the U.S. will respond over time to security threats in the Middle East, particularly from Iran. Many of China’s neighbors were heartened by Obama’s “pivot to Asia” and his push for the Trans-Pacific Partnership, an enormous trade deal, but U.S. staying power in the face of China’s expansion remains very much in doubt, and Trump’s views on trade are now well-known around the world.

In today’s more volatile world, the U.S. needs allies. Many of Trump’s campaign pledges will make it harder to regain the trust Obama has lost. Some of them will inflict still more damage. Trump’s charge that NATO allies are freeloaders won’t improve relations with European governments or voters. His threats to impose tariffs on Mexico and Japan will antagonize citizens and lawmakers in those countries. A promise to eject 11 million undocumented workers from the U.S. and build a wall along the southern border will antagonize millions of Latin-Americans. His “suggestion” that all Muslims should be banned from entering the country won’t improve U.S. relations with the world’s Muslims or their governments, both of whom are critical for the daily struggle against terrorism.

Whether or not he follows through on these campaign pledges, the uncertainty President Trump will create will leave many allies unsure how much responsibility they can afford to accept as part of collective action. Some will take risks, expecting U.S. support that isn’t coming. Others will question U.S. intentions, and the Trump administration’s refusal to make clear which commitments it will honor and which it won’t will strip allied governments of the domestic support required to spend the money and accept the risks needed to take more responsibility for their own security. U.S. allies deserve to know whether the United States intends to lead, whether it will fight only for its core interests, or whether they must now adapt to the reality that the Americans aren’t coming. And U.S. voters are likely to remain divided over the value of American leadership. Does an active international role make the United States safer and more prosperous? Or poorer and less secure? Trump hasn’t offered a clear answer to that fundamental question.

One clear beneficiary of Trump-generated uncertainty will be China. Allies in Asia will hedge their bets on American staying power with a stronger embrace of China. To protect their economies and promote their flagship companies, Britain and Germany will do the same. Trump has already offered a preview of the future of the “special relationship” by contradicting Prime Minister David Cameron’s call for Britons to vote to remain within the European Union, by warning that he and Cameron are “not going to have a very good relationship” after Cameron called his proposed ban on Muslims “stupid,” and by challenging London’s newly elected Muslim mayor to an IQ test. The mayor of Paris has a similarly low opinion of Trump’s intelligence, and France will turn to Russia for help in the Middle East. Putin will then feel freer to test a weakened NATO, confident that European governments will balk at Trump’s insistence that they pay a much higher share of NATO’s bills. Japan will move toward a more assertive defense policy, heightening tensions and the risk of conflict in the region that is more important than any other for the future of the global economy. Doubts about Trump’s commitments will undermine the ability of institutions like the International Monetary Fund and the World Bank, in which Washington has considerable influence, to function.

4. Trade

For long-term peace and prosperity, America’s commercial partnerships are as important as its military alliances. Trump’s abrasive approach to trade negotiations will push potential partners around the world, including traditional U.S. allies, toward China. If Trump wins the election, Speaker Paul Ryan probably won’t have support from enough House Republicans to pass the TPP, the largest free-trade agreement ever negotiated by the U.S. Both Bernie Sanders and Trump have anchored their campaigns on the claim that trade kills U.S. jobs. Opposition to trade from pro-labor Democrats is nothing new, but the growing chorus of conservative anti-trade voices has drowned out traditional support from the business community. The Transatlantic Partnership, a still nascent U.S.-European deal, is already on a slow boat to nowhere. U.S. public support for it has fallen from 53 percent in 2014 to 18 percent today. Given his hard-line comments on the campaign trail, it’s unlikely that any government will want to invest political capital in trying to bargain with President Trump on trade.

Trump probably wouldn’t follow through on threats to impose 45 percent tariffs on goods from China and 35 percent on imports from Mexico. No need to start trade wars that would inflict heavy damage on all sides. But given his campaign complaints that China, Mexico, Japan and others are dumping cheap products into American markets to harm U.S. companies, we should expect his administration to be hyperactive in launching cases against dumping, theft of intellectual property theft, and accusations of cyber attacks. Mexico would be especially vulnerable since this is the culprit with whom the U.S. has greatest leverage. It’s important for any U.S. administration to insist on fair trade practices from other governments, and the Obama administration recently slapped import taxes of more than 500 percent on imports of Chinese cold-rolled flat steel. But Trump’s campaign rhetoric suggests that his administration will pursue these cases much more often and more aggressively—and probably sometimes for political, rather than commercial, reasons.

5. Terrorism

Finally, a Trump presidency would make the United States, its citizens and its assets the single most attractive target for Al Qaeda, ISIL, and other Islamic militant groups. There is obviously nothing new about terrorist attacks, and would-be attacks, on American targets. The Clinton, Bush and Obama administrations have all faced this problem. But Trump’s intensely anti-Muslim rhetoric will encourage a lot more militants to look beyond softer and more accessible targets in Europe toward the “big score,” a deadly attack on Trump’s America. U.S. military personnel, businesspeople and tourists are more likely to be targeted abroad. Trump’s rhetoric will also make it easier for militant organizations to recruit and raise money, and a more aggressive intervention in the Middle East’s various conflicts would only amplify this effect. It’s impossible to know where and when terrorists will strike, but Trump’s anti-Muslim vitriol will make America less safe, not more.

Red Herrings: What Not To Worry About

1. U.S.-China relations

There is considerable fear that Trump’s anti-China rhetoric will ratchet up tension with a nation that could be our most dangerous rival, militarily and economically. But this doesn’t pose the risk you might think. The next president, Trump or Clinton, will have two advantages in U.S. relations with China, the world’s most important bilateral relationship. First, China’s leaders are now focused on a complex, high-stakes economic reform process, one designed to transition from an inefficient export-based economy to a more innovative and resilient model powered mainly by domestic consumption. Success depends on Beijing’s ability to avoid conflicts that are bad for business, even those concocted by a U.S. president who wants to shake things up. Second, the expected slowdown in Chinese economic growth looks to be under control, and President Xi Jinping appears confident in his hold on power. Trump’s campaign assertion that Japan and South Korea should take greater responsibility for their own security will increase that confidence. This gives him less incentive to create an artificial foreign policy emergency to divert public attention from domestic problems.

President Trump will make a point of antagonizing China, particularly on trade and investment relations, but Chinese officials can afford to respond by taking the high road on most points of potential conflict to try to convince other governments that Washington, not Beijing, is the cause of trouble in U.S.-China relations. Trump will sometimes spoil for a fight, but Xi appears unlikely to give him one under any but the most extraordinary circumstances.

2. Asia’s geopolitics

China isn’t the only country in the midst of a delicate and dangerous domestic economic reform process. Japan’s Shinzo Abe and India’s Narendra Modi are hoping to avoid confrontations with China that undermine efforts to stoke growth. The South China Sea remains a hot spot worth watching, but Vietnam, the Philippines and Malaysia can’t afford a direct confrontation with Beijing. Leaders of all these countries will sometimes saber-rattle for short-term political gain, but actual conflict is in no one’s interests. President Trump and newly elected President Rodrigo Duterte of the Philippines have enough in common to build a solid relationship. The loss of the TPP would hurt Japan and a number of South Asian countries, but that will make stable relations with China only that much more important for them. Asian leaders will watch President Trump closely, but the risk that any of them will allow push to come to shove is lower than many fear.

3. Iran

Will Trump provoke conflict with Iran? In April, Trump told AIPAC, America’s most powerful pro-Israel lobby organization, that his “No. 1 priority is to dismantle the disastrous [nuclear] deal with Iran.” That pledge would be more credible were it not a direct contradiction of other comments he’s made on this subject, and if, as with his ban on Muslims entering the country, he hadn’t already established a pattern of backing away from other (apparently) deeply held convictions. Criticizing the Iran deal allows him to attack the president—and, by extension, Hillary Clinton—on a signature issue. But when he’s not in front of AIPAC, Iran hasn’t figured prominently among the list of adversaries he wants to corner.

* * *

Donald Trump presents himself as the man uniquely qualified to “remasculate” U.S. foreign policy, to sweep aside those who believe leadership depends as much on patience, discipline, generosity and imagination as on military muscle and an iron will. He wants to reassert American power without a mature understanding of the basis for that power. He lives in a zero-sum world, one divided between winners and losers, good and evil, doers and freeloaders, us and them.

But America First won’t strengthen America. It will alienate friends and embolden rivals. In the process, it will badly damage U.S. commercial interests. It will undermine the institutions that the U.S. and its allies created from the ashes of World War II and which continue to extend U.S. international influence into the future. It will cast grave doubt on what America stands for.

A Trump foreign policy will undermine U.S. exceptionalism, the consensus-based conviction that America will fight for more than its self-interest and is therefore worthy of emulation. That idea has sustained plenty of damage in recent years. It will sustain more. But the biggest risk posed by a Donald Trump foreign policy is that he will destroy this worthy aspiration once and for all.

Article Link to Politico:

Bernie's Final Few Days of California Dreamin’

Pay no mind to the superdelegates and shouting. Democrats voters are choosing Clinton.

The Daily Beast
June 3, 2016

So here we are. It all comes down to Calif—hey, wait. No, it doesn’t all come down to California.

That’s how Bernie Sanders has been framing next Tuesday, and the media have completely bought into it. Watching cable news, you’d think that if Bernie wins California, Jerry Garcia’s going to rise from his grave and the Dead will reunite and Sanders will be the nominee.

California’s big, and California’s razor close, and certainly it makes a difference whether Sanders or Hillary Clinton wins it. But not that big a difference. A whopping total of 475 delegates are at stake, but if it’s as close as the polls suggest, the winner stands to net a mere 20 or 30 delegates. Using this excellent delegate calculator, let’s go through all the remaining races and then circle back to the big prize, bearing in mind that right now, among pledged delegates, it’s Clinton up by 268, 1,769 to 1,501.

Saturday June 4, Virgin Islands.
Seven delegates are at stake. The U.S.V.I. are three-quarters African American and just 15 percent white. So say Clinton wins it 75-25. She’ll take five delegates to Sanders’s two, netting three.

Sunday, June 5, Puerto Rico. I’ve been banging on about Puerto Rico being important because it has 60 delegates, which is a pretty big prize. Let’s say Clinton wins that one by, oh, 65-35, which doesn’t seem crazy. She’ll win the delegate contest 39-21, netting 18.

Then come all the contests on Tuesday, June 7:

South Dakota
has 20 delegates. Say Sanders wins 60-40. He’ll win the delegate race 12-8, netting four.

North Dakota has 18 delegates. Give Sanders another 60-40 win here; again, he’ll win 11-7, netting another four.

has 21 delegates. Give Sanders a third win of about that size. That’s 13-8 in terms of delegates, so he nets five more.

New Mexico
is a little more interesting. It has 34 delegates. A poll came out earlier this week showing Clinton with a 26-point lead. I can’t quite believe that, but about half the turnout is expected to be Latino, so give Clinton New Mexico by 14 or 15 and she wins the delegate race 20-14, netting six.

Now we come to New Jersey and its 126 delegates. Not much polling. There was one in early April that showed Clinton +9, but early April was a long time ago. An early May survey had her +28, and a mid-May one +17. Sanders certainly hasn’t been competing there much. Let’s be if anything a little conservative and say Clinton wins it roughly 58-42. That translates into delegate totals of 73-53, so she’ll pick up 20 delegates.

So if these totals are about right, Clinton will win another 170 delegates, Sanders another 136. That would her at 1,939 and him at 1,637. Which brings us to California.

California’s 475 pledged delegates are awarded in a pretty complicated way (here’s a .PDF of the whole plan, if you’re interested). Most of them, 317, are awarded within congressional districts based on who won that district. There are 53 of those. In 2008, according to Bob Mulholland, the veteran California Democratic insider and a Clinton supporter this year, she won 42 of them. “But that’s an eight-year-old race,” as he noted to me, so who knows if it means anything for this year. Another little wrinkle is that all congressional districts aren’t created equal—some have as many as nine delegates, others as few as four. Just 105 delegates are awarded on the basis of the total statewide vote, and then there are 53 elected officials and party operatives who are pledged according to the results. That’s your 475. Then there are 73 superdelegates, from Jerry Brown and Barbara Boxer on down.

But put them aside. This is about pledged delegates, right, because that’s what’s up for grabs when people vote. This brings us to one of the great obfuscations of this primary season.

You always read that a candidate needs 2,383 delegates to clinch the nomination. And that is true if you include superdelegates. Hang with me here, this matters. There are 4,051 pledged delegates and 713 supers. Add those two numbers together, then divide that by two, then add one (i.e., 50 percent plus one). That gets you to 2,383.

But if you’re talking pledged delegates only, 50 percent plus one is 2,026. You never see that number, and I guess I understand why—2,383 is the number, officially. But 2,026 is a majority of pledged delegates—you know, the ones you win by persuading voters to pull the lever with your name on it. I’ve been mystified as to why the Clinton people aren’t pushing more awareness of the 2,026 number. If the situation were reversed, we can be sure that Jeff Weaver would be all over cable denouncing the mere existence of 2,383, that strutting harlot of a number!

So it’s next Tuesday night in California. The state-by-state delegate scenario that I played out above has occurred. Clinton is at 1,939, needing just 87 delegates out of California to hit 2,026. Do you know how badly Sanders would have to beat her to limit her to 86 delegates? No, you don’t. But I do. He’d have to win by 82 to 18 percent. That would net Bernie 309 delegates out of California and would get him to 2,026, while she’d have 2,025.

That isn’t going to happen. What’s going to happen, even if Sanders wins the state by, say, three or four points, is that he will net about 20 delegates, but she will still have won around 225 or 230, meaning she will exceed 2,026 by about 150 delegates, and Sanders will be short of the magic number by about the same amount. And then there’ll be a little cherry placed on the sundae the following Tuesday when the District of Columbia votes and Clinton wins big and nets another 10 or so delegates.

So that’s the unfuzzy math. It has nothing at all to do with the superdelegates Sanders and Weaver have spent months traducing. It’s pledged delegates, earned in the voting booth (or at the caucus hall). Superdelegates will never, ever, ever undo such an outcome, and they never, ever, ever should. In a season when Sanders people have alleged a rigged system and sometimes outright theft, that would be the only actual case of theft in this season—for superdelegates to tell the voters sorry, you made the wrong choice when you chose your candidate, who is (incidentally) the first woman nominee in our party’s history.

And then California Democrats will meet after the fact at the Long Beach Hyatt Regency on June 19 to formalize everything, just like that recent meeting in Nevada. But let’s not even go there.

Article Link to The Daily Beast:

A Billionaire Of Her Own?

Some #NeverTrump Republicans think Hillary should make Mark Cuban her running mate.

By Ben White
June 3, 2016

Hillary Clinton is sinking in national polls, shackled by dismal favorability ratings and facing a brutal general election campaign against a Category 5 political hurricane who seems impervious to any traditional lines of attack.

Perhaps Clinton needs a Donald Trump of her own? Perhaps she needs a maverick who literally owns the Mavericks.

That’s the operating theory behind a whisper campaign among some Democrats and #NeverTrump Republicans urging Clinton to seriously consider NBA owner and self-made billionaire Mark Cuban as a potential vice presidential running mate.

It’s not likely to actually happen, of course. Democratic insiders close to the Clinton campaign dismiss Cuban with a laugh. “He's nowhere near ready to be president,” one senior Democrat said. “He’s not on any list, short or otherwise.”

Maybe so. But no one thought Trump could ever get the Republican nomination. If nothing else, 2016 is the year when nothing is impossible and the crazy quickly becomes the inevitable.

And the case for Cuban is not especially crazy. He is an outspoken, reality-TV tested, megarich media star with 5 million Twitter followers and an apparently burning desire to play smash-mouth ball and hit Trump where it hurts most by denigrating The Donald’s business record and questioning how much money Trump really has.

And Cuban is apparently very much up for the job.

The Mavericks owner reiterated in an email interview with POLITICO that he would be “open” to serving as VP for either Clinton or Trump and dismissed the idea that his lack of political experience would serve as an impediment.

“I think there are plenty of political resources available within both parties. There are no shortage of experts willing to help,” he said. “So no. I don't think having no political experience hurts me. On the flip side , I have an independent, nonpartisan perspective which I think brings value to the position.”

While Cuban says he remains open to running with Trump, some of his other public comments of late would suggest he’s not likely to wind up on the GOP ticket. He once said Trump was like the guy in the bar “willing to say anything to get laid.”

In an interview with WABC TV this week, Cuban questioned whether Trump was actually a billionaire and ripped the presumptive GOP nominee’s business decisions.

“I don't think he's very good at brands for non-real-estate products. And, to me, it's more a reflection of desperation,” he said. “So when you're putting your name on steaks, and you're putting your name on water, you're putting your name on playing cards, you're putting your name on all this nonsense, right? You're not going to make big bucks, no matter what.”

Cuban, whose net worth is estimated at $3.1 billion, also said he had far more money on hand than Trump. “As of May 27, Donald doesn't have more than $165 million in cash and securities and bonds,” he said. “And trust me, I've got a lot more than that in cash, securities and bonds.”

That very Trump-like braggadocio is likely sweet music to the Clinton campaign’s Brooklyn brain trust which has been flailing around for ways to damage a Republican candidate who can seemingly say and do anything without losing his bedrock appeal to blue collar voters disgusted with the political status quo.

Recent national polls show Trump nearly tied with or even slightly ahead of Clinton in a general election matchup. There is no flat-out panic yet in Clinton land — it’s still early and a post Bernie Sanders bounce is surely coming — but there is plenty of hand-wringing over how the most cautious and traditional of presidential candidates can compete with the manic, off-the-cuff political circus that is the Trump campaign.

The latest line of attack from Clinton is that Trump is a business fraud who preyed on the vulnerable with his now-defunct Trump University.

Cuban, who rose to wide national fame with his role on ABC’s hit business reality TV show “Shark Tank,” could theoretically prosecute this case better than Clinton or any more traditional cookie-cutter running mate with extensive government experience and an electorally attractive swing-state pedigree.

“He would bring a lot,” said James Pethokoukis, a scholar at the conservative American Enterprise Institute and a card-carrying member of the #NeverTrump wing of the GOP. “He would make voting for Clinton a lot more palatable for centrists and even some Republicans. He could even peel off some Trump voters. He’s basically Trump without the crazy. He’s probably richer than Trump and he has the business experience and charisma and he’s got this great Horatio Alger story.”

Unlike Trump, whose father was a wealthy real-estate owner, Cuban grew up with relatively modest means in Pittsburgh where his father upholstered cars for a living.

He went to Indiana University's business school because it was the cheapest of the top 10 institutions and worked as a bartender in Dallas after graduation before launching a series of tech startups, including, that catapulted him to billionaire status and ownership of swanky private jets, the Dallas Mavericks and film distributor Magnolia Pictures, in addition to other holdings.

He has the same kind of no-apologies swagger that voters seem to love in Trump. Cuban’s Twitter profile picture features the billionaire chomping on a cigar on an airplane with the Mavericks’ 2011 NBA championship trophy on the seat next to him.

This kind of bravado rubs some in Clinton’s orbit the wrong way. Cuban, after all, went public about the Clinton campaign seeking a meeting with him. That’s the kind of self-promotion that’s usually poison for would-be VP picks. Clinton herself in an appearance on NBC’s “Meet the Press” said only that she “appreciated” Cuban’s openness to joining the ticket.

But for Cuban, any potential friction with Clinton — or Trump for that matter — would not necessarily be a bad thing.

“A successful partnership is defined by results,” he wrote in the email interview. “We don't have to be friends. We shouldn't agree on everything. A little conflict can be good. It results in more critical thinking and hopefully better solutions.”

One thing Cuban would not do is ease Clinton’s problems with the Sanders-loving left. He’s a member of the .001 percent who has flirted with Republicans and written for the George W. Bush Institute. And the lack of experience is a deal-breaker for some on the left who pine for Massachusetts Sen. Elizabeth Warren or someone like her as a fire-breathing progressive VP candidate.

“I don’t believe in on-the-job training for my doctor, lawyer, car mechanic or refrigerator repairman and I certainly don’t believe in it for the president or VP,” said Dennis Kelleher, CEO of the financial reform group Better Markets. “As someone who has seen it up close from the inside for many years, running the United States of America or being next in line to do so is the biggest, most difficult job in a very complex and dangerous world. On-the-job training while in the White House would be an irresponsible leap of faith we cannot afford as a county.”

But Clinton certainly has all the experience in the world and would presumably bring to the White House scores of longtime policy experts who could help Cuban should he somehow be thrust into the top job. And thinking about 2016 as a typical presidential race could be a fatal mistake for Clinton.

“What would another perfectly respectable senator or Cabinet member or anonymous governor really bring to the ticket?” said Pethokoukis. “Cuban rather than Bill Clinton could be the star on economic policy talking about growth and American innovation which is exactly what she needs to do.”

Cuban, for his part, knows the odds of his getting the call are slim and that Clinton is much more likely to pick a traditional pol who helps her with demographics and the electoral map.

But if the phone rings on his private Gulfstream jet, Cuban is ready to answer.

“I think it would be challenging,” he told POLITICO of a VP run. “But if we are able to make the country and world a better place, it's worth taking on the challenge.”

Article Link to Politico:

A Billionaire Of Her Own?

An Unserious War In Afghanistan

By Max Boot
June 3, 2016

President Obama will have to make some hard decisions soon about the future of the American presence in Afghanistan. The new U.S. commander, General “Mick” Nicholson, has nearly finished the 90-day review of force requirements he promised when appointed. It is highly likely that, just like his predecessor, General John Campbell, he will call for the administration to slow down its withdrawal schedule. Obama has already done that once; last fall, he agreed to maintain 9,800 troops in Afghanistan through this year (2016) and not go down to practically zero by the time he leaves office as he had planned. Instead, the president said that he would go down to 5,500 troops at the end of 2016, but it’s obvious that this is a formula for mission failure, given the fact that the Taliban are now presenting the most serious threat since 2001.

As the Long War Journal noted: “In Helmand, the Taliban control or contest most of the districts, and have laid siege to the capital of Laskar Gah for several months,” and that is just one of many provinces where they have made serious gains. “Afghan forces have been stretched thin attempting to fight the Taliban on multiple fronts.”

Indeed, even the 9,800 cap that is currently in place — 6,950 troops providing support to Afghan forces (Operation Resolute Support) and 2,850 engaged in a separate counter-terrorism mission (Operation Freedom’s Sentinel) — is plainly inadequate and can only be maintained with sleight of hand. The House Armed Services Committee has just revealed the numbers game that the administration plays: It is relying heavily on contractors to make up for the shortfall of soldiers.

This has been a common pattern since 2001: At no point in the last 15 years has the U.S. military had enough troops to deal with all of the missions thrown its way. The typical response has been to have a 1 to 1 ratio of contractors to troops; thus, when there were 100,000 troops in Afghanistan (itself an artificial cap imposed by the White House) there were roughly 100,000 contractors. But now the ratio has been skewed much more heavily in favor of contractors. There are now 26,000 contractors in Afghanistan — i.e., roughly 2.6 contractors per soldier.

This reliance on contractors has deleterious consequences for military readiness and capabilities. The House Armed Services Committee noted that an Army Combat Aviation Brigade — a unit that flies transport helicopters and helicopter gunships —typically deploys with 1,500 to 2,500 soldiers. But now they are deploying with as few as 800 soldiers, which means that most of the unit’s mechanics are staying home. Currently, the Defense Department is paying $101 million a year for 427 civilian personnel to maintain the helicopters of the 4th Infantry Division’s combat aviation brigade in Afghanistan. That is not only costly and wasteful — at a time of declining defense budgets — but it also impairs the unit’s ability to maintain combat readiness, because its mechanics are not getting the experience of operating helicopters in combat.

This is just nuts: It is taking the American military’s reliance on contractors, already dangerously high, to a whole new level. And for no good reason, since it would be cheaper and more efficient just to deploy the units as they are normally constituted. The only reason not to do so is because of the artificial troop cap imposed by the White House to meet its perceived political needs, which are totally divorced from battlefield reality. Note that the administration has been keeping “only” 9,800 troops in Iraq so that it can say there are “fewer than 10,000” — in much the same way stores price goods at $3.99 rather than $4.00. This is a cheap marketing gimmick that has no place in a serious foreign policy.

Just as ludicrous is the current limit on the use of American airpower in Afghanistan. As General David Petraeus, another one of General Nicholson’s predecessor as commander in Afghanistan, recently observed, the administration forbids air strikes on our enemies in Afghanistan — the Taliban: “Existing U.S. and NATO policy generally allows them to strike targets on the ground only when hostile forces can be identified as al-Qaeda or ISIS loyalists, when they pose an imminent threat to NATO personnel, or, reportedly, when a strategic collapse is imminent.”

The government in Kabul, to say nothing of U.S. commanders, would be grateful if the U.S. would provide greater air support to target Taliban forces that have been making significant gains against Afghan troops. The Obama administration continues to resist those entreaties. Yet the Special Operations Command is free to launch an airstrike using drones to kill the commander of the Taliban, Mullah Mansour, in Pakistan, apparently over the objections of its government. Huh? How come the U.S. forces can attack the Taliban in Pakistan but not Afghanistan?

It’s good to hear from an anonymous “senior administration official” that the president is open to “possible modifications” of the U.S. mission in Afghanistan. Because the policy as currently constituted makes no sense. Obama needs to scuttle plans to drawdown our forces this year. Instead, he needs to relax the troop cap and relax the prohibitions on air strikes. Otherwise, everything that he has asked troops to sacrifice for on his watch will be for naught.

Article Link to The National Interest:

For the US, Sailing Around The South China Sea Is Not Strategy

Beijing’s new islands and equipment are permanent; while America’s naval excursions are temporary, the vessels destined to simply float away--a big problem. 

By Harry J. Kazianis
The National Interest
June 3, 2016

After President Barack Obama’s visits to Vietnam and Japan, the wider Asia-Pacific region has to wonder what the future holds as a dangerous geostrategic rivalry develops between the People’s Republic of China and the United States. And considering the stakes, such worries are completely justified.

The rise of China – and its campaign to “salami slice [4]” its way – occupying small pieces of reefs and semi-submerged features in the South China Sea in increments towards regional dominance – threatens America’s dominant position in Asia. Beijing’s seemingly inexhaustible need to control the world’s most economically vibrant region has set in motion what the New York Times rightly called a “game of chicken [5]” that many fear could spark a tragic great-power war.

China’s goal is simple: Dominate the Asia-Pacific and slowly but surely push America out. To achieve this, Beijing must negate the sizeable military assets Washington has in the region – especially the US Navy. To operationalize such a strategy, Beijing has developed a concept known to Western strategic analysts as anti-access/area-denial, or A2/AD. Leveraging the combined strength of such military platforms as ultra-quiet submarines; more than 80,000 sea mines, the world’s largest inventory; air-defense platforms; budding undersea tracking systems [6]; various cruise missiles; and two deadly anti-ship ballistic missile systems, China has set the stage to turn areas around its near seas, as far away as the very ends of the South China Sea towards Indonesia, into what some are calling a “no-man's land” for US naval vessels and aircraft.

And Beijing’s A2/AD strategy launched in early-2000s seems now to be expanding into what author Robert Kaplan called Asia’s Cauldron [7], or the South China Sea. China has undertaken what can only be described as a clever effort to build small military outposts on reclaimed reefs, underwater features and islands. While at various times claiming it would not “militarize” the area, Beijing has placed advanced anti-ship weapons, anti-air assets and rotated fighter jets into the area thanks to massive new airfields. If China proceeds by installing anti-ship ballistic missiles along with newly purchased Russian S-400 air-defense batteries [8], the stage would be set for not only a credible South China Sea air-defense identification zone (ADIZ) but the severe degradation of America’s military capabilities in this economically critical body of water. In the event of a crisis, Washington would face a terrible choice: unthinkable military losses or simply walking away, thus leaving the region to China’s mercy and America and its critical alliance networks marginalized or even broken.

As for responding to the changing strategic situation in Asia, the United States has suffered a series of setbacks, some unavoidable and others self-inflicted.

When Washington could turn its attention to Asia – complicated by Russian actions in Ukraine and the rise of the Islamic State – the results have been mixed. While the Pentagon has attempted to dampen the impact of China’s A2/AD strategy with an important operational concept named Air-Sea Battle (ASB) – designed to leverage the combined joint warfare operational powers of the US Navy and Air Force to take down Beijing’s anti-access networks – fears of possible escalatory strikes on the Chinese mainland that could lead to a nuclear showdown have stirred controversy and unneeded doubt. Also, by its very nature focusing on armed conflict, ASB does nothing to place needed roadblocks to stop China from expanding its potential zone through reclaimed reefs and military equipment in the South China Sea.

So far, the only US action that demonstrates resolve has been to conduct three so-called “freedom of navigation” operations, or FONOP – suggesting to Beijing that Washington will [9] “fly, sail and operate wherever international law allows.” Unfortunately for the United States, while such actions show some sort of response, they do nothing to slow China’s attack on the status-quo – and fall far short of a much needed comprehensive strategy. As Washington simply sails around the South China Sea, Beijing presses ahead with installing ever-more advanced pieces of military hardware and could be planning to reclaim the strategically important Scarborough Shoal next. Beijing’s new islands and equipment are permanent; while America’s naval excursions are temporary, the vessels destined to float away.

Considering the stakes in the South China Sea for the United States along with regional allies like Japan, the Philippines and others, a stronger set of options is needed to dramatically slow or halt Beijing’s attempts to unwind the status quo. Sizeable roadblocks must be placed before China that, if crossed, would entail a sizeable price from Beijing.

I have proposed in the past a concept called “shamefare [10]” as a challenge to Chinese actions in the South China Sea by publicly embarrassing China for its expansionist moves. The United States, along with its regional partners and allies, must make every effort at documenting Beijing’s actions and distributing them around the world – especially through social media.

For example, video cameras should be placed on any military asset that has the potential to come in contact with the Chinese military or paramilitary actors. If an aggressive action is taken by China – as when a Chinese J-11 fighter came within 15 meters of a US surveillance plane on May 17 – the US government should release the recording without delay. Reports have noted the Pentagon has footage of the incident, but won’t release it – an error that must be corrected. Additionally, the recent US FONOP in the South China Sea near Fiery Cross Reef should also have been documented – putting a human and important non-threatening face on such operations.

Shamefare should also be expanded to allies and partners like the Philippines and Vietnam who have had negative interactions with China on the high seas. Imagine if Manila had documented the 2012 standoff with Beijing over Scarborough Shoal for the whole world to see? What if Hanoi had filmed in greater detail China’s billion-dollar oil rig off its coast surrounded by more than 100 fishing and other vessels? Imagine if such images and video were shared on popular social media networks then filtering down to television and standard news organizations – the impact and outcry would be truly historic while dramatically increasing the costs of such aggressive Chinese actions.

Shamefare itself though is not a strategy. It must be combined with a revitalized Air-Sea Battle concept, now called JAM-GC; continued FONOP operations; complete documentation of Beijing’s destruction of the environment around island reclamation projects; increased “lawfare” with Vietnam and other South China Sea claimants suing China in international courts; and Washington once and for all making Asia its single most important foreign policy focus. Anything short of such an effort will see China dominate the region.

Considering the dilemma presented by Beijing, Washington has been caught off guard by the scope, size and sophistication of China’s coercion. A do “something foreign policy” full of slogans and slick-sounding military concepts alone is a recipe for disaster. Only a focused America, willing to enact a bold strategy in the face of Beijing’s aggressive actions has a chance of success. Indeed, one thing is plainly obvious – simply sailing around the South China Sea is not a strategy for success.

Article Link to the National Interest:

China’s Aggression Is Killing Foreign Investment

Beijing's pushy policies scare capital away.

By Peter Navarro
The National Interest
June 3, 2016

Every time China’s military forces advance with a territorial claim in the East or South China Seas or in India’s Arunachal Pradesh or across the Taiwan Strait, foreign direct investment into China retreats. As Senator Everett Dirksen once said, “a billion here, a billion there,” and pretty soon it’s real money.

If a strong economy is key to survival of the Chinese Communist Party, Beijing’s brain trust has made a huge strategic blunder in abandoning its “peaceful rise” in favor of a rapid military buildup and pursuit of territorial claims throughout Asia. Naked aggression by the People’s Liberation Army, coupled with Beijing’s hard, bullying line on a host of disputes, is not just driving most of the rest of Asia into America’s arms. The specter of a new Imperial China is also raising very real questions in corporate boardrooms around the world as to the wisdom of long-term capital investment in China.

Make no mistake about the importance of foreign direct investment (FDI) in China’s economic development and transformation. In the wake of Deng Xiaoping’s 1978 economic “second revolution,” first a trickle and then a flood of FDI transformed China into the world’s largest factory floor and drove double-digit GDP growth for more than three decades.

Today, however, China’s flood of FDI may have reached its high-water mark. In 2015, India overtook it as the world’s top FDI destination, while FDI into China has plateaued since 2011.

Even more ominous for China’s growth and job-creation prospects, the mix of FDI has significantly shifted from in-flows to build factories to that for financial services; and it’s no secret as to what is going on here: Once-na├»ve business executives are now slowly but surely beginning to reevaluate the mounting risks of locating factories or parts of their supply chain in China—or even opening new markets on the mainland.

In fact, once the rose-colored glasses are lifted, this is a simple risk calculation. On the one hand, China continues to dangle the prospects of cheap labor, lax regulations, illegal export subsidies, and one of the world’s largest masses of humanity spending like drunken sailors in an orgy of consumption.

On the other hand, Beijing’s autocrats are imposing increasingly onerous conditions of market entry. These include the requirement of a local “joint venture” partner, the forced transfer of one’s technology, and stringent currency controls. In addition, wages that used to be cheap are rising, already severely polluted water is in increasingly short supply, and air quality continues to deteriorate further from abysmal levels. Dickensian England never looked this grim or gray.

There is also this stark risk factor: Any company that does business with China risks having all forms of its intellectual property stolen. Sadly, this risk starts from the moment a business executive takes a laptop or a cell phone through Chinese customs and has one’s data stripped clean—most S&P 500 companies don’t even allow their executives to bring their laptops or phones to China. And of course, once one factory gets built to foreign specifications, it is a simple matter to replicate that factory under a Chinese flag.

The newest and biggest looming risk, however, is purely geopolitical. To understand the nature of such geopolitical risk, look no further than the debacle of revanchist Russia’s taking of the Crimea and large chunks of Eastern Ukraine at gunpoint. In the wake of Russia’s gambit, its trade with the West has been sharply curtailed, tough economic sanctions remain in force, the Russian economy is in recession, and, most importantly from a geopolitical-risk perspective, any foreign company with a major Russian exposure—from Poland and Italy to Germany—has taken a very heavy hit.

For anyone who thinks this geopolitical risk scenario can’t repeat itself with an equally revanchist China, think again. Indeed, the canary in the coal mine for a much larger economic catastrophe may be found in the aftermath of the violent 2012 anti-Japanese riots across more than a hundred cities in China.

The 2012 riots (as well as less raucous protests in 2010) were over China’s historical claim to five small islets that comprise less than two square miles of territory—Japan’s Senkaku Islands in the East China Sea. While Japan has held this territory for more than one hundred years, Beijing’s revanchists claim the islets as the “Diaoyus,” and at least the rabid nationalist element of China appears willing to go to war over them.

After these nationalists burned Japanese factories, smashed storefronts, stormed the Japanese Consulate General’s headquarters, and tipped over Japanese cars in 2012, the business community of Japan collectively got the message that the better part of wisdom might be to take their FDI elsewhere. In the wake of that 2012 meltdown, Japanese FDI in China has fallen sharply, while it is popping up all over the rest of Asia, e.g, for the third straight year Japan’s FDI in Southeast Asia has risen and the pace is accelerating.

Japan is hardly alone in diverting its FDI to, if not richer, than certainly far less risky geopolitical climes. Writ large, Japan’s FDI gambit may, in fact, be the far better bet for much of the rest of the world.

Here, while it is true that China has 1.3 billion potential consumers on paper, almost half of that rapidly aging population remains stuck on peasant farms living at subsistence levels. At this rate, Carrier air conditioners, GM Chevys, or even Kentucky Fried Chicken do not appear to be in these peasants’ Hobbesian future.

In contrast, Southeast Asia alone has 650 million people in a far more vibrant demographic. India’s 1.3 billion consumers and workers are, on average, significantly younger than China’s. And Australia, New Zealand, South Korea, and Japan are all strong and stable democracies with a relatively high income per capita.

It doesn’t take a rocket scientist or a Harvard MBA to realize that it is just plain stupid locating a new factory or large parts of your supply chain in a country that looks increasingly like it is willing to go to war in order to rewrite the maps of Asia. That’s way FDI is increasingly being diverted from China to other destinations in Asia—and at least partly why the Chinese economy remains stagnant.

That said, for some corporations like Apple and Cisco and GE that have fallen too deep into the Chinese risk pool, there appears to be no going back. Rather than retreat or hedge, these lemming-like corporations are simply doubling down—hoping against hope that a single spark in the East or South China Seas won’t start a prairie fire that burns their factories and dreams in China down.

It will be interesting to see how this all turns out—keeping in mind the Chinese curse “may you live in interesting times.” At a minimum, Beijing’s aggression is taking an ever bigger bite out of its FDI apple—with severe collateral damage to its economy.

The lesson here—which may be too late for the Chinese hegemon—is this: Sometimes, the best economic policy is peace and the status quo, not aggression and revanchism.

Article Link to the National Interest:

A Vote Against Trump Is Not A Vote For Hillary

An imperfect foreign-policy address from the Democratic frontrunner.

The National Interest
June 3, 2016

Hillary Clinton offered a compelling case against voting for Donald Trump in the upcoming presidential election. But the arguments she made on her own behalf were far weaker. It was easy for her to go after Trump: all she had to do was quote the inanities and insanities that pass for Trump’s national-security policy. And she did. 

She rightly noted that Trump seems to have no problem contemplating the spread of nuclear weapons, whether to Japan, South Korea or elsewhere. She pointed out that he also seems to have no concern about the outbreak of nuclear war between Japan and North Korea, quoting him accurately on that subject: “Good luck, enjoy yourself folks.” Likewise, she cited his equally ludicrous assertions that “maybe Syria should be a free zone for ISIS” and that he “know[s] more about ISIS than the generals do.”

She pummeled Trump on his readiness to leave Europe to its own devices if the allies do not increase their own defense spending; presumably, she also takes issue with her former boss, who complained about “free riders” in his now-infamous Atlantic interview. She rightly stressed that Trump seems far too cozy with Russia’s Vladimir Putin than American national interests would dictate. Her assertion that “if Donald gets his way they’ll be celebrating in the Kremlin” may be less exaggeration and closer to the truth. And she was on the mark when tearing into him for his attitude toward Mexicans, Muslims and women.

Where Clinton fell short, however, was when she began to extol her own virtues and those of the Obama administration. She vigorously defended the Iran nuclear agreement (formally known as the Joint Comprehensive Plan of Action), claiming that it was she who led the way in imposing “crippling sanctions” that brought Tehran to the table. In fact, she and her administration colleagues resisted the imposition of additional sanctions until they were virtually forced by the Congress to accept them. She repeated the president’s flawed argument that the only choices available were either war or consummation of the deal with Tehran. She deftly glossed over the fact that the administration’s self-imposed deadline gave Iran the upper hand in the negotiation, however, which led among other things, to the absence of any constraints upon Iran’s development of long-range missiles capable of delivering nuclear or other weapons throughout the Middle East and beyond. Her promise to “distrust but verify” and to employ military action in response to Iranian violations of the agreement rings hollow in light of her silence in the face of the administration’s current efforts to enable European business to evade American sanctions.

Clinton had nothing to say about the Libya fiasco—what could she say?—nor about her inability to bring about any movement in the moribund Israeli-Palestinian “peace process.” She did talk tough when it came to ISIS, arguing that America needs to “take out” its strongholds in Syria and Iraq by intensifying the air campaign and supporting Arab and Kurdish forces on the ground. She was silent regarding the 2012 Obama “red line” speech, which the president delivered while she was still serving as Secretary of State. And while it is true, as Clinton asserted, that she was in the Situation Room watching the SEALS eliminate Bin Laden, it was not she who made the decision to do so. She was a privileged spectator; nothing more.

Clinton also was silent regarding her views on trade, though she was quick to bash Trump for his readiness to ignite a trade war with China. In fact, while her tone might be less inflammatory than her soon-to-be Republican rival for the presidency, in practice, it is not much different. Having once supported the NAFTA agreement, as well as the Trans-Pacific Partnership, she now claims that she regrets both decisions. Opposition to free trade is the canary in the coal mine of neo-isolationism; and Clinton therefore may simply be a half-step behind Trump’s “Fortress America.”

Clinton has nevertheless become the darling of the neocons. This should come as no surprise, since their views on national security matters were never far from the liberal interventionism she espoused while Secretary of State, while most neoconservatives are quite liberal on domestic issues. In fact, one of the archdeacons of neoconservatism, Reuel Marc Gerecht, told National Public Radio that both he and the other hundred or so Republican signers of the open letter attacking Trump’s national-security policy were now Clinton supporters.

Gerecht and several others who signed that letter may indeed now align themselves with Clinton. But not all. Some of those who signed the letter may well vote for the Libertarian candidate; others may write in a name; still others may simply skip the presidential line and vote the Republican down-ticket; and, should Trump backtrack from his zanier positions, some might bring themselves to vote for him. Many, like this writer, simply have not made up their minds what course they will take. But one thing is for certain: under no circumstances will they cast their vote for Hillary Clinton.

Article Link to The National Interest:

Russia Pounds The Achilles’ Heel Of America’s ISIS War

U.S.-backed rebels are cheek by jowl with al Qaeda—giving Russian jets an excuse to bomb the hell out of them.

By Nancy A. Youssef
The Daily Beast
June 3, 2016

In the last week, Russia has stepped up its attacks in northern and western Syria, and the U.S. has cried foul, claiming Russia is only pretending to target terrorists.

“Despite claims they are focusing on [al Qaeda in Syria] and [ISIS], Russia and [Syrian President Bashar al-] Assad have primarily targeted the moderate opposition,” a U.S. intelligence official explained to The Daily Beast. “Moscow’s offer of joint operations with the United States [against ISIS] was a blatant attempt to deflect attention from his targeting of moderate opposition, and sadly, innocent Syrians trying to survive the disaster Assad has created. By continuing to back Assad, it appears Moscow has squandered the opportunity presented by the cessation of hostilities to stabilize the situation in Syria.”

Russia has a completely different version of this story. The Kremlin says some of the U.S.-backed rebels not only work with al Qaeda but refuse to sever the relationship. Therefore, it is not Russia’s fault that U.S. allies are working so closely with a terror group and that Russia accidentally strikes U.S.-backed rebels in its the war against extremists in Syria.

And the fact is, the Russians aren’t totally wrong. Some of the U.S.-backed rebels do team up with al Qaeda. The latest Russian-led assault in Syria has made it harder for the U.S. to convince those groups to break those terrorist ties. It’s a situation that further exposes the Achilles’ heel of the American strategy in Syria: the line between terrorist and “moderate rebel” is pencil-thin.

The claims and counterclaims by the United States and Russia are the latest iteration in the battle of who is a legitimate target in counter-terror operations inside Syria. The debate was resurrected this week after the country has suffered its worst bombardment in months. A purported wave of Russian strikes earlier this week on hospitals in opposition-held parts of the city of Idlib killed at least 60.

In addition to the city of Idlib, Russian and Syrian government airstrikes have concentrated on the neighboring province of Aleppo, home to Syria’s largest city, and Daraya, a Damascus suburb under siege by the regime. In recent weeks, Russia has supported Syrian forces in Aleppo, moving troops from the city of Tadmour, U.S. defense officials told The Daily Beast.

Russia has denied targeting anyone other than al Qaeda and ISIS, which are excluded from a so-called cessation of hostilities that took effect in February. But terrorists are clearly not the only casualties in the Russian air attacks. According to the Syrian Observatory for Human Rights, Russian air strikes have killed more than 2,000 civilians, including 500 children and 300 women, since Russia’s intervention began on Sept. 30.

The U.S. believes that Russia has set its sights on the rebels in the latest campaign to weaken opponents to Assad by conflating opposition groups with al-Nusra Front, al Qaeda’s franchise in Syria.

Last month, before the latest assault, Secretary of State John Kerry called for rebels to distance themselves “physically and politically” from Nusra. A month earlier, U.S. Special Envoy for Syria Michael Ratney issued a statement urging the opposition to dissociate from terror groups.

It didn’t happen. Last week, Russia claimed they were pausing for a day for rebels to relocate from Nusra. Russia then ramped up its attacks on both rebels and Nusra.

The Russians claim that as opposition areas shrink, rebel forces are increasingly moving toward Nusra-held areas, making it difficult to distinguish between rebels and terrorists.

“I have an impression, which is supported by yet unconfirmed facts, that these [moderate] groups intentionally occupy al-Nusra front positions in order to prevent al-Nusra from being attacked…Perhaps those supporting al-Nusra are interested in breaking down the ceasefire and doing everything to force a military solution [of the Syrian crisis]. This would be totally unacceptable,” Russian Foreign Minister Sergei Lavrov told Sputnik News last month.

What appears to be happening is that in critical areas of the war the rebels are pinched between Nusra and the Russian bombardments. And when the Russians see Nusra arriving, they point out its presence and declare the strike legitimate, experts believe.

“It’s a self-fulfilling prophecy because Russian bombardments have weakened critical mainstream opposition defenses, requiring Nusra to deploy reinforcements, after which Russia can point to Nusra and say that Russian strikes have targeted Nusra all along,” said Jennifer Cafarella, a Syria analyst at the Washington-based Institute for the Study of War.

To be sure, it has been clear for years that the U.S.-allied anti-Assad rebels in Syria lean on al Qaeda’s military prowess for their survival. Some U.S. officials stress that Nusra and opposition forces currently are working together on occasion and that such cooperation is not born out of shared ideology but practical wartime necessity.

Kerry’s growing push for the opposition to distance itself from Nusra became all the more difficult this week, after the latest rise in air assaults on the opposition. Simply put, the opposition needs Nusra’s help to survive, experts said. Indeed, the opposition working with al Nusra is the best defense for civilians who are victims of the ramped up air campaign and the threat of a regime ground advance. This week, reports emerged of civilians fleeing Idlib after the attacks on the hospitals.

“The opposition does not have enough military capability to preclude defeat. In the absence of that, they have chosen an alliance with Nusra. An alliance does not equal shared objectives or ideology for most groups,” Cafarella asserted.

All the while, ISIS has seized numerous villages from U.S.-backed rebels in northern Aleppo and is positioned to take Azzaz. These opposition forces face defeat without increased U.S. support.

In the short term, there is nothing to stop Russia from continuing its attacks on Nusra and opposition groups.

The Geneva talks are, at best, tenuous. The chief negotiator resigned earlier this week in protest against the regime’s refusal to allow humanitarian aide into besieged areas and in objection to Russia’s air campaign.

The United Nations has so far not followed through on a pledge to make humanitarian airdrops into rebel-held areas without Assad’s permission. A June 1 deadline set by the United Nations International Syria Support Group passed with no action.

“The failure, once again, of the ISSG to deliver on its promise to intervene confirms that Russia has freedom of action in Syria,” Cafarella told The Daily Beast.

Article Link to the Daily Beast:

Friday, June 3, Morning Global Market Roundup: Asia Stocks Edge Up As Markets Look To U.S. Jobs Data For Fed Clues

By Nichola Saminather and Hideyuki Sano
June 3, 2016

Asian shares advanced on Friday as traders awaited U.S. jobs data later in the day, with subdued activity in many markets underscoring investor wariness over rising prospects of a near-term Federal Reserve rate hike.

Europe looks set for a similar start, with financial spreadbetters expecting Britain's FTSE 100 to open up 0.5 percent, and Germany's DAX and France's CAC 40 to each rise 0.4 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.5 percent, setting it up for a rise of 0.4 percent for the week. Japan's Nikkei closed up 0.5 percent, paring losses for the week to 1.1 percent.

Chinese shares recovered from a lackluster start, with the CSI 300 index trading up 0.7 percent and the Shanghai Composite climbing 0.4 percent, putting both on track for weekly gains of more than 4 percent.

Hong Kong's Hang Seng index rose 0.4 percent, set for an advance of 1.7 percent for the week.

Markets expect U.S. employment data due at 1230 GMT to show a non-farm payroll increase of about 164,000 and 0.2 percent rise in average wage earnings in May.

The data will be followed by a speech from Federal Reserve Chair Janet Yellen on Monday, the last chance for the Fed to communicate with markets before it begins a blackout period ahead of its policy meeting on June 14-15.

"If we see a job figure that is largely in line with market consensus and if Yellen maintains a positive tone on rate hikes, I think the chance of a rate hike in June is pretty high," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.

Currently U.S. money market futures are pricing in only about 20 percent chance of a hike in June and 60 percent by July.

Ahead of the two key events, Wall Street shares held firm, with the S&P 500 gaining 0.28 percent to 2,105.26, mostly led by 1.3 percent rises in the healthcare sector.

It now only needs to rise about 1 percent to set a closing record.

In recent weeks global markets have been puzzling over what the Fed will do in the near term as relatively upbeat U.S. data have been eclipsed by a still-sluggish global economy and worries over the risk of Britain exiting the European Union.

"Markets are pricing in smaller chances of a hike partly because of worries about 'Brexit'. That is also something that could influence the Fed," Ichikawa added.

The uncertain global backdrop was underlined by the European Central Bank, which on Thursday predicted consumer price growth would remain below target through 2018 as it struggles with cheap energy feeding into the price of other goods and services.

The ECB kept its negative rates unchanged, with President Mario Draghi saying stimulus from previously approved and yet to be implemented measures were expected to work its way through the system.

German debt yield hit a three-week low of 0.109 percent on Thursday after the ECB gave a cautious economic outlook.

The euro was little changed at $1.11545 on Friday, after sliding from this week's high of $1.1221 touched early on Thursday.

Against the yen, it last stood at 121.14 after falling to a three-year low of 121.01 yen in the previous session.

The yen gained 0.2 percent to 108.645 per dollar, after hitting a two-week high of 108.5 earlier in the session, a move some market players attributed to disappointment over a lack of a clear plan on stimulus from Japanese Prime Minister Shinzo Abe. It is poised for a gain of 1.6 percent for the week.

The yen tends to strengthen when there is bad news on the economy because it is often used as a funding currency for investment in higher-yielding riskier assets.

The dollar index, which tracks the greenback against a basket of six major peers, was flat at 95.508.

Oil prices were supported, with international benchmark Brent futures continuing to trade above the $50 a barrel level seen on Thursday for the first time in seven months, after the latest drawdown in U.S. crude stockpiles offset OPEC's failure to set a ceiling for its output.

Brent was steady at $50.04, headed for a rise of 1.5 percent for the week.

U.S. West Texas Intermediate (WTI) crude futures was also flat at $49.19 a barrel. It had tumbled more than $1 earlier in the week, which set it up for a loss of 0.3 percent for the week.

OPEC failed to agree on a clear oil-output strategy on Thursday as Iran insisted on steeply raising its own production, although Saudi Arabia's new oil minister promised not to flood the market and sought to mend fences within the organization.

Gold is headed for its fifth consecutive weekly decline, weighed down by the uptick in risk appetite and shift of investments to equities.

Spot gold was little changed at 1,210.80 an ounce, poised for a drop of 0.1 percent for the week.

Article Link to Reuters:

Oil Holds Above $50 After OPEC Meeting

By Henning Gloystein
June 3, 2016

Brent oil prices held around $50 a barrel on Friday following an OPEC meeting that failed to agree on output targets, but which was seen as supportive as Saudi Arabia pledged not to flood the market with more fuel.

The Organization of the Petroleum Exporting Countries (OPEC) failed to agree to a clear oil-output strategy on Thursday as Iran insisted on raising production to regain market share lost during years of sanctions, which were lifted in January.

Analysts still took away positives from the meeting in Vienna, as Saudi Arabia showed restraint.

"We will be very gentle in our approach and make sure we don't shock the market in any way," Saudi Energy Minister Khalid al-Falih told reporters.

As a result, Brent crude futures held above $50 per barrel on Friday, trading at $50.19 per barrel at 0647 GMT, up 15 cents from the last settlement and almost double January lows.

U.S. West Texas Intermediate (WTI) crude futures were trading up 9 cents at $49.26.

Despite the failure to agree on a joint policy, analysts said that rivals Iran and Saudi Arabia both got what they wanted from the meeting.

"Both sides have achieved their underlying aims; Iran's production remains unconstrained and Saudis policy of allowing the market to rebalance through price is still in place. Non-OPEC supply has fallen and OPEC has gained market share," BNP Paribas said.

Given that Iran's facilities cannot increase exports by much more and that Saudi Arabia pledged restraint just as supplies are disrupted elsewhere - especially in Nigeria, Venezuela, Libya and the United States - traders said that the OPEC meeting was supportive of oil prices.

"The rate of global stock build has fallen and the elevated stocks will begin to erode from the start of 2017, providing scope for price improvement," the bank said.

Bank of America Merrill Lynch said that rising oil prices were also being "exacerbated by seasonal dynamics, as well as robust trend gasoline consumption growth in the U.S., India, and even China."

The U.S. bank said that "fueled by the lower prices, oil consumption around the world is booming on less efficient use, less substitution effects, and more economic demand."

Strong demand in Asia was also reflected by a jump in refining margins especially for diesel and jet fuel.

For diesel, traders said a record heat-wave in south and southeast Asia had pushed up fuel demand to operate air conditioners, while jet fuel demand was soaring because of Asia's booming air travel.

Article Link to Reuters:

Boy Abandoned In Japan For Being Naughty Found Alive, Unharmed

By Elaine Lies
June 3, 2016

A Japanese boy abandoned in a dense forest by his parents for being naughty was found alive and unharmed on Friday, nearly a week after his disappearance set off a massive search that kept the nation riveted.

Seven-year-old Yamato Tanooka was discovered in a building on a Japanese military base around 4 km (2.5 miles) from where he disappeared last Saturday after his parents left him by the side of a road, reportedly as discipline for throwing stones at cars.

"One of our soldiers was preparing for drills this morning and opened the door of a building on the base, and there he was," a member of Japan's Self-Defence Forces told NHK national television.

"When he asked 'are you Yamato?' the boy said yes. Then he said he was hungry, so the soldier gave him some water, bread and riceballs."

Yamato was taken to hospital for checks but was healthy except for low body temperature and would be kept overnight as a precaution, a doctor told a news conference.

A tearful Takayuki Tanooka, the boy's father, thanked rescuers for their efforts and apologized for causing trouble.

"We've reflected on what we did and it was really excessive," Tanooka said, his voice shaking.

"We - well, we loved him before, but I hope to give him even more attention now," he said.

Yamato's parents first said he disappeared while they foraged for edible plants, but later told police they had left him by the road to discipline him after he threw stones at people and cars.

They said when they drove back a few minutes later the boy had disappeared. The area is so remote that residents of the region say they rarely go through it.

The boy somehow managed to survive for nearly a week in the densely forested area, where night temperatures fell as low as 7 degrees Celsius (45 Fahrenheit) and heavy rain had fallen, despite wearing only a t-shirt and jeans.

Yamato said he had "walked through the mountains" until he found the building, which was unlocked. He drank water from a nearby faucet and slept on mattresses spread on the floor.

The search for Yamato gripped Japan. At its peak, it involved several hundred shouting rescuers beating through heavy bush, as well as soldiers on motorbikes and police on horseback.

News programs gave regular updates throughout the week, and NHK sent a news flash when he was found.

The incident set off a flood of social media comment, with most of those posting comments lambasting the parents for their carelessness. On Friday, most expressed relief.

"To be honest, I was certain of a sad result. As the parent of a 7-year-old myself, all I can say is that I am really, really happy," one wrote.

Article Link to Reuters: