Tuesday, July 19, 2016

Tuesday, July 19, Night Wall Street Roundup: S&P Pulls Back From Record; Dow Notches Eighth Day Of Gains

By Lewis Krauskopf
July 19, 2016

The S&P 500 pulled back from record highs on Tuesday, while the Dow industrials edged up for an eighth straight day of gains, as investors digested mixed earnings reports amid lowered expectations for global economic growth.

Netflix's (NFLX.O) disappointing quarterly results weighed on the S&P 500 and the Nasdaq, while Johnson & Johnson's (JNJ.N) strong earnings and forecast helped prop up the Dow.

The International Monetary Fund cut its global growth forecasts for the next two years, citing uncertainty over Britain's looming exit from the European Union.

Even with the economic concerns triggered by Britain's recent vote, the S&P 500 and Dow have hit record highs in the past week. But investors are closely watching U.S. corporate earnings for signs of whether the momentum for equities can be maintained.

"There’s enough uncertainty out there in a market that’s done pretty well as of late to cause people to take some money off the table today," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

The Dow Jones industrial average .DJI rose 25.96 points, or 0.14 percent, to 18,559.01, setting another closing record. The Dow's eighth straight session of gains marked its longest winning streak since March 2013.

The S&P 500 .SPX lost 3.11 points, or 0.14 percent, to 2,163.78 and the Nasdaq Composite .IXIC dropped 19.41 points, or 0.38 percent, to 5,036.37.

The S&P 500 had closed at a record high on Monday.

Eight of 10 S&P sectors finished lower. Materials .SPLRCM and energy .SPNY shares lagged as a rise in the U.S. dollar put pressure on oil and other commodities denominated in the currency.

Second-quarter earnings for S&P 500 companies are expected to fall by 4.3 percent, according to Thomson Reuters I/B/E/S, as reporting season kicks into gear this week.

"If you see a lot of disappointment and disappointing outlooks, or confusion over Brexit and what that’s going to mean to some companies, you could see the market pull in and take some profits," said Tim Ghriskey, chief investment officer of Solaris Asset Management in New York.

Netflix slumped 13.1 percent after its subscriber numbers missed estimates. It was one of the biggest drags on the Nasdaq and the S&P 500.

Goldman Sachs (GS.N) dropped 1.2 percent, with most of its businesses under pressure even as the Wall Street bank reported a higher quarterly profit.

Shares of health insurers were stung by reports that U.S. antitrust officials plan to block Anthem's (ANTM.N) acquisition of Cigna (CI.N) and Aetna's (AET.N) takeover of Humana (HUM.N).

After the market closed, Microsoft (MSFT.O) shares rose 4 percent following its results. During regular trading ahead of the report, the company's shares fell 1.6 percent.

Declining issues outnumbered advancing ones on the NYSE by a 1.43-to-1 ratio; on Nasdaq, a 1.87-to-1 ratio favored decliners.

The S&P 500 posted 23 new 52-week highs and 1 new low; the Nasdaq Composite recorded 70 new highs and 28 new lows.

About 5.6 billion shares changed hands in U.S. exchanges, well below the 7.5 billion daily average over the past 20 sessions.

Article Link to Reuters:

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Oil Prices Fall On Oversupply Concerns Despite Output Cuts

By Keith Wallis
July 19, 2016

Oil prices eased on Tuesday as concerns over a crude and refined fuel glut outweighed an expected cut in U.S. shale production and a probable further draw in U.S. crude inventories.

Crude prices fell more than 1 percent in the previous session after worries about potential supply disruptions stemming from an attempted coup in Turkey proved unfounded.

"Prices are a bit softer in the Asian trading period - traders and investors are torn which way prices are going to break. It's a knife edge between optimism and pessimism," said Ben Le Brun, market analyst at Sydney's OptionsExpress.

The market is waiting for U.S. crude stocks data on Tuesday and Wednesday to help give direction to prices, he said.

Brent crude slipped 11 cents to $46.85 a barrel as of 0657 GMT after finishing the previous session down 65 cents, or 1.4 percent.

U.S. crude, known as West Texas Intermediate (WTI), fell 11 cents to $45.13 a barrel after settling 71 cents, or about 1.6 percent, lower in the previous session.

Fuel inventories in the United States, Europe and Asia are brimming despite this being the peak summer driving season, leading traders to store diesel on tankers at sea amid wilting demand growth. With landed oil product storage nearly full as well, there is little support for any sustained recovery in crude prices even as output tapers.

U.S. shale oil production is expected to fall in August for a tenth straight month, by 99,000 barrels per day (bpd) to 4.55 million bpd, according to a U.S. drilling productivity report on Monday.

Further weighing on supply, U.S. commercial crude oil inventories likely fell by 2.2 million barrels last week, a Reuters poll of analysts showed on Monday. [API/S] [EIA/S]

That would be the ninth consecutive week stocks have fallen. The poll was taken ahead of weekly oil stocks reports due on Tuesday from the American Petroleum Institute (API) and on Wednesday from the U.S. Department of Energy's Energy Information Administration (EIA).

Giving some support to prices, China's crude oil imports - which slowed partly due to seasonal refinery maintenance in May and June - could rebound in the second half of the year as refineries there further diversify sources of supply, shipbroker Banchero Costa (Bancosta) said in a report on Tuesday.

China's crude imports grew 14.2 percent during January to June, with most of the gains coming from huge increases in supply from Russia, Oman, Iraq and Brazil, said Ralph Leszczynski, head of research at Bancosta. 

Article Link to Reuters:

Tuesday, July 19, Morning Global Market Roundup: Asian Shares Dip, Crude Oil Extends Losses

July 19, 2016

Asian shares slipped on Tuesday as a downturn in crude oil curbed enthusiasm from fresh record highs on Wall Street, prompting investors to take profits on recent market gains.

The subdued mood was expected to extend into European trading, with financial bookmakers at CMC Markets calling Britain's FTSE 100 .FTSE to open 16 points lower, Germany's DAX .GDAXI to open down 32 points, while France's CAC .FCHI was seen down 15 points.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was down 0.3 percent, off session lows but still moving away from a nine-month high touched last week which put it into technically overbought territory.

China's yuan steadied against the dollar, a day after slipping below the psychologically important 6.7 level for the first time in more than five years. Still, traders expect downward pressure on the currency to persist.

China stocks were lower, with the CSI300 index .CSI300 of the largest listed companies in Shanghai and Shenzhen down 0.7 percent and the Shanghai Composite Index .SSEC down 0.6 percent.

On Monday, the Dow Jones industrial average .DJI and the S&P 500 .SPX both hit new peaks on hopes that declining U.S. corporate earnings are turning around. [.N]

"It's hard to maintain consistent optimism when markets attain such high levels, and some profit-taking is natural," said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank in Tokyo, who noted that weaker oil prices were taking their toll on related sectors.

Pressure remained on crude oil prices after they settled down more than 1 percent on Monday, as rising stockpiles of crude and refined fuel intensified fears of another major supply glut. [O/R]

Brent crude LCOc1 was 0.2 percent lower at $46.86 a barrel, after shedding 1.4 percent on Monday. U.S. crude CLc1 was also down 0.2 percent at $45.13, after dropping 1.6 percent overnight, with investors mixed on oil's near-term direction.

"Prices are a bit softer in the Asian trading period - traders and investors are torn which way prices are going to break. It's a knife edge between optimism and pessimism," said Ben Le Brun, market analyst at Sydney's Options Express.

Japan's Nikkei stock index .N225 ended up 1.4 percent, as markets reopened after a public holiday on Monday and responded to a weaker yen.

In the previous week, the benchmark index had gained 9.2 percent to notch its biggest weekly gain since December 2009, helped by Wall Street as well as expectations that the Bank of Japan will deliver further stimulus as early as its next policy meeting later this month.

Japanese policymakers won't go as far as funding government spending through direct debt monetization, but might pursue a mix of aggressive fiscal and monetary expansion to battle deflation, according to sources familiar with the matter.

A failed coup in Turkey had dented risk sentiment and bolstered the perceived safe-haven yen before it ran its course. On Monday, Turkey purged its police force after rounding up thousands of soldiers and called for the United States to hand over a cleric that the Turkish government accuses of being behind the takeover attempt.

The dollar took a step back after climbing to more than three-week highs against the yen. It was last down 0.1 percent at 106.09 yen JPY=, after rising as high as 106.33 earlier in the session, its highest since June 24.

The euro EUR= was steady against the dollar at$1.1074.

The European Central Bank will hold a regular policy meeting on Thursday, its last one before an eight-week summer break. It is not expected to take any additional easing steps.

Instead, ECB President Mario Draghi is likely to appeal to governments to do more to bolster the euro zone economy in the wake of Britain's vote last month to exit the European Union.

Some bond traders believe the ECB might address scarcity of bonds it can buy under its 1.7 trillion euro stimulus program, with more than a half of German bonds now ineligible.

The dollar index .DXY, which gauges the greenback against a basket of currencies, edged slightly higher to 96.584.

Spot gold XAU= was slightly down at $1,327.70 an ounce, after dropping as much as 1 percent on Monday. [GOL/]

Article Link to Reuters:

North Korea Fires Three Ballistic Missiles In Show Of Force

By Jack Kim and James Pearson
July 19, 2016

North Korea fired three ballistic missiles early on Tuesday which flew between 500 and 600 kms (300 and 360 miles) into the sea off its east coast, South Korea's military said, the latest in a series of provocative moves by the isolated country.

The U.S. military said it detected launches of what it believed were two Scud missiles and one Rodong, a home-grown missile based on Soviet-era Scud technology.

North Korea has fired both types numerous times in recent years, an indication that unlike recent launches that were seen as efforts by the North to improve its missile capability, Tuesday's were meant as a show of force.

"This smells political rather than technical to me," said Melissa Hanham, a senior research associate at the U.S.-based Middlebury Institute of International Studies at Monterey, California.

"I think the number and distance of the missiles lets them remind the ROK (Republic of Korea) of what they are up against," she said, referring to South Korea by its official name.

The launches came days after South Korea and the United States announced a final decision to deploy the Terminal High Altitude Area Defence (THAAD) anti-missile system in the South to counter threats from the North, which had prompted Pyongyang to threaten a "physical response."

"Our assessment is that it was done as a show of force," a South Korean Joint Chiefs of Staff official said at a briefing.

The missiles were launched from an area in the North's western region called Hwangju between 5:45 a.m. South Korea time (04:45 p.m. EDT Monday) and 6:40 a.m., the South's military said, an indication that the North was confident they would not crash on its own territory.

"The ballistic missiles flight went from 500 km to 600 km, which is a distance far enough to strike all of South Korea, including Busan," the South's military said in a statement.

Busan is a South Korean port city in the south.

North Korea has test-fired a series of ballistic missiles in recent months, in defiance of United Nations Security Council resolutions, including intermediate-range missiles in June and a submarine-launched missile this month.

"In addition to the basic goal of enhancing missile units' readiness to fight, it might be a way of reminding their southern neighbors that the site chosen for a THAAD battery in South Korea is within reach," Joshua Pollack, editor of the U.S.-based Nonproliferation Review, said of Tuesday's launches.

South Korea announced last week the THAAD system would be deployed in the southeastern county of Seongju.

In addition to the decision to base a THAAD system in South Korea, the United States recently angered North Korea by blacklisting its leader Kim Jong Un for human rights abuses.

"The threat to our national security is growing very quickly in a short period of time," South Korean Prime Minister Hwang Kyo-ahn told parliament on Tuesday.

Bombs, Missiles, and Sanctions

North Korea conducted its fourth test of a nuclear device in January, and activity at its nuclear test site has increased recently, according to media reports in South Korea and Japan citing government officials, as well as a report by Washington-based North Korea monitoring project 38 North.

Following the latest nuclear test and a February space rocket launch that was widely viewed as a missile test in disguise, the U.N. Security Council imposed tough new resolutions that further isolate North Korea.

While China supported tougher sanctions against its neighbor and ally North Korea, it has sharply criticized the decision to base a THAAD battery in South Korea, saying the move will destabilize the security balance in the region.

China's foreign ministry did not immediately respond to a request for comment on Tuesday's missile launches.

Japan denounced the launches.

"The latest launch is a breach of the UN Security Council resolution and is extremely hazardous to shipping and aircraft and we have strongly protested," the Japanese government said in a statement.

Article Link to Reuters:

Melania Trump Copies Michelle Obama's Speech From 2008

By Richard Valdmanis
July 19, 2016

Aspiring first lady Melania Trump's speech at the Republican National Convention on Monday contained a section strikingly similar to that delivered at the Democratic convention in 2008 by the woman she hopes to succeed in the role.

A Trump campaign official suggested the similarity to Michelle Obama's speech may have been the result of an error by her team of speech writers.

"My parents impressed on me the values that you work hard for what you want in life; that your word is your bond and you do what you say and keep your promise; that you treat people with respect," Melania, the wife of presumptive Republican presidential nominee Donald Trump, told the convention in Cleveland.

"They taught me to show the values and morals in my daily life. That is the lesson that I continue to pass along to our son."

"And we need to pass those lessons on to the many generations to follow, because we want our children in this nation to know that the only limit to your achievements is the strength of your dreams and your willingness to work for them."

That small section of Melania Trump's roughly 15-minute speech, a highlight of the opening day of the convention, was similar to part of Michelle Obama’s speech in 2008 in support of her husband Barack Obama.

"And Barack and I were raised with so many of the same values: that you work hard for what you want in life; that your word is your bond and you do what you say you're going to do; that you treat people with dignity and respect,” Michelle Obama said in her speech.

"...And Barack Obama and I set out to build lives guided by these values, and pass them on to the next generations," she added.

"Because we want our children, and all children in this nation, to know that the only limit to the height of your achievement is the reach of your dreams and your willingness to work for them."

Before Monday's speech, Melania, a Slovenian-born jewelry designer and former model, told NBC's Matt Lauer: "I wrote it... with as little help as possible."

A spokesman for the Trump campaign called the speech a success, but suggested her writers may have mistakenly injected some borrowed language.

"In writing her beautiful speech, Melania's team of writers took notes on her life's inspirations, and in some instances included fragments that reflected her own thinking," Jason Miller, Trump's senior communications advisor, said in a statement.

Article Link to Reuters:

Federalist Dream Not Dead Yet, At Least In The European Parliament

Undaunted by Brexit, leading MEPs are busy writing manifestos for more Europe.

Politico EU
July 19, 2016

Donald Tusk, Jean-Claude Juncker and other leaders now preach a gospel of Euro-realism, but there’s still one place where it’s safe to make bold proposals for reform of the EU in the post-Brexit era, even if they have little chance of becoming reality: the European Parliament.

Several leading MEPs are crafting reform manifestos that call for everything from more integration among eurozone countries to full-on reform of the EU treaties. Authored by members of three of the assembly’s biggest political groups — the center-right European People’s Party, the center-left Socialists, and the centrist Liberals — the reports are already setting off alarm bells with Euroskeptics across the Parliament.

Few European leaders want a repeat of the tortuous negotiations that preceded the ratification of the Lisbon Treaty in 2007. Those who matter, especially Germany’s Angela Merkel, have already rejected calls for treaty change in response to the U.K.’s decision to exit the EU. Even Juncker, president of the European Commission and, to many, the archetypal federalist, has said that he is “not an advocate for a United States of Europe.”

But given the Parliament’s role in Brexit — it doesn’t have a formal part to play in the negotiations themselves but must approve the final agreement — EU leaders will not be able to completely ignore the advice they’re about to get from MEPs on how to fix Europe.

One of the leading MEPs drafting a report, Guy Verhofstadt, insists the Parliament should even play a big role in the Brexit talks themselves — similar to the one it had during negotiations in February on reforms aimed at keeping the U.K. in the EU. “If we aren’t involved from day one [in the U.K.’s exit negotiations] we won’t give our consent,” said Verhofstadt, leader of the assembly’s centrist Alliance of Liberals and Democrats for Europe.

The federalists in the Parliament think now is the best time to overhaul the EU, arguing that the rise of anti-EU populist sentiment across the Continent is being misread. Verhofstadt argues that people “are rejecting Europe as it is now,” not as it could be. Citing findings from Eurobarometer, the EU’s official polling agency, he believes people want more action in areas ranging from securing the EU’s borders to establishing a digital single market.

This line of thinking is reflected in the parliamentary reports, which overlap substantially with each other. A draft report from center-right German MEP Elmar Brok and center-left Italian MEP Mercedes Bresso looks at what can be achieved within the Lisbon Treaty as it currently stands, such as streamlining how legislation is made in Brussels and enhancing the role of the Parliament in eurozone governance.

Verhofstadt calls for full-blown treaty change in order to strip out the various exemptions that allow countries to opt in and out opt out of EU rules, such as those that allow the U.K. and Ireland not to participate in the Schengen area. Instead he wants to create an “associate status” for those countries that don’t want to fully participate in the EU.

Proposals from Socialist French MEP Pervenche Bères and German center-right MEP Reimer Böge focus on the idea of giving the eurozone its own budget capacity, reflecting themes in the other two reports.

Parliament’s Heavy Hitters

A view that permeates all the reports is that the intergovernmental approach — which relies on finding consensus among an increasingly fractious group of EU countries — is not working. Bresso describes this process as “thousands of meetings whose result is too little, too late.”

Verhofstadt said the coordination is deliberate. By ensuring that each of the reports is drafted with cross-party support, the federalists hope to secure a majority of MEPs to ratify them after the summer. The positions would not have any legal force, but if adopted by a majority vote of the Parliament there would be some political pressure on EU leaders to take them into account.

It is also no coincidence that the lead MEPs hail from Germany, Italy and France, founding EU member countries whose support would be needed for any major constitutional reform.

"National blocs are likely to cringe at the notion of “more Europe”

But finding common ground among Parliament’s political groups beyond a core of stalwart federalists may prove difficult. Aside from the fact that proposals from the constitutional affairs committee, the home of two of the reports, are rarely taken seriously by the rest of the Parliament, most of Böge’s and Brok’s German compatriots are extremely hostile to any calls for further eurozone integration. A much less far-reaching proposal to introduce a European deposit insurance scheme is snarled up in both the Council and the Parliament’s economic affairs committee due in large part to German objections.

And outside the German center-right delegation, other national blocs are likely to cringe at the notion of “more Europe,” either with or without an overhaul of the Lisbon Treaty.

Gunnar Hökmark, a Swedish MEP in the same group as Böge and Brok, said “a lot of people agree with Elmar, but a lot of people have other views.” He dismissed calls for a new eurozone finance minister, suggesting that Europe “already has a finance minister and he or she is called the Stability and Growth Pact.”

That was echoed by Romanian MEP Siegfried Mureşan, also from the EPP and a member of both the budget and economic affairs committee, who said “the rules are correct” and dismissed calls for major institutional reform.

Aside from internal politicking within the EPP, many MEPs wonder why anyone should bother calling for more Europe at a time when Euroskepticism is on the rise in many countries. Syed Kamall, British leader of the European Conservatives and Reformists bloc and a supporter of Brexit, said recently, “Whatever the challenge, more Europe is not always the answer. Ignoring the results of national elections and referenda and saying ‘we continue anyway’ is not a good enough response.”

Even Bresso, co-author of one of the reports, thinks that “now is not a good time for those who want to advance the ‘ever closer union.'”

Article Link to Politico EU:

Federalist Dream Not Dead Yet, At Least In The European Parliament

Washington Must Call Erdogan’s Bluff

By Benny Avni
The New York Post
July 19, 2016

Turkish President Recep Tayyip Erdogan, a Putin-like autocrat, is seizing on last week’s coup attempt to further solidify his one-man hold on power and turn once-secular Turkey into a country ruled by Islamic principles.

And now he’s threatening to torpedo our war against the Islamic State.

Erdogan wants the United States to extradite his political rival, Fethullah Gulen, whom he accuses of having a role in the failed coup and who happens to live in Pennsylvania.

Meanwhile, back in Turkey, tens of thousands of army troops, cops, judges, junior government officials, independent organizations and members of the press have been rounded up. There’s little evidence all these people participated in last week’s clumsy attempt by some members of the army to overthrow him, but Erdogan is determined to purge the country of all opponents.

Topping that list is Gulen, an Islamic cleric who’s lived since 1999 at a compound in the Poconos after being granted asylum. Erdogan is accusing Gulen of orchestrating the failed coup — never mind that Gulen denounced the coup early on and denies any connection.

And Erdogan has an ace up his sleeve: The Incirlik airbase in Turkey is central to NATO’s air war against ISIS. It’s been shut since Saturday, and on Monday there were reports of major Turkish operations against remaining anti-Erdogan plotters there. Incirlik, for now, is off limits for stationed US troops.

Turkey has yet to file an official extradition request, but Erdogan has been hinting that if we cough up Gulen, we’ll get back our access to the Incirlik base — or, as Prime Minister Binali Yildirim put it Monday, not doing so would “question our friendship.”

Should we? And who’s Gulen, anyway?

He has established a vast chain of charter schools in Turkey and elsewhere, including in the United States. His followers are deeply engrained in Turkey’s judiciary, police and the business community — making him part of the “deep state” that Erdogan is so paranoid about.

And he was once Erdogan’s closest ally. Both wanted to deepen Islam’s involvement in the country’s political and social life, reversing the secularism of the founder of modern Turkey, Mustafa Kemal Ataturk. (Persecution by the then-secular Turkish government won Gulen US asylum in 1999.)

After Erdogan’s rise to power in 2003, Gulen, now in Pennsylvania, remained a political ally, using his vast network of followers and funds to promote Erdogan’s goals. But as Erdogan turned increasingly authoritarian (and, some say, after Gulen criticized Ankara’s overreaction to the 2010 Mavi Marmara incident that led to a break with Israel — fences that were only recently mended), the alliance ended.

Erdogan started accusing Gulen of running a “deep state” — a network of influential power brokers undermining the elected government. He arrested Turkish Gulenists and demanded the United States extradite the preacher on various charges. In an attempt to strip his permanent-resident status and send him over for trial in Turkey, Erdogan in 2014 had Turkey file criminal-conspiracy charges against Gulen. This year, a judge in Scranton, Pa., dismissed a lawsuit filed by Turkey against Gulen.

But last week’s disastrous coup attempt changed the game. Now Erdogan has an opportunity to realize his dream of becoming a modern-day Islamic caliph. Getting rid of Gulen is central to that plan. Erdogan’s supporters and Turkey’s numerous conspiracy theorists are already saying Gulen’s presence on US soil is proof America was behind the coup attempt.

No wonder Erdogan is willing to threaten ceasing his cooperation in the war against ISIS unless America hands Gulen over: This is personal.

Secretary of State John Kerry’s reaction thus far has been prudent: He demanded unassailable evidence before handing Gulen over. But that’s not enough.

America has indicated we’ll stand behind Erdogan’s “democratically elected government.” And, yes, Erdogan’s been repeatedly elected — but now we must demand a return to true democracy.

Kerry can counter Erdogan’s Incerlik gambit with some conditions of our own: You want Gulen? Start cooperating, fully and unconditionally, in the war against the Islamist terrorists who threaten us all (terrorists you’d been tacitly supporting until very recently).

And end your war on Turkey’s freedoms, rather than intensify it. Prove, for example, your courts are independent, and reverse the arbitrary suspension of 3,000 judges and prosecutors since the coup.

Oh, Kerry may want to add in his behind-the-scenes negotiations: If you even dare to again hint that you’d kick us out of Incirlik, we’d relocate and take our troops to Kurdish Iraq.

In other words, we must do the un-Kerry.

Article Link to the New York Post:

The Air Is Getting Thinner As The S&P Climbs Higher

By Doug Kass
Real Money
July 19, 2016

It's almost as if nothing is predictable any more -- in life, in the economy or in the markets.

Consider the fact that:

* Desperate violence and terrorist attacks are melding together to create a disturbing overlay to our everyday lives.

* Both the Democratic and Republican presidential nominees' flaws are driving this year's election campaign, causing a disconnect between politics and the reality of our everyday lives.

* The widening gap in incomes and net worth is sparking a rejection of the status quo, both here and abroad.

* Global economic growth's weak trajectory and Washington's stark partisanship have combined to produce fiscal inertia. This puts the responsibility for stimulus on central banks, which have in many cases taken interest rates into negative territory. This has disadvantaged savers and put investors and traders on an arguably dangerous path of malinvestment in a search for yield.

Now, I've often remarked that we've never seen so many possible market and economic outcomes before in history. Yet many "talking heads" still express a certainty of view on business TV and elsewhere.

However, I've learned as my career has progressed over the past four decades that uncertainty and ambiguity aren't market-friendly. Instead, valuations suffer proportionately to the degree of uncertainty and risk.

That basic interrelationship hasn't changed despite the market's recent euphoria.

In other words: "Tick, tock, tick, tock ..."

Don't Trust This 'Goldilocks' Market

"The market can remain irrational longer than you can remain solvent."

-- John Maynard Keynes

With the S&P 500 seeming to rise ever higher, Wall Street's consensus appears to be that we're seeing the return of "Goldilocks" conditions -- an improving U.S. economy coupled with less chance of a Federal Reserve rate hike. Stocks continue to defy all odds and reject untoward events of almost any kind, but I remain wary.

It's true that stocks and bonds' recent relentless climb has calmed most investors -- making them far less fearful of a possible major downturn (what I call the Bull Market in Complacency). It's also a fact that plenty of people aren't heavily invested these days, having turned away from stocks after the 2008 crash even though a new bull market began in March 2009. Thus, many retail and institutional investors are "offsides" in a world that's filled with plenty of uncertainties.

There are many reasons for this, not the least of which is what I call the "Screwflation of the Middle Class." After all, plenty of middle-call investors face a squeeze in disposable income and simply don't have the cash to invest. They have to pay rising costs of living instead.

As such, I see a weak foundation for the markets, along with a disappointing trajectory for global economic growth. The market's potential upside simply doesn't look very promising to me when compared to its possible downside.

I see numerous structural headwinds, and I continue to see more good short opportunities for stocks than long ones. I also have virtually no fixed-income holdings.

I suspect that we'll first see a rejection of the "Goldilocks" theory in U.S. Treasury yields, which I think will eventually climb. In fact, I continue to believe that we've already seen a generational low in bond yields.

Personally, I took in my short of the SPDR S&P 500 ETF SPY on Friday night amid the near 15-handle drop in S&P 500 futures that followed the attempted coup in Turkey. I did this almost robotically, based on the failure of previous geopolitical developments to dent the S&P 500. I assumed that I'd get a chance to reshort Spiders this week at higher prices.

I'll likely continue to trade on the short side in the months ahead as long-side opportunities deteriorate and risks expand. If I were investing a large personal portfolio and/or a substantial-sized pension plan, I'd simply have too much respect for my capital to do anything other than reduce long exposure in the face of today's arguably poor risk-vs.-reward quotient.

Of course, short selling isn't for everyone. After all, as John Maynard Keynes famously noted in the quote above, markets can remain irrational longer than you can remain solvent (or in this case, short).

That's why I say that most traders and investors should consider simply staying in cash, as "Cash Is the Alternative" to stocks (or "C.I.T.A.").

The bottom line: The investment air is getting thinner and thinner on Wall Street as the S&P 500 climbs ever higher.

Article Link to Real Money:

The Alarmists Need to Relax: Even 1968 Wasn't 1968

By John Tamny
Real Clear Markets
July 19, 2016

It's a rather pricey part of Manhattan to live in today, but in the 1960s New York City's Harlem neighborhood was very poor and very unsafe. Full of restaurants and bars today, fifty years ago it was known as a place to avoid; particularly at night.

Interesting about Harlem, a locale marked by race riots in the ‘60s, was how very prosperous it was back then in a global sense. Though poor by lofty U.S. standards, historian Steven Hayward points out in the first volume of his impossibly good two part book, The Age of Reagan, that per capita income in 1964 Harlem "would have ranked it among the five richest nations in the world."

Hayward's broader point, one too often forgotten by commentators eager to find major meaning in everything, is what perhaps helped drive unrest in the upper part of Manhattan in the ‘60s. While it's not uncommon to suggest poverty is the root of frustration within the citizenry, Hayward suggested that "revolutionary turmoil is often fueled more by rising expectations [my emphasis] than repressive conditions."

This is worth remembering in consideration of all the supposed present-day tumult, not to mention all the commentary from left and right about how bad things are in the United States. Relative to what? Bad times for us are boom times elsewhere. The living conditions of the poor in the U.S. would rate as middle to upper middle class in other parts of the world. Is the U.S. really in turmoil right now, or are spoiled Americans angry that what is great isn't spectacular? It's something to think about.

At present we're hit by daily commentary about a "war on cops" inside a "nation divided" by all manner of things, including economic inequality. To believe the headlines these are bad times, but maybe not.

About policing in the U.S. today, it should first be said how awful the recent murders were in Baton Rouge and Dallas. All lives matter, including those of the police whose job it is to serve and protect us. Still, the underreported good news is that the supposed "war on cops" is vastly overstated.

As libertarian scholar Radley Balko pointed out last year, not only is violence against the police near all-time lows, so is the rate of violence against police in the U.S. well down. The number of firearm-related deaths for police has plummeted over the last 100 years. The number of deaths perhaps unsurprisingly hit a high during the Prohibition era, and that's worth bringing up as way of suggesting that an end to the worthless drug war would make policing exponentially safer than it presently is.

As for a "divided America," let's hope. Never explained is why it's a good thing when America is united on issues. Unity plainly makes it a lot easier for Washington to impose a lot of economy and freedom-sapping one-size-fits-all solutions on us that will make us worse off. What makes the U.S. great isn't that we're a unified blob; rather the genius of the United States is a fierce individuality protected by the Constitution. Mobs can vote for a lot of dumb things, at which point we should cheer on our continued division.

Certainly the rise of politicians like Donald Trump and Bernie Sanders signals something amiss, this column has written about currency devaluation as the historical driver of societal tumult, but let's not forget the Harlem stat. While the U.S. has very rich and very poor, it can't be forgotten that the lifestyles of the U.S.'s very poor are pretty grand by global standards. So while some of the general U.S. frustration is surely economic, it's more realistically rooted in the U.S. economy not growing fast enough as opposed to not growing. While economic growth is easy, and is as simple as reducing or removing the tax, regulatory, trade tariff and floating money barriers to production, it's always worth stressing that the U.S. has more of an expectations problem than a growth problem. Sorry, but we're spoiled.

All of which brings us back to 1968. It's been suggested more than once that the murders in Dallas and Baton Rouge alongside broad political unrest signal something bigger societally; perhaps a return to the divisions of 1968. The problem there is that the alleged 1968 upheaval is just that. To see why, it's time to return to Hayward's The Age of Reagan once again.

Though the riots at the 1968 Democratic Convention in Chicago give off the impression now of a Democratic party torn apart by Vietnam, Hayward reminds readers that the Republican party was even more divided, and the Republican nomination for president "much more in doubt than the Democratic nomination." Vice President Hubert Humphrey, a defender of the Vietnam War who wasn't on any Democratic primary ballot, had the nomination well in the bag owing to broad support among party leaders. As for Robert F. Kennedy's campaign, he wasn't terribly popular on the hard left such that Humphrey welcomed his candidacy as a way of Kennedy publicly exposing his weakness with the Democratic voters.

Kennedy was assassinated after the California primary that he won, and that Humphrey hoped he would win given his view of him as a non-threat. As for what this signaled societally, Hayward writes that,

"The assassination of Robert Kennedy two months after the killing of Martin Luther King has forever blurred and romanticized the memory of 1968. Like King's killing, Kennedy's killing set off a fresh round of America-bashing among liberals. ‘The world today,' Arthur Schlesinger Jr. said the day after, ‘is asking a terrible question which every citizen of this republic should be putting to himself: What sort of people are we, we Americans?'"

But as Hayward pointed out, the Kennedy tragedy had very little to do with "we Americans." As he noted, Sirhan Sirhan "was a foreign born radical whose diary said, among other things, ‘I advocate the overthrow of the current president of the f-----United States of America...I firmly support the Communist cause and its people.'" Did either tragic death have an impact on an allegedly insurgent left in the U.S.? Hayward thinks not; writing that by '68 "the left had little use for King, and no use for Kennedy." King was shot in Memphis while helping bus strikers, while Kennedy was seen as too far to right of the hard left on Vietnam. On the domestic policy front Kennedy was way too far to the right. No less than Ronald Reagan observed about him that "I get the feeling I've been writing some of his speeches."

The 1968 "revolution" or unrest was anything but. As opposed to a divided nation, the U.S. was much more unified than is commonly thought. Seemingly more than it is today. On the subject of the Chicago riots that generated a big police response, Hayward cited a poll showing that "71 percent of Americans thought Chicago's security measures were justified; 57 percent thought the police had not used excessive force, while 25 percent thought the police had not used enough force." Just as the statistics show there's no "war on cops" today, there certainly wasn't one in 1968. There wasn't even a sentiment problem as the polling data unearthed by Hayward reveal.

What was the problem then, much like now? Probably one of context. Americans are once again spoiled. So used to good times are we that even a slight slowdown in the continuous increase in our living standards causes us to make a lot of noise. Importantly, the noise magnifies everything, including tragedies that it well should. But let's not confuse what's happening now with something bigger than it is. Expectations can be cruel, and all this talk of some kind of bigger meaning to the present gives us something to talk about, but little of substance.

Indeed, the context is weak. Things keep getting better, though not as rapidly as they have been. Reduce the governmental barriers to production, and we'll be back on the fast track; all the talk of 1968 put to bed. As it should. There's no story about 1968. 1968 wasn't even 1968.

Article Link to Real Clear Markets:

Turkey Faces Its Iran 1979 Moment

Empowered by surviving a coup, Erdogan may be tempted to encourage an Islamist counterrevolution.

By Soner Cagaptay 
The Wall Street Journal
July 19, 2016

Turkey is at a pivotal point in its history following the failed coup attempt of July 15. President Recep Tayyip Erdogan, having survived the coup plot, won fresh legitimacy and gained a new ally: religious fervor in the streets. Mr. Erdogan can use this impetus either to become an executive-style president, or he can encourage the forces of religion to take over the country, crowning himself as an Islamic leader.

Though the incremental acquisition of power has been more his style in the past, the powerful eruption of Islamic support for him over the weekend may prove too tempting. This is Turkey’s Iran 1979 moment—will a brewing Islamic revolution overwhelm the forces of secularism?

As the coup plot was unfolding on Friday night, Mr. Erdogan appealed to religious sentiments in the country, rallying his supporters to launch a counter-coup. On his orders, calls for prayer were issued from Turkey’s over 80,000 mosques at 1:15 a.m.—not a time when people are supposed to be praying. The strategy worked, the call to prayer acted as a call to political action, and religious Turks took to the streets in defiance of the secularist military. Together with pro-government police forces, they overpowered the military’s botched effort.

Since July 15, pro-Erdogan sentiments in Turkey have been running high. Calls to prayer continue throughout the day (Islam requires only five calls to prayer at set times daily), reminding religious Turks of their political duty to stand with the president.

Mr. Erdogan, a politician with an Islamist pedigree, came to power in 2003 as prime minister and head of the ruling Justice and Development Party (AKP). At that time, he followed a policy of economic growth to build a support base. He also moved away from Islamist politics, instead embracing reform and seeking European Union membership.

After winning electoral victories in 2007 and 2011 on a platform of economic good governance, however, Mr. Erdogan turned staunchly conservative and authoritarian.

He now regularly cracks down on freedoms of expression, assembly and association. He has shut down or taken over media outlets. He bans access to social media, locks up journalists and sends the police to harass opposition rallies.

Mr. Erdogan also promotes efforts to impose religion: In December 2014, Turkey’s Higher Education Council, a government-regulated body, issued a policy recommendation that mandatory courses on Sunni Islam be taught in publicly funded schools to all students, even ones as young as age 6.

In 2014, Mr. Erdogan, acceding to term limits, stepped down as prime minister and as the head of the AKP. He instead assumed the presidency—a formerly weak office that he has been steadily transforming. The coup gives Mr. Erdogan an excuse to press ahead with his plans to cobble together a parliamentary majority; he intends to amend Turkey’s Constitution and take over the posts of prime minister and AKP chairman in addition to being president.

This process, which would make Mr. Erdogan the most powerful person in Turkey since the country became a multiparty democracy 1950, fits into his gradualist approach to consolidating power. At the same time, it presents a risk: In the two most recent elections, Mr. Erdogan’s AKP has maxed out at 49.5% support, and although the president’s popularity has risen since the coup, there is no guarantee that this bump will last until the next elections, which, depending on when Mr. Erdogan calls them, could be as late as next year.

Enter a second, quicker path to power: Islamist revolution. Erdogan supporters—who took to the streets to defy the coup, and who have continued to rally throughout the country since then—are not the garden-variety conservative AKP supporters, but rather Islamists, and even jihadists. Over the weekend, pro-Erdogan mobs captured and beat soldiers who had supported the coup. Images were reportedly posted online, in the Islamic State style, of a soldier who had been beheaded.

Unfortunately, jihadist sentiments in Turkey have become increasingly noticeable lately, in no small part due to Mr. Erdogan’s education policy, as well as his Syria policy, which has allowed Islamist radicals to use Turkey as a staging ground. According to a recent poll by the Pew Research Center, 27% of Turks don’t view Islamic State unfavorably. Mr. Erdogan can now harness these forces to usher in an Islamist revolution.

Revolutions don’t require majorities, but rather angry and excited minorities that are willing to act violently to take power. Following the failed coup plot, Turkish politics has not settled down. Mr. Erdogan is still not in charge of the whole country, which is why as of Sunday afternoon he hadn’t returned to the Turkish capital. It is not yet safe for him. Religious fervor is running high; mosques continue to call for prayers throughout the day. Islamists and jihadists who are angry at the military roam the streets, while most Turks of other political outlooks are scared to leave their homes.

If Mr. Erdogan were to pump up religious fervor further, he could convert the religious counter-coup d’état into an Islamist counter-revolution, ending Turkey’s status as a secular democracy. Adding to the temptation is the fact that the military, divided and discredited in the public eye following the failed coup, is in no position to prevent a counterrevolution.

But an Islamist revolution would carry risks. Turkey would be stripped of its NATO membership, exposing the country to nearby enemies, including Russia. It would also almost certainly lead to an economic meltdown, hurting Mr. Erdogan’s power base.

The first scenario, in which Mr. Erdogan uses the coup to consolidate power, is more likely than the second, but the chances of an Islamist revolution have never been higher in Turkey.

Article Link to The Wall Street Journal:

Merrick Garland Deserves A Vote - For Democracy’s Sake

Playing political football with a Supreme Court nomination erodes the rule of law and leaves major issues in limbo.

By Barack Obama
The Wall Street Journal
July 19, 2016

For more than 40 years, there has been an average of just over two months between a president’s nominating someone to the Supreme Court and that person’s receiving a hearing in Congress. It has now been more than four months since I nominated Merrick Garland,chief judge of the U.S. Court of Appeals for the D.C. Circuit—and Congress left town for a seven-week recess without giving him a hearing, let alone an up-or-down vote.

This is much more serious than your typical case of Washington dysfunction. And if we allow it to continue, the consequences of congressional inaction could weaken our most important institutions, erode public trust and undermine our democracy.

Every Supreme Court nominee since 1875 who hasn’t withdrawn from the process has received a hearing or a vote. Even when the nominee was controversial. Even when the Senate and the White House were held by different parties.

But Chief Judge Garland isn’t controversial. He has more federal judicial experience than any Supreme Court nominee in our history. He is widely respected by people of both political parties as a man of experience, integrity and unimpeachable qualifications. The partisan decision of Senate Republicans to deny a hearing to a judge who has served his country with honor and dignity is not just an insult to a good man—it is an unprecedented escalation of the stakes. It threatens the very process by which we nominate judges, regardless of who our next president is. And it should concern every American who cares about the rule of law and upholding the institutions that make our democracy work.

Here’s why. Historically, when a president nominates a Supreme Court justice—regardless of when in the presidential term this occurs—the Senate is obligated to act. Senators are free to vote their conscience. But they vote. That’s their job.

If Republicans in the Senate refuse even to consider a nominee in the hopes of running out the clock until they can elect a president from their own party, so that he can nominate his own justice to the Supreme Court, then they will effectively nullify the ability of any president from the opposing party to make an appointment to the nation’s highest court. They would reduce the very functioning of the judicial branch of the government to another political leverage point.

We cannot allow the judicial confirmation process to descend into an endless cycle of political retaliation. There would be no path to fill a vacancy for the highest court in the land. The process would stall. Court backlogs would grow. An entire branch of government would be unable to fulfill its constitutional role. And some of the most important questions of our time would go unanswered.

This is troubling for two reasons. First, a functioning judiciary—at every level—is essential to the business of the nation. For example, last month, a deadlocked Supreme Court was unable to reach a decision on several major issues, leaving the law itself in limbo. Across the country, judicial vacancies are leaving some lower courts so overwhelmed they can barely make it through their dockets. Twenty-nine judicial emergencies have been declared by lower courts across the country. This has real implications for jurisprudence, real financial costs to the judicial system and real consequences in the lives of people awaiting the outcomes of those cases.

Second, treating the Supreme Court like a political football makes the American people more cynical about democracy. When the Supreme Court becomes a proxy for political parties, public confidence in the notion of an impartial, independent judiciary breaks down. And the resulting lack of trust can undermine the rule of law.

So here’s an idea. Democrats and Republicans in the Senate could agree to give Chief Judge Garland a hearing when they return from their extended recess, while also committing to give every future qualified Supreme Court nominee a hearing and a vote within an established time frame. It’s a good idea that my predecessor, President George W. Bush, suggested during his time in office. This reasonable proposal would prevent the confirmation process from breaking down beyond repair, and help restore good faith between the two parties.

In my travels around the world as president, I have seen how hard democracy is—how it takes more than a proclamation or even an election. Democracies depend on the institutions we build, the rules upon which the nation is founded, and the traditions, customs and habits of heart that guide our behavior and ensure that political differences never override the founding ideals that bind us. And it is on us—all of us—to preserve and protect them.

Now we need Congress to act. We need senators to demonstrate that, once again, America has the capacity to rise above disagreements and maintain a fidelity to the values that, for 240 years, have made this extraordinary experiment a success. That’s what the American people deserve—and it’s what makes ours the greatest country the world has ever known.

Article Link to the Wall Street Journal:

America’s Nukes Aren’t Safe In Turkey Anymore

But is there anywhere else in Europe that would take them?

Foreign Policy
July 19, 2016

Among the candidates for most iconic image of this past weekend’s attempted coup in Turkey has to be the many videos of Turkish F-16s, hijacked by the mutineers, flying low over Istanbul and Ankara. Eventually, those planes seem to have bombed the parliament. There were rumors that they considered shooting down the plane of President Recep Tayyip Erdogan.

What’s clear is that mutineers managed to keep the F-16s in the air only because they were able to refuel them mid-flight using at least one tanker aircraft operated out of Incirlik Air Base. Eventually Turkish authorities closed the airspace over Incirlik and cut power to it. The next day, the security forces loyal to the government arrested the Turkish commander at the base. (The images of him being escorted away in handcuffs are in the contest to qualify as the weekend’s most iconic.)

In retrospect, it is understandable why the Turkish government closed the airspace over Incirlik, even if it did temporarily disrupt air operations against the Islamic State in Syria. But that is in retrospect. In the moment, it raised a disquieting thought. There are a few dozen U.S. B61 nuclear gravity bombs stored at Incirlik. Does it seem like a good idea to station American nuclear weapons at an air base commanded by someone who may have just helped bomb his own country’s parliament?

To be sure, coups have occurred in other countries where the United States stores nuclear weapons. Turkey, Greece, and South Korea have all seen military juntas seize control while U.S. nuclear weapons were present on their soil.

Counterintuitive as it might seem, nuclear weapons have tended not to be a primary target of coup plotters. This has been true for countries that host U.S. nuclear weapons stationed abroad, but also for coup attempts in France and the Soviet Union. My friend Bruno Tertrais found the French case so peculiar that he wrote a great little paper about it.

The weapons at Incirlik are stored in vaults in the floor of the protective aircraft shelters. The shelters are inside a security perimeter. The United States and its NATO allies recently invested $160 million on security upgrades for nuclear weapons, the most visible aspect of which is new security perimeter at Incirlik visible in satellite images. And, of course, if the coup plotters have accessed a weapon, it would require someone to enter a code to arm it. It would not be a simple thing to snatch and use a U.S. nuclear weapon. Coup plotters generally have other things to worry about.

At the same time, if a hostile junta were to seize control of a country with U.S. nuclear weapons stationed in it, things might be dicier. An airbase is a not a fortress; it is not intended to withstand a siege by the host government any more than an embassy might. Use control devices such as “Permissive Action Links” can prevent someone from easily using a stolen weapon, but may eventually be bypassed. There has long been talk about developing security features that would render a lost or stolen weapon a “paperweight” but that’s mostly been just that — talk.

So while the precautions to protect U.S. nuclear weapons at Incirlik are reasonable, they are based on a series of assumptions about the stability and friendliness of the country. The site of the Incirlik base commander being frog-marched off the base is disquieting precisely because it undermines such assumptions.

The security situation in Turkey has been deteriorating for some time. Earlier this year, the Department of Defense evacuated military and civilian families from Incirlik, citing concerns about terrorist threats. Then, in April, two goons from a local right-wing group attempted to “sack” a U.S. airman on base. (Sacking is just that — throwing a sack over someone’s head, in this case retaliation for a perceived slight against Turkish soldiers.) This occurred about one kilometer from the weapons perimeter. And now an official in the Erdogan government insinuated that the United States may have played a role in the coup, largely on the basis that a cleric named Fethullah Gulen, who has a large number of followers in Turkey, resides in exile in the United States.

Given the general climate of instability, you might ask why U.S. nuclear weapons are even stored in Turkey in the first place. That’s especially relevant because one of the peculiar things about U.S. gravity bombs in Turkey is that there are no planes available to deliver them. In other NATO states with U.S. nuclear weapons, the host nation maintains so-called dual capable aircraft that, in theory, would be provided with U.S. nuclear weapons to use in a crisis. (Stop guffawing, it’s unseemly.) But unlike Belgium, Germany, Italy, or the Netherlands, there are no aircraft in Turkey certified to carry nuclear weapons. And the U.S. only rotates combat aircraft through Incirlik, so there are no U.S. aircraft certified to carry nuclear weapons there either. In other words, Incirlik is a glorified storage depot.

I humbly submit that we could find a more stable location to serve as such a depot.

There’s nothing stopping the United States from immediately removing the weapons from Turkey, just as it pulled them out of Greece in 2001 once it was clear the weapons there were not safely protected. Those weapons could come back to the United States.

Some analysts argue this is not the time to reduce the number of U.S. nuclear weapons deployed to NATO member states, not with the recent downturn in relations with Russia. Fine; if they are so important, then they could go to another NATO member state. The United States has built plenty of nuclear weapons storage vaults in nearby European countries.

Who should get the honor? Scratch Belgium and the Netherlands off the list, even if you like the chocolate. The local security at those bases is crap, with activists repeatedly having breached security at them. Incirlik and Aviano Air Base in Italy, by contrast, are U.S.-operated air bases with U.S. forces providing security for the nuclear weapons stored there. They recently got new security perimeters, paid for by NATO states including the United States. Aviano could potentially take some of Incirlik’s nuclear weapons, but it has only a moderate number of available vaults.

That leaves U.S.-operated air bases in the United Kingdom (Lakenheath) and Germany (Ramstein). Though these locations are not without drawbacks. Neither appears to currently host nuclear weapons and would require security upgrades. The Germans are increasingly skeptical of American nuclear strategy. And my British friends keep wittily saying they aren’t sure that the United Kingdom counts as a politically stable country anymore. But, obviously, either country would seem to be a better choice for the nuclear weapons currently sitting in Turkey. During the coup, there were reports that Erdogan sought asylum in Germany but was rejected. Maybe Chancellor Angela Merkel would consider asylum for the bombs, instead.

There is, of course, another reason that Incirlik is a depot for U.S. nuclear weapons. Even if there are no planes to deliver the bombs, some U.S. officials felt that having nuclear weapons deployed outside of Europe and on Iran’s doorstep helps deter Tehran from using any nuclear weapon it might acquire, thus reassuring America’s allies and partners in the Middle East.

In theory, the Iran deal (formally the Joint Comprehensive Plan of Action) manages the problem of an Iranian bomb. In practice, though, Washington clearly feels it needs to reassure allies and partners who are more frightened by the fact that it made a diplomatic agreement with Tehran than they were by Iran’s unconstrained nuclear program. While I find that reasoning bizarre, I accept that withdrawing nuclear weapons to Germany or the U.K. might unnerve some partners in the Middle East. But, after the events of the past weekend, leaving them in place seems positively terrifying.

Article Link to Foreign Policy:

Why Iran Needs To Fight Saudi Arabia To Forge Peace

Despite all the challenges it poses for Iran, Saudi Arabia’s regional policy and strategic behavior is still not perceived as a threat in Tehran — but could failing to respond be a mistake?

By Hassan Ahmadian
July 19, 2016

TEHRAN, Iran — Turki al-Faisal Al Saud’s call for regime change in Tehran, let alone his mere participation at the July 9 Mujahedeen-e-Khalq’s (MEK) annual conference in Paris, is an unprecedented move against Iran by a high-ranking Saudi royal.

Prior to Faisal’s statements at the MEK convention, the Saudi deputy crown prince, Mohammed bin Salman, paid a 10-day visit that started on June 14 to Washington and then Paris, during which he stressed the necessity to counter the "Iranian threat.” Meanwhile, as has been the norm during his tenure so far, Saudi Foreign Minister Adel al-Jubeir, who accompanied Mohammed, went even further in his criticism of Iran's regional policy, demanding that Tehran stop “exporting its revolution.”

This situation has in fact been prevalent ever since King Salman bin Abdul-Aziz Al Saud was crowned in January 2015. As such, one can assume that there has been a paradigm shift in Riyadh's regional policy, which encompasses relations with Tehran. At this point, Saudi Arabia has crossed so many unwritten rules in its dealings with Iran that some observers anticipate a war between the two nations.

Yet despite all these changes, there are no parallels in Iran’s policy toward Saudi Arabia. Even with reference to the abovementioned developments, Iran did not bother to reciprocate — at least in terms of the level of its reaction. The question as to why it did not react has two logical answers. The first would be that Iran accepts the Saudi accusation that it is the main source of instability and terror in the region. However, given internal debates on regional policy in Tehran, this assumption has no basis. The second possible answer is that Iranian elites do not perceive the Saudi moves against Iran as being of importance, in terms of their effect. This answer is more relevant in Iran’s internal debates.

In fact, Iranian elites tend to exclude Saudi Arabia from their list of perceived national security threats, even though Riyadh has ironically been the main source of threat against Iran during the past five turbulent years in the Middle East. Iranians have been witnessing aggressive acts on the part of Saudi Arabia in Iraq, Syria, BahrainYemen and now even within Iran. Yet, Iranian elites still refrain from viewing Riyadh as a threat.

In the Iranian debate on Saudi Arabia’s regional policies, there have always been two viewpoints: The first and most prevalent one stresses the need for dialogue and diplomatic engagement with Riyadh as the best way to stop its hostile attitude toward Iran. Indeed, the majority within Iran’s diplomatic and political and even security apparatus hold this stance. The second and more marginal viewpoint takes Riyadh’s hostility as a threat and advocates the creation of an infrastructure to counter this threat. Notwithstanding its reasoning, this point of view has never made its way to foreign policy decision-making in Iran. Thus, Iran’s formal bureaucracy has never moved to perceive Riyadh as a threat and hence never dealt with it as such.

This perception stems from a tradition in Iran’s worldview that divides Middle Eastern states into independent and dependent ones. In the view of Iranian elites, at least in the 1980s and 1990s, Saudi Arabia was dependent and could not initiate nonaligned policies. According to this point of view, even the Saudi support for Iraq during the 1980-88 Iran-Iraq War was not an independently initiated Saudi policy. Thus, Saudi hostility toward Iran at that time was perceived as being somewhat beyond the will of the Saudi state. Even though this understanding of Saudi Arabia has changed in Iran during the past decade, Tehran’s approach toward Riyadh has not. As such, within the current framework of the Iranian understanding of Saudi Arabia, differences with Riyadh are seen as manageable via diplomacy. This was the case during the tenures of former Reformist President Mohammad Khatami (1997-2005) as well as Principlist President Mahmoud Ahmadinejad (2005-13), and has continued under incumbent President Hassan Rouhani since 2013, too.

Another reason why Tehran in the past did not consider Riyadh as a threat was the perception of the latter’s military as weak and security as fragile. In this reading, a country with limited military might is not considered as a direct threat. Accordingly, Riyadh was perceived as so vulnerable in terms of its military and security that it would be deterred from posing any sort of direct threat against Iran. In other words, the logic behind this perception was that the risk of putting oneself in jeopardy would pre-empt threats against others. Despite Saudi Arabia’s huge military expenditure over the past decade, this perception has not changed. Indeed, there have even been voices in Tehran who despise Riyadh for what they perceive of as the Saudis' purchasing arms that they cannot use.

Despite all the changes in Saudi foreign policy, Riyadh is still perceived in Tehran almost the same way it was a decade ago. Although the voices demanding a stronger stance and a revision in Iran’s policy toward Saudi Arabia are getting louder, it seems that Iranian elites, even if they feel a need for change, still stick to the previous policy of preferring diplomatic engagement to resolve differences to avoid yet more escalation with Saudi Arabia. Thus, the main objective in Tehran is to de-escalate the situation or at the very least stop any further escalation.

Hence, despite all the challenges it poses, Riyadh’s regional policy and strategic behavior is still not perceived as a threat in Tehran. At this point, the question is thus whether Iran’s approach to de-escalation will eventually backfire. Indeed, the Iranian perception of Saudi Arabia as not constituting a direct national security threat appears to be well understood in Riyadh and may even be part of Saudi decision-makers’ calculations in their dealings with Iran. As such, Saudi decision-makers may have latitude that their Iranian counterparts are lacking. Taking developments last year as an example, Riyadh appears to not have missed an opportunity to escalate things with Tehran, in the knowledge that the Iranians will not respond in kind.

Thus, Iran’s policy of seeking to not create another source of instability in the Middle East by avoiding counter-escalation in its dealings with Saudi Arabia may, in fact, very well paradoxically constitute a threat to both regional stability and Iranian national security. By avoiding a shift in policy toward Saudi Arabia, Iran may be inviting Saudi escalation against both Tehran and its allies while at the same time tying its own hands in terms of its responses. In other words, current Iranian policy can best be characterized as an inverse security dilemma that may cause more trouble than it solves.

Article Link to Al-Monitor:

Why Iran Needs To Fight Saudi Arabia To Forge Peace

Five Takeaways From Day 1 Of The GOP Convention

Doom descends on Cleveland as Trump’s speakers offer a sour view of the state of the union.

By Glenn Thrush
July 19, 2016

CLEVELAND — Darkness fell in Cleveland.

Ronald Reagan, the candidate Donald Trump most aspires to be, cheerily conjured the image of “Morning in America” in both of his winning presidential campaigns, blunting the edge of the harder-angled conservatism of his earlier career. On the first night of Donald Trump’s Republican National Convention -- personally stage-managed by the nominee -- a blackout curtain of unrelenting gloom was lowered on the Quicken Loans Center in service of his slogan “Make America Safe Again.”

A majority of Americans see the country on the wrong track, for sure, but polls don’t illustrate a population gripped by widespread death-metal doom. Yet for about two prime-time hours, viewers were hit with a relentless recitation of death, anger, danger, helplessness, blood, murder, fear and terror – graphic stories about Benghazi, crimes committed by illegal immigrants and out-of-control terrorism abetted by Hillary Clinton.

It was no surprise, given the country’s-on-fire tone of Trump’s primary message (His campaign book was titled “Crippled America,” after all) and to some extent it was an unconventional rendition of a conventional convention tactic: Vividly illustrating the perils so that the nominee, who speaks on Thursday, can offer his white-horse optimistic solution to the nation’s problems.

Still, laying out the case for Trump in such stark terms illustrated the weakness of a campaign he calls “a movement” bigger than himself. There’s a fragility to Trumpism in the absence of Trump’s personal presence – what a bummer it was hearing all that lousy news without the leavening of the candidate’s offbeat humor and the power of his personality.

Here are five takeaways from a first day filled with convention-floor conflict, poor stage management, flashes of powerful anti-Hillary messaging and Melania.

1. Trump is an apprentice at running a convention.

There were moments of clarity and power (Sheriff David Clarke delivered a clarion message for “Blue Lives Matters” – and former New York City Mayor Rudy Giuliani talked about his “big heart”), but for the most part, the shaggy program wasn’t up to the production standards of Trump’s TV shows.

This is not a small matter.

Trump, who has run his campaign on a shoestring and is only now hiring a professional staff, has made the convention a litmus test of his managerial competence. He is supposed to be good at entertaining, and he promised to make the RNC more watchable than the typical speech-and-policy snooze-athons.

Yet for a candidate obsessed with branding, Trump seemed oblivious to the stagecraft Reagan paid such close attention to. Even his big entrance was botched. The band was halfway through “Brown-eyed Girl” – when the sound guy cut off the mics to blare “We are the Champions” so he could stride on stage to introduce his wife and declare, “We are going to win so big!”

Patricia Smith, the mother of one of four Americans killed in Benghazi, was choking back tears, talking about her suffering, and placing responsibility with the former secretary of state. "I blame Hillary Clinton, I blame Hillary Clinton personally for the death of my son,” Smith said.

At that moment, Trump was calling in to FOX News to tell Bill O’Reilly, “I’m probably the least racist person there is.”

And Joni Ernst – a rising star in the GOP whose post-primary endorsement of Trump was critical in spurring consolidation of his support – was stuck in an 11 p.m. slot when most of the audience inside and outside the arena was long gone.

2. Melania was the most effective speaker of the evening. It wasn’t close. 

Trump’s wife did something no other speaker (with the exception of Clarke) managed to do: Deliver a concise message about her husband’s character and compassion without straying from the script or lapsing into rambling self-indulgence.

Despite apparent impediments (lack of political experience, a thick Slovenian accent, and an insistence on calling the man she lives with “Donald J. Trump”), she attempted to soften his image – and laid out of vision of inclusiveness the candidate himself often neglects.

“Donald intends to represent all of the people, not just some of the people,” she added, striking one of the few conciliatory notes in a strident night.

3. A house divided. 

The band played on, and on, and on.

For most of Monday afternoon, the many hundreds of reporters wandering the Quicken Loans Arena trawling for conflict were, instead, treated to what amounted to live hold music, courtesy of former “Saturday Night Live” bandleader G.E. Smith.

Yet behind the scenes (while the cameras focused on 50-something conventioneers awkwardly waltzing to a Rush’s prog-rock classic, “Limelight”) real drama was taking place: A last-ditch and doomed effort by anti-Trump dead-enders to roll back a rule that blocks pledged delegates from ditching the party’s nominee and voting for someone else.

Ultimately, Smith flicked off the amps and politics spilled, sans soundtrack, out into the cable-broadcast open, with much shouting and very little lasting impact. When the chairman called for a voice vote, Trump’s happy army shouted the gloomy Never Trump-ers down, the roll-call demand was ignored, and the opposition shrugged, collected their iPhones, and headed out to consider their shriveling options. “Norma Rae” it wasn’t.

But the incident (and the incidental music intended to mask it) revealed the underlying tension of a convention that threatens to break through the veneer of the mundane, cohesive normalcy of most conventions. The Never Trump movement, led by Virginia delegate Ken Cuccinelli and Utah Sen. Mike Lee (an ally of runner-up Ted Cruz), shocked the less-than-efficient Trump political operation by garnering nearly enough votes to force a roll-call vote on the floor; And while the insurrection was quelled, bad feelings lingered, unsoothed by the nominee’s staff or G.E. Smith’s Telecaster.

4. Kasich, and tired. 

Standard political practice would have dictated that a presidential nominee would avoid provoking civil war on the eve of his own coronation — especially with the symbolic host of his party’s convention. Ha. Ha. Ha.

The sun had barely risen on day one when Paul Manafort (Trump’s designated Adult in the Room) slammed Ohio Governor John Kasich, who has refused to endorse his party’s nominee or even step foot in the arena with him. “He’s embarrassing his party in Ohio,” Manafort said of Kasich – declaring the move “a dumb, dumb, dumb thing.”

5. Gay-friendlier GOP? 

The Republican Party’s 2016 platform remains as socially conservative as always – thanks to the work of religious conservatives allied with Cruz. It includes no mention of LGBT rights or protections and enshrines the concept of marriage as “a union between a man and a woman” despite polls showing that most Americans support same-sex marriage.

The head of the Log Cabin Republicans, the party’s most influential gay, lesbian and transgender rights group declared the language “the most anti-LGBT platform in the party’s 162-year history… Opposition to marriage equality, nonsense about bathrooms, an endorsement of the debunked psychological practice of 'pray the gay away' — it's all in there."

But there was virtually no mention of social issues on Monday and several of the most prominent speakers – including Giuliani and Clarke – went of their way to include diversity of sexual preference as something they think their party should stand for. As important: The audience seemed to take it all in stride.

Article Link to Politico:

Five Takeaways From Day 1 Of The GOP Convention

Republicans' Convention Advertises Their Weakness

By Jonathan Bernstein
The Bloomberg View
July 19, 2016

The highlight of the first day of the Republican Convention was Melania Trump singing her husband's praises. That's what those who just tuned in for the broadcast network coverage saw. It was a solid speech.

The rest of the day -- the part that very few voters watch -- had relatively few mentions of the Republican standard bearer.

The afternoon session was all about dissent: Dump Trumpers were still fighting to get a vote on something, anything, and when denied even a vote they resorted to a floor demonstration, with a couple of delegations actually walking out.

The second half -- the prime time portion, albeit only on CSPAN and the cable networks -- was all about red meat for hard-core Republicans. Benghazi figured prominently. Murderous immigrants figured prominently. Terrorism figured prominently. And the speakers bashed Hillary Clinton and Barack Obama frequently and with as much disdain as they could gather, with several of them saying Clinton belongs in jail.

That sequence of presentations had almost nothing at all for swing voters, who are almost certainly not obsessed with Benghazi, or with the need to say the words "radical Islamic terrorism" as if that's all that's needed to, in the words of the theme of the night, to "make America safe again."

But the two parts of the day go together: Even at the end of the primary season, Republicans still need to appeal to Republican voters because their party is badly split over Donald Trump.

So most speakers on Day 1 of the convention were speaking fully within the conservative closed information loop. It's a (fictional) world in which Obama spent the last eight years apologizing for the U.S. rather than opposing terrorism, a world in which Obama and Clinton support open borders, and so on. Indeed: It wasn't even necessary for most of speakers to bother mentioning what exactly Obama or Clinton had done, or to connect it to any particular bad outcome. Instead, all they needed to do was to make references to "leading from behind" or "bowing," references fully understood by those who listen to lots of conservative talk radio.

As several commentators said on Twitter, it all sounded more like CPAC -- the conservative conference in which conservatives talk to other conservatives -- than like a Republican convention.

I suspect all of this will be quite effective at appealing to Republicans.

The gamble is whether the convention will wind up being labeled "ugly" by the news media. Certainly, the Clinton campaign will encourage the media to talk about xenophobia, scaremongering and demagoguery. Republicans have been effectively painted with those sorts of words before, and they are more vulnerable to it than ever with Trump as their nominee. If you already think that Trump is an authoritarian who is a threat to democracy, then having the convention chant "lock her up" about the other party's nominee sounds even more threatening.

In other words: Republicans keep paying the price for selecting a nominee whom many in the party don't like.

Article Link to The Bloomberg View:

Convention Ruckus Gives Republicans A Clear Choice

By Megan McArdle
The Bloomberg View
July 19, 2016

“I wouldn’t call it hostile. It was spirited and intense.” That was Republican strategist Dan Senor on Bloomberg television, describing the face off between Trump supporters and the anti-Trump insurgents who were trying to force a roll-call vote on the party's convention rules.

The insurgents lost, of course. But that still left open, after the delegates vacated the floor, the question of what, exactly, the pro-Trump forces had won. In one of those little ironies with which life is peppered, I watched Senator Mike Lee of Utah giving an interview to CNN about why he supported the move for a vote, while on the stage, Oklahoma Governor Mary Fallin talked about how the convention was going to “bring us together as one party.” Meanwhile, a few feet from me, delegate Joel Mattila from Washington state was shouting at Mike Lee.

“Call them off, Senator! This is shameful!”

Lee gave him an incredulous look. “To ask for a roll-call vote?"

The Cleveland convention center today showed a party divided as no party has been since 1976, or perhaps, 1968. Three months ago, Trump supporters were moaning about The Establishment and all their tricksy maneuvering against the Donald. Today, I heard anti-Trump delegates bitterly complaining that pro-Trump delegate alternates had contributed to the voice vote, that Trump whips were maneuvering to shut down the effort for roll-call voting, and that the authorities were otherwise steamrolling them. Members of the Colorado delegation walked out in protest.

This is not normal disappointment with an election that didn’t go your way. It’s not even a procedural battle about the rules, though a Louisiana delegate I walked next to certainly waxed lyrical about all the non-Trump reasons that the rules should be changed. Mostly, it’s a battle over what kind of party the Republicans want to be. And in the convention center this evening, the two sides appeared no closer to agreement.

To be sure, I talked to a number of delegates who originally supported someone else, and were now supporting Trump as the only hope to beat Hillary Clinton. But not all of them looked happy about it.

When I asked one delegate from Washington, D.C. whether she had originally been a Trump supporter, she gave me a look that could have stunned an ox at fifty paces. Convention delegates are solid party stalwarts, the sort of people who can be depended on to rally behind anyone who can beat the opposing party come November. So the D.C. delegate's instant, visceral reaction is a problem for the Republican Party.

After the election results have been announced and the bumper stickers and lawn signs have been taken down, that visceral reaction will remain. It marks a deep divide in the party: between the folks who thrilled at the idea of a Trump candidacy, and the ones disgusted by it. Judging from the number of people who shouted for a roll-call vote today, that latter group is not small, even if it's not a majority of the primary delegates.

It’s hard to see how those two groups reconcile any time soon. Right now, at least, they have one thin thread holding them together: the need to unify in order to defeat Hillary Clinton. If Trump loses in November, as still seems very likely, then that thread will snap. Trump supporters will blame the Establishment for a stab in the back; anti-Trump forces will blame his supporters for nominating a candidate so unelectable that he could lose to a lackluster candidate like Hillary Clinton. The rebellion that was put down today could easily turn into a civil war.

The fact is that -- as I suspect Trump supporters are about to find out -- the party’s populist and establishment wings need each other. The populists supply energy, yes, but they are blind to the tedious-yet-necessary business of raising money, running campaigns, building legislative coalitions, and keeping your candidate from alienating too many voters.

The establishment wing obviously can’t win an election without its populists, notwithstanding all the bitter remarks about purging the Trump element from the party. If they want to win elections, they'll probably need to ask themselves a question I once heard offered to a newlywed in some sort of marital crisis: “Do you want to be married, or do you want to be right?”

As of yet, the answer seems to be they want to be “right.” Our nation’s first Republican president once said, “A house divided against itself cannot stand.” Neither can a party.

Article Link to The Bloomberg View: