Monday, December 19, 2016

Doomed To Stagnate?

Eight years ago it took 40 days to get a construction permit. Now it’s 81.

By Bret Stephens
The Wall Street Journal
December 20, 2016

The World Bank, which does many things poorly, does one thing exceptionally well: It publishes an annual survey that scores and ranks countries according to the ease of doing business. Want to better understand the mess Greece is in? In 2006 it took an average of 151 days to enforce a contract in the Hellenic Republic. Today it takes 1,580. Want to measure Israel’s progress? A decade ago, starting a business in the startup nation took about 34 days. Now it takes 12.

What about the United States? When President Obama took office in 2009, the U.S. ranked third in the overall index, just behind Singapore and New Zealand. It has since fallen to eighth place. Eight years ago, 40 days were needed to get a construction permit. Now it’s 81. When President Bush left office, it took 300 days to enforce a contract. Today: 420. As for registering property, the cost has nearly quintupled since 2009, to 2.4% of property value from 0.5%.

Not all the numbers have moved in the wrong direction under Mr. Obama. It takes somewhat less time to pay taxes today, for instance. But the broader trend is clear, and it goes to the heart of the most important debate in—and about—America today. Are we doomed to the long-term economic stagnation that afflicts Japan and Europe, regardless of who’s president? Or can we grow again as we did in the 1980s and ’90s?

The case for stagnation is macro. The labor force is no longer growing the way it used to. Innovation isn’t giving us the same productivity gains as it did in the past. There’s too much saving, not enough investment. Look at all the broad indicators, say the pessimists, and they all point south.

By contrast, the case for growth is micro. There’s nothing “secular” about our low rate of growth, goes the argument: It’s just the result of the never-ending accretion of ever more costly and time-consuming regulations, all of which could, in theory, be overturned at a stroke. These regulations go largely unnoticed by coastal elites because we’re mostly in the business of producing and manipulating words—as politicians, lawyers, bureaucrats, academics, consultants, pundits and so on. But regulations (and those who profit from them) are the bane of anyone who produces or delivers things: jet engines, burgers, pool supplies, you name it.

Words-makers have the benefit of the First Amendment, that great guard against speech regulation, to keep the government at arm’s-length from their work. Things-makers do not. It’s one of the reasons our worlds seem politically so far apart.

In recent months I’ve tried to get a better sense of the things-making world by asking executives in different industries to share their sense of what it’s like to do business in America today. They talk about Sarbanes-Oxley—its punishing auditing requirements. Or Dodd-Frank—the Compliance Blob it has created within banks. Or the Affordable Care Act—the employer mandate, the increased age of dependent “children,” the obscure little taxes for things like the “Patient Centered Outcomes Research Institute.”

Then there’s the rest of the iceberg.

Did you know that a company that is a contractor or subcontractor with the government must, according to recent Labor Department regulations, establish a goal of having 7% of its workforce be disabled? Did you know that, to achieve this goal, “Contractors must conduct an annual utilization analysis and assessment of problem areas, and establish specific action-oriented programs to address any identified problems.” (My emphases.)

Did you know that the Occupational Safety and Health Administration recently banned blanket policies on post-accident drug testing because they may be discriminatory? Did you know that OSHA’s decision to adopt the U.N.’s 2003 Globally Harmonized System of Classification and Labeling of Chemicals required a relabeling and reclassification effort that cost affected companies an estimated $2.1 billion in compliance?

Did you know that a driver who makes a delivery within Seattle’s city limits must earn a minimum of $15 an hour, irrespective of whether his company has a branch in the city? Did you know that San Francisco’s Fair Chance Ordinance forbids employers from asking about convictions or arrests on a job application?

The list goes on endlessly. When those of us in the words-making world use the term “overregulation,” we are mostly putting a name to a concept we rarely experience consciously. On the things-making of life, regulations are experienced every day as a mix of tedium and torment—a drag on profits, time and what used to be the joy of making money in America.

The Mercatus Center at George Mason University recently estimated that regulations have knocked 0.8% off of annual GDP growth since 1980, for a cumulative total of $4 trillion in lost domestic product. Economists trying to explain the puzzle of faltering growth might begin with that estimate. So, too, might those of us in the words-making world, puzzled by the anger out there, seeking to better understand what just happened in American politics.

Article Link To The Wall Street Journal:

Bad News For America’s Workers

By Joseph E. Stiglitz 
Project Syndicate
December 20, 2016

As US President-elect Donald Trump fills his cabinet, what have we learned about the likely direction and impact of his administration’s economic policy?

To be sure, enormous uncertainties remain. As in many other areas, Trump’s promises and statements on economic policy have been inconsistent. While he routinely accuses others of lying, many of his economic assertions and promises – indeed, his entire view of governance – seem worthy of Nazi Germany’s “big lie” propagandists.

Trump will take charge of an economy on a strongly upward trend, with third-quarter GDP growing at an impressive annual rate of 3.2% and unemployment at 4.6% in November. By contrast, when President Barack Obama took over in 2009, he inherited from George W. Bush an economy sinking into a deep recession. And, like Bush, Trump is yet another Republican president who will assume office despite losing the popular vote, only to pretend that he has a mandate to undertake extremist policies.

The only way Trump will square his promises of higher infrastructure and defense spending with large tax cuts and deficit reduction is a heavy dose of what used to be called voodoo economics. Decades of “cutting the fat” in government has left little to cut: federal government employment as a percentage of the population is lower today than it was in the era of small government under President Ronald Reagan some 30 years ago.

With so many former military officers serving in Trump’s cabinet or as advisers, even as Trump cozies up to Russian President Vladimir Putin and anchors an informal alliance of dictators and authoritarians around the world, it is likely that the US will spend more money on weapons that don’t work to use against enemies that don’t exist. If Trump’s health secretary succeeds in undoing the careful balancing act that underlies Obamacare, either costs will rise or services will deteriorate – most likely both.

During the campaign, Trump promised to get tough on executives who outsource American jobs. He is now holding up the news that the home heating and air conditioning manufacturer Carrier will keep some 800 jobs in my home state of Indiana as proof that his approach works. Yet the deal will cost taxpayers $7 million, and still allow Carrier to outsource 1,300 jobs to Mexico. This is not a sound industrial or economic policy, and it will do nothing to help raise wages or create good jobs across the country. It is an open invitation for a shakedown of the government by corporate executives seeking handouts.

Similarly, the increase in infrastructure spending is likely to be accomplished through tax credits, which will help hedge funds, but not America’s balance sheet: such programs’ long track record shows that they deliver little value for money. The cost to the public will be especially high in an era when the government can borrow at near-zero interest rates. If these private-public partnerships are like those elsewhere, the government will assume the risks, and the hedge funds will assume the profits.

The debate just eight years ago about “shovel-ready” infrastructure seems to be a distant memory. If Trump chooses shovel-ready projects, the long-term impact on productivity will be minimal; if he chooses real infrastructure, the short-term impact on economic growth will be minimal. And back-loaded stimulus has its own problems, unless it is managed extremely carefully.

If Trump’s pick for US Treasury Secretary, the Goldman Sachs and hedge-fund veteran Steven Mnuchin, is like others from his industry, the expertise he will bring to the job will be in tax avoidance, not constructing a well-designed tax system. The “good” news is that tax reform was inevitable, and was likely to be undertaken by Speaker of the House Paul Ryan and his staff – giving the rich the less progressive, more capital-friendly tax system that Republicans have long sought. With the abolition of the estate tax, the Republicans would finally realize their long-held ambition of creating a dynastic plutocracy – a far cry from the “equality of opportunity” maxim the party once trumpeted.

Large tax cuts and large expenditure increases inevitably lead to large deficits. Reconciling this with Trump’s promise to reduce the deficit will probably entail a return to Reagan-era magical thinking: despite decades of proof to the contrary, this time the stimulus to the economy brought by tax cuts for the rich will be so large that tax revenues will actually increase.

This story doesn’t end well for Trump’s angry, displaced Rust Belt voters. Unhinged budgetary policies will induce the US Federal Reserve to normalize interest rates faster. Some see incipient inflation (given the low unemployment rate); some believe the long period of ultra-low interest rates has distorted capital markets; and some want to “replenish their ammunition,” so that the Fed can lower interest rates should the economy slow down again.

Trump has argued that the Fed should raise interest rates. The Fed, which took the first step toward normalization in early December, will almost certainly deliver – and Trump will soon regret what he wished for. There’s a good chance that the monetary contraction will outweigh the fiscal stimulus, curbing the Obama growth spurt currently underway. Higher interest rates will undercut construction jobs and increase the value of the dollar, leading to larger trade deficits and fewer manufacturing jobs – just the opposite of what Trump promised. Meanwhile, his tax policies will be of limited benefit to middle-class and working families – and will be more than offset by cutbacks in health care, education, and social programs.

If Trump starts a trade war – by, say, following through on his vow to impose a 45% tariff on imports from China and to build a wall on the US border with Mexico – the economic impact will be even more severe. Trump’s cabinet of billionaires could continue to buy their Gucci handbags and $10,000 Ivanka bracelets, but ordinary Americans’ cost of living would increase substantially; and without components from Mexico and elsewhere, manufacturing jobs would become even scarcer.

To be sure, a few new jobs will be created, mainly in the lobbying shops along K Street in Washington, DC, as Trump refills the swamp that he promised to drain. Indeed, America’s bog of legal corruption is likely to reach a depth not seen since President Warren G. Harding’s administration in the 1920s.

And there really is no silver lining to the cloud that now hangs over the US and the world. As bad as his administration will be for America’s economy and workers, its policies on climate change, human rights, the media, and ensuring peace and security are likely to be no less damaging for everyone else.

Article Link To Project Syndicate:

Uber Fights Self-Driving Law Developed Precisely For Its Situation

Law is for ‘aspirational’ autonomous vehicles, expert says, but Uber tries to use California’s definition to avoid permit.

By Caitlin Huston
December 20, 2016

California’s regulations for self-driving cars were specifically developed for the type of cars Uber Technologies Inc. is sending around San Francisco. Yet the way the law is written could allow Uber to continue testing the cars without following the rules.

Uber launched its self-driving pilot in San Francisco last week, and the California Department of Motor Vehicles quickly ordered the company to stop using the cars until it obtained a permit, under regulations established for companies looking to test self-driving cars. Autonomous vehicles need many miles of driving for the technology to learn and adapt to surroundings so that it can eventually take over the role of driving.

Uber has so far refused to abide by the order, however, saying that the cars it is testing aren't autonomous and therefore not subject to the law. California defines autonomous cars as having “technology that has the capability to drive a vehicle without the active physical control or monitoring by a human operator,” and requires companies with cars that meet this standard to obtain the testing permit from the DMV.

Uber claims that the wording of the law itself means it only applies to cars that are already autonomous. Uber argues that its cars cannot be on the road “without the active physical control or monitoring” of a human, as its test cars have a driver and an engineer in the front seats.

While the fight centers on the vagaries of the law, experts say Uber’s interpretation isn't what the law is meant to enforce.

Bryant Walker Smith, assistant professor of law at the University of South Carolina, said the law is intended to regulate the development of a car that will at one point not need active monitoring, which is what Uber is doing.

“My view of the law that was passed is that it was intended to apply to this kind of vehicle,” Smith said.

Overall, Smith says the statute is for “aspirational” autonomous vehicles. If all companies took it literally like Uber, the statute would likely not apply to any cars in development, as they would have to start out the test with cars that are already fully self-driving.

Uber’s “very literal” argument might succeed if the company were facing a charge in court, Smith said. It doesn't work as well for the current situation, in which regulators are in charge of implementing and communicating their interpretation of the law, he said.

Twenty companies have obtained autonomous-driving test permits from the DMV, including Alphabet Inc. GOOG, +0.43% GOOGL, +0.33% Volkswagen Group of America, General Motors GM, +0.08%which has joined with Uber competitor Lyft — and Tesla Motors Inc.TSLA, +0.12%

Uber has specifically used Tesla’s “Autopilot” system as a comparison for its technology, arguing that the semi-autonomous features available on the electric cars don’t require a permit and are similar to the current capabilities of its own system. “Autopilot” is considered a driver-assistance platform, though Tesla Chief Executive Elon Musk has said the company — which did obtain a DMV permit for its testing — has an eventual goal of offering autonomous capabilities.

Tasha Keeney, an industrial innovation analyst at ARK Investment Management, said that Uber appears to be “aggressively” testing its self-driving technology with the goal of eventually creating a fully autonomous vehicle.

“It isn’t self-driving to the point that it is commercially ready, but that certainly seems like that is [Uber’s] goal,” Keeney said.

Still, Uber likely lags behind other developers in its self-driving capacity. Based on reports of media taking test rides in Pittsburgh, Keeney’s firm calculated that humans need to intervene in the Uber self-driving cars about once every 10 miles. Uber would have to report data similar to that in California if it obtains a permit.

Smith sees a few different potential near-term outcomes in California, with the first being a temporary or permanent injunction barring the cars from the road, which the California Attorney General’s office said Friday would happen if Uber didn't cease the program’s operations and seek a permit. If that came to pass, Uber and employees related to the pilot program could be held in contempt if they continued the pilot, he wrote.

Even if Uber does achieve a commercially viable autonomous car through its testing, it would then have to register with the California DMV on forthcoming deployment regulations.

“They’re not buying themselves all that much time,” Smith said of Uber’s fight against the DMV.

Article Link To MarketWatch:

BOJ Keeps Policy On Hold, Brightens View Of Economy

By Leika Kihara and Stanley White
December 20, 2016

The Bank of Japan kept monetary policy steady and took a more upbeat view of the economy on Tuesday, reinforcing market expectations that its future policy direction could be an increase - not a cut - in interest rates.

Reflecting a pick-up in emerging Asian demand and factory output, the central bank upgraded its language to signal its confidence that the economy is headed for a steady recovery.

"Japan's economy continues to recover moderately as a trend," the BOJ said in a statement announcing the policy decision. It also offered a brighter view on exports and output to say they were picking up.

But the central bank warned the impact of U.S. monetary policy on global markets was among risks to the outlook, suggesting that the Federal Reserve's interest rate hike cycle could disrupt emerging market capital flows.

As widely expected, the BOJ kept unchanged its pledge to guide short-term rates at minus 0.1 percent and the 10-year government bond yield around zero percent.

"The global economy recovered earlier than expected and the yen is weakening. Tailwinds are blowing, and the BOJ can stand pat for a while," said Hiroshi Shiraishi, an economist at BNP Paribas.

Underscoring its optimism on the outlook, the central bank even revised up its view on private consumption - considered a soft spot for the Japanese economy, the world's third largest.

"Consumption is moving on a firm note," it said, a brighter view than last month when it said there were some weak signs.

At the previous meeting on Nov. 1, the BOJ said the economic trend was for moderate recovery, but slowing emerging market demand was weighing on exports and output.

Focus On Kuroda

Financial markets are focusing on what BOJ Governor Haruhiko Kuroda will say at his post-meeting news conference about the recent rise in yields.

Japanese long-term interest rates have risen in tandem with global bond yields on expectations of steady U.S. interest rate hikes and the perceived inflation-stoking policies of incoming U.S. President Donald Trump.

This has tested the BOJ's resolve to cap the 10-year Japanese government bond (JGB) yield around its zero percent target.

That in turn has led to some market expectations the BOJ may raise its target for the 10-year JGB yield, which briefly hit 0.1 percent last week, as early as next year.

"I expect Kuroda to say something at his press conference to keep long-term yields in check," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

"If not, traders could try to test the BOJ's resolve by pushing yields higher," he said.

Market expectations of additional monetary easing have receded after the BOJ revamped its policy framework in September to one better suited to a long-term battle against deflation.

With inflation stubbornly shunning the BOJ's 2 percent target, the central bank is in no rush to raise its 10-year JGB yield target either, and sees any such move as a long-term option.

Still, the BOJ is more open to discussing the idea and may contemplate raising the target as early as next year if long-term rates reflect clear improvements in the economy and keep rising, sources have told Reuters.

Article Link To Reuters:

Uber's Loss Exceeds $800 Million In Third Quarter On $1.7 Billion In Net Revenue

Ride-hailing company's annual loss may hit $3 billion by year's end.

By Eric Newcomer
December 20, 2016

Even as Uber Technologies Inc. exited China, the company's financial loss has remained eye-popping. In the first nine months of this year, the ride-hailing company lost significantly more than $2.2 billion, according to a person familiar with the matter. In the third quarter, Uber lost more than $800 million, not including its Chinese operation.

At the same time, the company's revenue has continued to grow even after leaving the world's most populous country. Uber generated about $3.76 billion in net revenue in the first nine months of 2016 and is on track to exceed $5.5 billion this year, said the person, who asked not to be identified because the information is private.

Uber, a closely held company based in San Francisco, has stayed mum about its financial performance even as its valuation has soared to $69 billion, making it more valuable on paper than General Motors Co. and Twitter Inc. combined.

Uber's bookings—the total combined value of the fares that riders pay—were $5.4 billion in the third quarter, an increase from $5 billion in the second quarter and $3.8 billion in the first, according to the person.

The slowdown in Uber's bookings growth can at least partially be explained by the company's decision to leave China. Uber said on Aug. 1 that it came to an agreement with Didi Chuxing to exit China in exchange for 17.5 percent of the Chinese company. As part of the deal, Didi invested $1 billion in Uber. Uber's third-quarter financials don't include the business in China, which were part of the previous quarterly results.

Net revenue—the amount of money Uber generates after it pays its drivers—was $1.7 billion in the third quarter, growing from $1.1 billion in the second quarter and $960 million in the first, according to the person.

Uber's financials have leaked in dribs and drabs. The third-quarter numbers were reported earlier by the technology news site The Information. Bloomberg previously reported Uber's financial performance in the first half of this year. A spokesman for Uber declined to comment.

The company is said to have lost at least $2 billion last year and is on track to pile up a loss of at least $3 billion this year. Those are rough figures that may underestimate how much money Uber is losing and don't include interest, taxes or stock-based compensation.

Here's what we do know: Uber's loss in the first quarter of this year was about $580 million, according to the person. By the second quarter, the loss significantly exceeded $800 million, including China. That number is likely far higher.

Even in the U.S., Uber's home market, the company continues to lose money. After turning a slight profit in the in the first quarter of this year, Uber lost $100 million in the U.S. in the second quarter. The loss increased in the third quarter, the person said. Lyft, Uber's largest U.S. competitor, has promised investors that it will keep its losses below $150 million a quarter.

Article Link To Bloomberg:

Vestager, Apple Up Ante In Historic Tax Dispute

Apple complains it is being victimized, while Dublin says the Commission wants to rewrite Irish tax rules.

By Noelle Knox and Bjarke Smith-Meyer
Politico EU
December 20, 2016

Apple and the European Commission on Monday renewed their battle over Brussels’ attempt to hit the company with a €13 billion bill for back taxes in Ireland, with Apple appealing the case in an EU court.

The maker of iPhones and iPads tried to seize the legal and political momentum by filing its appeal in the General Court of the European Union overnight, hours before the Commission published a 130-page document — much of it redacted by Apple to protect corporate secrets — explaining its August ruling over Apple’s corporate structure that allowed it to pay as little as 0.005 percent in taxes in Ireland.

The legal battle will play out over months in European courtrooms, but the political fight hasn’t let up since Competition Commissioner Margrethe Vestager unveiled the case last August. The Danish commissioner became a hero to critics of tax avoidance by U.S. corporate giants, and a target for Apple and the governments in Dublin and Washington, who accuse her of politically motivated overreach.

By issuing the largest state aid ruling in history, Vestager has taken a calculated gamble that the courts will back up her legal reasoning and support the apparent extension of the Commission’s powers into, in effect, national tax policy. Vestager had previously grabbed headlines by going after other American icons like Starbucks, Amazon and McDonald’s for alleged sweetheart tax deals that violate EU state aid rules, giving them an edge over rivals.

The U.S. Treasury Department was quick to criticize the case again. “We continue to believe the Commission is retroactively applying a sweeping new state-aid theory that … threatens to undermine the overall business climate in Europe. Moreover, it threatens to erode America’s corporate tax base,” a Treasury representative said Monday.

Irish Pique

Dublin, in lock-step with Apple, published a summary of the eight legal arguments in its appeal before the General Court of the European Union.

“The Commission breached the duty of good administration by failing to act impartially and in accordance with its duty of care,” Ireland’s Department of Finance said in a tersely worded statement Sunday. “The Commission attempts to rewrite the Irish corporation tax rules … the Commission’s claim is inconsistent with member state sovereignty in the area of direct taxation.”

Brussels insists that two of Ireland’s tax agreements with the company amounted to illegal state aid because they were not available to all companies.

“[Apple Sales International] and [Apple Operations Europe] did not have any taxable presence in any other tax jurisdiction besides Ireland during the time that the contested rulings were in force. Indeed, each company operated through a single branch in Ireland and, more important, the companies did not have any taxable presence in the U.S. As regards ASI’s and AOE’s head offices, those head offices lack any physical presence or employees and are not located in any jurisdiction,” the document read.

Apple said it had to fight the case because otherwise it would “pay 40 percent of all the corporate income tax collected in Ireland, which is unprecedented and, far from leveling the playing field, selectively targets Apple.”

“This has no basis in fact or law and we’re confident the ruling will be overturned,” the company said.

Wednesday’s Legal Test

On Wednesday, Europe’s top court will provide crucial guidance on that point in a series of cases filed by Spanish companies against a 2009 state aid rulings that left them liable to pay back billions in back taxes.

The Apple case is hugely sensitive not only for Ireland but for hundreds of multinational companies that base their operations in low-tax countries.

The Commission’s August ruling against Apple has piqued the interest of ministers from France, Spain, Germany and Austria.

A spokesman for the German Finance Ministry said Monday they supported to Commission’s decision to go after Apple for tax avoidance, adding the European Court of Justice would ultimately decide the case. The spokesman also said the German cabinet on Wednesday would adopt a regulation implementing international standards to fight tax avoidance.

Ireland’s 12.5 percent corporate tax rate has attracted many companies and is strictly enforced, said Brian Keegan, tax director for Chartered Accountants Ireland.

“Ireland has already taken its fair share of tax,” he said, adding that the €13 billion is probably owed to other countries where Apple sold its products. “You can’t expect Ireland to be a general tax collector just because Apple is based here.”

Criminal Investigations

Other countries want their bite.

In October, Italy settled a criminal investigation into an executive for Apple Sales International in Ireland who was accused of helping the company avoid paying corporate taxes in Italy, according to a judge involved in the case.

A possible six-month jail sentence against Michael Thomas O’Sullivan, a legal representative for Apple in Ireland, has been converted into a €45,000 fine in what appears to be the first criminal charge against an Apple executive, according to the three-page settlement request obtained by POLITICO.

Low-tax countries in the EU will read the Commission’s reasoning with trepidation, as many have struck similar sweetheart deals with companies.

Luxembourg, Ireland, Cyprus, and the Netherlands were rated by the charity Oxfam earlier this month as the world’s 10 “worst” tax havens, despite an ongoing EU crackdown on tax avoidance and profit shifting across the bloc.

Last year, the Commission ruled that Starbucks and Fiat must each pay up to €30 million in back taxes to the Netherlands and Luxembourg, respectively. All of the parties have appealed. The Commission also continues to investigate the tax affairs of Amazon’s tax rates in Luxembourg.

Article Link To Politico EU:

Gold Is Nowhere Near Ready To Shine

Market-timing investors ride a downward ‘slope of hope.’

By Mark Hulbert
December 20, 2016

“Gold will have to decline even further before contrarian analysis flashes a buy signal.”

So began my month-ago column on gold-market sentiment, and it remains just as true today as then — if not more so.

That’s because the average short-term gold timer has responded to declining prices for the yellow metal GCG7, -0.22% over the last month by becoming more bullish. That’s just the opposite of how they typically respond to declines, and suggests that there is a strong underlying current of optimism in the gold-timing community.

That’s a bad sign, according to contrarian analysis. Tradeable bottoms usually are accompanied by widespread skepticism and despair rather than bottom-fishing.

Consider the average recommended gold exposure level among several dozen short-term gold timers I monitor on a daily basis (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). This average currently stands at minus 4.0%, versus a reading of minus 18.0% a month ago when gold bullion stood at just shy of $1,200 an ounce.

In other words, in the wake of a $60+ drop in gold’s price, the average gold timer has increased his exposure level by 14 percentage points.

That means we are even further away than we were a month ago to the sentiment levels that would lead contrarians to issue a buy signal. As you can see from the chart above, those necessary levels are lower than minus 30%.

How much further must gold decline in order to cause the HGNSI to drop to those low levels? It’s impossible to know, since it depends on how the gold-timing community behaves. A month ago, for example, we easily could have expected that a $60+ drop in gold’s price would have led the necessary number of gold timers to throw in the towel — thereby causing the HGNSI to drop to well-below minus 30%.

It didn’t, of course, so you might conclude that at even bigger drop is necessary to do the trick. But it could also be that an extended trading period for gold would lead the gold timers to give up in frustration.

Fortunately, contrarians don’t need to predict what it will take, or when it will happen. Instead, they can let the situation unfold on a day-to-day basis. If the HGNSI drops significantly in the next several days, for example, then a contrarian buy signal would be forthcoming relatively soon.

Such a signal could take a lot longer to appear if the gold-timing community persists in its relative optimism.

Article Link To MarketWatch:

Monday, December 19, Morning Global Market Roundup: Asia Stocks Find Relief As China Set To Return Seized U.S. Drone

By Hideyuki Sano 
December 19, 2016

Asian shares steadied near four-week lows on Monday after China agreed to return the U.S. drone it had seized, easing worries for now about possible deterioration in diplomatic relations.

But with expectations of U.S. President-elect Donald Trump's policies lifting U.S. interest rates and the dollar, shares in many emerging markets are likely to remain vulnerable to possible capital outflows.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS hit a four-week low and last stood down 0.1 percent. It has lost 3.5 percent since Trump won his surprise election victory.

Hong Kong shares .HSI hit a four-month low as the Hong Kong dollar soared in line with the U.S. dollar to which it is pegged, and after insurance shares were hit by a Chinese regulator's warnings. nL5N1EB03X.

Japan's Nikkei .N225, which has benefited from the yen's sharp fall against the dollar, dipped 0.2 percent from Friday's one-year high.

Financial markets briefly turned "risk-off" in late U.S. trade on Friday following news that a Chinese Navy warship had seized a U.S. underwater drone in international waters in the South China Sea.

The Dow Jones industrial average .DJI ended down 0.04 percent to 19,843.41 on Friday, while the S&P 500 .SPX lost 0.18 percent to 2,258.07.

The diplomatic incident appears to have been resolved for now after the two countries said on Saturday that China will return the drone.

"I think the markets' trend will continue. Share prices will edge higher and so will bond yields. The dollar will remain strong. One key question is whether the Dow Jones will hit the 20,000 mark," said Koichi Yoshikawa, executive director of financial markets at Standard Chartered Bank in Tokyo.

The yuan is little moved in Asia, firming slightly from Friday's 8 1/2-year low of CNY=CFXS of 6.9616 to the dollar.

Still, doubts on the future of Sino-U.S. relations with Trump in the White House could eventually cast a shadow on financial markets, some market players say.

Trump has previously threatened to declare China a currency manipulator and force changes in U.S.-Chinese trade policy, which he says has led to the theft of American jobs.

He has questioned a highly-sensitive aspect of U.S.-China diplomacy, notably whether Washington will continue to recognize that Taiwan is part of the "One China" line mandated by Beijing.

"Their relations seem to be getting worse. Toward Trump's inauguration next month, we could see more volatility in the yuan," said Kenta Tadaide, senior economist at Mizuho Research.

"If the yuan hits 7 per dollar, that would attract a lot of attention," he added.

Diplomacy aide, many Asian shares have been hit by higher U.S. rates and a stronger dollar, which was sparked by expectations that Trump's fiscal spending and tax cuts plan will fuel growth and inflation.

The 10-year U.S. Treasuries yield US10YT=RR stood at 2.584 percent in Asia on Monday, near its two-year high of 2.641 percent touched on Thursday.

As higher U.S. yields shore up the dollar, the dollar's index against a trade-weighted basket of six major currencies jumped to a 14-year high of 103.56 last week .DXY =USD, though it gave up some gains to profit-taking on Monday.

The index last stood at 102.71.

The euro EUR= traded at $1.0459, bouncing back from last week's low of $1.03665, its weakest since January 2003.

The dollar traded at 117.59 yen JPY=, down 0.3 percent on the day and off Thursday's 10-1/2-month high of 118.66.

Oil prices held firm in anticipation of tighter crude supply going into 2017 following the decision by OPEC and other producers to cut output.

Brent LCOc1 futures rose 0.7 percent to $55.57 a barrel, while U.S. West Texas Intermediate crude CLc1 added 0.8 percent to $52.29 per barrel.

Article Link To Reuters:

U.S. Electors Expected To Officially Confirm Trump Victory

By David Morgan
December 19, 2016

The U.S. Electoral College is expected on Monday to officially select Republican Donald Trump as the next president in a vote that is usually routine but takes place this year amid allegations of Russian hacking to try to influence the election.

At meetings scheduled in every state and the District of Columbia, the institution's 538 electors, generally chosen by state parties, will cast official ballots for president and vice president.

It is highly unlikely the vote will change the outcome of the Nov. 8 election, which gave the White House to Trump after he won a majority of Electoral College votes. The popular vote went to Democrat Hillary Clinton.

But the conclusion by U.S. intelligence agencies that Russia hacked into the emails of the Democratic National Committee in an attempt to sway the election for Trump has prompted Democrats to urge some electors not to vote as directed by their state's popular ballot.

The leaked emails disclosed details of Clinton's paid speeches to Wall Street, party infighting and inside criticism about Clinton's use of a private server to send emails while U.S. secretary of state. The disclosures led to embarrassing media coverage and prompted some party officials to resign.

Trump and his team dismiss intelligence claims of Russian interference, accusing Democrats and their allies of trying to undermine the legitimacy of his election victory.

Russian officials have denied accusations of interfering in the election.

On Sunday, Clinton's campaign chairman, John Podesta, said it was an open question whether the Trump campaign colluded with Russia about the emails, an allegation that Trump's incoming White House chief of staff, Reince Priebus, denied. A bipartisan group of U.S. senators called for a special committee probe of cyber attacks by Russia and other countries.

The number of Electoral College electors equals the number of representatives and senators in Congress, with each state receiving a share roughly proportional to its population size.

When voters go to the polls to cast a ballot for president, they are actually choosing a presidential candidate's preferred slate for their state.

A candidate must secure 270 votes to win. Trump won 306 electors from 30 states.

The electors convene meetings in each state to cast ballots about six weeks after each presidential election.

If no candidate reaches 270 in the Electoral College, the president is chosen by the U.S. House of Representatives - currently controlled by Republicans.

Article Link To Reuters:

Oil Prices Rise In Anticipation Of Tighter 2017 Market

By Henning Gloystein 
December 19, 2016

Oil prices rose on Monday in anticipation of tighter crude supply going into 2017 following the decision by OPEC and other producers to cut output to prop up prices.

Brent crude futures, the international benchmark for oil prices, were trading at $55.57 per barrel, up 36 cents, or 0.7 percent, from their last close.

U.S. West Texas Intermediate (WTI) crude oil futures were up 43 cents, or 0.8 percent, at $52.33 a barrel.

Traders said the higher prices in front-month crude futures were due to expectations of a tighter market.

The Organization of the Petroleum Exporting Countries (OPEC) and other producers led by Russia have announced cutbacks of almost 1.8 million barrels per day (bpd) in oil production from January 2017 in an effort to bolster prices to reduce rampant global overproduction which has seen output outstrip consumption for over two years.

"With investors now expecting a relatively high level of compliance with the production cut agreements, prices should be well supported," ANZ bank said on Monday.

"Saudi Arabia has stated its willingness to cut production below 10 million bpd if needed (down from around 10.5 million bpd currently), which should limit risk to the deal," U.S. bank Morgan Stanley said on Monday, adding that some of the non-compliance risk to the deal to cut output in 2017 came from Iraq, which increased its January loadings versus December.

ANZ bank said that "some weakness in U.S. dollar also helped improve (oil) investor sentiment."

The dollar has lost 0.8 percent against a basket of other leading currencies since hitting 2002 highs last week.

Swings in the dollar can affect oil demand as they influence fuel prices for any country using its own currency domestically.

Despite this, there were factors that weighed on markets, preventing prices - which remain relatively low - from rising more.

In the United States, which did not participate in the production cut deal, drilling for new oil has increased for seven weeks.

Drillers added 12 oil rigs in the week to Dec. 16, bringing the total to 510, the highest since January, though still below 541 rigs a year ago, energy services firm Baker Hughes said on Friday.

"Since its trough on May 27, 2016, producers have added 194 oil rigs (+61 percent) in the U.S.," U.S. bank Goldman Sachs said.

As a result, U.S. oil production is edging up, rising from below 8.5 million bpd in July to almost 8.8 million bpd by mid-December.

Article Link To Reuters:

Iran Finalizes 100-Jet Deal With Airbus, First Delivery In January

By Tim Hepher
December 19, 2016

Iran has finalised an agreement with Airbus to acquire 100 jetliners, the first of which is tentatively expected to be delivered in mid-January, a senior official said on Monday.

The deal, split roughly equally between narrow-body and wide-body aircraft, will be signed in coming days, possibly as early as Monday or Tuesday, Deputy Roads and Urban Development Minister Asghar Fakhrieh Kashan told Reuters.

Under the agreement, Airbus will supply four types of aircraft: its medium-haul A320 and A321 aircraft and the long-haul A330 and A350, he said, in remarks confirming Iran's decision to drop the A380 from a draft deal signed in January.

Iran, which last week finalised a deal with Boeing (BA.N) for 80 jets, has so far reached agreements with foreign leasing firms to finance a total of 77 aircraft, including 42 from Airbus and 35 from Boeing, Kashan said in a telephone interview.

Article Link To Reuters:

Japan Eyes Record Spending, Less New Debt In Financial Year 2017/18 Budget

By Takaya Yamaguchi
December 19, 2016

Japan's government plans an initial budget of a record 97.45 trillion yen ($830 billion) for fiscal 2017, while keeping new debt issuance just below this year's level, a draft of the budget seen by Reuters showed.

The planned budget poses a challenge to Prime Minister Shinzo Abe's efforts to streamline spending and proceed with fiscal consolidation to rein in the industrial world's heaviest debt burden.

It presents a test of the premier's resolve to achieve a primary budget surplus - excluding debt servicing and new bond sales - by fiscal 2020, which is seen as difficult.

The general-account budget spending for the fiscal year to begin on April 1 marks an increase from this year's 96.7 trillion yen, the draft showed, reflecting snowballing social security spending to fund the cost of services for Japan's fast-ageing population.

The government aims to approve the fiscal 2017 budget draft at a cabinet meeting on Thursday, along with a small third extra budget for the current fiscal year.

Tax revenue for the fiscal 2017 will be forecast at 57.71 trillion yen, up just 110 billion yen from this year, the draft showed.

The government plans to sell new bonds worth 34.37 trillion yen, which would be a nine-year low and slightly below this year's initially-planned 34.43 trillion yen.

To curb new bond issuance, the government will tap bigger non-tax revenue of 5.37 trillion yen, compared with this fiscal year's 4.69 trillion yen, the draft showed.

The government is also set to reduce debt-servicing costs, thanks to rock-bottom interest rates under the Bank of Japan's yield curve control policy.

Article Link To Reuters:

Yahoo Security Problems A Story Of Too Little, Too Late

By Joseph Menn, Jim Finkle and Dustin Volz 
December 19, 2016

In the summer of 2013, Yahoo Inc launched a project to better secure the passwords of its customers, abandoning the use of a discredited technology for encrypting data known as MD5.

It was too late. In August of that year, hackers got hold of more than a billion Yahoo accounts, stealing the poorly encrypted passwords and other information in the biggest data breach on record. Yahoo only recently uncovered the hack and disclosed it last week.

The timing of the attack might seem like bad luck, but the weakness of MD5 had been known by hackers and security experts for more than a decade. MD5 can be cracked more easily than other so-called "hashing" algorithms, which are mathematical functions that convert data into seemingly random character strings.

In 2008, five years before Yahoo took action, Carnegie Mellon University's Software Engineering Institute issued a public warning to security professionals through a U.S. government-funded vulnerability alert system: MD5 "should be considered cryptographically broken and unsuitable for further use."

Yahoo's failure to move away from MD5 in a timely fashion was an example of problems in Yahoo's security operations as it grappled with business challenges, according to five former employees and some outside security experts. Stronger hashing technology would have made it more difficult for the hackers to get into customer accounts after breaching Yahoo's network, making the attack far less damaging, they said.

"MD5 was considered dead long before 2013," said David Kennedy, chief executive of cyber firm TrustedSec LLC. "Most companies were using more secure hashing algorithms by then." He did not name specific firms.

Yahoo, which has confirmed it was still using MD5 at the time of the attack, disputed the notion that the company had skimped on security.

"Over the course of our more than 20-year history, Yahoo has focused on and invested in security programs and talent to protect our users," Yahoo said in a statement to Reuters. "We have invested more than $250 million in security initiatives across the company since 2012."

Competing Priorities 

The former Yahoo security staffers, however, told Reuters the security team was at times turned down when it requested new tools and features such as strengthened cryptography protections, on the grounds that the requests would cost too much money, were too complicated, or were simply too low a priority.

Partly, that reflected the internet pioneer's long-running financial struggles: Yahoo's revenues and profits have fallen steadily since their 2008 peak while Alphabet Inc's Google, Facebook Inc and others have come to dominate the consumer internet business.

"When business is good, it's easy to do things like security," said Jeremiah Grossman, who worked on Yahoo's security team from 1999 to 2001. "When business is bad, you expect to see security get cut."

To be sure, no system is completely hack-proof. Hackers have managed to break into passwords that were encrypted using more advanced technologies than MD5. Other Internet companies, such as LinkedIn and AOL, have also suffered security breaches, though none nearly as large as Yahoo's.

"This could happen to any large corporation," said Tom Kellermann, a former World Bank security manager and security industry executive.

Kellermann, now CEO of investment firm Strategic Cyber Ventures, said he was not surprised that it had taken Yahoo several years to identify the massive attacks. "Hackers often have a capacity to burrow deeper than we thought into a system and remain for years," he said.

Reuters could not determine how many companies besides Yahoo were using MD5 in 2013. Google, Facebook and Microsoft Corp did not immediately respond to requests for comment.

According to another former security veteran at Yahoo, even when the company was growing quickly, security sometimes took a back seat as the company focused on system performance to keep up with the growth.

Then, when growth stalled, senior security staff left for other companies and the chances of getting approval for expensive upgrades dropped further, the person said.

"Any changes to the user database took forever because they were understaffed, and it's an ultra-critical system - everything depends on it," said the former Yahoo employee.

Yahoo declined to comment on details of its security practices, but said it routinely conducted drills to test and improve its cyber defenses and highlighted campaigns such as a "bug bounty" program in which it pays hackers to find security flaws and report them to the company.

Two Biggest Breaches

Last September, Yahoo disclosed a 2014 cyber attack that affected at least 500 million customer accounts, the biggest known data breach at the time.

Following last week's news of the even bigger 2013 breach, U.S. federal investigators and lawmakers said they are scrutinizing Yahoo's security practices, and Verizon Communications Inc is seeking to renegotiate a July deal to buy Yahoo's internet business for $4.8 billion.

The former Yahoo employees said the company's security problems began before the arrival of Chief Executive Marissa Mayer in 2012 and continued under her tenure. Yahoo had suffered attacks by Russian hackers for years, two of the former staffers said.

In 2014, Yahoo hired a new security chief, Alex Stamos, and one of the security crews he led - known internally as 'The Paranoids' - thought they were making headway against the hackers, former employees said. In 2015, when the security crew discovered a hidden program attached to Yahoo's email servers that was monitoring all incoming messages, their first thought was that the Russian hackers had come back.

It turned out that the program had been installed by Yahoo's email engineers to comply with a secret surveillance order requested by a U.S. intelligence agency, as Reuters previously reported. Stamos and some of his staff left Yahoo soon after that, creating further disruptions to security operations.

This week, in addition to disclosing the 2013 hack, Yahoo said someone had accessed its proprietary computer code to learn how to forge "cookies," which would allow hackers to access an account without passwords. Yahoo said it connected some cookie-forging activity to the same state-sponsored actor it believed was responsible for the 2014 data theft.

"They burrowed in and got access to everything," said Dan Guido, chief executive of cyber security firm Trail of Bits.

On Thursday, Germany's cyber security authority criticized Yahoo for failing to adopt adequate encryption techniques and advised German consumers to switch to other email providers.

Yahoo told Reuters it was committed to keeping users secure by staying ahead of new threats. "Today's security landscape is complex and ever-evolving, but, at Yahoo, we have a deep understanding of the threats facing our users and continuously strive to stay ahead of these threats to keep our users and our platforms secure."

Article Link To Reuters:

A Blueprint To Fix Relations With Russia

A policy memo to the president-elect. Priority: high.

The National Interest
December 19, 2016

THE TWO Chinese characters that make up the word “crisis” can be interpreted as meaning both “danger” and “opportunity.” Russia today offers your administration not only a serious challenge but a significant opportunity.

Russia is no longer the Evil Empire the United States confronted over decades of Cold War. Nonetheless, Russia remains a player whose choices affect vital U.S. interests profoundly across the agenda of global issues. First and foremost, Russia remains the only nation that can erase the United States from the map in thirty minutes. Second, Russia is key to preventing nuclear terrorism as well as proliferation of other weapons of mass destruction and missile-delivery systems. Third, Russia’s decisions on whether to share intelligence, or withhold it, significantly affect odds of preventing attacks by terrorists on U.S. citizens and assets across the world. Fourth, Russia is the largest country on Earth by land area, bordering China to the East, Poland in the West, and the United States across the Arctic. (Thus, claims that it is only a “regional” power miss the fact that it abuts every important region.) Fifth, Russia’s Soviet-era scientific establishment and post-Soviet achievements make it a global leader in science and technology, particularly in high-tech military hardware. These talents allow it to mount formidable cyber capabilities, second only to the United States, and to produce impressive weapons. The only way U.S. astronauts can currently travel to and from the International Space Station is to hitch a ride on Russian rockets. The cofounder of the most advanced digital company in the world, Google, is Russian-born Sergey Brin. Sixth, Russia is prepared to fight: it has demonstrated both the capability and the will to use military force to achieve its objectives, from annexing Crimea to bolstering Bashar al-Assad’s regime in Syria. Seventh, Russia’s potential as a spoiler is difficult to exaggerate—from selling advanced systems like S-300 air defenses to Iran to aligning militarily with China.

On their current trajectory, the United States and Russia face a serious risk of stumbling into a war neither side wants and which would be catastrophic for both. You have been elected to change the way Washington does business, and nowhere is that needed more than in dealing with Moscow. While the mainstream press and punditry have panned your campaign pledge to put “America First,” we suggest you remind everyone of the mantra under which both Democratic and Republican presidents fought the Cold War. It affirmed that Americans’ primary purpose in the world was to “preserve the United States as a free nation with our fundamental institutions and values intact.” To that end, they set about building a new world order aimed at advancing the cause of peace, prosperity and freedom for all: for Americans, their allies and other nations, in that order. While some now see that hierarchy as shortsightedly selfish or unworthy of a great power, the brute fact is that the survival and success of the United States is the essential prerequisite for American power to be applied to achieve any other objective in the world. As part of your America First doctrine, we urge you to prioritize America’s most vital interests and, from that foundation, engage Russia on what matters most to American citizens’ survival and well-being.

IN ORDER to understand the way ahead, it may be useful to briefly review how America arrived at the current impasse. Ironically, as we mark the twenty-fifth anniversary of the disappearance of the Soviet Union on Christmas Day 1991, U.S. relations with Russia are in their worst state since the high Cold War. All three post–Cold War administrations—Bill Clinton’s, George W. Bush’s and Barack Obama’s—entered office seeking to improve relations with Moscow. Each left office with the relationship in worse condition than when he arrived. President Obama began by announcing a “reset” in relations with Russia to secure Moscow’s cooperation on a number of priorities, including his vision of a world free of nuclear weapons. As his term ends, U.S. and Russian aircraft are operating in close proximity, attacking targets in Syria with minimum communication and no coordination. This risks an unintended collision that could lead to direct conflict. The United States has deployed a “tripwire” force of more than one thousand combat troops between the three frontline Baltic states, and Russia has responded by deploying advanced air defenses and nuclear-capable short-range missiles to its enclave in Kaliningrad. For the first time since the 1980s, military planners on both sides have been reexamining options that include the actual use of nuclear weapons. This outcome serves as a stark reminder that aspirations, however worthy, are not enough. Detached from coherent strategy and sustained operational execution, such aspirations not only predictably fail, but also dash hopes and incite suspicions.

Ukraine and Syria offer similar cautionary tales. Having encouraged Ukrainians to rise up against their corrupt, albeit democratically elected, president, the Obama administration and its European allies proved unwilling to mount a military response to Russia’s military intervention. Today, Ukraine is a flailing, almost failing state with no good news in sight. Syria provides a further bloody reminder that where parties are not willing to kill and die for their objectives, others who are will prevail. After announcing a grand objective—“Assad must go”—Obama was unwilling to commit American military forces to achieve that goal, leaving a vacuum that Vladimir Putin stepped in to fill. The point is not that the Obama administration should have sacrificed American lives to defend Syrians. We share the president’s judgment that American national interests do not justify that level of expenditure of American blood and treasure. Rather, the point is that successful strategy requires aligning ends and means. Where the means one is prepared to commit are inadequate to achieve grander objectives, goals must be adjusted accordingly.

To compensate for its policy failures, the Obama White House crafted two narratives. On the one hand, it claims that Russia is a loser who “doesn’t matter anymore,” so to speak. No longer a global player, it is a power in terminal decline: its economy collapsing, its population shrinking and its last-century industrial base no longer making anything the world wants to buy. On the other hand, as a high-level member of the administration confided with some embarrassment, in its final years, when facing intractable international problems, Obama’s instinct has been to “blame Russia first.” In the president’s own words,

[Putin’s] got to make a decision: Does he continue to wreck his country’s economy and continue Russia’s isolation in pursuit of a wrong-headed desire to recreate the glories of the Soviet empire, or does he recognize that Russia’s greatness does not depend on violating the territorial integrity of other countries?

As Henry Kissinger has explained most clearly, what Obama’s “or” really means is that Putin’s Russia should repent, reverse course, and follow in the footsteps of Germany and Japan in accepting its place in a unipolar, American-led international order. In Kissinger’s words, “The U.S. has put forward no concept of its own except that Russia will one day join the world community by some automatic act of conversion.” But as he notes, this is a fantasy: Russia is too big, too powerful and too committed to maintaining its sovereignty as a great power to become a supplicant in an American-dominated world order. Moreover, while the Soviet Union did lose the Cold War and its borders were rolled back to those resembling Catherine the Great’s, unlike Germany and Japan, it was not defeated in a hot war, not occupied and thus not shaped by the United States in the way states whose constitutions were written by the victor were.

Kissinger’s alternative—with which we strongly agree—is to seek to integrate Russia into an international order that takes into account Moscow’s minimum essential interests. That would begin with recognition that Russia remains a great power with sovereign interests and from there explore “whether their concerns can be reconciled with our necessities.” Critically, this would mean treating Putin personally as the strong leader of a major power he clearly is, and is recognized by his fellow citizens to be. It would also mean avoiding gratuitous disrespect.

THE OBJECTIVE of American policy is not to placate Russia or please Putin. Rather, it is to advance vital U.S. national interests. As seen during Obama’s second term, when treated primarily as a “foe,” Russia can undermine important American objectives. If it can be persuaded to act more as a partner, within the framework of a sustainable, if difficult, working relationship, Moscow can help advance U.S. foreign-policy objectives in a number of ways.

First, productive relations between Russia and the United States are essential to avoiding war, including nuclear war. As Washington discovered in the Cold War after the Soviet Union acquired a superpower nuclear arsenal, technology has imposed on the two countries an inescapable partnership and absolute requirement for sufficient cooperation to avoid the nuclear war of which both would be the first victims. Technology has made America and Russia, in effect, Siamese twins. However angry or even disgusted either is at the other, neither can strangle the other without simultaneously committing suicide. This ugly but inescapable fact serves as the starting point in this relationship.

While the possibility of an all-out nuclear war remains highly remote, it is no longer as unthinkable as it was when President Obama entered office. Hard as it is to imagine from Washington, Russia’s national-security establishment has become seriously alarmed about what it sees as American developments and plans to undermine its nuclear deterrent. U.S. planners know that America long ago gave up trying to develop a first-strike capability against Russia—because it was unattainable. Nonetheless, even serious Russians now interpret the extraordinary advances in modern warfare the United States has demonstrated since Desert Storm as evidence of a determined plan to achieve advantages in the strategic balance that will provide leverage to coerce Russia. In fact, the United States has redefined modern warfare with ISR (intelligence, surveillance and reconnaissance) that allows it to target precisely any fixed point on earth and to destroy it by multiple non-nuclear means. U.S. special-operations forces are capable of spectacular initiatives, demonstrated in the unannounced raid into Pakistan that killed Osama bin Laden or the nightly attacks and raids in Syria, Iraq and elsewhere. Advances in ballistic missile defenses, the use of big data in antisubmarine warfare, and in what Russians claim are cyber implants in their nuclear command-and-control system do cause them to worry. No longer is this fear only discussed in classified settings at the Russian national security council. President Putin spoke directly to this point in his December year-end address to the nation: “I would like to emphasize that attempts to break strategic parity are extremely dangerous and can lead to a global catastrophe. This cannot be forgotten for a single second.”

Russian planners’ response to this fear has been to lower the threshold for their own use of nuclear weapons, organically integrating nuclear attacks earlier in the escalation ladder in what they call hybrid warfare. Moreover, they have developed a dangerous doctrine of “escalatory deescalation”: if they were losing a conventional conflict in, for example, Ukraine or the Baltics, they would conduct a limited nuclear attack aimed at “deescalating” the war. Unfortunately, the United States has contributed further to this paranoia, and to misperceptions and misunderstandings that could lead to unintended conflict by essentially cutting off all official conversations among both military and defense counterparts.

Second, U.S.-Russia cooperation can advance both nations’ counterterrorism goals, including the wars against ISIS and Al Qaeda. As you said during the campaign, “I think it would be great if we got along with Russia because we could fight ISIS together.” Most Americans agree. According to a recent poll by the University of Maryland, 67 percent of Republicans and 53 percent of Democrats want the United States to cooperate with Russia to fight ISIS in Syria. Russia’s help in the war on radical Islamic terrorism could go well beyond the battlefields of Syria and Iraq. The difference between a relationship in which the Americans and Russians are sharing intelligence and one in which they are withholding it directly impacts Washington's ability to prevent terrorist attacks on the homeland. This was illustrated vividly by the Boston Marathon bombings, where the after-action review found that Russian security services had previously tipped off their American counterparts about the Tsarnaev brothers—but that the information had been discounted because of the distrust among the parties.

Third, Russia is also uniquely suited to help prevent both terrorist organizations like ISIS and Al Qaeda and state actors from acquiring nuclear weapons. As the Soviet Union was coming apart a quarter of a century ago, then Secretary of Defense Dick Cheney offered a fatalistic prediction about that country’s nuclear arsenal. “If the Soviets do an excellent job at retaining control over their stockpile of nuclear weapons,” Cheney said, “and they are 99 percent successful, that would mean you could still have as many as 250 that they were not able to control.” And yet, twenty-five years on, not a single loose nuclear weapon has been discovered. Moscow’s decision on whether to sell or withhold sensitive technologies can be the difference between failure and success in preventing the spread of nuclear weapons, which you have rightly called “the biggest problem [in] the world.”

Fourth, U.S. strategic interests require preventing an alliance or even alignment between Moscow and Beijing. Short of a formal alliance, which neither seems to seek at this point, Russia’s backing will embolden China to take tougher positions in confronting the United States. Just as Richard Nixon’s opening to China during the Cold War expanded America’s leverage with the Soviet Union, closer relations with Russia can help counterbalance a more powerful and assertive China.

EVERYONE KNOWS that Russia is a dangerous, difficult, often disappointing state with which to try to do business. Putin is a KGB man. His view of the world, and Russia’s place in it, was shaped by formative experiences as an intelligence operative. He carries with him deep scars from the collapse of the Soviet Union—which he believes was the “greatest geopolitical catastrophe” of the twentieth century. A fierce patriot, he is determined to assert Russia’s role as a great power of which his fellow citizens can be proud. He is prepared to play rough and has built formidable military capabilities he is not reluctant to use. And Putin is especially sensitive to any signs of disrespect. Nonetheless, in pursuit of his goals, he has shown himself to be a strong, strategic, pragmatic leader who has played a weak hand more effectively than many who had more advantages. No one can overlook the Russian government’s offenses, including its nuclear saber-rattling, intervention in Ukraine, indiscriminate bombing in Syria and many human-rights abuses at home. But Russia is too powerful to be “wished” away. The challenge is thus to advance U.S. interests in areas where they converge with Russia’s and manage differences in areas where they diverge.

As the first step in crafting of such a policy, we recommend that your administration develop a clear hierarchy of American priorities. Unless you define the difference between the vivid and the vital—distinguishing between the bright new shiny object of the day, on the one hand, and what is essential to America, on the other—your administration will find itself following its predecessors in engaging in optional pursuits at the expense of what is absolutely necessary. We recommend beginning with President John F. Kennedy’s number one lesson from the Cuban Missile Crisis: “Above all, while defending our vital interests, nuclear powers must avert those confrontations which bring an adversary to a choice of either a humiliating retreat or a nuclear war.”

Second, in this spirit you should prepare carefully for an early one-on-one meeting with Vladimir Putin to change the dynamics in the relationship. Relations between nations involve much more than their leaders’ personal relationship. But poisonous disrespect at the top seeps down through the layers of interactions between the governments. Alternatively, where the leaders signal mutual respect, establish a working relationship and demonstrate a determination to do business where mutual interests allow, others at successive layers in their governments can find productive opportunities. Reestablishing a relationship of minimal trust requires clarity about areas of disagreement as well as agreement and red lines that cannot be crossed.

Third, your meeting with Putin should be followed by revival of government-to-government dialogue with Russia, beginning with ways to prevent an accidental war between the United States and Russia, including nuclear war. Overturning President Obama’s ban on communication at every level from president-to-president to secretaries of defense, military chiefs and regional commanders; more rigorous deconflicting in Syria; revitalization of U.S.-Russia agreements on preventing military incidents and other confidence-building measures in the military-to-military domain; and establishing rules of the game for cyber operations—these and many similar initiatives can help reduce the risk of an unintended war with Russia. This should also include working to preserve cornerstones of the bilateral strategic nuclear balance, including the New Start Treaty and the Intermediate-Range Nuclear Forces Treaty.

Fourth, you should change the overall U.S. approach toward the Syrian conflict. Business as usual would do the United States no good. As you quipped at one point in the campaign, “If our presidents would have gone away and gone to the beach, the Middle East would be a far better place than it is right now.” In Syria, the current approach not only risks an accidental confrontation with Russia; it distracts from the U.S. campaign to destroy terrorist forces there and alienates regional allies. American military commanders have concluded that the United States has no credible military option to prevail. Russia’s military deployments in Syria and the Eastern Mediterranean have made no-fly zones unrealistic, and further arming the rebels is more likely to lead to escalation than to Moscow’s retreat. Alternatively, to switch sides and act in concert with Russia and Assad would run a major risk of angering U.S. allies and further strengthening Iran. As one of your first foreign-policy steps, we recommend that you order a review of the Syrian crisis with a view to developing a fundamentally new policy. That policy would be more open to cooperation with Russia in defeating ISIS and Al Qaeda, and less focused on removing Assad, but would also demonstrate that America will not allow Moscow and/or Tehran to impose a solution in Syria.

Fifth, though you have previously expressed skepticism about greater U.S. involvement in resolution of the Ukraine conflict, we believe you should join the efforts of European powers to find a solution, if only because this conflict also risks military confrontation with Moscow. While the cease-fire between Ukrainian government forces and pro-Russian separatists is mostly holding, it is dangerous to leave the conflict not-quite-frozen. As in Syria, there are forces on the ground not entirely under the control of either Kiev or Moscow that have their own agendas and welcome occasional skirmishes. These battles can easily escalate beyond their control. There are no good military solutions. Neither the United States nor its European allies are prepared to challenge Russia militarily so close to its borders.

If the United States is not in a position to defeat Russia and its allies in Ukraine militarily, it is imperative to offer Moscow a solution that Russian leaders would consider at least minimally acceptable. As Kissinger told the editor of this magazine in 2015, this will require that you recognize that “the relationship between Ukraine and Russia will always have a special character in the Russian mind,” and therefore Ukraine “cannot be put into a simple formula of applying principles that worked in Western Europe, not that close to Stalingrad and Moscow.” But Kissinger remained optimistic about “the possibility of some cooperation between the West and Russia in a militarily nonaligned Ukraine.” We share his optimism, and believe a suitable formula would include: implementation of the Minsk agreements with concessions by both sides, reestablishing Kiev’s control over Donetsk and Luhansk but providing these two regions with genuine autonomy, and assurances that Ukraine would not join NATO for as far as the eye can see. This latter commitment should not be difficult to honor, because the United States and most major European powers do not want Ukraine in NATO in any foreseeable future.

A genuinely different approach toward the Ukrainian and Syrian conflicts should incorporate credible strength and creative diplomacy to produce outcomes favorable to the United States. To demonstrate its strength, America should use military deployments and private warnings (so as to avoid publicly cornering Putin) to communicate to Moscow that unilateral solutions will not work in either Syria or Ukraine. The key is to show that the United States and its allies will be able to provide enough support to the rebels in Syria and to the government in Kiev to make sure that both conflicts are unsolvable on Moscow’s terms without prohibitive costs to Russia. This also means showing that whoever the United States chooses to support will gain strength over time, which encourages serious negotiations sooner rather than later.

Sixth, you should strengthen U.S. military capabilities in ways that simultaneously dissuade Russia from aggression (both overt and covert) against NATO allies in Europe and respect Russia’s legitimate interest in ethnic Russians living in the former Soviet Union. It is almost impossible for the United States to have too big a stick. But by far the most likely paths to military conflict with Russia begin not with a premeditated Russian attack, but with an unintended event, for example, an incident between nationals and ethnic Russians in one of the Baltics that creates a crisis in which Putin concludes he must intervene. NATO is the greatest alliance in history and played an essential role in America’s Cold War victory. But today, it stands in need of substantial reform. Europe is presently itself in crisis. The failure of the EU economies to grow since the Great Recession, Brexit, uncertainties about who may be Nexit, an unending stream of immigrants from the Middle East and North Africa, and an inability to control its own borders—all these raise fundamental questions about the viability of the European project. Given these challenges, the United States should not allow itself to become a lightning rod—or scapegoat. Thus we urge you to reiterate America’s commitment to NATO, including Article Five security guarantees, at the outset. But Washington should also propose that NATO members undertake a zero-based reassessment of the alliance. In his inaugural address, JFK urged Americans not to ask what their government could do for them but to “ask what you can do for your country.” European leaders should ask less what America can do for them and more what they can do for European security.

Your effort will be aided by an overall increase in U.S. military capabilities, much as President Ronald Reagan’s diplomatic outreach to the Soviet Union benefited from a perception in Moscow that the United States was changing the balance of power in its favor after a period of decline. This is especially important at a time when Russia’s defense production is poised to grow by 10 percent this year, despite economic pressure. Combining investment in U.S. capabilities with calculated use of your reputation for unpredictability could be particularly useful, much as Nixon cultivated the image of a “madman” to enhance his leverage in Southeast Asia. An early demonstration of your resolve might also be necessary—when suitable circumstances arise—to change Russian perceptions of the costs of ignoring U.S. preferences.

At the same time, we urge you to follow through on your campaign pledge to persuade Europe to contribute more to the alliance. Since European NATO members are the principal beneficiaries of the security guarantee, and they collectively exceed the United States in population and rival it in gross domestic product, they should pay a significantly larger share of the costs. We should put an end to the illusion that, as the Financial Timesput it, “the U.S. commitment to defend even the newest and smallest NATO members must remain unconditional.” Like all alliances, NATO is valuable to the extent that it advances and defends other American national interests—it is an instrument, not the icon that some in Europe (and particularly Central Europe) would understandably like it to be.

Accordingly, the United States should reiterate its commitment to defend the Baltic states from naked aggression, in concert with other allies, but insist that the Baltic governments themselves attempt to normalize relations with Moscow and meet the highest international standards in ensuring the rights of ethnic Russians. The goal must be to prevent incidents that could provide a temptation—or excuse—for Russian intervention. There should be no illusions that America accepts responsibility for allies who provoke conflict and then request assistance and reassurance to deal with the consequences.

Seventh, the United States should never apologize for its values, for its belief that basic human rights are the endowment of all human beings and its conviction that democracy is the best form of government. This is who America is. Nonetheless, we recommend communicating to Putin that regime change is not America’s objective. As a recent superpower still nostalgic for its past glory, Russia is particularly sensitive to efforts to shape its domestic processes. We suggest treating Russia the way the United States treats other undemocratic nations with whom it is friendly, such as Saudi Arabia.

Eighth, we encourage your administration to give greater consideration to Russia’s possible and likely responses in making policy decisions. Today, Russia is almost an afterthought in U.S. national security decisionmaking. In selecting individuals for key positions dealing with Russia, it will be important to appoint those both willing and able to implement your policy.

Ninth, you should seek ways to expand the economic foundation of the bilateral relationship. Though Russia has the sixth-largest economy in the world (measured in terms of purchasing parity), it ranks thirty-seventh among buyers of American products. With more than thirty years of experience in dealing with Russia as a businessman, you can bring unprecedented insights into ways to address this issue.

Last but not least, you should recognize that any meaningful attempt to pursue a new beginning with Moscow will face fierce opposition from some in Congress, many in the media and more of the bureaucracy than you imagine. Having a strong national-security team—and explaining that in reaching out to Russia you will not abandon important U.S. interests—should be sufficient to assure those who are willing to wait and see. Still, there will be vigorous opposition to any realistic engagement with Russia. Some are irreconcilably hostile to Russia. Thus, for your sharp turn in policy to succeed, you will need to make your case directly to the American people—something you have done many times during the campaign. If Americans clearly understand that the current path leads inexorably to a crossroad at which the U.S. and Russian presidents will have to choose between humiliation and nuclear confrontation, they too will move beyond the wishful thinking that has thus far prevented the United States from effectively pursuing its real national interests.

Article Link To The National Interest:

Here’s How Obama Can Hit Back At Putin Over Hacking

By Tim Weiner
December 19, 2016

The verdict is unanimous: President Barack Obama and every U.S. intelligence service agree that Russian President Vladimir Putin has run a sophisticated intelligence operation designed to disrupt American democracy and elect Donald J. Trump. The lone dissenter? Trump himself.

Obama vows that the United States will respond at a time and in a manner of its choosing. He has, at this writing, one month to strike back. Tick. Tick. Tick.

The White House, the Pentagon, and the Central Intelligence Agency have contingency plans locked away in top-secret compartments. (In theory, locked away from Russia – who knows these days?) They could hit Moscow’s leaders, intelligence services and oligarchs where it hurts. The United States could strike at their computer motherboards or their offshore money. It could place multifaceted malware inside Putin’s espionage networks. It could throw a monkey wrench into his political machine.

If Obama looks back into the annals of the Cold War, he will find a fitting blueprint for the last big intelligence operation of his presidency. It has a perfect code name: Farewell.

By 1975 – the year Putin became a Soviet spy – an espionage unit called Line X was up and running in Moscow. It worked with the KGB’s directorate of science and technology; with the Soviet GRU, devoted to military intelligence; and with the spy services of Eastern Europe. The mission was to steal cutting-edge software and hardware, military and civilian, from the West. The Soviets were 10 years behind the United States in science and technology. They either could catch up or, in time, they could crumble.

In 1981, President Reagan met with President Francois Mitterand of France at an economic summit in Ottawa. They spoke through bilingual intelligence officers. Mitterand, a lifelong socialist, had an invaluable gift for Reagan, an inveterate capitalist, that would serve as a lethal weapon against the Soviets.

The French had an agent inside the KGB, Colonel Vladimir Vetrov, whom they called Farewell. Vetrov had delivered 4,000 documents detailing the work of Line X. They described years of intelligence operations aimed at stealing software for airborne radar systems, designs for war planes and ballistic-missile defenses, computer systems for everything from space shuttles to energy plants - the crown jewels of the American military-industrial complex.

William J. Casey and Vice President George H.W. Bush, respectively, the director and ex-director of the CIA, read the gist of the translated Farewell dossier. They shared it with Richard V. Allen, the national security adviser, who assigned a staff member, Gus Weiss, to help devise a long, slow, subtle and devastating plan of counterattack. Weiss wrote an after-action report for the CIA in 1996. You can read it on the agency’s website.

“It was a brilliant plan,” Allen said 20 years later in an oral history interview. “We started in motion feeding the Soviets bad technology - bad computer technology, bad oil-drilling technology. We fed them a whole lot, let them steal stuff they were happy to get.” FBI agents posed as corrupt military contractors. They shipped clueless Soviet spies everything they sought and more: computer chips for next-generation weapons, blueprints for chemical plants, state-of-the art turbines. Each had a subtle and fatal defect. This herd of Trojan horses soon started running wild and biting the Russian bear.

And then the United States decided to really let them have it.

The Soviets needed the software for sophisticated computer systems to control pressure gauges and valves vital to an immense natural-gas pipeline under construction from Siberia to Eastern Europe. The CIA and the FBI surreptitiously steered a Soviet Line X officer to a Canadian company that had exactly the software he’d been assigned to steal. Moscow was well pleased. The codes and silicon chips were implanted in the Trans-Siberian pipeline in late 1982. Months passed. Then, slowly, the pressure started building - tick, tick, tick. Out in the frozen tundra, a fireball exploded.

Of course, had the tables been turned, this could have been seen as an act of terror. But no one was killed. In the context of the Cold War, it was fair play. The CIA put the final touches on the Farewell case by sending deputy director John McMahon to Western Europe with his own dossier: the names of 200 Line X officers and foreign agents. He delivered it to the intelligence services of NATO nations.

The Americans had deployed an array of weapons in its intelligence arsenal - political warfare, cyber attacks, strategic deception, and economic sabotage, among others - in a counterstrike coordinated by the CIA, the FBI, the Pentagon, and the National Security Council. How might the lessons of Farewell be used today in a proportionate response to a global and sophisticated Russian intelligence operation?

Obama may want to limit his response to gathering intelligence on the Russian hacks and publishing it as a devastating report before he departs the Oval Office. But he also could try to punish Putin.

The coming attack might be invisible to the American people - at first - but it must be seen and felt by Putin. It could take cyberweapons which the Russians have used and turn them against Moscow. It could strike Russian leaders and oligarchs where they are most vulnerable, by revealing and publishing their political, personal, and financial secrets - just as Putin stole the secrets of the Democratic Party and weaponized the information to wound Hillary Clinton.

If we have learned anything from Putin’s attack on the American political system, it is an old but vital lesson: information is power. We may soon learn how he likes a taste of his bitter medicine.

Article Link To Reuters:

Beijing Sees U.S. Drone As Part Of South China Sea Spying Efforts

By Ben Blanchard 
December 19, 2016

An underwater drone taken by a Chinese naval vessel in the South China Sea last week is part of U.S. surveillance efforts in the disputed waterway, but Beijing won't likely make a big fuss about its handover, Chinese state media and experts said.

U.S. President-elect Donald Trump, who has vowed to take a more aggressive approach in dealing with China over its economic and military policies, jumped on the unusual drone seizure with a pair of provocative tweets, accusing Beijing of stealing the equipment.

The drone, known as an unmanned underwater vehicle (UUV), was taken on Thursday, the first seizure of its kind in recent memory.

The Pentagon went public with its complaint about the incident and said on Saturday it had secured a deal to get the drone back. China says its looking for an appropriate way to return the vehicle, but accused Washington of hyping up the issue.

China is deeply suspicious of any U.S. military activities in the resource-rich South China Sea, which China claims almost in its entirely.

The overseas edition of the ruling Communist Party's People's Daily said in a commentary on Monday the USNS Bowditch, which was operating the drone, was a "serial offender" when it came to spying operations against China.

"The downplaying of the actions of the drone cannot cover up the real intentions in the background," it said. "This drone which floated to the surface in the South China Sea is the tip of the iceberg of U.S. military strategy, including toward China."

The drone, which the Pentagon said was operating lawfully was collecting data about the salinity, temperature and clarity of the water about 50 nautical miles northwest of Subic Bay, off the Philippines.

The USNS Bowditch is an "infamous" military reconnaissance ship that has been surveying China's coastal waters since 2002, said Ma Gang, a professor at the People's Liberation Army National Defence University, told the official China Daily.

"Oceanic data is crucial for ship formations, submarine routes and battle planning," Ma said. "Therefore, it is normal for the Chinese Navy to be suspicious of Bowditch's activities given past experience."

According to Chinese state media, the same ship was involved in incidents in 2001 and 2002 when it was shadowed by Chinese navy ships while operating in the Yellow Sea. Chinese media say it has also operated in the sensitive Taiwan Straits.

Zhang Huang, director of the security studies center of the National University of Defence Technology, told the main edition of the People's Daily the United States had been using civilian excuses to collect information that could have military implications.

"As soon as an underwater drone enters our waters for close in surveillance, it may be used to collect all sorts of information about submarine routes for our navy, seriously threatening our naval security," Zhang said.

Ni Lexiong, a naval expert, Shanghai University of Political Science and Law, told Reuters he believed the Chinese navy probably had orders to take the drone.

But Ni said this is a very different incident from the 2001 intercept of a U.S. spy plane by a Chinese fighter jet that resulted in a collision that killed the Chinese pilot and forced the American plane to make an emergency landing at a base on Hainan.

"This is a much smaller incident, it won't affect the overall picture of China-U.S. relations," he said, adding that he did not expect China to seek an apology from the U.S.

The 24 U.S. air crew members were held for 11 days until Washington apologized for the incident. That encounter soured U.S.-Chinese relations in the early days of President George W. Bush's first administration.

Article Link To Reuters: