Thursday, December 29, 2016

Trump Rally Delivers Solid Year-End Results, And Analysts See More Gains Ahead

Trump rally delivers solid year-end results, and analysts see more gains ahead.

By Patti Domm 
December 30, 2016

Stocks could quietly close out 2016 with healthy gains and the promise of more in 2017.

The S&P 500 ended Thursday down less than a point at 2,249, and is now up 10 percent for 2016. The Dow finished off 13 points, at 19,819, as it drifted even further away from 20,000. The Dow was on course for a double-digit gain in 2016 as well, up 13.7 percent year to date.

Tobias Levkovich, Citigroup's chief U.S. equity strategist, expects another solid move higher for stocks in 2017, with his target of 2,425 for the S&P 500. He said investors are more hopeful, but not yet overly euphoric.

He expects a better environment for stocks, with an improving economy and better business climate, based on the proposals of the incoming Trump administration.

"There's very little question that a reduced regulatory backdrop with reduced taxes should encourage corporate animal spirits. The two things businesses are most concerned by is high taxation and high regulation," he said.

Energy should no longer be the drag it had been, and that should be another positive for stocks. "[S&P] earnings should grow in the 6 to 7 percent range. Half of that is just energy not being a drag like it was last year," he said.

Oil has recovered sharply from its February bottom in the $20s per barrel. West Texas Intermediate crude futures for February settled Thursday at $53.77 per barrel, off 29 cents. WTI is now up 45 percent for the year.

Treasury yields were lower Thursday, and end-of-year buying also helped spur demand at the Treasury's $28 billion seven-year note auction Thursday afternoon. The 10-year yield was trading at 2.47 percent in late afternoon Thursday.

Friday's market could be even quieter with bond trading ending early on the final day of the year. The stock market is open for a full day.

The final data for the year is Chicago PMI at 9:45 a.m. ET on Friday.

"I'm surprised there's as much softness as we've seen in the last two days. This year there's a double incentive not to sell. There's a potential that capital gains rates would be lower next year," said Randy Frederick, Charles Schwab managing director, trading and derivatives.

But Frederick and others said there are more pressures on the market, including the rebalancing of stock and bond positions by pension funds.

"You've got portfolio changes. You have professional investors trying to hit benchmarks," he said.

Frederick said the U.S. sanctions on Russia and expulsion of diplomats, announced Thursday, did not impact the market. "At this point there's not a whole lot to be worried about. We don't have a very good relationship with Russia to begin with. We don't have much trade with them," said Frederick.

Frederick said the market could see some tax-related selling next week by investors who expect lower capital gains tax rates in 2017. President-elect Donald Trump has said getting rid of the Affordable Care Act is a priority and that means the additional 3.8 percent add on to the capital gains tax for some investors would also go away. The capital gains tax rate is 20 percent.

Around the Jan. 20 inauguration may also be a time for selling, as Trump takes office and investors start to look for action on some of his promises, Frederick said. Trump's proposed tax cuts, reduced regulation and infrastructure spending have helped fuel a 5 percent gain in the S&P since the election.

"There's two times to be concerned in January. Economically the backdrop is solid, but you could argue, we'll have a little more volatility," Frederick said.

Article Link To CNBC:

What History Has To Say About The Economy Trump Will Inherit

The economy was stronger in 2016 than several previous election years.

By Andre Tartar
December 30, 2016 

Research suggests factors beyond the control of any U.S. president, not their actual policies, set the course of the economy. Yet with voters, President-Elect Donald Trump will secure much of the praise or blame when it comes to the impact of his agenda over the next four years.

Here are six charts that illustrate the economy that Trump — who wants to focus on "jobs, jobs, jobs" — will inherit from President Barack Obama and how it compares with historical standards.

Gross domestic product is chugging along, growing at a 1.7 percent pace in the year through the third quarter. That's slower than what most prior administrations faced, and comes against a backdrop of weak global demand, aging demographics and tepid corporate investment. Trump has said he's aiming to achieve 3.5 to 4 percent average annual growth, even as real GDP expansion is projected to average just 2.2 percent next year and 2.3 percent in 2018, according to economists.

Non-farm payrolls in November came in at 178,000, the fourth-worst situation among the 10 incoming presidents included in this analysis, though still a massive improvement from the nearly 770,000 jobs lost around Election Day 2008. The 4.6 percent jobless rate in the same month puts Trump in a better situation than five of the previous six presidents — the exception being President George W. Bush, who won the election in 2000 when the unemployment rate was under 4 percent. 

Hourly earnings in November grew just 2.4 percent, lower than the similar wage growth figure posted for each of the previous seven presidents-elect analyzed.

The core inflation situation is getting close to the Federal Reserve's medium-term 2 percent goal, largely unchanged from the situation inherited by presidents Obama, George W. Bush, and even Bill Clinton. That said, the Fed focuses on headline inflation, which includes volatile fuel and food and is lower today, at just 1.4 percent.

U.S. industrial production fell by 0.6 percent in November. While not the 8.7 percent contraction Obama had to overcome, reversing this will be one of Trump's biggest challenges. 

Trump is also in a better position when it comes to the housing market, with roughly 1.1 million homes beginning construction this November versus 652,000 when Obama became president-elect in late 2008. Looking back since 1952, however, this is the second-lowest November release of any of the election years analyzed.

While today's economy is a mixed bag by historical standards, one thing is clear: Obama has left Trump a 2016 economy in a better state, by many measures, than when he was first elected president in 2008 in the middle of the worst downturn since the Great Depression.

This analysis was based on the latest available data from all sources.

Article Link To Bloomberg:

Trump's Stimulus Would Strain Tight Labor Market

By Conor Sen
The Bloomberg View
December 30, 2016

The fiscal stimulus plan President-Elect Donald Trump and congressional Republicans hope to pass in 2017 is intended to increase real economic growth. But fiscal stimulus doesn't exactly create growth. It creates demand. Whether demand leads to real growth depends on factors out of the government's control: productivity and the labor force.

While real growth in the gross domestic product during this economic cycle has been lower than it was in past cycles, the drop in unemployment has surprised people for being as rapid as it has. Even with real GDP growth that has averaged only around 2.1 percent during this recovery since 2010, the unemployment rate has fallen sharply, from a peak of 10 percent in October of 2009 to 4.6 percent last month. Even in the slowest year of economic growth of this cycle, 2012, with 1.3 percent real GDP growth, the unemployment rate fell 0.6 percent.

Now policy makers face a challenge. At 4.6 percent, the unemployment rate has already beat the Federal Reserve's longer-run forecast of 4.8 percent. When the labor market is so tight, how much more growth is possible? If GDP growth of around 2 percent has been enough to lead to a steady drop in the unemployment rate, sustained growth of 3 to 4 percent would drive it down to levels we haven't seen in decades, and far below levels the Fed believes are sustainable.

Two variables could give the economy more of a growth runway: labor force growth and productivity growth. One of the reasons the unemployment rate has fallen so quickly despite sluggish GDP growth has been relatively low labor force participation. The "prime age" labor force participation rate for people ages 25 to 54 fell from 83.1 percent in December 2007 to a low of 80.6 percent in 2015. Since then, it has recovered somewhat, to 81.4 percent. The drop in the participation rate for people ages 20 to 24 has been even larger. Should their participation rates increase, and should baby boomers decide to work a little longer, that would allow the economy to grow faster without driving up wages and prices too far.

While the path to higher labor force participation seems straightforward enough -- higher wages in theory should mean higher participation -- tackling productivity growth is trickier. Nobody really knows the best way to increase productivity growth. If we did, everyone would do it. Is it more trade deals, outsourcing and globalization? More automation? More capital spending? More government research? Is productivity growth simply at the mercy of unpredictable booms of technological innovation?

What we know is that productivity growth has been low since the last recession -- one of the main reasons for subpar economic growth in general -- and that without an increase in productivity growth, a sustained campaign of fiscal stimulus may end up creating more inflation than growth.

While the incoming Trump administration is sometimes compared to the Reagan administration, when it comes to the economy the two have faced opposite problems. Reagan came into office with high unemployment, high inflation and high interest rates. His economic team sought to tackle the supply side of the economy by cutting taxes, regulations and government spending, aiming to reduce bottlenecks on the production of goods and services.

Trump, on the other hand, comes into office with low unemployment, low inflation and low interest rates. His voters weren't animated by lower inflation and taxes, but rather by the prospect of more jobs and growth. So his team will be focused on stimulus to generate demand -- but will that lead to growth?

If it does, Trump may be hailed as the president who got isolated and disconnected Americans back to work, and who restored productivity growth to its pre-recession levels. If it doesn't, he may create an inflationary mess for the Fed to clean up -- a legacy less reminiscent of Reagan than of Carter.

Article Link To The Bloomberg View:

Companies Rush To Link Jobs To Trump

But firms like SoftBank were planning to invest in the U.S. even before the election.

By Tony Romm
December 30, 2016

Nearly a month before Donald Trump won the White House, Japanese conglomerate SoftBank pledged to invest billions of dollars in the U.S. economy.

But that didn’t stop the company and its shrewd chief executive, Masayoshi Son, from portraying those plans this month as the direct result of Trump’s election victory — an example of how SoftBank and many of its corporate counterparts are scrambling for ways to curry crucial, early favor with the president-elect.

A growing list of companies — including Dow Chemical, Carrier and IBM — have sought to give Trump the credit he seeks for job or investment announcements, hoping their concessions can win them seats at the table as Trump begins crafting policies in health care, education, financial services and technology. Sprint, which is owned by SoftBank, joined the list this week, pledging to bring back 5,000 jobs months after cutting thousands of employees. And OneWeb, which plans to provide satellite-based internet service and is backed by SoftBank, similarly pledged to create jobs. SoftBank’s support for the company predates Trump.

Some of the business pledges are recycled news, and others amount to little more than public-relations messaging that will be hard to track to see whether promises are realized — but analysts see it as an emerging way for investors and executives to stay on Trump’s good side.

“I suspect if companies can make announcements that are positive for American jobs, then of course they will, because every company wants to be on the good side” of Trump, said Steve Odland, leader of the Committee for Economic Development and the former CEO of Office Depot and Autozone.

“I think companies are learning, and have learned, actions taken can provoke a response,” Odland said. “Nobody wants to be shamed.”

Trump’s transition team expects additional companies could come forward with similar promises to create jobs or invest more in the United States. Sean Spicer, the administration’s incoming press secretary, predicted on Thursday that Trump would bring about “more and more of this,” later calling it the “tip of the iceberg.”

SoftBank did not respond to a request for comment; nor did Dow Chemical. IBM and Sprint declined further comment.

Companies have reason to want to be on Trump’s good side. For corporate America, the big fear is Trump’s bully pulpit, which includes his Twitter account with more than 18 million followers. As a candidate, Trump skewered companies like Apple for making some of its devices overseas, and his criticisms generated vast social media backlash for others in his cross hairs. As president-elect, his Twitter rants have gained the added ability to send stock prices tumbling — a lesson that Lockheed Martin and Boeing learned this month.

Maybe fearing a fall from grace, companies have so far done little to correct Trump even when he’s misrepresented their work, overstated their plans or taken credit for hiring and investment talks initiated before his election.

After the president-elect claimed he had stopped Carrier from sending thousands of jobs to Mexico — an overstatement, by some measures — Chuck Jones, the president of a local chapter of the United Steelworkers, chided Trump to “get all the facts straight before he starts talking about what he’s done.” Trump responded in kind, launching a vicious assault against Jones on Twitter.

“The lesson for companies is it’s better to just shut up and go with the flow than to launch a correction,” said Bill Reinsch, a fellow who works on trade policy at the Stimson Center. “Particularly if you’re being complemented, if he’s praising your company for doing the right thing, the rational response is shut up, say thank you and move on.”

Reinsch noted that United Technologies, Carrier’s parent company, likely considered how much goodwill could be gained from the Carrier move and hoped that “the next three decisions they make, he’s not going to complain about."

That strategy might have been on the mind of Dow Chemical CEO Andrew Liveris, who appeared with Trump earlier this month to tout a new innovation center. Speaking in Michigan, he said his company’s investment — and Trump’s presidency — would create “several hundred jobs” at Dow. That drew the praise of Trump, who earlier had named Liveris to a key manufacturing advisory post.

In reality, though, Dow is creating about 100 jobs, while moving an additional 100 back to the U.S. from other facilities, the company previously told POLITICO. Dow already was in the midst of a restructuring as it seeks to purchase rival chemical company DuPont.

Then came IBM: The day before CEO Virginia Rometty planned to huddle with Trump and other tech executives in New York, the company known as Big Blue promised to hire 25,000 workers in Trump’s first term. The eye-popping figure, however, belied the fact that IBM previously had as many of 20,000 jobs open anyway, months after it laid off as many as 14,000 workers around the world, according to one estimate earlier this year.

By far the most aggressive in its outreach, though, is SoftBank, whose chief executive, Son, long has aspired for a bigger foothold in the United States. For years, he’s eyed T-Mobile, hoping he could combine the wireless carrier with Sprint, which SoftBank purchased in 2013 — a plan that the Obama administration has not supported.

Son sought out Trump for a meeting in New York earlier this month, and he emerged promising to create 50,000 jobs and invest more than $100 billion in the United States.

The jobs figure may have been a new data point, but SoftBank’s investment plans were not: Son and others had publicized their aim to raise billions of dollars, with the help of backers in Saudi Arabia, for a new fund focused on U.S. startups. The fund reportedly had been valued at about $100 billion, and regardless of its size, probably would have contributed to U.S. job growth. And Sprint’s hiring targets weren't a new number but merely a portion of what Son already promised.

Even the OneWeb investment that Trump heralded on Wednesday began months before Trump became the president-elect.

The company, which hopes to use satellites to bring internet service to hard-to-reach areas, started talking to SoftBank well before Election Day, Greg Wyler, the company’s founder and executive chairman, said in an interview with POLITICO. Rumors of a tie-up began to swirl in October. By mid-December, OneWeb took home $1 billion in total investment, led by its Japanese benefactor, while pledging to create 3,000 new jobs, and it wasn't until Wednesday that it registered on Trump’s radar.

In Wyler’s telling, Son increased his “investment with us” after the SoftBank CEO met with Trump, though he declined to specify the amount of the increase. Still, the funding — and Trump’s positive feedback — appears to have offered some early benefit to the company. Wyler said there have been “indirect conversations” with Trump’s transition team about space policy but declined to comment on the nature or date of those talks.

“The announcement from the Trump administration, and the support for our space adventures, and to enable global internet access, is fantastic,” Wyler said.

Article Link To Politico:

Trump’s Extreme Oligarchy

By Simon Johnson
Project Syndicate
December 30, 2016

US President-elect Donald Trump is filling his cabinet with rich people. According to the latest count, his nominees include five billionaires and six multimillionaires. This is what is known as oligarchy: direct control of the state by people with substantial private economic power. Given that the Republicans also control both houses of Congress – and will soon make many judicial appointments – there is virtually no effective constraint on the executive branch.

In many instances – including the United States today – the initial reaction to such a government includes the hope that perhaps rich people will be good at creating jobs. They made themselves rich, goes the logic, so maybe they can do the same for the rest of us.

Hope usually dies last, but the incoming administration’s proposed economic policies are not encouraging. The organizing principle seems to be to discard pragmatism entirely and advance an extreme and discredited ideology.

The central theme of Trumponomics so far has been swift and sharp tax cuts. But Mick Mulvaney, Trump’s pick to run the Office of Management and Budget (OMB) is a prominent and articulate deficit hawk; he will have a hard time supporting measures that increase the national debt.

To some extent, tax cuts will be justified with overly optimistic projections regarding their impact on economic growth, as was done under President George W. Bush, with generally disastrous effects. But there is a limit to how much pressure can be put on the Congressional Budget Office, which is responsible for providing credible assessments of the fiscal impact of new policies.

Trump seems determined to lower income taxes for high-income Americans, as well as to reduce capital-gains tax (mostly paid by the well-off) and nearly eliminate corporate taxes (again, disproportionately benefiting the richest). To do this, his administration will seek to increase taxes on others, and now we are beginning to see what this will look like. People close to the president-elect are considering an import tariff, set at around 10%.

This tariff will undoubtedly be presented to the public as a move to make American manufacturing great again. But a tariff is just another name for a tax that increases the costs of all imported goods. This could help a few firms at the margin – and presumably Trump’s team will highlight news stories (real or fake) about a few hundred or even a few thousand jobs being “saved.”

But the cost per job will be high: all imports will become more expensive, and this increase in the price level will filter through to the cost of everything Americans buy. In effect, the oligarchs will reduce direct taxation on themselves and increase indirect taxation on everyone – much like increasing the sales tax on all goods. Under any such proposal, the burden of taxation would be shifted from the better off to those with less income and little or no wealth.

And that may be just the start of the negative impact on most Americans’ well-being. If Trump increases tariffs on imported goods, some or all of America’s trading partners will most likely retaliate, by imposing tariffs on US exports. As US export-oriented firms – many of which pay high wages – reduce output, relative to what they would have produced otherwise, the effect will presumably be to reduce the number of good jobs.

Some countries – such as China – may deploy other punitive measures against US firms operating on their territory. The net effect will again be to reduce employment, both worldwide and in the US. The world has had much experience with “trade wars,” and it has never been positive.

Why would a group of American oligarchs pursue such a disastrous policy? The Trump administration is taking shape as a coalition of businesspeople who wrongly believe that protectionism is a good way to help the economy and market fundamentalists who now dominate the Republican caucus in the US House of Representatives.

Before Trump’s rise to prominence, the House Republicans were developing a set of policies structured around deep tax cuts, sweeping deregulation (including for finance and the environment), and repeal of President Barack Obama’s signature health-care reform, the Affordable Care Act (“Obamacare”). They were, however, resolutely in favor of freer trade – and the Obama administration’s plan was to enact the Trans-Pacific Partnership (TPP), a free-trade agreement with 11 other Pacific Rim countries, with substantial Republican support in Congress.

Trump’s election has not changed the core House Republican agenda – in fact, it has brought that agenda’s architects into government, at OMB, at the Department of Health and Human Services, the CIA, and other prominent positions, with more likely to follow. As my colleague James Kwak explains in his new book Economism, their pro-market thinking has gone too far and is unlikely to lead to good outcomes.

Selling Trump’s signature issue – protectionism – to the House Republicans was not easy. But now they have started to think about an import tariff as part of their tax “reform” package, they will all start to get on board. And they will offer various strange justifications that deflect attention from the essentials of their policy: lower taxes for the oligarchs and people like them, and higher taxes – not to mention significant losses of high-paying jobs – for almost everyone else.

Article Link To Project Syndicate:

Now’s The Time To Rein In A Failed United Nations

By Rich Lowry
The New York Post
December 30, 2016

We’ve come a long way from Daniel Patrick Moynihan excoriating the United Nations’ 1975 “Zionism is racism” resolution in one of the finer exhibits of righteous indignation in the history of American speechifying.

The Obama administration acceded to — and, reportedly, assisted behind the scenes — a less-notorious but still noxious Security Council resolution condemning Israeli settlements. By the administration’s lights, the action is clever — it will be extremely difficult to reverse and will increase Israel’s international isolation.

But the bipartisan outrage over a resolution that, once again, demonstrates the United Nations’ hostility to our closet ally in the Middle East affords an opportunity to force an overdue crisis in the US-UN relationship.

We are the chief funder of a swollen, unaccountable UN apparatus that has been a gross disappointment going on more than 70 years now.

Proving that no country is perfect, we came up with the idea for the UN in the first place. FDR thought that the Four Policemen of Britain, the United States, the Soviet Union and China (with France eventually added as well) would keep the peace in the post-World War II world. Spot the flaw in this plan.

This vision immediately foundered on the reality of power politics. The first major event in the United Nations’ life after the Security Council began meeting in New York City was a threatened Soviet walkout. The Soviets used their Security Council veto about 50 times in the United Nations’ first years of existence.

It turned out that states with different interests and values weren’t going to act as a band of righteous international enforcers. In fact, as demonstrated in Rwanda and the Balkans, when confronted by hideously predatory forces bent on mayhem and murder, UN peacekeepers would simply stand aside.

In the decades after the UN’s founding, the influence of third-world dictatorships grew and so did the institution’s anti-Western and anti-Israel orientation, culminating in the Zionism resolution that US Ambassador to the UN Moyhihan so memorably inveighed against. That vote was finally reversed in 1991, but prejudice against Israel has become one of the organization’s core competencies — as well as impenetrable bureaucracy.

As early as 1947, a US Senate committee flagged “serious problems of overlap, duplication of effort, weak coordination, proliferating mandates and programs, and overly generous compensation of staff within the infant, but rapidly growing, UN system.” And those were the early, lean years.

We pay more than anyone else to keep the United Nations in business, about 22 percent of the UN’s regular budget. As Brett Schaeffer of the Heritage Foundation notes, “the US is assessed more than 176 other UN member states combined.”

Because nothing involving the United Nations is clean or straightforward, it’s hard to even know how much the United States pays in total into the UN system. But it’s probably around $8 billion year.

We should withhold some significant portion of it, and demand an end to the UN’s institutional hostility to Israel and the implementation of reforms to increase the organization’s accountability. There are individual UN agencies that do good work, and we can continue to support those.

Realistically, though, the United Nations will always be a disappointment. The fact is that the closest thing to what FDR envisioned in the UN is NATO, a like-minded group of nations that has been a force for peace, order and freedom. This is why President-elect Donald Trump should embrace NATO and turn his critical eye to the United Nations, where there is the genuine opportunity to, if nothing else, save the United States some money and rattle the cages of people taking advantage of our beneficence.

Charles De Gaulle dismissively called the UN “the thing.” The thing will always stumble on, but maybe Donald Trump can teach it a lesson or two about how we truly value our ally and its nemesis, Israel.

Article Link To The New York Post:

Krauthammer: Obama’s Late Hit On Israel

It’s his final, most shameful, legacy moment.

By Charles Krauthammer 
The National Review
December 29, 2016

“When the chips are down, I have Israel’s back.”
— Barack Obama, AIPAC conference, March 4, 2012

The audience — overwhelmingly Jewish, passionately pro-Israel, and supremely gullible — applauded wildly. Four years later — his last election behind him, with a month to go in office and with no need to fool Jew or gentile again — Obama took the measure of Israel’s back and slid a knife into it.

Many people don’t quite understand the damage done to Israel by the U.S. abstention that permitted passage of a Security Council resolution condemning Israel over its settlements. The administration pretends this is nothing but a restatement of longstanding U.S. opposition to settlements.

Nonsense. For the last 35 years, every administration, including a reelection-seeking Obama himself in 2011, has protected Israel with the U.S. veto because such a Security Council resolution gives immense legal ammunition to every boycotter, anti-Semite, and zealous European prosecutor to penalize and punish Israelis.

An ordinary Israeli who lives or works in the Old City of Jerusalem becomes an international pariah, a potential outlaw — to say nothing of the soldiers of Israel’s citizen army. “Every pilot and every officer and every soldier,” said a confidant of Palestinian leader Mahmoud Abbas, “we are waiting for him at The Hague” — i.e., the International Criminal Court.

Moreover, the resolution undermines the very foundation of a half century of American Middle East policy. What becomes of “land for peace” if the territories Israel was to have traded for peace are, in advance, declared to be Palestinian land to which Israel has no claim?

The peace parameters enunciated so ostentatiously by Secretary of State John Kerry on Wednesday are nearly identical to the Clinton parameters that Yasser Arafat was offered and rejected in 2000 and that Abbas was offered by Prime Minister Ehud Olmert in 2008. Abbas, too, walked away.

Kerry mentioned none of this because it undermines his blame-Israel narrative. Yet Palestinian rejectionism works. The Security Council just declared the territories legally Palestinian — without the Palestinians’ having to concede anything, let alone peace.

The administration claims a kind of passive innocence on the text of the resolution, as if it had come upon it at the last moment. We are to believe that the ostensible sponsors — New Zealand, Senegal, Malaysia, and a Venezuela that cannot provide its own people with toilet paper, let alone food — had for months been sweating the details of Jewish housing in East Jerusalem.

Nothing new here, protests deputy national-security adviser Ben Rhodes: “When we see the facts on the ground, again deep into the West Bank, beyond the separation barrier, we feel compelled to speak up against those actions.”

This is a deception. Everyone knows that remote outposts are not the issue. Under any peace, they will be swept away. Even the right-wing defense minister, Avigdor Lieberman, who lives in one of these West Bank Settlements, has stated publicly that “I even agree to vacate my settlement if there really will be a two-state solution.” Where’s the obstacle to peace?

A second category of settlement is the close-in blocs that border 1967 Israel. Here, too, we know in advance how these will be disposed of: They’ll become Israeli territory and, in exchange, Israel will swap over some of its land to a Palestinian state. Where’s the obstacle to peace here?

It’s the third category of “settlement” that is the most contentious, and that Security Council resolution 2334 explicitly condemns: East Jerusalem. This is not just scandalous; it’s absurd. America acquiesces to a declaration that, as a matter of international law, the Jewish state has no claim on the Western Wall, the Temple Mount, indeed the entire Jewish Quarter of Jerusalem. They belong to Palestine.

The Temple Mount is the most sacred site in all of Judaism. That it should be declared foreign to the Jewish people is as if the Security Council declared Mecca and Medina to be territory to which Islam has no claim. Such is the Orwellian universe Israel inhabits.

At the very least, Obama should have insisted that any reference to East Jerusalem be dropped from the resolution or it would face a U.S. veto. Why did he not? It’s incomprehensible — except as a parting shot of personal revenge on Benjamin Netanyahu. Or perhaps as a revelation of a deep-seated antipathy to Israel that simply awaited a safe political interval for public expression.

Another legacy moment for Barack Obama. And his most shameful.

Article Link To The National Review:

Obama’s Late Cyber Defense

He finally sanctions Russia, and Trump should get the message.

By Review & Outlook
The Wall Street Journal
December 30, 2016

President Obama promised retaliation against Russia’s cyber-meddling in this year’s U.S. elections “at a time and place of our choosing,” and on Thursday he followed through with an order to expel Russian agents and sanction Russian intelligence agencies. That’s a start, but the pity is that it comes at the end of a Presidency that held on to its Kremlin illusions for too long—and on the eve of another Presidency that risks making the same mistake.

Mr. Obama ordered that 35 Russian operatives be expelled and Russian intelligence compounds in Maryland and New York shut down. Nine Russian entities and individuals have been sanctioned, including four Russian military intelligence officers.

More important, technical data on Russian hacking methods will be declassified to help network experts “identify, detect and disrupt Russia’s global campaign of malicious cyber activities.” Mr. Obama also promised that he would take other steps, “some of which will not be publicized.”

Let’s hope so, because efforts to sanction Russia’s powerful FSB and GRU intelligence agencies won’t carry much sting with the officials and hired hackers who carried out the cyberattacks. Identities can always be changed and fake documents issued. The Kremlin has already promised that it will retaliate in kind, probably by expelling a similar number of U.S. diplomats from Moscow and stepping up its harassment of those who remain, washing out the impact of Mr. Obama’s order.

The larger flaw is that Mr. Obama’s order amounts to a far too late signalling exercise to underscore U.S. displeasure, rather than a serious retaliatory strike that imposes real costs on responsible Russian officials. House Speaker Paul Ryan was right to support Mr. Obama’s actions, but he was also right to add with no small irony that they are “an appropriate way to end eight years of failed policy with Russia.”

A better response would begin by exposing the embarrassing financial details of senior Russian officials—of which, as April’s Panama Papers’ disclosure suggested, there are plenty. That would get the attention of Vladimir Putin’s political and financial courtiers.

Further up the retaliatory chain, the U.S. and its allies could deploy offensive cyber-capabilities to disrupt or cripple sensitive Russian computer networks, expand the 2012 Magnitsky Act to impose travel bans and asset seizures on Russians involved in hacking, and even cut off Russian banks from the Swift financial network.

The Obama Administration has fretted that the U.S. must maintain “escalation dominance” against Russia, which may explain why even Thursday’s steps were so modest. But Mr. Obama’s timid responses so far to Moscow—and to attacks from China and North Korea—have emboldened its hackers to meddle in the U.S. political process. The Russian regime is nothing if not a respecter of power, and only a U.S. President willing to exercise it will get the Kremlin to stop.

Which brings us to Donald Trump, who told reporters who asked about Kremlin hacking on Wednesday that the U.S. should “get on with our lives” and that “the whole age of the computer has made it where nobody knows exactly what’s going on.” Lord knows what the President-elect means by that, but it seems to extend his strange and dangerous habit of making excuses for Mr. Putin and treating hacking as a nuisance, not a threat to U.S. national and economic security.

On Thursday the transition released a more considered statement from Mr. Trump repeating that it’s time to “move on” but that “in the interest of our country” he’d meet with U.S. intelligence officials next week “in order to be updated on the facts of this situation.” He’s wise to do so lest Mr. Putin treat him as a cyber-patsy the way he has Mr. Obama.

Article Link To The Wall Street Journal:

Russia And America's Cyber Deterrence Dilemma

Sanctions won't deter future Russian cyber attacks not only because of Washington’s limited ability to impose costs on officials it believes ordered the hacking, but because neither side is ready to accept deterrence in the cyber domain.

The National Interest
December 30, 2016

After months of increasingly strident warnings about Russian cyber attacks, including Russia’s alleged meddling in the 2016 presidential race, the Obama administration has imposed an array of sanctions and punitive measures against Russian targets. The President described the measures as a “response to the Russian government’s aggressive harassment of U.S. officials and cyber operations aimed at the U.S. election.” After “repeated private and public warnings that we have issued to the Russian government,” Obama added, sanctions “are a necessary and appropriate response to efforts to harm U.S. interests in violation of established international norms of behavior.”

In its remaining time in office, the Obama administration’s resolve to respond to Russia’s actions is clear. A bipartisan majority on Capitol Hill appears almost certain to support these measures, and is likely to impose additional punitive sanctions against Moscow in the near future. Much less clear is whether pressure from such sanctions can actually change the Russian behavior that has caused so much consternation in Washington.

U.S. sanctions against Russia are not new. Throughout the Cold War, Congress and the Executive branch wielded trade sanctions to underscore U.S. disapproval of Soviet foreign policy, as well as Moscow’s treatment of its own citizens, including Jewish refuseniks and other dissidents. Since the collapse of President Obama’s own attempt to “reset” relations with Russia, sanctions have once again taken center stage as the preferred instrument of U.S. opposition to Russian policies.

In 2012, Obama signed into law the Magnitsky Act, which sanctioned designated Russian individuals for their involvement in human rights abuses, and to which Moscow responded with a ban on adoptions of Russian orphans by U.S. citizens, plus a crackdown on U.S.-supported Russian charities and NGOs. New rounds of U.S. sanctions, this time paired with similar European measures, followed Russia’s 2014 invasion and annexation of Ukraine’s Crimean Peninsula, and its support for an armed insurgency in Eastern Ukraine. Russia responded with counter-sanctions against Western products and services, harsh anti-Western rhetoric, and—according to U.S. and European intelligence communities—a concerted disinformation campaign, including cyber attacks on U.S. political targets.

If the purpose of the Magnitsky sanctions has been to improve the situation for dissidents and whistleblowers in Russia, it would be hard to argue that they have succeeded. Likewise, to the extent that Ukraine-related sanctions seek to compel Moscow to implement its commitments under the Minsk framework agreements, they have clearly fallen short as well.

It should be no surprise that Western sanctions have resulted in neither dramatic reform of the Russian political system nor reversals in the Kremlin’s foreign policy. But, as sanctions advocates contend, they could serve as part of an effective deterrent against future Russian actions. The key question, therefore, is whether the latest sanctions—or any sanctions, for that matter—will be adequate to deter future Russian actions of the sort that have provoked this U.S. response.

At the height of the Cold War, Nobel laureate economist Thomas Schelling defined deterrence as the use of power not to coerce or compel, but to prevent an adversary’s attack. Schelling’s view of nuclear weapons as a deterrent echoed George F. Kennan’s famous insistence that the Soviet leadership could be deterred. “If the adversary has sufficient force and makes clear his readiness to use it,” Kennan wrote, “he rarely has to do so.”

What would it take for such a deterrence framework to constrain future Russian cyber attacks? First, the attacks must be clearly defined and clearly attributed to Russia. By that measure, it is problematic that the White House has announced retaliatory measures before releasing the results of an intelligence community review of Russia’s intervention in the 2016 election to be completed later in January.

While some U.S. intelligence sources have already concluded with “high confidence” that senior Russian officials approved of cyber attacks on U.S. political targets with the intention of swaying the 2016 election, President-elect Donald Trump has dismissed this finding, tweeting, “these are the same people that [in 2003] said Saddam Hussein had weapons of mass destruction.” The problem is that if Americans are not in clear agreement about the specific Russian actions being punished—and thus the actions to be deterred in the future—they risk muddling the message to Russians, Chinese, or anyone else Washington intends to deter.

The second measure of a successful deterrent strategy is whether the threatened punishment is credible and within Washington’s power to execute. The administration will almost certainly follow through on punitive measures against those listed in the new executive order, including Russia’s top FSB and GRU leadership. The President has also promised to “continue to take a variety of actions at a time and place of our choosing, some of which will not be publicized.” What matters is whether the targets of these measures are those actually responsible for the cyber attacks, and thus those who can decide whether to undertake such attacks in the future.

The final measure is whether the adversary is actually deterred: are U.S. sanctions more costly for the Russians than the perceived benefit of the attacks? Judging from the Kremlin’s reaction thus far, it does not appear that individual sanctions against senior Russian officials will have much of a deterrent effect. On the contrary, U.S. measures “naming and shaming” top Russian officials, while punishing other individuals and entities linked to cyber attacks, are very likely to be treated by the Kremlin as a justification for new countermeasures.

“If Washington really does take new hostile steps,” the Russian government has already warned, “they will be answered.” Recalling Russia’s retaliation following past U.S. sanctions, Washington should indeed expect escalation of the conflict rather than effective deterrence. Where and how this will occur is not yet clear, underscoring the risk of uncontrolled conflict escalation in the cyber domain.

U.S. sanctions are unlikely to deter future Russian cyber attacks not only because of Washington’s limited ability to impose adequate costs on the senior Russian officials it believes have ordered the hacking, but because neither side appears prepared to accept mutual deterrence in the cyber domain. In the early 2000’s, the Russian side proposed negotiations towards a cyber arms control treaty, but at the time U.S. officials had little interest in constraining capabilities in which they expected to enjoy unrivaled dominance. Now, the Kremlin may view cyber attacks as an indispensable counterweight to U.S. and NATO dominance in the conventional military sphere, and thus the Russians may be less inclined to negotiate.

The simple truth is that if either side believes it can gain more by using cyber weapons than by preventing their use, deterrence will fail. So far, U.S. sanctions have underscored the urgency of the cyber threat, but they are not likely to reduce it. Although President-elect Trump has signaled his desire to reduce conflict with Russia and focus on common interests, such as combatting ISIS, he will inherit a dangerously dysfunctional relationship, drifting rapidly toward a 21st century version of the Cold War.

Article Link To The National Interest:

U.S. Evicts Russians For Spying, Imposes Sanctions After Election Hacks

By Jeff Mason and Lesley Wroughton
December 30, 2016

President Barack Obama on Thursday ordered the expulsion of 35 Russian suspected spies and imposed sanctions on two Russian intelligence agencies over their involvement in hacking U.S. political groups in the 2016 presidential election.

The measures, taken during the last days of Obama's presidency, mark a new post-Cold War low in U.S.-Russian ties and set up a potential flashpoint between incoming President-elect Donald Trump and fellow Republicans in Congress over how to deal with Moscow.

Obama, a Democrat, had promised consequences after U.S. intelligence officials blamed Russia for hacks intended to influence the 2016 election. Officials pointed the finger directly at Russian President Vladimir Putin for personally directing the efforts and primarily targeting Democrats, who put pressure on Obama to respond.

"These actions follow repeated private and public warnings that we have issued to the Russian government, and are a necessary and appropriate response to efforts to harm U.S. interests in violation of established international norms of behavior," Obama said in a statement from Hawaii, where he is on vacation.

"All Americans should be alarmed by Russia’s actions," he said.

It was not clear whether Trump, who has repeatedly praised Putin and nominated people seen as friendly toward Moscow to senior administration posts, would seek to roll back the measures once he takes office on Jan. 20.

Trump has brushed aside allegations from the CIA and other intelligence agencies that Russia was behind the cyber attacks. He said on Thursday he would meet with intelligence officials soon.

“It's time for our country to move on to bigger and better things," Trump said in a statement.

"Nevertheless, in the interest of our country and its great people, I will meet with leaders of the intelligence community next week in order to be updated on the facts of this situation," he said, without mentioning Russia.

The Kremlin, which denounced the sanctions as unlawful and promised "adequate" retaliation, questioned whether Trump approved of the new sanctions. Moscow denies the hacking allegations.

U.S. intelligence agencies say Russia was behind hacks into Democratic Party organizations and operatives ahead of the Nov. 8 presidential election. U.S. intelligence officials say the Russian cyber attacks were aimed at helping Trump defeat Democrat Hillary Clinton.

Republican and Democratic lawmakers have voiced concern about Russia's actions, setting up a potential wall of opposition should Trump seek to overturn Obama's measures.

U.S. House of Representatives Speaker Paul Ryan, the top Republican in Congress, said Russia "has consistently sought to undermine" U.S. interests and called the sanctions overdue.

Republican Senators John McCain and Lindsey Graham said they intended to lead effort in Congress to "impose stronger sanctions on Russia."

Incoming White House Chief of Staff Reince Priebus told Fox News he did not condone foreign governments hacking U.S. institutions.

"It’s wrong and it’s something we don’t agree with," Priebus said. "However, it would be nice if we could get to a place where the intelligence community in unison can tell us what it is that has been going on and what the investigation was and what it has led to so that we can respond."

The Trump team's response could generate bipartisan discord early in the new administration's tenure.

"This is going to be a key source of tension post-inauguration," said Eric Lorber, a senior associate at the Financial Integrity Network, which advises banks on sanctions.

Spies And Sanctions

Obama put sanctions on two Russian intelligence agencies, the GRU and the FSB, four GRU officers and three companies that he said "provided material support to the GRU’s cyber operations."

He said the State Department declared as "persona non grata" 35 Russian intelligence operatives and is closing two Russian compounds in New York and Maryland that were used by Russian personnel for "intelligence-related purposes." The State Department originally said the 35 were diplomats.

The 45-acre complex in Maryland includes a Georgian-style brick mansion, swimming pool, tennis courts and cottages for embassy staff.

A senior U.S. official told Reuters the expulsions would come from the Russian embassy in Washington and consulate in San Francisco. The Russian embassy declined to comment.

The Russians have 72 hours to leave the United States, the official said. Access to the two compounds will be denied to all Russian officials as of noon on Friday.

The State Department has long complained that Russian security agents and traffic police have harassed U.S. diplomats in Moscow, and U.S. Secretary of State John Kerry has raised the issue with Putin and his foreign minister, Sergei Lavrov.

The U.S. official declined to name the Russian diplomats who would be affected, although it is understood that Russia's ambassador to the United States, Sergei Kislyak, will not be one of those expelled.

Obama said the actions announced on Thursday were just the beginning.

"These actions are not the sum total of our response to Russia’s aggressive activities. We will continue to take a variety of actions at a time and place of our choosing, some of which will not be publicized," Obama said.

A report detailing Russia's interference in the 2016 election as well as cyber attacks in previous election cycles would be delivered to Congress in the coming days, he added.

The sanctions were the strongest response yet by the Obama administration to Russia's cyber activities. However, a senior administration official acknowledged that Trump could reverse them and allow Russian intelligence officials back into the United States once he takes office. He said that would be inadvisable.

Obama amended an executive order originally issued in April 2015 to respond to cyber hacking to include sanctions on those who tamper with information to interfere with an election.

Trump said in October he would “cancel every unconstitutional executive action, memorandum and order issued by President Obama" on his first day in office, without saying who would determine their constitutionality.

Article Link To Reuters:

Iraqi Forces Launch Fresh Advance Against ISIS Inside Mosul

By Stephen Kalin
December 29, 2016

Iraqi security forces launched a fresh advance on Thursday against Islamic State militants in several southeastern districts of Mosul, where the fight had been stalled for about a month, Interior Ministry officials said.

"Our troops now are advancing. In the first five or 10 minutes they took 500 meters. Just now they are starting to shoot," said an officer from the rapid response forces, an elite Interior Ministry unit.

Those forces were advancing in Intisar district, while thousands of federal police troops redeployed from Mosul's southern outskirts two weeks ago were expected to push into a nearby area, he said.

The battle for Mosul, involving 100,000 Iraqi troops, members of the Kurdish security forces and Shi'ite militiamen, is the biggest ground operation in Iraq since the U.S.-led invasion of 2003.

Elite Iraqi soldiers have retaken a quarter of Mosul, the militants' last major stronghold in Iraq, but their advance has been slow and punishing. They entered a planned "operational refit" earlier this month, the first significant pause of the campaign.

The upcoming phase appears likely to give U.S. military advisers, part of an international coalition fighting Islamic State, a bigger role as they embed more extensively with Iraqi forces.

Mosul, the largest city held by Islamic State anywhere across its once vast territorial holdings in Iraq and neighboring Syria, has been held by the group since its fighters drove the U.S.-trained Iraqi army out in June 2014.

Its fall would probably end the group's ambition to rule over millions of people in a self-styled caliphate, but the fighters could still mount a traditional insurgency in Iraq, and plot or inspire attacks on the West.

Iraqi Prime Minister Haider al-Abadi, who previously pledged to retake Mosul by the end of the year, said this week it would take another three months to rout Islamic State in Iraq.

Article Link To Reuters:

Trump Will Face A Cornucopia Of Global Threats

No major power beyond the United States appears committed to the international order's maintenance.

The National Interest
December 29, 2016

IN 2017, the global environment is more dangerous than at any time since the end of World War II and is beset by numerous unfolding regional and global crises. Several countries seek to overturn the existing international order; no major power, except for the United States, appears to be seriously committed to its maintenance.

Instead of facing a single foreign-policy problem, President-elect Donald Trump will be confronted with an unprecedented array of diverse international challenges. These include: North Korea’s erratic leader Kim Jong-un and his nuclear saber rattling; an irredentist and reckless Russia that has annexed Crimea, is committing war crimes whilst waging war in eastern Ukraine and Syria, and seems poised to engage in further acts of aggression against neighboring countries; a Europe that is afflicted by the refugee crisis and continued economic and political malaise; a China that is engaged in a campaign of intimidation against its neighbors, is assertively pressing maritime claims and seeking to reduce, and eventually exclude, American influence from Asia; Iran’s efforts to dominate the Middle East and the rising tide of Sunni-Shia strife and destabilization in the region; and the jihadi terrorist threat.

The United States now is neither feared nor respected. Its enemies have been emboldened and are working together; the Moscow-Beijing-Tehran axis is the most significant example. They seek not just to inflict a series of humiliating defeats on the United States, but also to discredit the entire American approach to global and domestic governance. And, unfortunately, they have attained some success in these efforts.

America’s friends feel neglected, marginalized and alienated; its alliances have been weakened. Having repeatedly drawn “lines in the sand” and having repeatedly retreated from them, America’s credibility has been greatly damaged and its global influence diminished. The Obama administration’s flirtation with a no-first-use nuclear-weapons policy has been particularly damaging in undermining extended-deterrence guarantees.

The president-elect is also faced with a major decline in domestic support for an assertive foreign policy. While there has always been an isolationist streak in the American body politic, a major portion of the electorate now questions the value of U.S. global leadership. Many Americans have also turned sharply against free trade, which has been a major component of American postwar global strategy. Many disdain U.S. alliances and global institutions as irrelevant at best and dangerous at worst.

While these challenges are daunting, they can be managed. The United States remains the world’s strongest economic and military power, with a tremendous capacity for rejuvenation. The American people remain intensely curious about the world, idealistic and, with appropriate encouragement, willing to embrace an engaged foreign policy. America’s foes are plagued by numerous domestic problems, such as an acute legitimacy deficit, that can be exploited by an adroit foreign policy.

Accordingly, there are a number of steps that need to be taken. First, the new president must put forth a strategy that clearly lays out the fundamentals of U.S. foreign policy and elaborates why vital national interests require American global leadership. Second, the United States must lead internationally and engage both allies and friends and deter foes. Toward this end, the president must pledge to honor treaty commitments. Given finite domestic resources, burden sharing and alliance management are essential. Third, America should commit itself to maintaining a stable and rule-based international order. Our core values and moral narrative must be neither forsaken nor imposed. Fourth, recognizing that a strong domestic economy and defense are key to America’s power globally, President-elect Trump should concentrate heavily on both.

Some have spoken of the twenty-first century as the next “American Century.” There is no reason why this cannot be the case.

Article Link To The National Interest:

Post-Brexit, Britain Will Love Europe

Without the poison of EU membership and with Donald Trump in the White House, Britain may feel European after all.

By Tom McTague
Politico EU
December 29, 2016

Brexit may finally have turned Britain pro-European.

Once divorce proceedings with Brussels are out of the way, say an increasing number of British MPs, European diplomats and foreign policy analysts, the U.K. can rebuild ties with its European neighbors — increasingly important political and ideological allies in the age of Trump — from more solid foundations. Unlike before, the new alliance will not be infected from the start.

Far from being the cure for Britain’s Euro-hostility, membership of the continent’s grandest project became the “poison” at the heart of the relationship, infecting everything it touched.

“The gradual divergence of our economic interests from the euro currency countries would have continued to have been the poison in our relationship with our partners in the EU,” said Crispin Blunt, the Conservative chairman of the House of Commons foreign affairs select committee.

“Once we’re outside the EU, this poison drains away and our relationship becomes a positive one with shared mutual interests — the success of the 27 as a union becomes a positive interest for the United Kingdom, alongside all our bilateral country-to-country relations.”

After 50 years of growing Euroskepticism, June’s referendum may prove the shock Britain needed to begin making the rational case for engaging with Europe, according to the senior figures in U.K. and European foreign policy circles.

The tectonic plates of global politics are juddering with such force, few in Westminster feel confident enough to predict where the U.K. will land after Brexit.

In the foreign office and across Whitehall, an uncomfortable reality is dawning — the U.K. is leaving Europe at a time when many in Westminster have never felt more European.

Britain’s essential Europeanism has only been further emphasized by the election of Donald Trump in the United States, whose emerging world view suddenly makes America feel a very long way from Britain — and from most European countries.

From free trade to gay rights, nuclear proliferation, Russian expansionism and global warming (and almost everything in between), Theresa May has more in common with most of her European partners than she does with the incoming U.S. president.

A New Special Relationship

The tectonic plates of global politics are juddering with such force, few in Westminster feel confident enough to predict where the U.K. will land after Brexit. Divorce could easily turn bitter, souring the relationship for years to come. There is particular concern over the multi-billion Brexit break-up bill which could be demanded from Brussels.

Yet there are growing murmurings that a new special relationship may emerge from the Brexit earthquake — one, counter-intuitively, between the U.K. and Europe rather than with the States.

In telephone calls with senior figures in Trump’s team, U.K. Foreign Secretary Boris Johnson has pushed his department’s traditional script on the U.K.-U.S. special relationship and underlined the threat to the West from Moscow.

Responses from Vice President-elect Mike Pence and Trump ally Rudy Giuliani have been reassuring, senior government aides said, but there is a private acknowledgement that London has been left in a holding pattern, watching Twitter for clues as to what the most unpredictable president in recent American history will do once in the Oval Office. It’s not a position they have ever found themselves in with Berlin or Paris.

Jonathan Eyal, associate director at the respected London-based foreign affairs think tank RUSI, said a post-Brexit special relationship between Britain and the rest of the EU was “what a lot of the Brexiteers have failed to envisage.”

“A lot of what poisoned the relationship has gone,” Eyal said, pointing to rows about European defence cooperation and wider constitutional questions of sovereignty that have bedevilled debate about the EU in Britain. “Leaving the European Union will allow Britain to play a more positive and constructive role in forging European security structures,” he said.

After all, Eyal said, there is nothing that threatens U.K. security more than a chaotic continent on its doorstep. Britain has skin in the game, whether it likes it or not.

Eyal said there were two obstacles to a new special relationship emerging — lasting European hostility to the Brexit vote and “the temptation by some politicians in London to play divide and rule” in Europe. However, he added: “Once the psychological scars of 40 years of EU membership are out of the way, the road is clear for a very productive relationship between Britain and the European Union — as long as both sides act on the basis of reason rather than emotions.”

Wooing Europe

Europe in return, may look to London as a more stable and understanding military and diplomatic partner than the erratic administration in Washington, which shows signs of turning its back on the Continent by turning cold on free trade, environmental agreements and defense commitments.

European diplomats were more skeptical, insisting that diplomatic relations between the U.K. and many EU member states may take some time to recover following exit negotiations and even if they do, it will be hard to manufacture the closeness that comes with membership.

“It might be a better relationship, but it will be more distant,” one senior diplomat for a European Union member state said. “The cooperation within the European Union framework is very, very close.”

In private the French remain extremely confident that nothing will change to the military alliance struck between London and Paris.

The diplomat warned that this was new territory for both sides. “This will be the first time in 60 years that the British will have to think about its relationship with Europe from outside. Equally, the EU has never had a big European country outside and not trying to get in.”

On a bilateral level, however, there is no sign of let up in the growing ties between London and Paris and Berlin. Quietly but steadily the U.K. and France are integrating militarily following the 2010 Lancaster House Treaty, which forged closer ties on defense and nuclear issues. While British tabloids fumed at the prospect of an EU Army, the country’s troops were being placed, officially, under the command of French officers.

French officials in London and Paris privately confide that the megaphone Euroskepticism on show during the Brexit debate went hand in hand with “incredibly smooth” and increasingly tight bilateral relations, as if those were two different and separate worlds. In private the French remain extremely confident that nothing will change to the military alliance struck between London and Paris.

Anglo-German relations are also developing smoothly. In the U.K. government’s 2015’s Strategic Defence and Security Review, Germany was promoted into the second tier of military and intelligence allies, alongside France, just one tier down from the the U.S.

In the topsy-turvy world of 21st century politics, there is an emerging body of thought that it may have taken an historic break from the Continent for Britain to discover its European roots.

Article Link To Politico EU:

Thursday, December 29, Morning Global Market Roundup: Dollar Dips, Nikkei Slugged By Toshiba Selloff

By Wayne Cole
December 29, 2016

Asian shares were subdued on Thursday after Wall Street suffered a mild setback after weeks of gains, while a pullback in U.S. yields prompted year-end profit taking in the dollar.

Japan's Nikkei shed 1.3 percent as the yen firmed and Toshiba Corp dived 16 percent after news of potential massive writedowns led to a downgrade of its credit ratings.

S&P said it expected shareholder equity to "drastically shrink", eroding the conglomerate's financial resilience.

Moves elsewhere were more modest. Australia's main index recouped early losses to finish flat at a 17-month peak, while stocks in Shanghai added 0.2 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan was last up 0.19 percent.

The pullback on Wall Street came amid light volumes and likely reflected caution about what the New Year might bring, given Wednesday was the first session when trades actually settle in January.

The Dow fell 0.56 percent, while the S&P 500 lost 0.84 percent and the Nasdaq 0.89 percent. Boeing fell 0.9 percent after Delta Air Lines canceled a $4-billion order for 18 Dreamliner aircraft.

Technology was the largest weight on major indexes, with Nvidia down 6.9 percent after short seller Citron Research said the market was overlooking the headwinds for the stock - which had earlier touched a record high.

Weak home sales data were blamed for some of the selling, though normally this series barely gets a mention in markets.

Contracts to buy previously-owned U.S. homes fell in November to their lowest level in nearly a year, a hint of how rising mortgage rates could weigh on the housing market.

U.S. bonds made a rare rally as the soft report combined with surprisingly strong demand for a sale of new five-year Treasury notes. Yields on 10-year paper fell to their lowest levels in two weeks to around 2.492 percent.

Yet euro zone yields were also falling on concerns about the strength of a rescue plan for Italian banks and normal year-end caution.

Germany's 10-year yields hit their lowest in seven weeks at 0.181 percent, while their discount to Treasury yields reached the widest on record.

The ever-widening yield gap kept the euro restrained around $1.0450, after touching an eight-session trough of $1.0372 overnight. Sterling was also soft at $1.2243 after hitting its lowest in two months.

The dollar eased 0.5 percent on the yen to 116.75, but was still up 12 percent over the past two months.

In commodity markets, oil came off the boil after data showed a surprise build in U.S. crude inventories. U.S. crude fell 26 cents to $53.80 a barrel, while Brent was last quoted down 4 cents at $56.18. [O/R]

Article Link To Reuters:

Inside The 37-Year Standoff Over Iran’s Frozen U.S. Dollars

Iran sought the money from every administration since Carter’s; will Obama’s deal encourage more claims?

By Jay Solomon and Carol E. Lee
The Wall Street Journal
December 29, 2016

When the shah of Iran fell in 1979, the U.S. froze at least $400 million of Iranian money sitting in a Pentagon trust fund. The Islamic Republic of Iran never stopped trying to get it back.

Tehran unsuccessfully sought the money from Jimmy Carter in return for 52 American diplomats held hostage for 444 days. It asked the Reagan administration for the same money during dealings that led to the Iran-Contra scandal. The issue came up yet again during negotiations with George H.W. Bush’s White House.

No administration agreed to surrender all the money, until Jan. 17, shortly after four American citizens were released from Iranian jails in a prisoner exchange. That is when an Iranian government Boeing 737 lifted off from Geneva’s Cointrin airport carrying $400 million—stacks of Swiss francs delivered on wooden pallets earlier that day by the U.S. government.

The history of the frozen money, based on interviews with U.S., Iranian and European officials involved in the negotiations over the decades, shows how it has been a constant sore point between the two countries since the 1979 Iranian revolution. That sore spot finally has been removed, although in keeping with the four-decade pattern, it has been replaced by other financial grievances and more American detainees, suggesting similar dramas may lie ahead.

Over the past 18 months, Iran has detained at least three more American citizens for allegedly threatening the country’s national security. Iranian President Hassan Rouhani wants the U.S. to return another chunk of Iranian money, $2 billion frozen in 2009 in a Citibank account in New York. He has suggested that a deal similar to the one involving the $400 million could resolve the issue.

“There were these two issues that were being talked about simultaneously on parallel tracks,” Mr. Rouhani told NBC News in September. “Perhaps these dialogues can be still conducted simultaneously…in order to free the sums of money that are still owed to us.”

The Obama administration has said the $400 million payment, and another $1.3 billion paid in interest, wasn’t ransom but was part of a deal to resolve the long-running dispute over frozen assets once controlled by Shah Mohammad Reza Pahlavi. The cash transfer, besides resolving the financial standoff, helped seal a nuclear agreement the U.S. and its allies negotiated with Iran’s leaders. White House officials also have said they hoped the deal might lead Iran to moderate its behavior.

Critics of President Barack Obama’s Iran policy, including President-elect Donald Trump, view the transfer of funds, as well as the simultaneous nuclear deal implemented with Iran, as payoffs to an Islamist regime that has shown no inclination to moderate its hostility to the U.S. Pentagon officials have accused Tehran of increasing its support for militant groups across the Middle East since the deal was concluded.

U.S. lawmakers have introduced roughly a dozen pieces of legislation seeking both to prevent any future cash transfers to Iran and to formally ban the U.S. government from paying ransom.

The Obama White House is trying to further cement the nuclear deal before leaving office next month by ensuring European and American businesses complete billions of dollars of contracts with Iran, including airplane sales. Mr. Trump has pledged to either scrap the Iran agreement or renegotiate it, something Tehran says it won’t do.

Under the shah, Iran was the world’s largest buyer of American weapons. Washington looked to Tehran as the linchpin for its strategy to secure the oil-rich Persian Gulf and thwart Soviet ambitions in the Middle East.

Dozens of U.S. defense companies, including Boeing Co., Westinghouse Electric Corp. and Rockwell International, were contracted to supply the shah’s armed forces. Iran’s government deposited hundreds of millions in the Pentagon trust fund to ensure the continued flow of U.S. weaponry.

The overthrow of the shah by supporters of the Ayatollah Ruhollah Khomeini shattered the U.S.-Iranian military alliance. The Pentagon canceled billions of dollars of defense contracts. The U.S. formally severed relations with Iran after students, angry about U.S. support for the shah, took American diplomats hostage at the Tehran embassy in November 1979.

In January 1981, Iran released the hostages after 444 days, but only after the Carter administration began transferring $12 billion of Iranian money back to Iran’s new rulers. Current and former U.S. officials involved in Iran diplomacy say that marked the first such financial trade-off. Some lawmakers argued it bordered on extortion or ransom.

The transfers didn’t include the money deposited in the Pentagon trust fund, a sensitive issue given Tehran’s revolutionary government, say the U.S. officials.

“Clearly, in Iran’s eyes, hostage-taking and coercion were the only leverage they believed they had against a superpower,” says Patrick Clawson, an Iran expert at the Washington Institute for Near East Policy who has advised families who have sued Iran.

The U.S. and Iran agreed in 1981 to establish a tribunal in the Dutch city of The Hague to resolve the financial disputes remaining from the shah’s era. Three Iranian and three American judges sat with three from other countries. Nearly 4,000 cases were filed after the arbitration panel got started in 1982.

Settlements were reached on many government-to-government and private disputes, but the issue of the Pentagon funds and many of the arms deals initially weren’t among them, according to U.S. and Iranian lawyers who took part in deliberations.

U.S. government lawyers questioned whether the U.S. was legally obligated to compensate Iran’s revolutionary government. They also argued the embassy takeover might have breached the terms of the defense deals.

“The arms disputes were largely pushed back or ignored,” says Koorosh Ameli, an Iranian arbitrator who served on The Hague tribunal until 2009. “The parties’ legal arguments were nearly impossible to separate from their politics.”

The Reagan administration faced the issue of the money in the Pentagon fund when it opened a secret channel to Tehran during the mid-1980s, in what led to the Iran-Contra scandal.

U.S. officials held dozens of meetings with Mr. Khomeini’s representatives in 1985 and 1986 in a bid to improve relations. At the negotiating table, the U.S. sought Iran’s help in securing the release of Americans kidnapped in Lebanon. In exchange, the U.S. offered Iran antitank missiles to aid in its war against Iraqi dictator Saddam Hussein.

The Iranians wanted more, according to participants in the meetings. They demanded all the money in the Pentagon trust fund, or the arms they believed they had already bought. The U.S. refused.

“They raised it in every single meeting we had,” says Oliver North, the former Marine colonel who oversaw the Iran-Contra arrangements, referring to the Pentagon money. “It was an obsession."

The U.S. sold Iran hundreds of missiles, secretly using the proceeds to fund Contra rebels fighting Nicaragua’s Marxist government. The Iranians claimed the missiles were defective and the eventual exposure of the secret transactions led to criminal charges against senior Reagan administration officials, including Col. North.

During the presidency of George H.W. Bush, U.S. lawyers at The Hague worked to settle all outstanding claims, an effort to improve ties with Iran under its business-minded President Hashemi Rafsanjani. In 1990, $200 million was returned to Iran from the Pentagon trust fund. Another settlement for a failed arms deal was reached in 1991.

American hostages held by Iranian-backed militias in Lebanon were released shortly after, prompting accusations in Congress that ransom had been paid. The Bush administration denied that, but the incident undercut the U.S.’s ability to settle more claims during Mr. Bush’s tenure, say former U.S. officials who worked on the cases.

“What should we have done? Not taken the Americans back?” asks Abraham Sofaer, the State Department’s top lawyer at the time.

The politics surrounding the funds grew more complicated as accusations of Tehran’s support for international terrorism multiplied, current and former U.S. officials say. Iran is a supplier of arms and funding to groups designated as terrorist entities by the U.S. government, including Hezbollah in Lebanon and Hamas and Islamic Jihad in the Palestinian territories.

Congress passed legislation in 1996 allowing victims of terrorism to sue foreign governments for financial damages. Two years later, the family of Alisa Flatow, a 20-year-old New Jersey woman killed in the Gaza Strip when a jihadist suicide bomber struck a bus, won a $250 million judgment again Iran in a U.S. court. The court ruled Tehran oversaw and financed the terrorist group’s activities.

The Flatows and their lawyers cast about the U.S. looking to seize Iranian assets. Stephen Perles, one of the attorneys, got wind of $400 million in the Pentagon trust fund. Alisa Flatow’s father, Stephen, said in an interview he wanted the judgment to be paid from that $400 million.

“I didn’t want to receive taxpayer money for this,” Mr. Flatow said. “It’s the Iranians who should be paying.”

Ultimately, the Treasury Department found taxpayer money elsewhere, and the $400 million remained in the Pentagon account.

During President Obama’s second term, his administration and U.S. lawyers at The Hague intensified negotiations to settle Iran’s financial claims from the shah era. Senior U.S., Iranian and European officials say they were certain by the spring of 2015 the tribunal would eventually order the U.S. to repay the $400 million, plus interest.

Some lawyers who worked on The Hague tribunal during Republican administrations agreed. “I think it’s pretty clear that at some point we were going to have to settle,” says John Bellinger, the top lawyer in George W. Bush’s State Department.

Iran was demanding as much as $10 billion, citing the high rates of interest in the 1970s. In an out-of-court settlement, the U.S. agreed to pay Iran the $400 million, plus $1.3 billion in interest. It said the payments were a key advance in settling all disputes linked to the shah’s era.

Nevertheless, the timing of the January payment and the use of cash led many U.S. lawmakers and diplomats to characterize the $400 million as ransom.

Obama administration officials say they needed to pay cash because of U.S. sanctions and to quickly meet Iran’s economic needs. Nevertheless, over the past 18 months, the U.S. used international banks to send money to Iran to settle other financial commitments, undermining the argument that normal banking transactions were impossible with Tehran.

“There were many vehicles that could have been used to pay that money, other than untraceable cash,” says Mr. Sofaer, the State Department lawyer in the Reagan and George H.W. Bush administrations.

In the days before the $400 million was handed over in Geneva, the Pentagon transferred the money to the Federal Reserve Bank in New York. There it was converted into Swiss francs and deposited into an account at Switzerland’s central bank. Then it was moved to Geneva’s airport, where U.S. officials waited for word that the four American prisoners had departed Tehran. The officials said they used the payment negotiated separately at The Hague as leverage to ensure the Americans were freed.

On Jan. 17, several Swiss plane spotters—amateurs who track air traffic—noticed a Boeing 737 owned by the Islamic Republic of Iran on the runway at the Geneva airport. They began filming. The jet taxied past a U.S. Air Force jet and a Gulfstream V that had arrived to pick up the prisoners, then lifted off into the sky.

“We have a secret event between Iran and the U.S. Department of State in Switzerland,” wrote one of the spotters in an internet posting. “At Geneva Airport an exchange for Iranian-American prisoners is being conducted.”

A Swedish flight-tracking service followed the Iranian plane as it flew east over central Europe. The plane’s signal eventually disappeared over Turkey. The Iranians had informed the flight tower of their destination: Urmia, an airfield on Iran’s western border with Iraq.

Later that day, The Obama administration announced that the four Americans, including Washington Post reporter Jason Rezaian, had been released. It didn’t mention the cash transfer in Geneva.

Article Link To The Wall Street Journal:

Trump Tax Reforms Could Depend On Little-Known 'Scoring' Panel

By David Morgan
December 29, 2016

President-elect Donald Trump's goal of overhauling the U.S. tax code in 2017 will depend partly on the work of an obscure congressional committee tasked with estimating how much future economic growth will result from tax cuts.

Known as the Joint Committee on Taxation, or JCT, the nonpartisan panel assigns "dynamic scores" to major tax bills in Congress, based on economic models, to forecast a bill's ultimate impact on the federal budget. The higher a tax bill's dynamic score, the more likely it is seen as spurring growth, raising tax revenues and keeping the federal deficit in check.

As Trump and Republicans in Congress plan the biggest tax reform package in a generation, the JCT has come under pressure from corporate lobbyists and other tax cut advocates who worry that too low a dynamic score could show the legislation to add billions, if not trillions of dollars to the federal deficit.

"The problem is that the Joint Committee staff has adopted a whole series of assumptions that truly minimize the effects and underestimate the impact that a properly done tax reform could have," said David Burton, an economic policy fellow at the conservative Heritage Foundation think tank.

A low dynamic score could force Republicans to scale back tax cuts or make the reforms temporary, severely limiting the scope of what was one of Trump's top campaign pledges.

Other analysts warn that pressure for a robust dynamic score raises the danger of a politically expedient number that could help reform pass Congress but lead to higher deficits down the road.

Until last year, JCT used a variety of economic models in its arcane calculations, reflecting the uncertainties in such work. But House of Representatives Republicans changed the rules in 2015 to require that a bill's score reflect only a single estimate of the estimated impact on the wider economy and resulting impact on tax revenues.

Next year's anticipated tax reform package would be the biggest piece of legislation that JCT has scored using this new, narrower approach, presenting the committee with a daunting challenge.

JCT Chief of Staff Thomas Barthold acknowledged the challenge of dynamic scoring in an interview with Reuters.

"The U.S. economy is so darn complex, you really can't have one model that picks up all of the complexity and nuance. So the essence of modeling is to try to slim things down, try to emphasize certain points," he said.

Tax reform is still months away. But the initial legislation expected in 2017 is likely to fall somewhere between two similar but separate plans, one backed by Trump and the other by House Republicans including Speaker Paul Ryan.

The proposals lean heavily for fiscal legitimacy on dynamic scoring. Even the most robust independent scores show both plans adding to the deficit.

But dynamic scoring, like any economic modeling technique, is far from precise and, when it comes to fiscal policy, any theoretical flaws could lead to very real consequences for taxpayers and the U.S. economy.

The JCT has included macroeconomic analyses in its tax bill scores since 2003, providing a range of estimates on economic effects built on a variety of assumptions.

When Dave Camp, as chairman of the House Ways and Means Committee, produced a tax reform bill in 2014, JCT used two models and forecast revenue gains ranging from $50 billion to $700 billion. The committee also provided economic growth forecasts from as low as 0.2 percent to as high as 1.8 percent.

The tax package likely to emerge next year will probably be even more complex than Camp's, prompting some to worry that budgetary and economic forecasts will range even more widely.

Some critics, including lobbyists for major corporations that stand to gain from big tax cuts, want JCT's numbers to look more like the nonpartisan Tax Foundation's, a research group whose work has been embraced by Trump and House Republicans.

The Tax Foundation estimates that the House Republican tax plan would lead to a 9.1 percent higher gross domestic product over the long term, 7.7 percent higher wages and 1.7 million new full-time-equivalent jobs. It predicts the plan would reduce government revenue by $2.4 trillion over a decade, not counting macroeconomic effects, but by only $191 billion once economic growth is taken into account.

By contrast, the centrist Tax Policy Center estimates the House plan would add 1 percent to GDP over 10 years and erase $2.5 trillion of revenue, even with positive macroeconomic feedback, due to higher federal debt interest.

Article Link To Reuters: