by Bill O’Grady

On April 2, the P5+1[1] negotiating team and Iran announced a framework to deal with Iran’s nuclear program.  The framework is a “roadmap” to establishing a final agreement in June.  Negotiations on this issue have been underway for years; this framework could be a major step toward delaying Iran’s entry into the “nuclear club,” the group of nations that have nuclear weapons.

In this report, we will begin with a short history of Iran’s nuclear program.  Next, we will review the details of the framework.  The third part will address the broader policy issues surrounding Iran’s nuclear program.  An analysis of the real issue, regional hegemony, will follow along with a review of the political factors of the deal.  We will conclude with the potential market effects from this framework.

View the full report

__________________

[1] P5+1 includes the U.S., U.K., France, Russia and China (the five permanent members of the U.N. Security Council), plus Germany.

by Bill O’Grady

In this final installment of our four-part series on The New World Order, we will examine how, in light of winning the Cold War, policymakers have been unable to settle on a set of key priorities and offer what we see as “glimpses” of a new policy emerging.  In a sense, the U.S. never really wanted to be a superpower; the nation’s founding story is one of wresting independence away from a colonial power.  Americans were willing to put up with the economic and political distortions that came from becoming a superpower in order to defeat communism.  Now that this existential threat has ended, the political class has struggled to create a foreign policy that can simultaneously provide the required hegemonic global public goods and create a working economic policy and political coalition that will build domestic harmony.

In this report, we will recap why the current policy mix is unsustainable and yet, why the U.S. remains indispensable for world peace and global growth.  And so, if the U.S. cannot be replaced anytime soon, American policymakers need to create a solution that will allow the U.S. to fulfill at least some of the hegemon’s responsibilities and also create a sustainable domestic economy and political coalition.  We will conclude with a broad examination of the potential long-term market effects from this evolving New World Order.

View the full report

by Bill O’Grady

In this third installment of our four-part series on The New World Order, we will examine how policymakers coped with the new superpower role.  First, we will examine how policymakers attempted to resolve the tensions created between the desires of its domestic constituencies and foreign superpower obligations.  There are going to be periods when the requirements of the hegemon role adversely affect segments of society within the superpower.  The political class must navigate these divergences in such a way so as to keep domestic tranquility and fulfill its foreign obligations.  We will offer a history of how the U.S. managed these differences, with an analysis of Roosevelt’s political configuration and how the Reagan Revolution adjusted to the failures of the first program.  Second, we will detail these periods with charts.  Third, we will explain the capability and willingness of the U.S. to continue providing the global public goods to the world.

View the full report

by Bill O’Grady

This report is the second installment of our four-part series on The New World Order.  This week we will focus on two themes.  First, we will examine the global public goods the superpower provides, and second, we will analyze how the U.S. has provided those goods.  The global hegemon will often face tensions between the desires of domestic constituencies and its foreign obligations.  Every superpower has to negotiate these pressures and each tends to have its own particular ways of meeting both objectives.  However, it should be noted that no superpower can subjugate the goals and aspirations of its citizens indefinitely.  In other words, if the cost of hegemony becomes too high, a nation may be unable to maintain the position.  History shows that no superpower dominates forever.  History also shows that there are sometimes “gap” periods between superpowers; unlike 1945, the changeover is not always simultaneous.  I believe the evolution we are currently seeing, which will be discussed in Parts III and IV, will keep the U.S. as the reigning hegemon but with a much different manner of exercising that role.

View the full report

by Bill O’Grady

As our regular readers know, we have been focusing for several years on the issue of the uncertainty surrounding America’s superpower role.  It has been our position that the U.S. has lacked a coherent foreign policy since the Cold War ended in the early 1990s.  Although we cannot definitely say that a new policy is in place, the trappings of one does appear to be emerging.

Historians tend to adopt one of two methods to analyze history.  One method is the “Great Man” theory, which looks at history as a progression of key personalities that change and shape the world.  The other is the “Great Wave” theory, which suggests that social, economic and political factors work their way through history and individuals simply play their role by supporting or opposing the wave.  I lean toward the latter.  Although exceptional people matter, history is littered with great people trying to make changes at the wrong time and failing miserably.  Changes that the “failure” had attempted may eventually get made because the timing was right.  Given this position on how history unfolds, the personalities matter less and thus, this is why I don’t focus on people as much as trends.

The focus of this paper is how policy seems to be evolving and why; if this assessment is correct, who wins the next election has only a marginal impact.  Instead, it makes more sense to concentrate on the trends that are emerging and project how they are likely to evolve.

Although this report details my own analysis of emerging trends, it is greatly supported by the research of others.  I want to especially mention George Friedman of Stratfor.  His book on the next decade and his firm’s recent decade update were instrumental in this analysis.

This will be a four-part report.  Part I will begin with the evolution of U.S. foreign policy, focusing on the 25-year cycle pattern that has exhibited itself between the adaptations to new circumstances.  Part II will recap the superpower role and the American adaptation of that role.  Part III will examine why the current policy configuration is no longer adequate for the task.  It will analyze the economic and military costs of the current policy and argue that the costs have become too high to maintain the current role.  At the same time, it will conclude that no other nation can replace the U.S. in the hegemon role.  Part IV will discuss the emerging policy configuration, including its key features that will allow the U.S. to maintain some degree of global influence and yet also make the costs more manageable.  This analysis will include the winners and losers in this new order.  And finally, as always, we will conclude Part IV with market ramifications, which are many and significant if our view is correct.

View the full report

by Kaisa Stucke, CFA

Nigeria will hold its presidential election on March 28, following a six-week postponement due to heavy fighting in the northern region of the country.  The election promises to be a close one between the incumbent, Goodluck Jonathan, and a former military leader, Muhammadu Buhari.  Jonathan represents the Christian, southern region of Nigeria, while Buhari represents the Muslim, northern region.

In the past, Nigeria has alternated between electing presidents from the north and south.  The likely outcome from the upcoming election suggests that this pattern will not hold in the future.  Consequently, the risk of civil unrest would increase.

Once hailed as one of the most promising emerging markets, Nigeria’s social stability, economics and democratic process have been challenged by insurgent fighting and the weak energy markets.  The recent oil price collapse has had an outsized effect on Nigeria’s economy as more than 70% of the country’s revenues are derived from oil.  As oil prices have collapsed, so has the local currency.

Aside from the economic problems, the country is also fighting the radical Islamic insurgency Boko Haram.  The group has grown in size and danger since we last wrote about it.  It has evolved from staging stand-alone terrorist attacks and kidnappings to holding meaningful territory under its control in northern Nigeria.  The current government’s lack of attention to the fighting and its inability to defeat the group has caused a lack of confidence in the government in general.  Recently, however, the incumbent president has intensified the military’s involvement ahead of the election and the fight against Boko Haram has been somewhat succesful.

This week, we will look at the upcoming Nigerian presidential election and how the persistent threat of the Boko Haram terrorist movement has complicated the democratic process.  In turn, we will look back at the 2011 presidential election and analyze how the election facilitated the rapid spread of Boko Haram.  Exacerbating matters further, the country suffers from a deepening divide between the Christian south and the Islamic north, which we will discuss in detail in this report.  As always we will conclude with market ramifications.

View the full report

by Kaisa Stucke, CFA

The country of Yemen is slowly dissolving in the midst of an ongoing civil war.  The Houthi movement has aggressively secured territories in the north, including taking over the capital city of Sana, while al-Qaeda has widened its activities in the south.

At the end of January, Yemeni President Abd Rabbuh Mansur Hadi and his prime minister, Khaled Baha, were forced to step down after the presidential palace had been under insurgent Shiite Houthi fire for several days.  Since then, the president has tried to resume his duties, but the leader of the Houthis has also claimed the presidency.  Currently, there is no acting president, the parliament has been dissolved and it seems that military loyalties are fractured between tribal leaders.  In this environment, it is unclear who is in control of the country.

Outside powers are watching these developments closely.  Yemen’s wealthy neighbor and U.S. ally, Saudi Arabia, would like to see the Houthi insurgency stopped as the group is widely viewed as a proxy for Iran.  Saudi Arabia does not want to see Iran spread its sphere of influence.

At the same time, the U.S. has been a partner to Yemen in fighting al-Qaeda in the Arabian Peninsula, but the fall of its government has left the U.S. without a formal partner.  A partnership of convenience with the Houthis seems like the most practical approach for the U.S.  However, this approach, in addition to the possibility of a U.S.-Iran nuclear deal, would make the Saudis nervous and unsure about the direction of American foreign policy in the region.

The single, unified country of Yemen is unlikely to survive in the current environment of fragmented political power.  In fact, looking at Yemen’s long-term history, existing as a unified country is an anomaly.  It is likely that the country would return to its natural divided state, becoming a Sunni South Yemen and a Shiite North Yemen.

View the full report

by Bill O’Grady

This report is an update to a similarly titled piece published in 2013 (see WGR, 10/7/2013, Détente with Iran?).  The primary impetus for this update comes from a recent article by Michael Doran outlining President Obama’s “secret” Iran strategy, but similar themes have also been offered by other strategists.

In this report, we will delve further into what appears to be an evolving policy change by the U.S. with Iran, and discuss the basic goals of the U.S. and Iran.  With this background, we will examine America’s alternatives to achieving our aims in the region.  A full examination of U.S. difficulties in making a historic change in policy with Iran will follow.  From there, we will discuss the recent pattern of policy in the region and how it supports the notion that improving relations with Iran is probably the reason for this pattern.  As always, we will conclude with market ramifications.

View the full report

by Bill O’Grady

After the Syriza party won 149 of the 300 seats in the Jan. 24^th Greek elections, European markets have been roiled by worries over another crisis developing.  The party has engaged in some provocative behaviors; its leader and Greece’s new prime minister, Alexis Tsipras, decided that his first official visit would be to a monument that honored Greek citizens who suffered a mass execution at the hands of the Nazis.  That symbolism wasn’t lost on anyone.  Tsipras, and his new finance minister, Yanis Varoufakis, have indicated that they have no interest in fulfilling the bailout requirements of the European Central Bank (ECB), the European Union (EU) and the International Monetary Fund (IMF), the “troika” that has managed the bailout for Greece.

Austerity has severely harmed Greece’s economy, cutting its GDP by 26% from the pre-crisis peak.  The unemployment rate is 26% and youth unemployment is over 50%.  The election of Syriza is a reaction against the economic depression that Greece has endured as Syriza ran on an anti-austerity platform.

Of course, one nation’s austerity is another nation’s reform.  The German position, which has become the establishment position in Europe, is that excessive Greek fiscal spending and borrowing is responsible for the problems in Greece.  This excessive spending and borrowing is seen as leading to rampant corruption, gold-plated salaries and benefits for government employees and economic inefficiency.  Only reforms, or austerity, can bring Greece any hope of recovery.

The Greek and anti-establishment position is that Germany is the cause of not just Greece’s economic collapse, but the economic crisis in the Eurozone periphery.

In this report, we are going to use game theory to describe the situation between Greece and the EU/Germany/ECB.  This method shows how misunderstandings can develop and how catastrophic mistakes are made. Using this structure, we will outline the positions and perceptions of both sides and describe how this situation could lead to another crisis.  As always, we will finish with market ramifications.

View the full report