Month: March 2018

McMaster Out Bolton In

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Background:

Lieutenant General H. R. McMaster, President Trump’s second National Security Advisor, has been replaced by the former American ambassador to the UN, John Bolton.

What has happened:

  • Amid speculation of a contentious relationship with the President, LT. Gen H.R. McMaster has been let go.
  • John Bolton, who was a recess appointment to the UN under President George W. Bush, was unable to secure a Senate confirmation and resigned from the post 17 months after his appointment.
  • On a day that included confirmed tariffs against China and the ousting of another significant advisor at the White House, markets reacted to the instability.

Why it matters:

  • Although reports have circulated that LT Gen McMaster has requested to retire from the Army and depart public service, it is not final. There is speculation he could be nominated to command US Forces Korea.
  • John Bolton is a known foreign policy hawk; Bolton strongly supported the Iraq war and argues for a preemptive strike against North Korea and Iran. Bolton’s stance on foreign policy is likely to be inflexible.
  • John Bolton and new Secretary of State Mike Pompeo are similar in their views on national security and foreign policy; their appointments give rise to the concern that there will be no contrarian voice in the room as policy develops and tensions around the globe escalate.

 “HR McMaster shepherded the United States through a challenging year of major national security threats. A team player, McMaster worked closely with Ambassador Haley and President Trump to bring the North Koreans to the negotiating table. Now, the President appears to be consolidating a hard-line team heading into the North Korean negotiations. One risk with Ambassador Bolton is that he is closely tied to the neocons who led us into the Iraq war. President Trump campaigned against and disagreed with that conflict and Trump will need to privately keep Bolton’s hawkish views in check while publicly using them as a tool for negotiations with North Korea.”

Brigadier General Tata

Market Impact:

The news out of the White House this week might finally show some movement in the market. It appears that President Trump is positioning his team to follow through with some of his more extreme policy stances both on foreign policy and national security. These appointments may also indicate a willingness to ‘draw a line in the sand’ on trade and stick to it – even if it has negative impacts on the stock market.  Markets are finally realizing that protecting intellectual property rights and ‘unfair’ trade practices are not just a talking point or a negotiating point – but something this administration believes in strongly.  The implications for the Treasury market are less clear – as we must balance the ‘flight to safety’ response with the concern that tariffs are inflationary and China still holds over $1 trillion of our debt.

Peter Tchir, Head of Macro Strategy at Academy Securities

 

Original Post 03/24/2018

Russia Sanctions? “Bring ’em On.”

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Relations between the US and Russia have always been tense. Today is no exception. The modern diplomatic relationship between the United States and Russia began its significant backslide when Russia invaded and then annexed Crimea, ignoring international law and enmity. In the four years since the invasion, the US and its allies have admonished and sanctioned Russia for a multitude of its sins but arguably without result. These actions include information operations in the 2016 Presidential election, direct involvement in the Syrian civil war to include acquiescing to Assad’s use of chemical weapons, and most recently, the use of a deadly nerve agent against a former Russian intelligence professional (and his daughter) in the UK.
Russian President Vladimir Putin is a leader with a clear vision of where he wants to take his country and is aggressively and creatively working to achieve those ends. What are the broader geopolitical implications of Russia’s influence operations? How can we expect the US to respond? How will the markets react as tensions escalate?
The now infamous Russian interference in the 2016 presidential elections spurred a special counsel investigation in the United States, leading to the indictment of more than 19 Russians. While these indictments monopolize cable news airways, they have had no bearing on Russia and Putin. Russian information operations are deft and constant. Information ops, by definition, can best be characterized as a sequence of action, reaction, and counteraction. They are an endless and adaptive cycle. At least publicly, it appears any mandate from the Trump Administration to mitigate this ongoing threat has not been issued. Admiral Michael Rogers, the Director of the National Security Administration, said in his testimony before the Senate Armed Services Committee that the Trump Administration had not directed the agency to take proactive measures to stop Russian and foreign interference in our democratic process.
The US is not unique as a victim of Russian influence operations. Russia routinely targets Western democracies to undermine democratic institutions and create a culture of mistrust and chaos in their governing bodies. These sometimes subversive and always flagrant operations have done little to mobilize the Western world to confront this aggression.
However, things may be changing…finally. Just this month, Europe experienced the first offensive use of a nerve agent since the Second World War. A former Russian spy and his daughter (as well as a police officer) are in critical condition following their exposure to a nerve agent linked to a Russian operation. This action has led the leaders of the United States, France, Germany, and NATO to rally behind UK Prime Minister Theresa May in condemning the attack and its Russian perpetrators.
As a result, President Trump issued a new set of sanctions aimed at Russia. The sanctions (the barring of travel and freezing of assets in the US of 19 individuals and five entities) were advertised as a response to cyber interference by Russia in the US elections. However, timing is everything; the sanctions came on the heels of the nerve agent attack. Russia has vowed to retaliate, saying it will use the “principle of parity” in response to the new round of sanctions. Russia obviously has its hands full with its efforts to erode public trust in Western elections and attack its own citizens on foreign soil. It’s not a stretch to label both events as acts of war.
What are the effects of these sanctions? Will they have long-term or immediate implications? If these sanctions are effective, Russia may look for opportunities to help mitigate any cash flow issues. Market concern has concentrated on crude and the stability and endurance of the 2017 deal Russia made with OPEC, cutting production through the end of 2018. If Russia chooses to respond to sanctions, this is an option. In the past, we have witnessed energy producing nations “weaponize” this resource in an attempt to undermine profits of a competitor. OPEC has warned that supply from its competitors will exceed market demand. Discounts on Russian crude, coupled with increased shipments of crude from countries of the former Soviet Union could be a cause for concern. Crude prices are viewed as the benchmark for global growth, but low figures primarily hurt crude producers like the US (which continues on its aggressive march towards energy independence). This year, OPEC countries have already offered steep discounts, and a free flow of Russian oil could drive prices even lower. However, cheaper crude benefits many consumers and may ultimately have a broader positive impact should Russia chose to abandon its agreement with OPEC.
Vladimir Putin’s leadership style is both brazen and cunning. Putin’s aspirations are in his national interests. There is no separation between Russia and Putin; they are the same. However, Putin plays by an entirely different set of rules, focused on upending the status quo in an attempt to solidify his footing as a global leader. Putin’s re-election by an eye-wateringly large margin for another six-year term locks his grip on the strategic initiative. International observers will be waiting to see if Putin pursues a “leader for life” role in Russia as his ally, Xi Jinping, has in China. America faces global competition from Russia and will need to remain vigilant and adaptive to maintain the upper hand. The decision to compete or cooperate remains in our hands. Choose wisely.
– Major General (Ret.) Spider Marks

“Russia’s strategy is demonstrative intimidation to secure its interests, including pressuring the EU to ignore Russian hegemony and to re-secure their influence in the Middle East. Secondly, Russia is taking advantage of US relationship degradation among our allies and partners to influence global balance toward their objectives.  I believe their strategy is opportunistic while rapidly reacting to US absence or lack of policy alignment.”  
– Lieutenant General (Ret.) Frank Kearney
Original Post 03/21/2018

Secretary Rex Tillerson Ousted

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Background:
 
Rex Tillerson, who served as Secretary of State for 13 months, has been ousted by President Trump.
 
What has happened:
  • CIA Director Mike Pompeo has been asked by President Trump to replace Rex Tillerson, pending senate confirmation.
  • Gina Haspel, the current Deputy Director of the CIA and career intelligence professional, will replace Pompeo; if confirmed, she will be the first woman to run the CIA.
Why it matters:
  • Mike Pompeo, a three-term congressman, Army Veteran, and Lawyer, is known for his hawkish foreign policy.
  • Pompeo has been critical of the Iran Nuclear Deal (JCPOA), calling for its rollback.
  • Pompeo has supported regime change in North Korea and most recently, stated the US would make no concessions to Pyongyang.
  • In Secretary Pompeo, it appears President Trump will have a Secretary of State who more publicly aligns with his foreign policy vision.
Market Impact:
 
“Initial reaction to the President’s announcement was Treasury yields, and the Dollar went lower as we saw a very brief ‘flight to quality’ trade. For the most part, markets seem to be ignoring the cabinet change. This reaction is compatible with Rex Tillerson’s less visible role in recent months. “
Peter Tchir, Head of Macro Strategy at Academy Securities

North Korea Talks

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Background:
Earlier this week, the Republic of Korea sent a delegation to Pyongyang (the capital of the Democratic People’s Republic of Korea). This was done at the invitation of North Korea’s leader, Kim Jong Un.
What has happened:
  • The ten-person delegation led by the Republic’s national security advisor, Chung Eui-yong, held direct talks with Kim.
  • Kim Jong Un said that Pyongyang would consider ending its nuclear program and promised not to conduct any nuclear tests while negotiations are ongoing.
  • North Korea also signaled that it is ready to engage in direct talks with the United States.
   
Why it matters:
This is the first clear indicator from North Korea that they may be willing to abandon their nuclear program. To be successful, the following must occur:
  • A freeze on any current nuclear testing and development must be verified by inspectors.
  • The US and Republic of Korea should suspend joint military exercises during the period of the North Korean freeze.
  • The US should demand North Korea rejoin the Nuclear non-proliferation treaty as a precondition to direct talks.
Diplomacy can work. This effort will require a focused, personal touch by President Trump. There’s plenty of green on that pool table between good intentions and productive first steps. We must close the gap, cautiously, and quickly.
Major General Spider Marks
  “The Trump Administration’s deliberate and forceful application of the elements of national power–Diplomatic, Informational, Military, and Economic–have created the conditions for negotiations. Similarly, this “buying of time” has allowed for enhanced U.S. military preparedness in the region. Whether Kim Jong Un is sincere about negotiating and eliminating his nuclear weapons program remains to be seen, but the outlook for long-term solutions on the Korean Peninsula is more promising than it has been in years.”
Brigadier General Anthony Tata

Cozy With Kim

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It appears by all media accounts that the United States and North Korea are entering a period of peaceful transition and enhanced cooperation. We suddenly trust each other…at least enough to have direct talks. How did this happen over two weeks of ice dancing, curling, and biathlons? Does this sense of measured calm have staying power? How will the markets respond to the seemingly optimistic outlook on geopolitical stability? These questions are especially relevant considering recent reports linking Pyongyang with the Assad Regime’s chemical weapons capabilities.
The world is still euphoric over the “Make America Fourth Again” performance at the Olympics. Let’s be frank; the world loves to see America take one on the chin. More importantly, the games were executed flawlessly by the South Koreans. The Winter Games showcased world-class venues and the peaceful interactions among nations. The unparalleled beauty of Pyeongchang was matched only by the South Korean’s generosity of spirit. These games set a high bar; experiencing neither the weather challenges faced by Vancouver and Sochi nor the anticipated threat from the North. While not unprecedented, the North and South participated as a unified team. This partnership showed diplomatic savvy and was exactly the right move.
Last week, sitting in the same VIP reviewing box (at the closing ceremony), were Ivanka Trump and North Korean General Kim Yong Chol (head of North Korea’s Civilian Intelligence). Of course, the North Korean regime would send a prominent leader who, as an intelligence professional, is experienced and nuanced in the art of collection. North Korea would never squander the opportunity to score propaganda points and acquire some direct feedback on their efforts to “wedge” Washington and Seoul apart.
General Kim’s history is significant. Remember, he was blamed for the 2010 attacks on the South Korean warship Cheonan (killing 46 sailors) as well as the 2014 cyber-attack against Sony Pictures. He was personally sanctioned three times by both Washington and Seoul. At the Olympics, North Korea snatched the strategic lead from South Korea by simply showing up and not creating mischief or breaking anything. That’s a low bar, but one the North will continue to step over. US-North Korea relations can be characterized as volatile and episodic. We never fully engage in the long game with the North; it has been impossible, and the North prefers it that way. The dynamic is a never-ending back and forth. They bang the gong; we silence it but never take it away.
I operate under a measured optimism; this relative calm too shall pass. While serving as the lead intelligence officer on the Korean Peninsula, I witnessed the evolution of the Nobel Prize-winning Sunshine Policy. This policy was meant to soften tensions between the North and South, opening lines of communication, leading to reform. To some degree, it achieved its ends. However, South Korea built infrastructure and supplied aid to the North, only to be betrayed by the continued military provocation of North Korea.
Last Friday, the US issued a fresh set of sanctions against North Korea, the “largest ever” according to President Trump. A solution on the Korean Peninsula must be initiated with small, discernable steps, followed by enforced consequences for failure to meet international standards. Sadly, this is something the global community has never accomplished. Publicly, President Trump appears willing to take distinct actions to achieve results with North Korea saying, “If the sanctions don’t work we’ll have to go to phase two – and phase two may be a very rough thing, may be very, very unfortunate for the world.”
In today’s world of volatility, measured calm may be the best we can hope for, but we know hope alone is a failure. To maintain stability, and to ensure we don’t see Sunshine Policy version 2.0, the US-ROK military coalition must remain strong. It is.
Our world is volatile and ambiguous. The success of the Olympic games is no reason to assume anything has altered that reality. The United States and its allies must maintain their diligence and project their power or risk losing this measured calm.
Peter Tchir, Head of Macro Strategy at Academy Securities, added the following:
“Markets have acclimated to the new status quo of ‘measured calm’ on the Peninsula. Any indicators of progress towards a real and lasting solution would be rewarded with stocks rising. Markets would not be surprised to see a return to periodic posturing within the context of measured calm. The difficulty for markets and policymakers is that moving beyond measured calm would be very disruptive for stocks and bonds. Stocks would be impacted as concern about global trade increases. Bonds and the U.S. dollar might not benefit – unlike in traditional ‘risk-off’ situations. In the past, the US dollar benefitted when tensions increased; however, our involvement is so direct in this case, it’s predictable that the Euro would benefit.
Similarly, treasury bonds usually rally in a ‘flight to quality’ trade which helps mitigate the damage to stocks. With China (a large holder of treasuries) most certainly caught in the middle of any conflict on the peninsula, we might not see a flight to quality in the traditional sense. This would put a significant strain on stocks and the economy.
General Marks acknowledged the importance of a strong military in our dealings with North Korea; this imperative also holds true for the markets and economy. A powerful military is neither a luxury nor a given.”
Original Post 03/18/2018