The Lusty Month of May
Alas, May is over. You were supposed to sell away, if you were a stock trader. But equities managed to rise for a third straight month as there was growing talk that the global economy had bottomed. We all wait, now, to see if a true recovery is in the offing, like a sperm whale bursting through the surf, or do we instead drag along the ocean floor, ripping up the coral. Pardon the analogy, but as Guenevere alludes to above, what you all do with your personal life is your own business, though clearly, when looking at the likes of the Taliban or Kim Jong-il the past four weeks, you could easily look at the human race aghast.
What we do know is June will start out with a rather large bankruptcy. Will we rue the day in May when Uncle Sam decided that it needs to own up to 72.5% of General Motors? Or will we, the taxpayers, make out on our investment? I don’t care how you feel about the deal itself, you should want it to succeed at this point because otherwise the price to be paid will be huge, $50 billion, for starters.
Here’s what we’ve learned. A UAW health-care trust will own 17.5% of the new GM; with 10% going to the old GM’s creditors, and the option to buy an additional 15% of equity in seven to 10 years. Because bondholders actually ended up with a better/bad deal than what they were facing, there is hope that the bankruptcy process will be swift, a la Chrysler’s, which has gone exceedingly well; so well Chrysler could emerge in its new form next week.
In the case of both GM and Chrysler, however, the question is will the new products sell, and how quickly? For the answers you need look no further than housing and employment. The sooner these two recover, the better sentiment will become and the more likely it will be that the consumer, 70% of the economy, after all, will feel like once again shopping for a new car. I still maintain that in the case of Chrysler, its new alliance with Fiat will pay dividends. Fiats will sell.
And to those who complain the government is going to cram smaller cars down our throats, I say, you are deeply underestimating the public’s appetite for same. The American consumer will buy more small cars because they want to. In fact the other day, my barber, who is as right-wing as they come, and who has owned trucks or SUVs as long as I’ve known him (over 15 years), said to me out of the blue, “You know, I’m sick of paying for gasoline. I’m getting one of those small cars.” Granted, not exactly a scientific survey, but everything in life is cyclical. Downsizing, in so many ways, is in.
Back to housing, the S&P/Case-Shiller index of 20 major metropolitan areas showed prices fell in March, 18.7% from a year earlier, and we now have home prices off 50.4% from their peak in Las Vegas, 53% in Phoenix, 47% in Miami and 41% in Los Angeles. But other markets, such as New York, off 19.7%, are still probably in the catch-up mode, while there are growing signs that bottoms have formed in the likes of Phoenix and parts of Southern California.
If you know anything about me it is that I’m consistent in my opinions. I said last fall that the bottom in housing would come in the April-May time period (remember, Case-Shiller was March data), and I see no reason not to stick with this prediction. April existing home figures, for example, showed a slight rise in the median price over March. So if you expect me to believe there is another 20% down, as some are calling for, I fail to see it. I’m well aware of the record numbers either in foreclosure or delinquency, 12% nationally (as well as here in New Jersey). The foreclosure picture will continue to worsen, particularly on the high end, as long as the labor data remains putrid. I live in a wealthy area, and in my short drive to and from the office, I see new For Sale and For Rent signs almost daily. Particularly when it comes to rental properties, no one here has seen it this bad.
I am also well aware that the recent spike in mortgage rates (until Friday’s remarkable bond market rally) is worrisome, and of course threatens to derail a recovery in housing, but, again, when you have markets that have already declined 50%, with many beginning to stabilize, then, nationally, we are very close to, if not at, the bottom. That’s my opinion and I’m sticking to it.
I’m trying to hold off on some Big Picture stuff until we hit mid-year, but on the topic of debt, I have to repeat what I wrote on 5/9 in this space.
“We have officially entered an era where budget deficits matter. For so long, people harped on the deficits (including yours truly) but in terms of funding them and any negative impact on the markets it hasn’t been an issue, thanks in no small part to China’s economic engine that was churning out double-digit growth and gobs of yuan looking for a home.”
I wrote the week before, 5/2, of the IMF’s pronouncement that the Group of 20 leading economies would run budget deficits of at least 6.5% of GDP into 2010 and possibly beyond. It’s easy to cry wolf for years and years and then one day say you were right. On the deficit issue, I harped on it but recognized the time for its impact on the markets was down the road. We’re obviously now at that point and it has to be a big part of the equation in putting together future forecasts. Just as I said way back that when housing bottomed, we’d scrape along the bottom for an extended period, the deficits and the accompanying higher rates will impact the strength of any recovery.
But back to today, this week we had two leading indicators of consumer sentiment post stronger than expected readings, again, while durable goods orders for April were also solidly positive. The second reading on first quarter GDP was slightly better, -5.7% vs. the flash estimate of -6.1%. But a reading on Chicago area manufacturing came in far weaker than expected, and at 34.9 is well below the 50 dividing line between growth and contraction. So that was a bit disturbing.
Globally, however, the news was definitely on the positive side this week. India’s GDP for the first quarter came in better than expected, up 5.8%. Japan’s industrial production for April rose a super 5.2% owing to stronger demand for Hondas and Toyotas, while exports in April rose over the March pace (though down 39% year over year). Consumer spending rose in Germany and France in April, while eurozone industrial production fell less than expected in March. And UK and Aussie home prices rose; for the month of May for the former, and for the first four months of ’09 for the latter. Consumer sentiment around the world, it seems, is also improving.
As for those who keep screaming about looming inflation, consumer prices fell in Germany in May, while Hong Kong authorities are warning of deflation later in the year. Ergo, I remain very sanguine on the inflation front, despite the huge rally in commodities for the month, the biggest in 34 years. The weak dollar has played a large role, as oil in particular had a great month, and speculators are clearly hoping for a far stronger recovery than I myself see.
David M. Smick / Washington Post
“For years, the world has wanted Americans to consume less and to save more. They are getting their wish. The U.S. savings rate, near zero less than a year ago, has soared to nearly 5 percent of income and could go higher. Total personal savings jumped from $20 billion in the first quarter of 2008 to a whopping $453 billion during the same period of 2009. The real danger is if the savings rate goes to 7 or 8 percent. If that happens, economic recovery could be seriously delayed….
“Consumption comprises 70 percent of our economy. While the reckless, overleveraged consumption habits of the past hardly made sense, the fear now is that American consumption patterns are on a long-term decline. That means potential economic growth in years ahead could be stunningly low (unless the financial system miraculously recovers and business investment picks up the slack).
“The role of upper-income earners has become crucial to savings. There is an undeniable ‘trickle down’ aspect to the workings of our economy. Like it or not, those making more than $100,000 a year are responsible for half of retail sales and 70 percent of the profit margins at retail, according to a study by American Express Publishing and the Harrison Group marketing and research firm. Suddenly, because of the economic meltdown, this group has become highly cautious about spending. Their savings rate has soared, the study reported.
“The question is whether Washington is politically demonizing the very folks capable of leading us out of the recession. Affluent Americans have become the new political whipping boy. They are perceived as the illegitimate recipients of the ill-gotten proceeds of financial liberalization and are about to face stiff increases in taxation….
“Policymakers need to ask themselves which development over the past few months enjoys the greater potential to revive the economy: (a) the $800 billion stimulus package that produced millions of rebate checks worth several hundred dollars; or (b) the $3 trillion stock market jump (since the March 9 low), which has relatively cash-rich, traditionally big-spending Americans looking at their 401(k) retirement accounts with some relief for the first time in a while.
“Ultimately, the factor determining the success of the Obama economy will be the level of private demand for durable goods by the end of 2010. Success will require a lot of spending by a lot of high-income earners the president probably doesn’t like and who probably don’t like him.”
–The rally resumed in earnest, despite an absolutely crazy week in the bond pits, with rates first soaring and then rallying back to unchanged. In the end good news trumped bad and the major averages all ended with solid gains; up 2.7% for the Dow Jones to 8500, 3.6% for the S&P 500, and 4.9% for Nasdaq, which is now up 12.5% on the year.
–U.S. Treasury Yields
Consider that on Thursday morning, the 10-year Treasury was trading at 3.74%, with mortgage rates soaring above 5.40%, but ended the week exactly where it started, 3.45%.
–Market strategist Marc Faber said he’s “100 percent sure the U.S. will go into hyperinflation” due not only to enormous levels of money flooding the global financial system, but also because the Federal Reserve will be reluctant to raise interest rates for fear of cutting off the recovery, thus allowing inflation to take hold and then rocket higher.
–A tentative deal was reached, Friday, for the European operations of General Motors, as an alliance of Magna International, a Canadian auto parts maker, and Sherbank of Russia, agreed to acquire it. More on this one next week, but for now it is a blow to Chrysler because it lessens the clout of Fiat, which had sought to become a global powerhouse with an acquisition of GM Europe that would have included Opel.
–A USA TODAY analysis revealed that “Taxpayers are on the hook for an extra $55,000 a household to cover rising federal commitments made just in the past year for retirement benefits, the national debt and other government promises” for a total of $546,668 per household. The total owed by the government is now $63.8 trillion. Or, if each dollar represented one mile, about 11 light years’ worth. Really. Just worked that out on the back of the beer coaster, err, post-it note.
–A UN study has world income declining 3.7% this year on a per capita basis, with economists concluding there are “no green shoots to be seen which could signal beginnings of a new spring.” Any global recovery is dependent on a sustained level of international coordination, far more so than has already occurred, according to these blokes.
–OPEC is holding the line on further production cuts as the price of oil recovers off the lows of late 2008. Saudi Arabian Oil Minister Ali Naimi said the world is headed towards a new spike when demand recovers, possibly back to $150 within three years, due to minimal spending on new projects, a point I concur on. The Saudis would love to see an average of $75-$80 (what oil producer doesn’t?) I would just say that, near term, there is no way you can legitimize $65 crude when demand is as slack as it remains. I’ve also told you I’m not the kind of investor who’s good at chasing rallies.
Separately, U.S. Geological Survey researchers have concluded 30% of the world’s undiscovered gas and 13% of its undiscovered oil is located north of the Arctic Circle, which would seem to benefit Russia, since it has the most territory in the region, but geologists believe much of the oil in question is off northern Alaska.
–The Canadian dollar rose 9.2% in May, its best single month since at least 1950.
–Of the home loans in foreclosure during the first quarter, 49.8% were prime loans (highly worrisome), 43.2% were subprime, and the balance represented overextended beavers.
–Dell warned that the global slump in PC demand isn’t over yet.
–For some reason, the level of joblessness in New York City related to the financial sector has been far below what was predicted. For example, city officials and economists forecast 50,000 job cuts, but only 19,000 have been given pink slips since the August 2008 peak, according to the state Labor Department. Some believe the cuts have simply been delayed and the figures are skewed by generous severance packages that obscure the real damage. [Hilary Potkewitz / Crain’s New York Business]
–The head of Pequot Capital Management, Art Samberg, is pulling the plug on his main hedge fund after 23 years due to an ongoing federal insider-trading investigation that has “cast a cloud over the firm,” as he put it to investors. At one point in 2001, with assets of $15 billion, Pequot was the world’s largest hedge fund operator. Since then, despite solid performance, assets had dwindled to $3.5 billion. Two smaller funds will be spun off into independent entities and continue on their merry way.
–Due to the economic crisis, suicides in Japan continue to rise, with more than 100 people a day taking their lives in April. Japan’s suicide rate is 24 cases per 100,000 in recent years, compared with 11 in the United States.
–The latest data on home prices in Ireland reveals the average home has fallen 19% in value from the peak in February 2007. I can guarantee it’s really far more than this.
–UK home prices may have risen in May over April, but London luxury-home prices fell 20% in May from a year ago.
–New York State’s employee pension fund lost 26% of its value for the year ended March 31, or $45 billion, meaning that barring a huge bounceback in equity prices, greater contributions will need to be made beginning in 2011 to ensure that future obligations to retirees can be met. Such contributions will ultimately be paid by taxpayers.
–The Journal had a story headlined “More Households Cut the Cord on Cable.” The other day when a group of us got together at the shore for our “Credit Crunch Weekend,” we were musing why anyone would pay for HBO, for example. Most of us still do, mindlessly, awaiting the next “Sopranos” or “Deadwood,” but the stretches in between are lengthy. Frankly, I’m just waiting now for “Curb Your Enthusiasm,” and after that another season of “Entourage.” As for basic cable, any family can easily do without.
[HBO does have a Ridley Scott production on Churchill this Sunday.]
–Inflation Alert: The New York Times is raising its daily newsstand cost to $2 from $1.50 this coming Monday. Previous increases at the Washington Post and Tampa Tribune did result in higher circulation revenue. In 2007, for example, the Post cost 35 cents and is now 75, while the Times and Wall Street Journal were $1 and will now both be $2.
–Deflation Alert: Apartment rents in some sections of midtown Manhattan are down over 20% from year ago levels. Lots of supply…not enough demand. Funny how that works.
–Toys R Us Inc. is acquiring FAO Schwarz and will operate the flagship store in New York City and a second one at Caesar’s Palace in Las Vegas.
–If you want to buy a beer on an American Airlines flight, beginning Monday, the perky/aged flight attendants will only accept credit cards for the purchase. Repeat… if you plan on purchasing a beer (or food, or headsets) on American Airlines from a miserable flight attendant, be prepared to whip out some plastic rather than a five-spot. This sucks. We’re turning into Iceland, where I told you from my recent experiences I didn’t see anyone use cash for anything, and they have the debt loads to prove it.
–Russia’s Digital Sky Technologies invested $200 million in Facebook, Inc., giving the social-networking service a value of $10 billion, which is down about $5 billion from an earlier valuation.
–Time Warner confirmed it will spin off AOL by year end. The one-time darling now accounts for less than 10% of Time Warner’s revenues.
–Hedge-fund manager Bill Ackman lost his seemingly decades-long battle to gain a seat on the Target Corp. board. Talk about a boring story (one that CNBC fell for since it was filler), and a losing one for those investing in Ackman’s Target-only hedge fund, this was it.
–Banco Santander was forced by the trustee representing the estate of Bernard Madoff to cough up $235 million to resolve claims against two of the bank’s hedge funds, a big win for trustee Irving Picard.
–Morgan Stanley is increasing the salaries of its top executives as part of a plan to de-emphasize bonuses. For example, the co-presidents are to be paid $800,000 and $750,000, more than double the previous level. The chief legal officer will receive a base of $750,000 vs. $300,000 in 2008.
–The Food and Drug Administration is recommending that drugmakers limit dosages and strengthen warnings on prescriptions and over-the-counter medicines containing the painkiller acetaminophen to reduce the risk of liver injury. More on this when the agency meets end of June to discuss new findings, but Johnson & Johnson, maker of Tylenol, for example, is rather interested.
–Bloomberg’s Matthew Lynn wrote of two new economic indicators that have come to light: extramarital affairs and the price of Latvian hookers; both signaling further trouble ahead. It seems that based off data from a U.K. Web site called illicitencounters.co.uk, when the benchmark FTSE-100 index slides, “people plot affairs. And when the bulls rage, the same thing happens. When it is trading sideways, they stick with their partners.”
A spokeswoman for the site told Lynn, “It has to do with people’s confidence levels. When the markets are up, they think they can have an affair because they feel they can get away with anything. When the market hits the bottom, they are looking for a way to relieve the pressure.”
Another fellow, John Hempton, monitors the health of the Baltic economies based on the price of Latvian hookers, currently about $60 for the standard service (premium extra, I imagine). Hempton argues that “since the prices have collapsed by about two-thirds in a year, Latvia and the other Baltic states are still in big trouble with deflation lurking.”
[Deflation Alert, part deux: Price of Latvian hookers, standard service.]
Back to the U.K. affairs index, site traffic soared as the market tanked in November, but it has basically held steady since. Ergo, as Matthew Lynn concludes, “we’re in a bear-market rally, not the start of a genuine recovery.”
By the way, my advice to those who may want to check out the illicitencounters site; pass. You might catch a virus.
–Speaking of viruses, I mused from Iceland on 4/25 that maybe I would stay there as swine flu began to hit in the U.S., seeing as it took 50 years for Iceland to get the Black Death. Well, never mind. This week Iceland confirmed its first case of H1N1, a man who had recently returned from New York.
North Korea: Funny how some missed the North Korean nuclear test on Monday, May 25, “startling the world,” as noted by the Washington Post. On Tuesday, I received my copy of the May 25 issue of Defense News and it reported, “North Korea appears to be preparing to test-fire short-range missiles after banning ships from waters off its northeast coast.” Nothing on an imminent nuclear test. Last Saturday’s Wall Street Journal at least reported, “Leading U.S. officials are now publicly voicing their belief that Pyongyang will conduct its second nuclear test in the coming months.”
Your intrepid reporter, on the other hand, had one stark line of commentary last Saturday, upon weighing all the evidence:
“North Korea: I’m not going to go on a John Bolton rant here because this story still has a long way to play out and, let’s face it, none of us have all the facts yet. That said, here’s what we do know.
“Pyongyang was supposed to declare all of its nuclear activities, including on enrichment of both plutonium and uranium (if any on the latter), as well as the actual number of nukes it may be hiding and its dealings with the likes of Syria and Iran, a full six months ago.
“This week, Pyongyang completed its version of events and none of the above has been complied with. None. Instead, the two documents we’ve received, one of 18,000 pages and the other a 60-page executive summary, detail its plutonium production (but zero evidence of the amount made; kind of important, you understand) and, as you all saw by now, the North blew up a cooling tower at the already disabled Yongbyon facility. As former NBA star Derrick Coleman used to say, ‘Whoopty-damn-do.’
“Now don’t get me wrong, I’m all for engagement, including with Iran as I’ve stated over the years (end-running Ahmadinejad in this instance), and I’m glad the North Koreans have begun cooperating on a certain level and that the other four parties involved in negotiations, Japan, South Korea, China and Russia, remain in the process.
“But for the little the Commies have actually done, President Bush and Condoleezza Rice and a lame ambassador, Christopher Hill, have decided it is in everyone’s best interests to take North Korea off the terrorism blacklist (following a 45-day notice period with Congress), as well as lifting a number of trade sanctions.
“This despite the fact we still have no idea how much plutonium they actually produced (don’t tell me you believe the figure they’ve given us), nor any proof they never had a uranium enrichment program, nor what they were doing with Syria and are doing with Iran, nor, the real bottom line for today, how many nukes did they actually put together and where the hell are they?
“Now the administration would have you believe that we won’t learn any of the above without rewarding them first. And that we wouldn’t receive any cooperation from the other players without giving in as we did.
“Instead, what the Bush White House has done is just punt another issue down the road for the next occupant. Maybe, history will prove that Bush and Rice had the right strategy. Any peace-loving American or citizen of the world should want this and I will certainly hop aboard and praise them should this prove to be the case. But for now, how can you not help but wonder just what is going on here? Remember, none of us, including our own intelligence agencies, truly have a picture as to the men standing behind Kim Jong-il these days.
“Or maybe the White House does know what the generals are all about and that they will soon launch a coup against Kim and announce to the world that North Korea seeks to join the community of nations with an economy that is the next Asian tiger. At which point this would scare the hell out of South Korea because it would kill many of its jobs and the people would revolt and then we have the next Korean War! Well I did get you to think about all the possibilities, didn’t I?”
That was almost one year ago, in yet another example of why I believe George W. Bush’s legacy as one of the 3 or 4 worst presidents in our history is quite secure. How many times over the years have I said Iran and North Korea are far more important Big Picture items than Iraq? Well, we’re now there. It’s about nuclear proliferation, and for eight years, the Bush administration did squat concerning two of the three biggest potential proliferators on the planet. [And I’m not even talking about Pakistan.] The Bush folks were, however, somewhat successful in removing a portion of the threat from the former Soviet Union.
This week National Security Adviser James Jones, in a speech in Washington, said that while North Korea still has “a long way to go” to create a nuclear weapon and “have a delivery system” for it, “The imminent threat is the proliferation of that type of technology to other countries and potentially terrorist organizations and non-state actors. That, in my view, is the most imminent danger.”
Jones, continued, on the other big issue of the day: “This is a pretty serious moment….If we fail to convince Iran of the error of its ways” in potentially pursuing development of nuclear weapons, the result could be to “trigger a nuclear arms race” in the Persian Gulf. “If we are not successful in convincing North Korea – we have not been successful in changing their ways – then we have another serious problem.”
Greg Torode of the South China Morning Post:
“Its toys may be nuclear, but it is tempting to see North Korea as an errant child.
“Predictably unpredictable, it is not interested in rules, or even basic conventions of normal behavior. It has even attempted to bite the hands of its only friend, China, for example.
“Pyongyang’s surprise second test yesterday of a nuclear explosive – considerably larger than its first in October 2006 – has undoubtedly raised the stakes, making the troubled international effort to denuclearize the Stalinist hermit state even more complicated. The region is suddenly a more dangerous place as a result.
“Just as the international community tries to punish North Korea, it will also be trying to soothe and pacify it, given the threat implied by its tests. And just as if they were dealing with a spoiled brat, the international community runs the risk of rewarding it for its bad behavior.
“When it staged its first test, there was a lot of chest-beating, particularly in the Washington of then-President George W. Bush, that the North must not be so rewarded, nor should it be allowed to act as if part of the unofficial nuclear ‘club.’….
“(But) last October, in a move that highlighted Mr. Bush’s conversion from ‘axis of evil’ hostility to engagement, the U.S. removed North Korea from its list of nations that sponsored terrorism.
“Any optimism was short-lived. Tensions rose amid the change of administration in the U.S. and the hawkish new government of Lee Myung-bak in Seoul. Fresh doubts about the health of North Korean leader Kim Jong-il and a lack of clear succession plans in communism’s only dynasty fuelled the uncertainty….
“With no new approaches or breakthroughs apparent, the region risks a nuclear version of Groundhog Day – where a test is followed by hostility, engagement, more hostility and another test, each time ratcheting up the tension just that little bit higher….
“North Korea, of course, appears to love keeping the region, particularly Japan, off balance – and yesterday’s test is another sign it is prepared to ignore Beijing in favor of what it perceives to be its own interests.
“But there is one nagging flaw in the six-nation effort that involves the disparate powers of China, Russia, the U.S., Japan and the two Koreas. Having got this far, why should North Korea ever want to give up its nuclear weapons?
“Rightly or wrongly, there is a cold logic at work in Pyongyang, however strange and paranoid it may appear. Mr. Kim’s regime appears to understand that the presence of nuclear weapons guarantees against a U.S. invasion, with Washington never having attacked a nuclear-armed state.
“As one mainland Korean expert put it yesterday, China and its neighbors may ultimately have to become used to a North Korea with a small nuclear arsenal. [ed. this is the same stupid argument being made in some circles with regards to Iran, as well.]
“ ‘We used to think North Korea’s nuclear weapons program was just a negotiating tool,’ said Cai Jian, a scholar at Shanghai’s Fudan University.
“ ‘But I think it’s become clearer North Korea’s ultimate objective is possessing nuclear weapons, and nothing short of that,’ he told Reuters.
“That reality may prove all too clear in the long weeks and months ahead. If that is the case, internal change and reform will be one of the only hopes for easing the threat that is modern North Korea, however long term.”
As I’ve surmised for years, including in my June 2008 review, the biggest issue today, though, is just who is calling the shots in Pyongyang? Are the generals all hard-liners, willing to risk millions of lives in a catastrophic, albeit short war? Are there any that would be considered reformers, thus using the dramatic nuclear test as just another bargaining chip for recognition and aid? Certainly as I write it appears to be more of the former than the latter.
And who is Kim grooming as his successor, with the generals’ approval, of course? The brother-in-law, or his 26-year-old son, Kim Jong Un, of whom I’ve written before. The younger Kim is western-educated, a fact that you’d think wouldn’t go over well with the generals. Regardless, the generals chose the transition period to pick a fight, including their announcement that the 1953 Armistice with South Korea was null and void. The North also appears to have restarted the plant at Yongbyon that can churn out weapons-grade plutonium, and it threatened “a powerful military strike” if any of its ships are boarded to look for nuclear material or related missiles and parts. Plus, shortly the U.S. will have to deal with the trial of two jailed American journalists.
The Obama administration is hoping that Russia and China will exert influence on the North to back off its varied threats and give up the game. Russian territory, after all, is only 80km from the nuclear test site. But Russia has zero clout other than a lame Security Council vote.
As for China, they were clearly upset. Did Kim finally go too far? China can put the squeeze on North Korea in a heartbeat, as it accounts for 73% of the North’s international trade. It has tremendous leverage over the North’s economy. 90% of their oil, and 45% of their food, comes from China. But perhaps most importantly, China could just curtail the shipment of luxury goods to Kim, which Kim doles out to placate the generals.
Some final thoughts. President Bush dumped this issue in Obama’s lap, but for the record, Obama also supported removing North Korea from the terrorism watch list. [John McCain didn’t.]
Obama is receiving some deserved criticism for cutting back on missile defense. Defense Secretary Gates, though, has approved some of the cutbacks. It’s too easy for critics to just say we’re not doing enough on this front. I trust Gates implicitly, but I need to do more work of my own on the topic.
Lastly, assuming the generals in Pyongyang don’t suddenly launch the devastating artillery barrage on Seoul that has long been the nightmare scenario, the major threat is that North Korea will move material and weapons to the likes of Iran, Syria and al-Qaeda, some of which has already occurred, witness the nuclear plant that was being built in Syria and Iran’s recent missile launches. [Throw in Pakistan’s A.Q. Khan and his past work and you can see why NSA chief James Jones is duly concerned.]
Speaking of Pakistan, R. Jeffrey Smith and Joby Warrick / Washington Post:
“Sometime next year, at a tightly guarded site south of its capital, Pakistan will be ready to start churning out a new stream of plutonium for its nuclear arsenal, which will eventually include warheads for ballistic missiles and cruise missiles capable of being launched from ships, submarines or aircraft.
“About 1,000 miles to the southwest, engineers in India are designing cruise missiles to carry nuclear warheads, relying partly on Russian missile-design assistance. India is also trying to equip its Agni ballistic missiles with such warheads and to deploy them on submarines. Its rudimentary missile-defense capability is slated for a major upgrade next year.”
So imagine a Pakistani naval or submarine commander is really an al-Qaeda sympathizer. He would probably just need 2 or 3 cohorts to successfully launch a nuclear armed cruise missile. That is a nightmare.
[On the issue of the Pakistani military’s fight against the Taliban in the Swat Valley, who the heck knows just how successful the campaign has been. Certainly the Taliban continues to launch terror attacks, such as this week’s horrific bombing in Lahore, in a further step to destabilize the government.]
Israel: Prime Minister Netanyahu and President Obama are butting heads over the settlements issue. Netanyahu believes the fate of them should be part of negotiations with the Palestinians, while Obama and Secretary of State Hillary Clinton insist all settlement activity must cease first.
Within the Israeli cabinet itself, there is disagreement on the illegal outposts. Defense Minister Ehud Barak says they must be removed, but Foreign Minister Avigdor Lieberman (a bad guy) says they shouldn’t. Netanyahu will probably allow the outposts to be dismantled (as some already have), but he is adamant “natural growth” of the existing large settlements be allowed to continue.
It’s a stall game, not dissimilar to Iran’s on the nuclear front. Israel, convinced the Obama administration will do nothing more than talk tough, will continue to expand the settlements…period…unless the Obama administration threatens to withhold aid.
This week also saw a real tiff between Netanyahu and the French government, with the Israeli prime minister postponing a meeting in France with President Sarkozy over French comments concerning the fate of Jerusalem. A French Foreign Ministry spokesman said, “Jerusalem needs to turn into a capital for two states. Activities like destroying Palestinian houses and expulsion of Arab citizens encourage violence. They are unacceptable, and against international law.” Netanyahu insists, “Jerusalem was always ours and will always be ours. It will never again be partitioned and divided. Only under Israeli sovereignty will united Jerusalem ensure the freedom of religion and freedom of access for the three religions to the holy places.” [Jerusalem Post]
Iran: Joint Chiefs of Staff chairman Admiral Mike Mullen said, “the unintended consequences of (a preemptive) strike (against Iran) would be extraordinarily serious,” just as it would be if Iran ended up with nuclear weapons, Mullen added.
Iran’s presidential election is June 12, and one thing to keep in mind, with four respectable candidates (in terms of popularity), should none of them hit 50%, the top two face off on June 19.
Flynt Leverett and Hillary Mann Leverett / New York Times, on the Obama administration’s handling of Iran.
“Obama administration officials are buying into a Bush-era delusion: that concern about a rising Iranian threat could unite Israel and moderate Arab states in a grand alliance under Washington’s leadership.
“President Obama and his team should not be excused for their failure to learn the lessons of recent history in the Middle East – that the prospect of strategic cooperation with Israel is profoundly unpopular with Arab publics and that even moderate Arab regimes cannot sustain such cooperation. The notion of an Israeli-moderate Arab coalition united to contain Iran is not only delusional, it would leave the Palestinian and Syrian-Lebanese tracks of the Arab-Israeli conflict unresolved in free fall. These tracks cannot be resolved without meaningful American interaction with Iran and its regional allies, Hamas and Hizbullah.
“Why has President Obama put himself in a position from which he cannot deliver on his own professed interest in improving relations with the Islamic Republic? Some diplomatic veterans who have spoken with him have told us that the president said that he did not realize when he came to office, how ‘hard’ the Iran problem would be. But what is hard about the Iran problem is not periodic inflammatory statements from President Mahmoud Ahmadinejad or episodes like Ms. Saberi’s detention. What is really hard is that getting America’s Iran policy ‘right’ would require a president to take positions that some allies and domestic constituencies won’t like.
“To fix our Iran policy, the president would have to commit not to use force to change the borders or the form of government of the Islamic Republic. He would also have to accept that Iran will continue enriching uranium, and that the only realistic potential resolution to the nuclear issue would leave Iran in effect like Japan – a nation with an increasingly sophisticated nuclear fuel-cycle program that is carefully safeguarded to manage proliferation risks. Additionally, the president would have to accept that Iran’s relationships with Hamas and Hizbullah will continue, and be willing to work with Tehran to integrate these groups into lasting settlements of the Middle East’s core political conflicts.
“It was not easy for President Richard Nixon to discard a quarter-century of failed policy toward the People’s Republic of China and to reorient America’s posture toward Beijing in ways that have served America’s interests extremely well for more than 30 years. That took strategic vision, political ruthlessness and personal determination. We hope that President Obama – contrary to his record so far – will soon begin to demonstrate those same qualities in forging a new approach toward Iran.”
Lebanon: As you look to the critical June 7 election here, just remember that the “March 14” coalition represents the good guys; the “March 8” coalition the bad ones. Part of the March 14 coalition’s campaign platform is that if Hizbullah and its friends win a majority in parliament, Lebanon’s economy could tank as foreign governments and companies won’t want to be seen propping up Hizbullah.
“Iranian President Mahmoud Ahmadinejad said Tuesday, ‘The opposition victory in the parliamentary elections will strengthen the resistance and change the situation in the region….The Zionist regime is a fake entity, which aims at threatening, occupying, and waging wars; because without all those quantities of violence, it would be dead.’ Meanwhile, Iranian Parliament Speaker Ali Larijani reiterated Tehran’s support for Hizbullah and Hamas and refuted claims that Hizbullah was a terrorist group. The U.S. ‘must know that Iran takes pride in its support for Hizbullah and Hamas,’ Larijani said before Revolutionary Guards maneuvers were set to start in Tehran on Monday.”
But, according to Germany’s Der Spiegel, the UN-backed tribunal looking into the assassination of former Lebanese prime minister Rafik Hariri has found evidence linking the bomb that killed Hariri and 23 others to Hizbullah. Eight phone numbers were traced to Hizbullah operatives, according to the report, and were used leading up to the attack, but fell out of usage directly afterwards. According to the findings, the top Hizbullah operative, Hajj Salim, masterminded the murder, Salim reporting directly to Sheikh Nasrallah. Needless to say, if true, this is explosive.
Lastly, the visit by Vice President Joe Biden to Beirut on May 22 was meant to prop up the March 14 ruling majority and the Lebanese Armed Forces, as Biden promised further military aid assuming the Hizbullah-led opposition didn’t emerge victorious. It was an aggressive foray by Biden/Obama, especially as it was his only stop in the region. It’s just impossible to know if more voters than not see it as interference in their election.
Russia: President Medvedev challenged leaders at an EU summit to help Ukraine pay its gas bills to avoid further disruption of supplies this coming winter, which on one hand is positive since Russia for the first time is saying it’s a joint problem, and not just Europe’s.
But Medvedev added, “Russia has offered no assurances and will not offer any,” when asked about the possible suspension of gas supplies to Europe. “What for? There are no problems on our part…Let the one who pays for the gas offer assurances.”
Supposedly, Ukraine needs $4 to $5 billion to meet its obligations.
Meanwhile, protests in Georgia are growing, as tens of thousands demand the resignation of President Saakashvili, who the opposition accuses of monopolizing power since the Rose Revolution that swept him into office in 2003. By week’s end the Orthodox Church was calling for snap elections. Such turmoil obviously plays into Russia’s hands.
Sri Lanka: There is growing evidence the government slaughtered up to 20,000 civilians in the final onslaught against the Tamil Tigers. And in a document just revealed, as reported by the Irish Independent:
“Of the 10,191 patients evacuated to the northeastern… ‘no-fire zone’ between February and May 9…3,113 were recorded as ‘seriously wounded’ with injuries that included deep abdominal wounds and the loss of hands, feet and limbs.”
Aid workers say most of the wounds were caused by shelling, yet the government claimed “not a drop of civilian blood had been spilt by the army,” according to the paper.
Catherine Philp / London Times
“Sri Lanka’s no-fire zone is a scene of such utter devastation it mocks its very name. It is a glimpse of hell unleashed in paradise. A glistening white beach packed with home-made bunkers where civilians huddled to protect themselves from the shells that the government denies launching in the final weeks of the offensive….
“Peering down from above, one struggles to imagine the terror of being here in those last days of battle when 100,000 civilians were trapped in this tiny spit of sand between the guns of the Tamil Tigers and the cannons of the Sri Lankan army.”
Total, an estimated 150,000 suffered injuries. President Rajapaksa should be brought up for war crimes.
Venezuela: Deputy Israeli Foreign Minister Danny Ayalon said this week that Hizbullah has “sleeper cells” in South America, and on a related issue, Venezuela has been supplying Iran with uranium. I’ve told you for years that this is the main concern when thinking about Hugo Chavez; not the fact that he is a socialist/dictator and controls a lot of oil. Rather, Chavez is allowing Iran to build a base of operations just a few hours flight from the United States.
Italy: Prime Minister Berlusconi said he would resign if he is caught lying about allegations he had an affair with an underage girl. Berlusconi, 72, is under the gun to explain his relationship with now 18-year-old model Noemi Letizia. It was his estranged wife, Veronica Lario, who announced earlier in the month, “I cannot remain with a man who consorts with minors.”
On a different issue, Bloomberg had an extensive story on how the Mafia is increasingly controlling business in Italy for one simple reason; it “has vast amounts of cash,” according to a leading prosecutor. With banks tightening lending standards and companies at risk of going bankrupt, many are turning to the Sicilian mob.
–President Obama selected Sonia Sotomayor, a federal appellate judge, to fill the retiring David Souter’s seat on the Supreme Court. She would become the first Hispanic justice, and with Democrats holding a 59-40 advantage in the Senate (60-40 when Al Franken is seated), Sotomayor is a lock, so the experts say.
Of course that doesn’t mean some will complain, seeing as how Sotomayor once said appellate courts are “where policy is made.” And this gem, from 2001.
“Justice (Sandra Day) O’Connor has often been cited as saying that a wise old man and wise old woman will reach the same conclusion in deciding cases…I am not so sure that I agree with the statement. First,…there can never be a universal definition of wise. Second, I would hope that a wise Latina woman with the richness of her experiences would more often than not reach a better conclusion than a white male who hasn’t lived that life.”
But as Stuart Taylor of the National Journal notes, “Imagine the reaction if someone had unearthed in 2005 a speech in which then-Judge Samuel Alito had asserted, for example: ‘I would hope that a white male with the richness of his traditional American values would reach a better conclusion than a Latina woman who hasn’t lived that life’ – and had proceeded to speak of ‘inherent physiological or cultural differences.’”
George Will / Washington Post
“Her ethnicity aside, Sotomayor is a conventional choice. The court will remain composed entirely of former appellate court judges. And like conventional liberals, she embraces identity politics, including the idea of categorical representation: A person is what his or her race, ethnicity, gender, or sexual preference is, and members of a particular category can be represented – understood, empathized with – only by persons of the same identity.”
I just have a feeling Sotomayor isn’t the lock she appears to be, especially when some on the left are concerned about her stance on abortion. And her decision in the New Haven, Conn. firefighter case should be overturned by the Supreme Court shortly. So as I like to say, wait 24 hours.
–Christopher Caldwell / Financial Times, on the debate between President Obama and former vice president Dick Cheney.
“Mr. Obama hit the rock of public opinion last week. The Senate, which his party controls, voted 90-6 against closing Guantanamo. The Democrats’ Senate leader, Harry Reid, explained that he did not want terrorists released in the U.S. ‘No one’s talking about releasing them,’ said an incredulous reporter. ‘We’re talking about putting them in prison somewhere in the United States.’ Mr. Reid replied laconically: ‘Can’t put them in prison unless you release them.’
“Bloggers snorted at the stupidity and cravenness of this remark and, in his speech, Mr. Obama repeated the bloggers’ red herring that ‘nobody has ever escaped from one of our federal, supermax prisons.’ But Mr. Reid is right. Bringing Guantanamo prisoners to the U.S. is safe only if you assume they will not receive a fair trial. In a system that guarantees due process, if you cannot charge a person or if a judge finds his interrogation unconstitutional, you release him. Mr. Obama’s constitutionalism is underwritten by the Bush war on terror.
“That is why Mr. Cheney’s big push has been successful. It confronts Mr. Obama with a Gordian knot that he dare not cut. A constitution that enshrines rights is an asset, but it does not come free. If it did, every country would have one.
“Eight years ago, Americans reckoned that some rights were worth trading for security. If they want those rights back, they will probably have to trade some security. That is the bargain. Until Mr. Obama admits it he will be tangled up in an illogic from which no oratory can extract him.”
–Appearing on “Face the Nation,” Colin Powell assured everyone “he was still a Republican,” adding, “On almost every demographic indicator the Republican Party is losing. The Republican Party has to take a hard look at itself and ask, ‘What kind of party are we?’”
On “Meet the Press,” former speaker of the House, Newt Gingrich, said the party has to make itself open enough to include both Dick Cheney and Powell.
“Republicans are going to be very foolish if they run around deciding they’re going to see how much they can purge us down to the smallest base.”
On the issue of Guantanamo, Powell said, “I’ve felt it should be closed for the past six years. Guantanamo has caused us a great deal of trouble throughout the world.” He also said Obama didn’t handle it well when he asked Congress for $80 million to close the camp without having any real kind of plan on how to handle the 240 detainees.
–Mortimer Zuckerman, Editor-in-Chief / U.S. News & World Report
“Obama’s rationale for dealing now with long-term problems such as healthcare and energy is that this is the moment to do it or, as some of his advisers have put it, let’s not waste a good crisis. But programs of this scale have in the past defeated much less overburdened administrations. Given that the programs have little to do with the short-term financial and economic crisis, they risk overloading the system and the ability of the public to cope.
“Many administrations are lucky to do one thing at a time, never mind two. But winning the economic war will be tougher when you are trying to jam a whole bunch of bills through Congress, particularly when they involve a huge expansion of federal spending. Franklin Roosevelt’s big mistake early on was to create the National Recovery Administration. It was meant to stimulate business and labor in new endeavors, but he had too much on his plate. The act was not thought through and flopped in a torrent of bureaucratic regulations discouraging to enterprise and threatening to individual liberties….
“President Obama has had an outstanding start. He has demonstrated the capacity to lead and to manage on the national scale. For example, he is to be commended for his remarkably forthright reform views on education and his determination to connect all Americans on the Web….
“Yet his convictions and charm will be enough to carry the country forward only if his policies are adequate to meet the financial and economic crises. Similarly, his willingness to meet and treat with the enemies of America will not pay dividends (notably in dealings with Iran, Iraq, Afghanistan, and Russia) unless America’s economic strength is restored.
“There is a palpable sense of hope in the country, even as everyone’s eyes are trained on one person: Obama. He is our nation’s leader and teacher who still retains the trust of the class. He has succeeded in evoking huge expectations and hopes; the challenge now is in living up to them.”
–This is outrageous. Queen Elizabeth has been excluded from 65th anniversary commemorations of D-Day next week in France, even though she is the only living head of state who served in uniform during World War II. British Prime Minister Gordon Brown will be there, but not the queen who, according to several biographers, called Dwight Eisenhower her favorite president.
Some say Queen Elizabeth has been excluded because French President Sarkozy didn’t want to share the spotlight more than he already will with Barack Obama being in the house, but it seems that it was Gordon Brown who dropped the ball as relations between him and the queen have soured amid the economic crisis and the furor over parliamentarians’ expenses.
If I’m the queen, I change the locks on No. 10 Downing Street while Brown is away. It’s what the people there want these days, anyway.
–Hey, you see that murder on the Harvard campus? A student, an alleged drug dealer, was gunned down by a New Yorker, not a student, looking to rob the victim, and the suspect may have had help from another student. Ah yes, America’s future leaders.
–What an embarrassment. Sen. Roland Burris (D-Ill.) was caught on an FBI wiretap related to the Rod Blagojevich case promising to make a campaign contribution at a time he was pressing Blago for the seat vacated by Barack Obama.
“I will personally do something. And it’ll be done before the 15th of December,” Burris told the then-governor’s brother. “And tell Rod to keep me in mind for that seat, would ya?”
I imagine Burris is a total outcast in the Senate…and no word on whether he has raised more than the initial $845 for his election efforts in 2010.
–Douglas Belkin of the Wall Street Journal had a story titled “Chicago Student Killings Spark Appeals to Obama.” Since last fall, 37 public-school children have been murdered, compared with 21 homicides during the 2007-08 school year, and some in Chicago claim Obama isn’t showing the same passion for the issue as he did when he was a young man in the area.
I couldn’t agree more, as an admittedly outside observer, though one who also said upon his election that Obama could do great things in the inner cities. He’s good at this kind of thing. Get a group of kids together…and listen. I have a small amount of experience in such matters and I know this is what they respect. Why should it solely be up to the likes of Bill Cosby and Colin Powell to spread the gospel of inner-city non-violence when America has its first black president who can do so?
–According to a study by Uniroyal, the Irish and British are the biggest whiners in Europe.
–Lastly, forget H1N1, which appears to be in relative control until the second wave hits in the fall. We learned of a far more lethal virus this week, “Lujo.” Of five people infected in Zambia and South Africa last fall by this illness that has just been identified, four died. The bug comes from a family of viruses found in rodents, according to Dr. Ian Lipkin of Columbia University. “This one is really, really aggressive.”
“The outbreak started in September, when a female travel agent who lives on the outskirts of Lusaka, Zambia, became ill with a fever-like illness that quickly grew much worse.
“She was airlifted to Johannesburg, South Africa, where she died.
“A paramedic in Lusaka who treated her also became sick, was transported to Johannesburg and died. The three others infected were health care workers in Johannesburg.”
Thankfully, the esteemed Dr. Anthony Fauci said, “It’s not a kind of virus like the flu that can spread widely.” Nonetheless, I’m skipping Lusaka and Johannesburg, for now.
Pray for the men and women of our armed forces, and all the fallen.
Gold closed at $978…taking dead aim at weekly closing high of $1002 [3/14/08]
Oil, $66.44 [highest weekly close since 10/31/08]
Returns for the week 5/25-5/29
Dow Jones +2.7% [8500]
S&P 500 +3.6% [919]
S&P MidCap +4.4%
Russell 2000 +5.0%
Nasdaq +4.9% [1774]
Returns for the period 1/1/09-5/29/09
Have a great week. I appreciate your support.
