[Posted 7:00 AM ET]
Iran
25 years after the end of the Iranian hostage crisis, a new one
continues to unfold. An emergency meeting of the International
Atomic Energy Agency is slated for February 2, but as of this
writing IAEA chief Mohamed ElBaradei is refusing to advance
the release of his already scheduled March 6 final report on
Iran’s nuclear program.
The 35-member IAEA board is where a referral to the UN
Security Council must originate, but even if a resolution to do so
passes, Russia and China have already said they are against
levying sanctions if it got to the Council. China believes “all
relevant sides should remain restrained” and Russian President
Vladimir Putin has warned against “abrupt, erroneous steps.”
I urge you to take a quick look at my 1/19 edition of “Hott
Spotts” and refresh your memory as to the timeline. For well
over two years, as I’ve been writing, Iran has “brilliantly” stalled
for time and for now the game continues.
Former U.S. Defense Department official Richard Perle:
“(The EU-3…France, Germany and Britain) will still be talking
when the Iranians detonate their first bomb. (Iranian President)
Ahmadinejad’s rantings are deeply rooted in an apocalyptic
concept of the 12th imam which welcomes mass destruction.”
Crazy? Don’t count on it. Perle concludes the “Bush
administration has become paralyzed.” [Times of London]
Charles Krauthammer / Washington Post:
“Instead of being years away from the point of no return for an
Iranian bomb, as we were before we allowed Europe to divert
anti-proliferation efforts into transparently useless talks, Iran is
probably just months away. And now, of course, Iran is run by
an even more radical government, led by a president who
fervently believes in the imminence of the apocalypse.”
Senator John McCain, appearing on “Face the Nation,” labeled
Iran the “gravest threat since the end of the Cold War” and he
favors levying sanctions even if meant skyrocketing oil. But
it would appear we won’t get that far.
Today, even Israel is uncertain. Ariel Sharon had said, “Israel
will not accept a nuclear weapon equipped Iran.” The defense
forces are ready to attack. But the army chief of staff this week
ruled out a preemptive strike.
How would Iran counter? Ballistic missiles loaded with
chemical weapons? A wave of terrorism unleashed against
Israeli and other Jewish targets?
Further commentary; this from an op-ed by Patrick Devenny in
the Daily Star:
“Unfortunately, much of the debate concerning a hypothetical
Israeli strike on Iran remains mired in the dry algorithms of
logisticians, who frequently remind the world just how difficult it
would be for Israel to attack Iranian nuclear installations. Take,
for example, a U.S. Army-sponsored report last year concerning
the geopolitical repercussions of a nuclear-armed Iran. While
thousands of words were devoted to the minutiae of the Israeli
Air Force’s operational range and payload figures, relatively
little effort was expended on outlining the regional repercussions
of such an act.
“Suffering from this narrow-minded analysis is Lebanon, which,
more than any other local actor, could find itself in an
unfortunate strategic position were hostilities to commence
between Israel and Iran. Not only does Lebanon abut northern
Israel, but it plays host to Hizbullah, which has made no secret of
its fealty to the regime in Tehran.
“In the event of an Israeli attack, Iran would likely respond with
a Hizbullah missile barrage against Israel, thereby exacting
revenge while maintaining its own distance. Recent Iranian-
supplied upgrades to Hizbullah’s rocket arsenal…have placed
major Israeli population centers – such as Haifa – within range.
With Hizbullah’s recent buildup, the aggregate Israeli
conventional threat against the Iranian nuclear program has been
rendered relatively minor in comparison to a potential Hizbullah
response targeting Israel and its economy. Iran’s leaders are well
aware of this fact, and are likely to view Hizbullah’s rockets as
their primary deterrent against an Israeli attack.
“These same leaders would have little trouble in convincing their
allies in Hizbullah to unleash its arsenal, considering that the
party’s leadership maintains tight contacts with Iran’s rulers and
its ever-present security apparatus. Hizbullah religious leaders
have trained in Iranian seminaries and maintain close
connections with ruling Iranian clerics.”
Michael Rubin / Wall Street Journal
“As they cleanse their home front, the theocrats may use their
nuclear capability to act upon their ideological imperative to
destroy Israel. The West once ignored Saddam Hussein’s threats
against Kuwait. But dictators often mean what they say. Even if
Iran does not use its bomb, a nuclear deterrent will enable it to
lash out conventionally without fear of consequence.
“Diplomacy can only work when both sides are sincere. Like an
abused spouse, Western policy makers blame themselves rather
than understand the fault is not theirs. There is no magic formula
waiting to be discovered. To Tehran, the West is naïve. More
diplomacy will only give the Islamic Republic time to achieve its
nuclear goal. The only solutions that can rectify the problem are
those that deny the Islamic Republic its nuclear arsenal or those
that enable Iranians to cast aside theocracy and its aggressive
ideology and instead embrace freedom.”
Peter Hannaford / The Weekly Standard:
Mr. Hannaford quotes Hassan Abassi of the Revolutionary
Guard, the forces that helped bring Ahmadinejad to power, from
a May 2004 speech.
“We have a strategy drawn up for the destruction of Anglo-
Saxon civilization and for the uprooting of the Americans and
the English.”
Hannaford:
“(Abassi) claimed that there are 29 sites in the United States, and
elsewhere in the West, that Iran has targeted, and ‘we have
already spied on these sites and we know how we are going to
attack them.’”
[Additional source: Ilan Berman, author of “Tehran Rising”]
And in our ongoing effort to know the enemy, this week I quote
from a weekend speech by President Ahmadinejad:
“Unfortunately, today people face rulers who think they have
more rights than other nations because their arsenals are stocked
with nuclear, biological, and chemical weapons….
“Each year, tens of new nuclear power plants are constructed, but
a few Western countries which have nuclear weapons are
questioning Iran, even though, with unprecedented inspections
and supervision, there is not the slightest evidence against us.
“They think they have the power and want to deprive Iran of its
rights. They clearly announced that they are against research.
They want to monopolize nuclear energy and impose their
policies on other nations.
“These countries supplied Iran’s previous regime with weapons
and power plants and helped (its attempts) to master the nuclear
fuel cycle, but after the victory of the Islamic Revolution they
changed course and stood against us.”
[Tehran Times]
This is propaganda of the first order…and highly effective when
the audience is largely comprised of those whose knowledge of
history is limited to what they have been force fed, including
hatred for Israel and the West. That said, there is a core in Iran
that desires positive change but we are far, if ever, from effecting
it. And many of these same people still view developing the
bomb as a source of national pride.
Lastly, Ahmadinejad said at one point this week, “ultimately they
need us more than we need them.” Four million barrels of oil
worth.
Wall Street
At year end, complacency was the order of the day and I can’t
help but note what I wrote 12/31/05 in attempting to forecast ’06.
“(The) U.S. economy will stay positive for the first quarter, but
since I look for major foreign policy issues to potentially
dominate the 24-hour news cycle before April, the outlook for
the rest of 2006 is, at best, cloudy.”
I also added earnings would disappoint, but I didn’t realize just
how soon. I thought by the second quarter, not this last one!
And to those who continue to believe capital spending is going to
pick up in a big way, with corporations finally carrying their
share of the load after watching housing and the consumer
dominate for years, I thought this was indeed possible, but “with
one important caveat”:
“Corporate CEOs are far more fickle than the average American
and if one of my hot spots flares up in a big way, they will be the
first ones heading to the door.”
So here we are…Iran, skyrocketing oil all over again, and
earnings guidance that is less than spectacular. Stocks responded
in kind, staging a broad-based sell-off on Friday and finishing
down 2% and more on the week as measured by the major
averages.
Crude oil ended up at $68.48, its highest weekly close ever and
back near the all-time high of $70.85 on concerns the Iranian
nuke crisis is on the verge of spinning out of control. But
there was another key ingredient this week…Nigeria.
Nigeria is the 3rd-largest OPEC producer behind Saudi Arabia
and Iran, as well as the 8th-largest exporter overall at some 2.4
million barrels per day; most of which goes to the United States.
For decades Nigeria has faced unrest in the oil-rich Delta region,
where most of the crude is produced, and the people here have
seen zero change in their pitiful lives. It’s the classic case of one
corrupt regime after another sopping up the wealth for its own
gain while the people suffer. Western oil companies, such as
Shell and ExxonMobil, have been pulling their workers or are
threatening to.
And on the natural gas front, while the price of this has been
collapsing and is far more sensitive to weather patterns than
geopolitical concerns, for the second time in weeks, Russia has
proved it is not a reliable source of energy. Suffering through a
historic cold wave, Russia cut off a portion of supply intended
for the likes of Italy to meet the soaring needs of its own
populace. By week’s end, with the cold mass having hit
Ukraine, it, too, was forced to cut back on the gas passing
through to the rest of Europe through its pipeline in order to
meet domestic demand.
On the earnings front, it wasn’t just technology that disappointed,
but even the likes of General Electric and Citigroup reported
either results that missed expectations or issued tepid outlooks
for the first quarter. Prior to these two Friday morning, tech
heavyweights IBM, Intel, Yahoo, eBay, Motorola and Apple
all had one thing or another that upset analysts and traders who
in most cases had these stocks priced for perfection. Separately,
the higher oil prices did a number on airline issues that had
finished up ’05 in fine fettle but are collapsing anew.
Broadly speaking, the economic news of the week was mixed,
with the Fed’s regional survey of the economy showing
continued moderate to robust growth in most areas, but also
softer housing in a majority of markets. This latter bit was
confirmed by the weak numbers on December housing starts,
while a storyline in USA Today captured a lot of attention:
43% of first-time home buyers in ’05 put no money down.
I’ve talked about this topic ad nauseum for years now, but here’s
a summary of the issue from PIMCO’s Bill Gross, as stated in
Barron’s Annual Roundtable.
“The fact is the American homeowner has learned to use his
home as an ATM machine, whether in Des Moines or Miami or
Las Vegas or Orange County, Calif. There is a lot of equity in
Des Moines, just as there is in Miami. Homeowners have been
able to extract it by taking out ‘funny-money’ mortgages and by
borrowing money at 1% and 2% initially.
“Beginning in January of ’06, a substantial percentage of
adjustable-rate mortgages begin to adjust upward. They have
had a grace period in the past year or two. We have a long
stretch ahead of us in which prior Fed policy affects the economy
…Typically, when the Fed marches interest rates up, 12 to 18
months later there is a slowdown in the economy. We are
beginning to see that, but the funny-money phenomenon and
adjustables and the like have postponed the pain. Slower growth
in ’06, ’07 and ’08 will be the result.”
And economist Ed Hyman of ISI, one of the best on the Street,
weighed in on the message of the bond market these days, as told
to Greg Ip of the Wall Street Journal.
“Mr. Hyman thinks long-term interest rates are a reason to be
less, not more, optimistic about the outlook. They’re low, he
says, because ‘alternative returns aren’t very attractive.’ Low
expectations for investment – in new businesses, for example –
are detrimental to economic growth. Investors are putting money
into long-term bonds ‘because they can’t figure out how to get
better than 4%.’ Such an environment means short-term rates of
about 4.5% might actually be more restrictive than previous
experience suggests.”
This last point has been a consistent theme of Gross’s as well.
As for the international scene, Tokyo took center stage this week
and not because of a continuation of its spectacular bull run.
Instead, the Nikkei index collapsed 1,000 points (about 6%) in
the span of three days before settling down. The chief culprit
was an Internet services company called Livedoor, which
through an aggressive series of acquisitions had become a $6.3
billion Web empire; all headed up by a 33-year-old
nonconformist who embraced the limelight.
Well, authorities raided Livedoor’s offices amidst allegations of
stock manipulation and funny accounting when it came to the 50
or so companies it cobbled together and, to top it off, for now, a
former Livedoor executive committed suicide.
Tokyo’s market is replete with day traders and speculators of all
stripes and the resulting activity short-circuited its computer
system; with the lack of capacity forcing the exchange to shut
down…a huge embarrassment. More days of this sort will likely
occur, including this coming Monday after Wall Street’s ugly
finish.
Staying overseas, China announced it has accumulated reserves
of $819 billion, rivaling Japan’s $846 billion; a staggering total
amassed for the most part in just the past ten years. But what
remains most worrisome is the fact about 3/4s of China’s
holdings are in U.S. Treasuries.
For now, however, the United States continues to attract foreign
buyers of its stocks and bonds; $89 billion worth in November
(the last month for such data), including $54 billion in our bonds.
So, still no problem funding our massive deficits, but these
things have a way of reversing in a flash under the right
circumstances.
Lastly, a word on North Korean dictator Kim Jong il’s excellent
adventure to China. While details are virtually impossible to
confirm, the little guy with the bad hairdo and about 10-15 nukes
in his portfolio was supposedly looking at examples of China’s
economic miracle and how he might be able to replicate it.
At first blush one could easily conclude, ‘Hey, this isn’t all bad.
Better than the alternative, that’s for sure.’
But I have spoken in the past about China’s problems with Kim
and his destitute hordes. It’s not only an issue of the regime
collapsing at some point and China being faced with a massive
wave of refugees. It’s also about North Korea suddenly
becoming the new low-cost producer. If…[emphasize, If]…an
agreement on the nuclear front was ever reached, the North
would be granted all manner of economic incentives. What if
Kim or whoever succeeds him got religion? Deng Xiaoping did,
beginning in the late 1970s, and laid the groundwork for China’s
spectacular progress. The last thing China thus wants is a new
competitor on its border. It’s having a tough enough time
finding employment for all of its own citizens these days.
Just something else to chew on. For the darker side of Kim, I
have further fodder below.
Street Bytes
–We keep hearing of a continuation of double-digit earnings
growth but outside of the energy sector, and a few other selected
issues, I just don’t see it for all of 2006. Thanks to the above
mentioned disappointments, the Dow Jones had its first 200-
point loss since May 2003 on Friday and finished off 2.7% for
the week, thus wiping out its early 2006 gains. The S&P 500 lost
2% and Nasdaq fell 3% to 2247. Even Google took it on the chin
in a big way, off $36 on Friday alone to $399. [Its recent high
was $475.]
General Electric was symptomatic. While it’s earnings were in-
line, revenue growth was a mere 3% and the outlook for all of
’06 failed to provide cause for any new optimism.
–U.S. Treasury Yields
6-mo. 4.46% 2-yr. 4.35% 10-yr. 4.35% 30-yr. 4.52%
This week’s release of the consumer price index confirmed that
core inflation, ex-food and energy, remained tame; up 2.2% for
all of 2005. But the overall rate, including stuff you and I use
daily, was up 3.4%. Treasuries were little changed, though
buffeted by two countervailing forces; the impact of higher
energy prices, inflationary, against a flight to quality over the
cause of the skittishness, Iran. Once the overall economy shows
real signs of a slowdown, however, I would expect the longer
end of the yield curve to rally…that is if we can avoid a dollar
crisis.
–Ford will be formally announcing a restructuring plan on
Monday that will include 25,000 layoffs over the next four years.
–With Merrill Lynch’s record earnings, the top five Wall Street
firms earned $20 billion in 2005. Thanks to still surging mergers
& acquisition activity, the big boys will continue to rake it in.
–Oil stocks surged to new highs, led by the likes of oil services
giant Schlumberger. And my friends at Pritchard Capital tell me
President Bush will be highlighting clean coal technology in his
upcoming “State of the Union” address.
–Entrepreneur Mark Cuban, appearing on CNBC, opened up a
real can of worms (as he is wont to do) in discussing a topic I’ve
raised on these pages over the years, click fraud. This is where
search engines bang away at the pop-up ads a company is paying
for, thus generating excess revenue.
A few years back I noticed the traffic on StocksandNews was
soaring in one Latin American country, I grew suspicious, and
pulled an ad campaign I was running on a search engine (not
Google or Yahoo). Immediately the traffic dropped there and it
was obviously a case of outright fraud where the engine uses
partners all over the world to just keep clicking on your spots.
Yes, Cuban is right.
Of course where he was really going with the discussion is that if
some day Google or Yahoo are found to be doing the same thing
(knowing the lion’s share of each of their businesses is still paid
search), it would be a bloodbath and I firmly believe that
Cuban’s comments had at least a little to do with the pounding
Google’s shares took on the week.
I have also consistently written over the years that paid search is
incredibly overrated and that when corporations finally catch on,
the game will be over. But that’s just my opinion, I could be
very wrong.
Separately, involving Google, the Bush administration has
subpoenaed the company for the search records of its users as
part of a court case involving the protection of children from
Internet pornography; the 1998 Child Online Protection Act
having been struck down by the U.S. Supreme Court two years
ago.
Google said it wouldn’t release the random data requested
because it violated the rights of its users. I certainly agree with
the stance it’s taking but at the same time, isn’t it ironic that
Google would act in such a fashion? After all, just like some of
its brethren, at the drop of a hat it has kowtowed to China and its
demands for information on dissidents.
–Yahoo’s share of Internet search ads is down to 19% from 27%
a year earlier, while Google’s share is up to 60% from 47% over
the same period (not including Asia).
–30,000 are employed in China to scan the Web for offensive
material. The entire CIA employs 16,000.
–Some upstate New York operation stupidly shipped spinal
column bone tissue with an order of veal, Japanese inspectors
discovered it, and just six weeks after the ban on U.S. beef was
lifted, it was re-imposed.
–Boston Scientific raised the stakes in the battle for Guidant to
$80 per share, up from Johnson & Johnson’s $71. It will have
buyer’s remorse should this go through.
–Hedge funds generated $25 billion in revenue for Wall Street in
2004 (the final figure for ’05 isn’t known as yet), or 1/8th of the
total. The hedge funds also represent 30% of total stock
commissions.
–The couple involved in the Wendy’s extortion plot over the
finger in the bowl of chili received 9 and 12 years in prison. It’s
not known whether they will get kitchen duty.
–An article in a leading medical journal, The Lancet, reports
Tamiflu is not effective against the H5N1 virus, but Roche, the
makers of the drug, say it has been proved effective in tests in
Turkey which has a major bird flu problem today.
–Beijing city planners have proposed a Disney theme park for
2010, thus beating out Shanghai which failed to formalize its
plans. If Beijing officials are smart, they’ll insist Disney not
install the “It’s A Small World” ride, which tends to drive people
crazy.
–The FCC is probing those companies that are selling cellphone
records. It is absolutely outrageous this is so easy to do.
Concurrently, I’ve raised my estimate on the percentage of
dirtballs in the world from 47 to 53.
–Speaking of outrageous, property taxes in my home state of
New Jersey are up 29% in four years. But not that some here
can’t afford it. Two new golf courses are opening up across the
river from Wall Street; one with an initiation fee of $150,000, the
other at $500,000.
–My portfolio: My new best friend, Jim Cramer, favorably
mentioned my carbon fiber play on Friday. That’s worth a $1 or
$2. And the rest of my meager holdings hung in there this week,
as it was one where an 80 / 20 split between cash and stocks
looked alright.
Russia
The coldest weather since 1950 pummeled the nation, including
Moscow, as temperatures plunged below minus 20 degrees
Fahrenheit for days on end, bursting water pipes and closing
factories amidst the highest demand for energy in the nation’s
history.
Separately, Russia has a new dispute with Ukraine, related to its
earlier tussle over Gazprom and natural gas. Ukraine seized a
lighthouse on the Black Sea at Sevastopol, even though Russia
has a lease on it until 2017. Sounds like a small deal, but it’s yet
another example of the tension between these two. Some in
Ukraine wanted this done because of the Gazprom issue as a way
of sticking it to Russian President Vladimir Putin. But the
upcoming parliamentary elections in Ukraine, March 26, could
see Putin get his revenge as it appears increasingly likely
President Yushchenko will suffer a crushing defeat.
But recently I’ve commented extensively on Putin’s use of the
energy weapon, as well as Defense Minister Sergei Ivanov’s op-
ed in the Wall Street Journal. Here is more food for thought;
first Gazprom.
Georgy Bovt / Moscow Times:
“A lot has been written about the recent gas deal that Gazprom
reached with Ukraine, but most of it only proves that no one has
the slightest idea what really happened. Everyone arrives at
different numbers, and everyone has a different estimate of how
much money will be siphoned off under the deal. No one has the
slightest doubt that huge sums will disappear, however.
“To the outside observer, public reaction to the deal in Russia
must have seemed highly peculiar. If an agreement this murky,
dubious and nontransparent had been reached in a country with
freedom of speech and at least a minimal system of checks and
balances among the branches of government, it would have
resulted in an enormous scandal, a huge public outcry, a
parliamentary inquiry and, most likely, high-level resignations
and high-profile court cases. But not here.
“It came as no surprise that the State Duma kept quiet about the
deal. The current Duma always keeps its nose clean in such
situations. The opposition also found nothing objectionable in
the deal that it could turn against the Kremlin in order to make a
little political hay….
“What we have as a result is a social paradox. On the one hand,
when sociologists ask people what concerns them about life in
this country and what they think is hindering Russia’s
development, the overwhelming majority cite corruption,
especially in the government, and the bureaucracy. Yet on the
other hand, when Gazprom brazenly cuts a shady deal with
Ukraine, the public couldn’t care less.”
Daniel Twining / The Weekly Standard:
“Unlike corrupt politicians who view their country’s oil wealth
as a means of elite enrichment, President Vladimir Putin is
methodically consolidating state control over Russia’s energy
resources and deploying them as a tool of international statecraft.
Russia’s energy exports have replaced both nuclear arms and the
Communist International as the principal agent of Russian
influence abroad….
“Rather than liberalizing its economy, as China has done to such
explosive effect, Moscow is reasserting state control, in a
concerted strategy to make Russia a great power once again.
“A closer look at the way Russia has wielded energy supplies to
support its allies and bludgeon its rivals in Eurasia suggests that
major economies increasingly dependent on Russian gas and oil
exports – including great powers in Europe and Asia, and even
the United States – are rendering themselves vulnerable to the
ambitions of an autocratic, imperial state that has not refrained
from using energy as a geopolitical weapon and has been ruthless
in its treatment of both internal political opponents and
neighboring states.”
On Gazprom, which is now one of the five largest companies in
the world in terms of market capitalization:
“ ‘Many observers wonder whether Gazprom…is really a
company at all,’ writes the Economist. ‘Often, it seems more
like an arm of the state,’ pursuing ‘the Kremlin’s ambitions as
well as its own.’
“Gazprom’s chairman is Dmitri Medvedev, Russia’s first deputy
prime minister. He previously served as Kremlin chief of staff
and is perhaps President Putin’s most trusted aide. Medvedev is
the leading candidate to replace Putin in 2008.”
Gazprom, primarily a natural-gas giant, also controls significant
oil reserves. But one oil company it doesn’t own is Rosneft, “the
state oil giant that acquired the biggest production unit of what
had been the largest private oil company in Russia, Yukos, when
the government arrested that firm’s chief executive, Mikhail
Khodorkovsky, and banished him to prison camp in Siberia for
daring to fund opposition political parties.”
“Rosneft’s chairman is Putin’s powerful deputy chief of staff,
Igor Sechin. From the Kremlin, he is reported to have
masterminded the attack on Yukos’ leadership – from which
Rosneft benefited handsomely. Sechin leads the ‘siloviki’
faction in the Kremlin composed of former military and secret
police officers. According to the Financial Times, Rosneft is
viewed in Russia as ‘the oil company of the siloviki,’ of which
Putin and the other leading candidate to replace him as president,
second deputy prime minister Sergei Ivanov, are themselves
members….
“There may be no better evidence that Russian energy policy is
at the core of Russian political power and strategy than the
expectation that President Putin will assume Gazprom’s
chairmanship when his term ends in 2008. ‘I intend to leave the
Kremlin, but I don’t intend to leave Russia,’ he says
enigmatically. He has already mastered the role. ‘Those who
have dealt with Putin,’ said one commentator, ‘may have gotten
the impression that they were talking not with the president of
Russia but with the CEO of Gazprom.’”
I still say Putin remains president for a third term, but I have to
admit I hadn’t thought of the Gazprom angle.
As for Sergei Ivanov’s op-ed that I highlighted last week, on
Monday, Alexander Golts wrote in the Moscow Times:
“In theory, (Ivanov’s) opinion piece in The Wall Street Journal
last Wednesday should have struck fear into the international
community. Ivanov seriously asserted that the scope of the use
of military force was on the rise, ‘not least because more
challenges to national security have emerged.’ Chief among
these threats, Ivanov held, was ‘interference in Russia’s internal
affairs by foreign states – either directly or through structures
that they support.’”
But Mr. Golts, as opposed to yours truly, fails to see the danger
in this.
“Such a declaration of imperialist foreign policy ought to inspire
fear, but it doesn’t. Here’s why: In 2002, the Kremlin opted not
to launch a preemptive strike against fighters in Georgia’s
Pankisi Gorge. Last year, it chose not to intervene in events in
Kyrgyzstan. The reason is simple: Putin doesn’t believe the
military can get the job done. His doubts are well founded. For
all of Ivanov’s cheerleading, the combat readiness of the armed
forces is at an extremely low level….
“Maintaining a million-man army while attempting to preserve
nuclear parity with the United States simply requires greater
financial resources than Russia has at its disposal, even with the
current sky-high price of oil. There can only be one rational
conclusion: The size of the army must be reduced. Instead, the
Defense Ministry is doing everything possible to hang on to its
enormous conscript force. After all, small mobile units are
obviously incompatible with imperial ambitions. If we are to
take Ivanov’s opinion seriously, ‘imperialism without a leg to
stand on’ has become Russia’s new military doctrine.”
Lastly, in the January / February 2006 issue of The Atlantic
Monthly, Benjamin Schwarz has an eye-opening commentary tied
to the above discussion titled “The Perils of Primacy.”
“The news media and the nation’s leaders have almost entirely
ignored a startling and perilous development in the old sphere of
nuclear confrontation, the one involving nuclear-armed major
powers: the U.S. threat to the stability of deterrence. The past
fifteen years have seen a profound and dangerous shift in the
nuclear balance.”
During the Cold War, Washington and Moscow maintained a
balance of terror, the doctrine of mutually assured destruction
(MAD).
“Today, however, one country – the United States – appears to
be on the verge of establishing true nuclear primacy. Ironically,
America’s nuclear dominance may dramatically diminish its
security.”
Russian nuclear capabilities are eroding at a staggering rate.
“More important than (the) quantitative reduction, though, has
been the even steeper qualitative decline. Owing to financial
constraints, Russia can’t ensure unbroken monitoring of
American ICBM fields, and can’t plug the holes in its missile-
warning networks that render it blind to attacks from U.S.
submarines in launch areas in the Pacific. Maintenance, supply,
and training deficiencies afflict Russia’s nuclear forces generally
and its submarines most crucially.”
The Russians have carried out just a handful of ballistic-missile
submarine patrols in the past four years, for example.
“Equally noteworthy has been the sluggish pace of
modernization in the nuclear forces of China…Whatever
Russia’s vulnerabilities, China’s are far more pronounced.
Beijing has no operational ballistic-missile submarines (the
component of a nuclear arsenal most likely to survive a first
strike). Moscow’s arsenal contains approximately 800 missiles
that could reach the continental United States; Beijing’s contains
about eighteen. Most important, the military personnel devoted
to China’s nuclear forces have nothing like the training,
experience, and institutional history of even Russia’s – let alone
America’s, who have been training and preparing for nuclear war
for well over half a century.
“But whereas Russia’s nuclear capabilities have decayed, and
China’s have remained largely static, America’s have become far
more lethal.”
Schwarz notes the spectacular gains in the United States’ nuclear
force “are inconsistent with the aim of simply deterring an
adversary’s nuclear attack – a goal that would require merely a
‘countervalue’ strike on the enemy’s cities. They are necessary
for a disarming ‘counterforce’ strike, aimed at preempting a
nuclear attack – and hence wining a nuclear war.”
Back in 2003, a RAND report concluded:
“What the planned force appears best suited to provide beyond
the needs of traditional deterrence is a preemptive counterforce
capability against Russia and China. Otherwise, the numbers and
the operating procedures simply do not add up.”
Schwarz details “a brilliant and sobering study” that has recently
been prepared by Keir A. Lieber and Daryl G. Press and
presented to the Council on Foreign Relations in October.
“To grossly oversimplify: the erosion of Russian capabilities,
combined with new, overwhelming warhead yields and the
‘accuracy revolution’ in U.S. nuclear forces, has largely obviated
the problems of ‘fratricide’ (the prospect that U.S. missiles on
the attack would destroy each other, leaving their targets safe)
that once helped make a disarming strike impossible to achieve.
“Lieber and Press emphasize that their analysis doesn’t prove
that a U.S. first strike would succeed, but it highlights a
development that is grave if only because it’s one that prudent
planners in Russia and China who conduct similar analyses, are
no doubt already surmising: that their countries can no longer be
confident of having a viable deterrent.”
And this nuclear imbalance is only going to grow over the
coming years. But Schwarz doesn’t detail the rapid advances
China has made on the short- and medium-range missile front,
weapons designed to take out U.S. aircraft carriers in the event of
a conflict over Taiwan and the sea lanes.
Nonetheless:
“Until a nuclear stalemate is restored – if it ever is – Moscow and
Beijing will surely buy deterrence by spreading out their nuclear
forces, decentralizing their command-and-control systems, and
implementing ‘launch on warning’ policies. If more than half a
century of analyzing nuclear dangers and ‘crisis stability’ has
taught us anything, it is that all these steps can cause crises to
escalate uncontrollably. They could trigger the unauthorized or
accidental use of nuclear weapons; this could lead to inadvertent
nuclear war.”
Foreign Affairs, continued
North Korea: Dan Rather did an interesting piece on “60
Minutes” last week. Needless to say it was disturbing. And if
you read an article by Professor Bradley Thayer, a defense
expert, in the latest issue of Defense News you wouldn’t come
away reassured either.
“North Korea is the most dangerous state on Earth….
“One of the most compelling reasons why this is so is because
decisions are limited to a tiny circle: Kim Jong il and his cronies.
Whenever this situation arises, as in North Korea or Iran, there is
significant risk deterrence will fail. Unlike leaders in
democracies, dictators face no checks and balances.
Accordingly, the leader’s psychology is critical for deterrence to
work.
“During the Cold War, deterrence theorists gave comparatively
little attention to the psychology of individual leaders. That
made sense in the first nuclear age. It was reasonable to assume
the leaders of superpowers would be rational and their actions
could be checked by bureaucracies and other countervailing
pressures. But the future of nuclear deterrence will not repeat the
past.”
Professor Thayer postulates that today there is great variation in
how people think and react to threats.
“The bad news is that North Korea is more dangerous than had
been believed….
“While most people will be deterred by nuclear weapons most of
the time, some people, in some situations, will not be because
their brain is different. How they reason in critical situations is
dissimilar from the rest of the population. Furthermore, these
people are bolder, take greater risks, and are more likely to be
leaders….
Thayer talks about “gut feelings” and how this impacted
decision-makers such as Napoleon, Stalin and Hitler. “A leader
who depends on his gut to make decisions cannot be deterred.”
“Today, we worry that Kim may base his decisions on his gut
feelings and so is as difficult to deter as Hitler.”
But leaders “are sensitive to personal threats. To ensure that
deterrence will work against a leader as dangerous as Kim, the
United States must have the conventional and nuclear
capabilities to threaten him and his loved ones with personal
destruction, even in their hard and deeply buried bunkers.”
Iraq: The vote has finally been tallied (five weeks after the
election) and the Shia religious alliance, coupled with the Kurds,
do not have a clear cut majority so they’re forced to deal with the
Sunnis in some form or another. The Sunnis actually picked up
58 of the 275 seats, an encouraging development. But while it is
still way too soon to tell how this will all shake out, one thing is
certain; initially it’s basically about divvying up the oil revenues.
The Sunnis will demand a significant share as payment for their
cooperation.
Afghanistan: There were some disturbing suicide attacks here
that killed 24 on Monday. Disturbing because it was the first real
sign tactics are being imported from Iraq. And then you had the
detailed report from the Wall Street Journal and the UN Office
on Drugs and Crime that 52% of Afghanistan’s economy is
based on opium exports. What’s equally depressing is to think of
how an entire generation of young people, throughout the region,
is being lost at lightning speed.
Syria: President Bashar Assad released five political prisoners,
including two prominent ones, in an effort to get some of the heat
off him. Of course Assad is not one of the brighter bulbs on the
planet (though he’s a survivor) as he met with Iran’s
Ahmadinejad and voiced his full support for the latter’s nuclear
efforts.
Pakistan: Yes, President Musharraf can be frustrating to deal
with, and by necessity he has to play both sides at times, but no
doubt this is also a man of amazing courage. Following the CIA
operation that intended to kill Zawahiri and the cries from his
people, Musharraf told them Pakistan “has to stop harboring
terrorists.” In other words, “Shut up.”
Israel: Thankfully, Thursday’s suicide bomber was inept, but the
bigger picture is all about the Palestinian parliamentary elections
on Wednesday and the percentage Hamas ends up with.
As for Israel’s own election in March, acting Prime Minister
Ehud Olmert has a decisive lead.
France: President Jacques Chirac raised a few eyebrows with the
following statement.
“The leaders of states who use terrorist means against us….must
understand that they would lay themselves open to a firm and
adapted response on our part. This response could be a
conventional one. It could also be of a different kind.”
France has an estimated 350 nuclear warheads. But Chirac’s
comment may have greatly complicated any negotiations with
Iran.
Kuwait: Sheikh Jaber al-Sabah, who ruled Kuwait since 1977,
died. The new emir is 76 and in poor health. As stable as it’s
appeared over the years, the leadership situation here now bears
watching.
Saudi Arabia: U.S. intelligence is convinced the kingdom has
cracked down internally on militants (as spelled out in a good
piece by the Los Angeles Times the other day), but at the same
time the Saudis’ efforts have been minimal in stopping the flow
of insurgents into Iraq or financial support to the terrorists.
Related to this, Charles K. passed along a story by author
Raymond Learsy who brings up a point that on the surface
certainly makes sense; the Saudis have every incentive to keep
the price of oil high and one easy way of doing so is keeping
Iraqi production down. Thus it can accomplish this by fueling
the insurgency and disrupting the oil flow, while at the same time
cracking down on those who mean it harm at home. Learsy’s
conclusion is eventually the U.S. has to confront “the head of the
snake.”
China / Taiwan: In a survey for United Daily News, 60% of
Taiwanese want direct trade, transport and postal links with the
mainland; while Taiwan’s President Chen Shui-bian has had to
reorganize his government yet another time, the 4th since he took
over in 2000, with the resignation of his premier. I can see why
the people want what’s known as “the three links,” but if they
also think China would give them a fair shake politically (“one
China, two systems”), they need only look to Hong Kong and the
broken promises there on the democracy front.
As for the mainland itself, there was another large protest over
land use, this time in a rural area near giant Shenzhen. But in a
rare admission, China’s Premier Wen Jiabao admitted the land
conflicts and backward conditions in the farm sector threaten not
only the country’s stability but also its food supply.
“In some areas, illegal seizures of farmland without reasonable
compensation and resettlement have provoked uprisings; this is
still a key source of instability in rural areas and even the whole
society.”
As reporter Elaine Kurtenbach of the AP notes, “Such seizures
are draining the supply of farmland in a country where even with
bumper harvests grain output is failing to keep pace with rising
demand.” [South China Morning Post]
Canada: Election time, Monday, and conservative Stephen
Harper evidently has a sizable lead over Prime Minister Paul
Martin and his Liberal Party. Harper may fall short of a clear cut
majority in parliament, but cobbling together a workable
coalition for real change appears within range. For starters,
Harper has vowed to rebuild Canada’s military.
Haiti: Two more UN peacekeepers were killed here…Jordanians.
Chile: Michelle Bachelet became Chile’s first female leader,
garnering 54% of the vote in a runoff.
Liberia: Ellen Johnson-Sirleaf was inaugurated as Africa’s first
elected female leader.
Ivory Coast: But next door to Liberia, this country, which has
been split since 2002 following a failed coup, has witnessed a
sharp escalation in unrest and UN peacekeepers trying to keep
the warring factions apart have been routed in some instances.
Ms. Johnson-Sirleaf must be on guard to the potential for
renewed violence spreading to her own historically troubled
nation.
Slovakia: What a tragedy. 44 soldiers, part of the NATO-led
peacekeeping force in the Balkans, died when the transport plane
returning them to their homes crashed.
Random Musings
–CNN was briefly barred in Iran after a mistranslation of
comments made by President Ahmadinejad.
In the above quoted speech on Iran’s nuclear research, the CNN
translation said Iran has the right to build “nuclear weapons”
instead of “the right to nuclear technology.”
Yup, that will do it. By week’s end CNN was back after
admitting its mistake.
–First Lady Laura Bush is urging Condoleezza Rice to run for
president. And the race for 2008 is heating up as Senator Hillary
Clinton said the Republican House was being run like a
“plantation,” while former Vice President Al Gore accused
President Bush of breaking the law with regards to the
government’s eavesdropping.
And then you have the fraud who goes by the name of Ted
Kennedy. The senator, as Boston-area friend David P. reminds
me, refuses to pronounce Judge Alito’s name correctly, while
continually smearing him. Oh, and as the New York Times’
John Tierney wrote in an op-ed, another Kennedy,
environmentalist Robert Jr., is out front on plans to squelch a
wind farm off the coast of Cape Cod because the clan prefers to
sail in those waters.
–As even Democratic operative James Carville observed the
other day, when it comes to Democrats bitching about the
Supreme Court they need only look in the mirror. To the victor
go the spoils.
–New Jersey has a new governor, Democrat Jon Corzine, who
has vowed to clean up the budget mess here and do something
about our property taxes. But what’s clear is that our taxes
overall are going up…in a big way…and the people will revolt
unless we see major reductions in the cost of state government
first.
–And then you have that daffy mayor in New Orleans, Ray
Nagin. He’s not only in over his head, he’s simply a fool. To
wit, Mayor Nagin told a Martin Luther King Day audience that
Katrina was God’s way of showing displeasure about U.S.
involvement in Iraq.
“Surely God is mad at America. Surely He’s not approving of us
being in Iraq under false pretense. But surely He’s upset at black
America also. We’re not taking care of ourselves. It’s time for
us to come together. It’s time for us to rebuild New Orleans –
the one that should be a chocolate New Orleans. This city will
be a majority African-American city. It’s the way God wants it
to be.”
Oh brother.
–I went to the dump the other day and was throwing out some
books, including anything written by George Soros that I picked
up long ago before I came to my senses. So I made sure I
propped them up on the edge for all to see.
–A Caltech student set a new world record in solving Rubik’s
Cube…11.13 seconds. But I seriously doubt he’s the kind of guy
you’d want to have a beer with.
–Last time I wrote of the New Horizons spacecraft and its trip to
Pluto and beyond. What I didn’t know is that the Stardust craft
would return to earth the next day. What an amazing feat this
was….picking up some comet dust and then whisking it back in
a perfect re-entry. The scientists involved are heroes.
–Canada Geese have begun settling down in parts of New
York’s Central Park for the first time so a local reporter was sent
out to gauge public opinion. A vast majority of residents had the
reaction, “They were here before we were…what’s the
problem?” Idiots.
–Ang Lee, director of “Brokeback Mountain” and Golden Globe
award winner, is a huge hero in Taiwan these days. I remain
partial to a different kind of western; one with Clint Eastwood or
Lee Van Cleef. Not that there is anything wrong with
Brokeback, mind you.
–Lastly, The Atlantic Monthly is celebrating its 150th
anniversary and back in August 1894, Theodore Roosevelt, then
a 35-year-old member of the Civil Service Commission, had the
following thoughts on public service in a piece for the journal.
“It is proper to demand more from the man with exceptional
advantages than from the man without them. A heavy moral
obligation rests upon the man of means and upon the man of
education to do their full duty by their country. On no class does
this obligation rest more heavily than upon the men with a
collegiate education, the men who are graduates of our
universities. Their education gives them no right to feel the least
superiority over any of their fellow-citizens; but it certainly
ought to make them feel that they should stand foremost in the
honorable effort to serve the whole public by doing their duty as
Americans in the body politic…
“Again, there is a certain tendency in college life…to make
educated men shrink from contact with the rough people who do
the world’s work, and associate only with one another and with
those who think as they do. This is a most dangerous tendency.
It is very agreeable to deceive one’s self into the belief that one is
performing the whole duty of man by sitting at home in ease,
doing nothing wrong, and confining one’s participation in
politics to conversations and meetings with men who have had
the same training and look at things in the same way. It is
always a temptation to do this, because those who do nothing
else often speak as if in some way they deserved credit for their
attitude, and as if they stood above their brethren who plough the
rough fields….
“This is a snare round which it behooves every young man to
walk carefully. Let him beware of associating only with the
people of his own caste and of his own little ways of political
thought. Let him learn that he must deal with the mass of men;
that he must go out and stand shoulder to shoulder with his
friends of every rank, and face to face with his foes of every
rank, and must bear himself well in the hurly-burly. He must not
be frightened by the many unpleasant features of the contest, and
he must not expect to have it all his own way, or to accomplish
too much. He will meet with checks and make many mistakes;
but if he perseveres, he will achieve a measure of success and
will do a measure of good such as is never possible to the
refined, cultivated, intellectual men who shrink aside from the
actual fray…
“In conclusion, then, the man with a university education is in
honor bound to take an active part in our political life, and to do
his full duty as a citizen by helping his fellow-citizens to the
extent of his power in the exercise of the rights of self-
government. He is bound to rank action far above criticism, and
to understand that the man deserving of credit is the man who
actually does the things, even though imperfectly, and not the
man who confines himself to talking about how they ought to be
done.”
—
Pray for the men and women of our armed forces. [Speaking of
those who take action.]
God bless America.
—
Gold closed at $553
Oil, $68.48
Returns for the week 1/16-1/20
Dow Jones -2.7% [10667]
S&P 500 -2.0% [1261]
S&P MidCap -1.1%
Russell 2000 -0.5%
Nasdaq -3.0% [2247]
Returns for the period 1/1/06-1/20/06
Dow Jones -0.5%
S&P 500 +1.1%
S&P MidCap +2.8%
Russell 2000 +4.7%
Nasdaq +1.9%
Bulls 57.3
Bears 22.9 [Source: Chartcraft / Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
