by Bill O’Grady

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

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

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by Bill O’Grady

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

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

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

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

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

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by Bill O’Grady

Since last summer, oil prices have suffered a precipitous decline.  The weakness is mostly due to supply and demand factors; however, because oil is a market with an active cartel, the decision by the cartel leader, Saudi Arabia, to allow prices to decline is also a key factor in price weakness.

This isn’t the first time the kingdom has fostered a price breakdown.  There were two other episodes in which the Saudis led oil prices lower.  In 1986 and 1998, the kingdom boosted production and allowed prices to decline in a bid to maintain its market share.

In this report, we will focus solely on the geopolitics of the 1986 event.  The analysis will begin with the basic economics of oil and cartels.  From there, we will detail the history of the kingdom’s decision to abandon OPEC’s price targets in 1986 and the geopolitical fallout that emerged in the coming years.  We will compare and contrast the 1986 situation to the present situation.  As always, we will conclude with potential market ramifications.

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by Bill O’Grady

On New Year’s Eve, King Abdullah of Saudi Arabia was hospitalized with pneumonia.  According to reports, he is taking visitors and will probably survive this illness.  On the other hand, the king is at least 90 years old and is becoming increasingly frail.

In light of his advanced age and declining health, an analysis of royal succession in Saudi Arabia is in order.  This process is becoming increasingly uncertain.  Unlike many European royal families, Saudi successions are not based on primogeniture; instead of passing from the king to his eldest son, it passes to a brother.  Due to the advancing age of the second generation of princes, this process is becoming increasingly problematic.

We will begin this report with a history of Saudi kings.  Following this history is an examination of the current Saudi succession, focusing on the Crown Prince and who remains as potential kings among the “second generation” of the Saudi Royal Family.  In this context, we will analyze the challenges facing the kingdom and how the succession issue will likely complicate the manner in which these issues are resolved.  As always, we will conclude with potential market ramifications.

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by Bill O’Grady

In our 2015 Geopolitical Outlook, one of the risks we discussed was the rise of populism.  In this week’s report, we will focus on European populism.  The recent attack on the employees of Charlie Hebdo in France makes this a timely topic.

In this report, we will define populism, examine why populism has developed in the West, note the particular characteristics of European populism and identify the effects it could have on general geopolitics in the future.  As always, we will conclude with potential market ramifications.

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by Bill O’Grady

On Wednesday, December 17, 2014, President Obama surprised the country by announcing a prisoner exchange and negotiations to begin establishing diplomatic relations with Cuba.  Given that the Eisenhower administration broke off diplomatic relations with Cuba in January 1961, even considering resuming relations is a major change in policy.  In this report, we will discuss the importance of Cuba to the geopolitics of the U.S and offer a short history of the island along with a summation of the lessons of that history.  We will analyze the limits of the current thaw and why this attempt at rapprochement is occurring now.  As always, we will conclude with potential market ramifications.

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by Bill O’Grady

As is our custom, we close out the current year with our outlook for the next one.  This report is less a series of predictions as it is a list of potential geopolitical issues that we believe will dominate the international situation in the upcoming year.  It is not designed to be exhaustive; instead, it focuses on the “big picture” conditions that we believe will affect policy and markets going forward.  They are listed in order of importance.

Issue #1: America’s Strategic Drift

Issue #2: The Collapse in Oil Prices

Issue #3: The Rise of the Populists

Issue #4: Taiwan

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