by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It was a heavy weekend of news.  Let’s dig in:

Manafort, Gates indicted: Paul Manafort and his former business associate, Rick Gates, were indicted this morning and told to surrender to the FBI.  Latest reports indicate that Manafort and his former partner will face charges related to tax law, money laundering and disclosure of foreign lobbying.  The media over the weekend was frothy over who might get indicted, but Manafort has been on the special council’s radar for months.  The fact that we didn’t see anything beyond these two does suggest, at least for now, that the scope of the probe remains relatively narrow.  Gates remained with the Trump campaign until after the election, but Manafort was relieved months before November.  Because the indictments were narrow in scope, we doubt this news will have significant market impact, at least in the short run.

Realtor and home builders revolt!  The National Association of Home Builders and the National Association of Realtors have officially come out in opposition to the GOP tax plan despite the fact that the deduction for state and local property taxes was retained in the proposed tax bill.  The two groups wanted a homeowner tax credit in the bill as well, but bill writers scrapped the proposal.  Losing these two groups weakens the possibility of passing a tax bill; there is a realtor in nearly every congressional district and they will flood the airwaves with critical ads in the coming weeks.  It looks to us that if a bill is going to make it through the Senate, it will need to cut rates AND keep most deductions, meaning it will be a deficit builder.   In the coming weeks, we will have more to say about the impact of a larger deficit on the economy and financial markets.  In general, the risk of larger deficits is that it leads to higher inflation, but the effects are actually rather complicated.  This chart offers one clue.

This chart shows that since the late 1980s, the fiscal account scaled to GDP tracks the dollar and leads the forex rate by two years.  The correlation isn’t perfect but it does suggest that if we are right and the deficit does widen then the dollar could be vulnerable to a broader decline, but not until 2019-20.

The Fed chair this week: The money is on Powell.

The betting site Predictit.org is indicating a more than 80% chance that Jerome Powell will be the next Fed chair.  Again, we warn that the president is prone to change his mind and we may see a surprise.  We also want to reiterate the message of this week’s Asset Allocation Weekly (see below); the FOMC will be unusually hawkish next year regardless of who is chair.

Madrid takes control: Spain’s public prosecutor has accused the entire former government of Catalonia of rebellion, sedition and embezzlement and the deposed Catalan leader, Carles Puigdemont, is calling for civil disobedience.  The polling data doesn’t really favor independence.  In fact, there was a large anti-independence demonstration over the weekend in Barcelona.  The risk is that Rajoy’s crackdown will build sympathy for the independence movement and independence-supporting candidates will win when new elections are held in December.  Again, if Rajoy wants to look at a successful playbook, the way Ottawa has dealt with Quebec Separatists is perhaps the best.

Barzani resigns: A few weeks ago, Iraqi Kurds voted for independence.  Now, the man who led that vote, Masoud Barzani, has resigned as the Kurdish region’s president.  The move has clearly backfired as Iran, Turkey and Baghdad have moved to quash Kurdish independence.  The U.S. has negotiated a ceasefire, but we are hearing that oil flows from the region have been halted.

China breaks up plot to assassinate Kim Han-sol: [1] Kim Han-sol is the son of Kim Jong-nam, the older brother of Kim Jong-un.  Earlier this year, the “Young General” apparently had his older brother assassinated.[2]  According to reports, two agents of the DPRK are in custody in Beijing and are being interrogated.  Kim Jong-un is likely worried that China might consider overthrowing him and put a relative in place to maintain the dynasty.  Thus, the current DPRK leader has an incentive to kill any potential claimants to the throne.

View the complete PDF

---

[1] https://www.bloomberg.com/news/articles/2017-10-30/china-breaks-up-plot-to-kill-kim-jong-un-s-nephew-report-says

[2] https://www.confluenceinvestment.com/wp-content/uploads/weekly_geopolitical_report_3_6_2017.pdf

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] As we detail below, Q3 GDP came in stronger than forecast.  And, yesterday’s spate of tech company earnings were quite solid.  Equities and the dollar continue to rally and interest rates are grinding higher.  Here is what we are watching:

A budget passes the House: As expected, the House passed a budget but the measure made it by a mere four votes.  The measure failed to attract any Democrat Party votes and GOP members from high income tax states tended to oppose the measure as well.  A tax bill could make it through the House over the next two weeks, but the Senate will be a different story.  If a deal does get passed (and we put the likelihood at a coin flip, at present), it won’t happen until probably late Q1 or early Q2 2018.  As the bill is developed, opposition will grow as lobbyists will try to preserve tax breaks.  At this juncture, the most controversial issue is the ending of State and Local Tax (SALT) deductions.  If this measure does pass, it could further polarize the nation politically and geographically.

Will repatriation occur?  One of the expected benefits of corporate tax reform is that money held overseas (which isn’t taxed under current law until it’s repatriated) will come flowing in, funding new projects and boosting the dollar.  Although a deal could bring the former, don’t count on the latter.  Brookings[1] notes that much of this money is already in the U.S.  Under American tax law, the earnings held overseas can be repatriated without triggering a tax event if it isn’t used for dividends, buying companies, loan collateral or making investments.  In other words, the money is already in the banking system but it is affecting the economy through bank lending, not through direct action by firms.  Thus, a deal to “bring back” the money will help stocks (we expect it to be used mostly for dividends and stock repurchases) but it won’t boost wages, investment (at current low interest rates, there is no legitimate investment project that isn’t already being made) or the dollar.

Catalonia: Catalan President Puigdemont was unable to convince his regional parliament to organize new elections and has moved to declare independence.  PM Rajoy will now almost certainly move to depose the Catalan government and take direct control of the province.  New elections will likely come in the next six months.  So far, the financial markets are taking all this tumult in stride.  Eurozone equities are higher this morning, although Draghi’s policy changes being taken as dovish and the weakness in the EUR are probably more than offsetting anything happening in Spain.  However, this drive to self-determination and the withdrawal from the center across Europe is a broader problem that will need to be managed in the future.

Will Venezuela default?  PDVSA, the Venezuelan state oil company, will need to make $985 mm in debt service payments today, and another $1.2 bn by next Thursday.  Although the country has used its 30-day grace period on some loans, these bonds don’t have this vehicle and so the money is due.  Default is looming if they fail to pay; if the debt is restructured, it would be one of the largest in history.  It is also possible that creditors will attempt to seize assets, including the Citgo refineries here in the U.S. (there are three, representing about 750 kbpd of capacity).  Although official reserves are $9.9 bn, it isn’t clear how much of that has already been pledged as collateral.  Credit default swaps put the odds of an official default at 75% over the next year.

View the complete PDF

---

[1] https://www.brookings.edu/blog/up-front/2017/10/25/repatriated-earnings-wont-help-american-workers-but-taxing-those-earnings-can/

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It’s a news-heavy morning.  Here is what we are tracking:

Yellen out?  Politico is reporting that the president has narrowed the field for Fed chair, eliminating Gary Cohn yesterday and also Yellen.  Although the source from Politico, Ben White, is generally reliable, in the same report, a source suggests that the president changes his mind often and so no one may really be out.  Still, Senate Republicans would like to have a Fed dominated by GOP members and therefore would prefer someone other than Yellen.  It is worth noting that the president recently visited with Senate Republicans and thus may have been swayed.  For the most part, we have seen this as a Powell/Taylor race for a while and, from our perspective, it’s really about who gets what seat.  Powell would be expected to be a continuation candidate; Taylor would likely be much more hawkish.  We note that some have argued that, theoretically, Taylor could be dovish.  The official Taylor Rule (different from the Mankiw Rule, which we detail often) is based on a formula that compares inflation to a target and GDP compared to potential GDP.  If Taylor were to conclude that the Trump administration’s deregulation and fiscal policies increase potential GDP, he could be dovish.  This was the argument Greenspan made in the 1990s; he believed that the tech revolution would boost productivity enough to offset rising wages.  Still, the Taylor Rule is widely calculated and if he were to manipulate the formula to justify current policy, the dream of “rules-based monetary policy” would be lost.  Thus, it seems reasonable to expect that if Taylor is chair, he will be hawkish.  The dollar rallied on the news.

ECB: The ECB generally did as expected; although rates remain unchanged, QE will be reduced from €60 bn per month to €30 bn per month, starting in January.  It will be extended to September.  In addition, the ECB will continue to reinvest maturing bonds, thus keeping the balance sheet level after QE ends.  Although this outcome was in line with expectations, European bond yields fell and the EUR dropped.  The ECB is intending to reduce accommodation but at a very slow pace.

Interest rates: We have seen interest rates rise recently.  It appears to us that the primary driver of this change has been expectations of tighter U.S. monetary policy.  This is coming from two sources.  First, the market is discounting that a new Fed chair will be more hawkish than Yellen.  Second, even if Yellen remains, the roster of next year’s FOMC will be decidedly more hawkish based on the policy stance of the regional presidents; this is the topic of tomorrow’s Asset Allocation Weekly.  We are seeing the deferred Eurodollar futures market implied yield rise to near-cycle highs.

If Yellen is reappointed, which would be a modest surprise, we would look for a retreat in the above yield but probably not below this year’s lows set in early September.  This would put some downward pressure on the dollar and probably lower 10-year Treasury yields.

Catalonia to hold elections?  The regional Catalan government is set to call elections in a bid to stall a takeover by Madrid.  If calling elections doesn’t placate Madrid, PM Rajoy will likely invoke Article 155 of the Spanish constitution, which allows the central government to take control of a province to maintain the governmental integrity of Spain.  Tensions remain high but Rajoy should probably allow an election to go forward because there is a good chance voters will want to stay in Spain.  This is the message that comes from Scotland and Quebec; areas may want autonomy but actually leaving is usually a minority idea in a region.

Energy recap: U.S. crude oil inventories rose 0.8 mb compared to market expectations of a 3.0 mb decline.

This chart shows current crude oil inventories, both over the long term and the last decade.  We have added the estimated level of lease stocks to maintain the consistency of the data.  As the chart shows, inventories remain historically high but have declined.  The impact of Hurricane Harvey is diminishing as refinery operations recover.  We also note the SPR fell by 0.3 mb, meaning the net build was 0.5 mb.

As the seasonal chart below shows, inventories rose modestly this week.  It appears that we are “skipping” the usual autumn inventory rebuild period.  We did see a strong recovery in production after a short hurricane disruption the previous week.  Oil imports rebounded as well.   Still, we usually see much higher inventory accumulation this time of year and so it should be supportive for prices if it remains slow.

Refinery operations rebounded last week in line with seasonal norms.  If this continues, and we expect it will, it should be bullish for oil prices.

Based on inventories alone, oil prices are undervalued with the fair value price of $53.76.  Meanwhile, the EUR/WTI model generates a fair value of $63.42.  Together (which is a more sound methodology), fair value is $59.80, meaning that current prices remain below fair value.  For the past few months, the oil market has not fully accounted for dollar weakness.  However, now the markets are not even taking tightening inventories into account.  In general, without the expected seasonal lift in crude oil inventories, oil prices at current levels are attractive.

In other oil news, Saudi Arabia and Russia appear poised to extend output constraints through 2018.  The official meeting is held on November 30.  The kingdom has been vacillating on where, when and if on the IPO of Saudi Aramco.  The leadership’s concern appears to be tied to the disclosure rules that New York and London would require.  The Royal Family essentially owns the state oil company and uses its revenue as the funding arm of the government.  Going public wouldn’t necessarily end that role but it would make the diversion public.  The FT reports this morning that the Saudi Stock Exchange, the Tadawul, may be the sole listing venue for Saudi Aramco.  We would assume that reporting requirements would be minimal.  However, listing exclusively on the Tadawul would likely reduce the value of the firm due to the expected lack of transparency.  On the other hand, it will allow the kingdom to raise funds in a manner it can control.

View the complete PDF

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Financial markets are a bit weaker this morning—equities are signaling a softer opening while Treasuries are continuing to take on water.  There is a lot going on; this morning we are focused on the following issues.

Xi sets Standing Committee: The new Standing Committee of the Politburo is led by General Secretary Xi.  Only LI Keqiang was retained from the last committee.  The new members include Li Zhanshu, who was Xi’s chief of staff and a close ally.  He is considered an orthodox Marxist and will support Xi’s attempts to rekindle Marxist indoctrination.  Wang Yang is from the Youth League (the other main faction is represented by Xi—the “princelings,” or sons of the early revolutionaries) and was a target of discrimination by the disgraced Bo Xilai.  Wang Huning is a political theoretician who supports “neo-authoritarianism,” a platform that best exemplifies Xi’s governance.  Zhao Leji is perhaps the most obscure of the new members who has mostly had a competent, but uninspiring, career.  He replaces Xi loyalist Wang Qishan as head of the anti-corruption bureaucracy.  Han Zheng was a municipal administrator in Shanghai and rounds out the group.  Overall, there is no one on this roster who is a clear heir apparent for Xi, and none will be young enough in five years to serve a subsequent five years, a requirement for heir status.  As we noted earlier this week, Xi will be required to give up the presidency in five years due to term limit law.  However, he will very likely retain the position of general secretary.  We would view the group as mostly loyalists but all appear competent.  The fact that Xi didn’t pack the committee with diehard loyalists suggests he feels very confident in his power.

Ships at sea: Although they are not in position to conduct operations against North Korea, the U.S. is moving two carrier strike groups (CSG), the CSG Nimitz and CSG Theodore Roosevelt, into the western Pacific.  The Nimitz was in the Middle East (part of the U.S. 5^th Fleet) but will be joining the 7^th Fleet in the Pacific.  Although not entirely necessary, the U.S. usually prefers to have three carrier groups in a region if it is considering military operations because three can conduct round the clock sorties on a target.  We also note that North Korea has tested a solid fuel rocket engine; North Korea has tended to use liquid fuel missiles, which are easier to manage but are vulnerable to pre-emptive strikes during the fueling period.  Going to solid fuel allows North Korea to launch missiles with less preparation, reducing the chances of a “left of launch” strike.  Meanwhile, NBC[1] is reporting that Joseph Yun, the top U.S. diplomat to North Korea, is warning members of Congress that North Korea refuses to engage in talks, apparently upset by President Trump’s characterizations of Kim Jong-un.  Yun suggested that diplomatic efforts are on their “last legs” and told lawmakers the White House is unresponsive to his worries.  President Trump will make a visit to the region in early November, a 12-day trip.  He is creating something of a stir by refusing to attend the East Asia Summit on November 14^th; U.S. presidents usually attend such events as a show of Pacific leadership.  Although the attendees of the summit will be disappointed, the other parts of the president’s visit should indicate that the U.S. remains a Pacific power.  We monitor the region closely; bringing three carrier groups together is a worrying development that may simply be a show of force.  Nevertheless, having these assets in place does give the president a platform to launch a war with North Korea.

Iraqi Kurds: On the one hand, the Iraqi Kurdish government has offered to freeze progress toward independence in a bid to ease tensions.  At the same time, Kurdish and Iraqi forces clashed yesterday.  Both sides accused the other of an ambush, although it does appear the Kurds got the better of Iraqi forces.

Fed update: In a meeting with the GOP senators yesterday, the president had a show of hands for the Fed chair position.  It appears that John Taylor was the preferred candidate, although Jerome Powell also received some votes.  Yellen noticeably did not.  However, we do note that President Trump may be Chair Yellen’s strongest advocate,[2] if for no other reason than the equity markets would cheer the decision.  President Trump has pointed to the strong equity markets as confirmation of his successful administration; if picking Taylor were to trigger a sell-off (and it very well could), then Trump would probably want to avoid this.  We still think this is a race between Powell and Taylor, but reappointing Yellen does hold some positive features for the president.

GOP mutiny: Senators Flake and Corker have indicated they won’t run for re-election and have come out with harsh criticisms of the president.  Flake was almost certain to face defeat in the primary.  The GOP is turning populist and establishment Republicans are being forced, at a minimum, to acquiesce to the president.  For senators, especially, criticizing the president looks like a path to becoming a private citizen.  The key unknown is how these senators will vote on taxes.  Corker is a deficit hawk and Flake probably leans that way, and there is little chance the tax plan (it’s no longer being called reform) will be revenue neutral.  If Flake and Corker decide to vote against the plan, the GOP is at 50/50 in the Senate.  Losing any other senators will doom the process.  If tax cuts fail to materialize, the failure could have significantly adverse effects on the GOP at the mid-term elections.

View the complete PDF

---

[1] https://www.nbcnews.com/news/north-korea/lack-talks-north-korea-sounds-alarms-capitol-hill-n813951?utm_source=Sailthru&utm_medium=email&utm_campaign=New%20Campaign&utm_term=%2ASituation%20Report

[2] https://www.bloomberg.com/news/articles/2017-10-24/yellen-is-said-to-find-unlikely-advocate-at-white-house-trump

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Here is a recap of what we are watching this morning:

Xi elevated: Although the news is rather obscure to Western eyes, “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era” was added to the Chinese constitution today.  Such thoughts, such as Jiang Zemin’s “Three Represents” or Deng’s “Theory on Socialism with Chinese Characteristics,” are also part of the constitution.  For the first time since Mao, such theories have been added to the constitution for a sitting general secretary.  Essentially, this elevates Xi to the same level as Mao in terms of leadership status.  Deng Xiaoping wanted to ensure that China would never have to deal with a cult of personality like Mao had created and thus built a consensus leadership structure that elevated the Standing Committee of the Politburo to the leadership of the Communist Party of China (CPC) and the general secretary was primus inter pares (first among equals).  This pronouncement about Xi suggests that the Deng era is now over.  As we noted yesterday, Xi’s speech jettisoned Deng’s concept of a quiet rise of China; instead, Xi is now signaling that China intends to act as a major power on the world stage.  How this actually plays out will be something to watch.  History isn’t encouraging.[1]  We will get the Standing Committee announcement around 11:45 EDT.  However, with this announcement, it doesn’t really matter who is on the committee.  We don’t expect a successor to be established and our operating assumption is that Xi will remain general secretary until late next decade, although he will legally be required to give up the president title.

EU labor rule change: Currently, within the EU, a worker from a poorer part of the union can take a job in a richer part but accept less pay than the prevailing wage in the richer nation.  These are known as “posted jobs.”  Posted jobs give “imported” labor an advantage in the richer parts of Europe.  The issue has divided the EU.  Not surprisingly, the richer nations, led by France, want to cap the time a posted worker can accept lower pay to 18 months.  Transportation would not be part of the agreement.  Needless to say, the EU’s periphery nations aren’t happy about the proposed changes, while the core of the EU (Germany, Netherlands, France) support them.  Meanwhile, Hungary’s PM Viktor Orban praised Central Europe as a “migrant-free zone.”

Merkel and the U.K.: We noted last week that Chancellor Merkel seemed to turn dovish on Brexit.  Germany apparently has discovered that it runs a large trade surplus with the U.K.; some €50.4 bn last year, or about 1.6% of Germany’s GDP.  This is the largest bilateral surplus with any other nation, even exceeding the U.S.  Merkel seemingly wants to avoid a sudden shock of disrupting trade flows.  In addition, because of the CDU/CSU’s lackluster showing in the last elections, Merkel will be forced to engage in fiscal spending or tax cuts to gain coalition partners.  Thus, Germany will be less able to spend on EU goals and thus can’t easily fill a gap if the U.K. decides to stop paying its EU contributions.  Consequently, Merkel has decided that if the U.K. will pay a fair share of its EU obligations then she will give May some slack in trade negotiations.  As a side note, coalition-building fiscal spending will tend to turn the ECB hawkish sooner than it otherwise would have and thus is EUR bullish.

Differences in vision: Over the past week, we have seen two ex-presidents offer thinly veiled criticisms of the current president.  The criticism was fairly wide-ranging but included the foreign policy of this president, which can be both interventionist and isolationist at the same time.  As we have discussed before, the Trump policy model is Jacksonian.[2]  Jacksonians shun the global policing role of a superpower.  They only go to war when honor is besmirched or when an existential threat to the homeland develops.  Yesterday, at the Hudson Institute, Gen. David Petraeus and Steve Bannon offered dueling visions of American foreign policy.  At heart, however, is a key difference of opinion on policy—Petraeus is defending the traditional superpower role while Bannon is wanting to jettison those burdens.  We suspect Bannon’s position is becoming increasingly dominant.[3]

View the complete PDF

---

[1] https://www.amazon.com/Destined-War-America-Escape-Thucydidess-ebook/dp/B01IAS9FZY

[2] https://www.confluenceinvestment.com/weekly-geopolitical-report-april-4-2016/ and https://www.confluenceinvestment.com/weekly-geopolitical-report-president-trump-preliminary-analysis-november-14-2016/

[3] https://s2.washingtonpost.com/camp-rw/?e=Ym9ncmFkeUBjb25mbHVlbmNlaW0uY29t&s=59ef2311fe1ff6159ed3f073

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] There was (and is) lots of news.  Let’s dig in:

Abe in a landslide: PM Abe’s gamble to call early elections looks like a winner.  The LDP and the rest of Abe’s ruling coalition will take 313 seats, giving him a “supermajority” of more than 310 seats, which is the level that will allow him to make changes to the constitution.  Japanese equities rose on the news and the JPY declined modestly (it has been weaker on expectations that Abe would prevail and thus Abenomics would continue).  However, on the economic front, we don’t see much more from Abenomics.  The “three arrows” were really all about a weaker JPY; that has been achieved and it’s probably not possible to weaken the currency much further without prompting a negative reaction from Washington.  BOJ Governor Kuroda will probably get reappointed.  We look for Abe’s focus to shift toward adjusting the constitution to allow Japan to project military power.  As U.S. isolationism develops, this is a necessary step to deal with a growing Chinese threat.

Xi and the Party Congress: Today, we expect Chairman Xi to reveal the new members of the Standing Committee of the Politburo, the most powerful body in China.  But, for now, the real story is that Xi is ending Deng’s foreign policy.  The PRC’s foreign policy has evolved, starting with Mao, who was essentially isolationist.  He turned the nation inward to stabilize the persistent tensions between the insular interior and the cosmopolitan coasts.  This led to unity and income equality with weak economic growth.  Deng allowed the coasts to flourish to lift the economy at the expense of regional divergence and rising income inequality.  Deng called for China to avoid projecting power globally to allow for uninterrupted economic development.  Because the economic development was based on export promotion, workable relations with the U.S. were imperative.  The 2008 Great Financial Crisis and uncertainty about the U.S. role in the world has led Chinese leaders to sense a vacuum, and Xi has indicated over this Congress that he wants China to fill it.  China is facing the problems of the late stages of a “high growth/low cost nation,” which are unbalanced development (too much productive capacity with inadequate household share of GDP) and too much debt.  Xi is making it clear he intends to follow imperialism to resolve this problem, the paths the British and the Dutch took when they faced this point in their development.  The problem for China is that it doesn’t have the military power to pull this off; thus, it must try to develop economic colonies under the protection of the U.S. military.  When Japan faced this issue in the 1930s, it invaded China and eventually bombed Pearl Harbor.[1]  An assertive China is going to be a growing problem for global stability.

Spain: PM Rajoy appears poised to take direct control of Catalonia.  If the current provincial leadership declares independence, they may all end up in jail.  Rajoy has the state apparatus to take control; what he doesn’t have is the political legitimacy to enforce his will.  In other words, he will find that it’s one thing to establish control but it’s another to maintain it.  Rajoy will face overt and covert opposition to taking away Catalan autonomy and disruption will prove to be costly given that the province represents 20% of Spain’s GDP.

Another populist win: As we noted last week, the Czech Republic has elected a populist slate of candidates, with the Ano Party winning nearly 30% of the vote, almost 20 points higher than the closest rival.  The Social Democrats, the center-left, saw their support collapse from 20.5% to 7.3%.  It should be noted that the next largest parties in this vote lean Euro-skeptic, suggesting that the EU is becoming rather unpopular.  Along with recent elections in Austria and the rise of the AfD in Germany, we are seeing a nationalist, anti-immigrant surge in Europe.  Meanwhile, we note that Lombardy and Veneto, regions in Italy, have voted for more autonomy from Rome.  Although neither are pushing for independence, Europe appears to be moving away from centralization, which has been the primary trend in Europe since WWII.

Iran: SOS Tillerson has warned European firms that doing business with Iran might be risky as new U.S. sanctions are being considered.[2]  This move by the Trump administration comes with evidence that the Iranian government has used the removal of sanctions to undermine the economic power of the Iranian Republican Guard Corps (IRGC).[3]  During sanctions, the IRGC took over large swaths of the economy to maintain growth and evade sanctions.  This allowed the IRGC to develop power independently of the clerical government.  President Rouhani and the Ayatollah Khamenei have been trying to weaken the IRGC’s economic power to prevent them from becoming a political threat.  If the Trump administration puts sanctions back in place, Iran will have no recourse other than to allow the IRGC to resume its activities.

Jimmy to the rescue?  In a curious op-ed in the NYT, Maureen Dowd interviewed former President Jimmy Carter.  The interview was wide-ranging but a couple of items stick out.  First, the former president would be willing to help negotiate with the North Koreans.  He is credited with the 1994 Agreed Framework, which diffused a crisis over North Korea’s nuclear program, although we now know Pyongyang simply moved to another method to attain a nuclear weapon.  Still, Carter did likely prevent a war on the peninsula.  Essentially, it appears Carter is sending a signal to the Trump administration that he is available.  We note Carter said some rather flattering things about the president and also that he didn’t vote for Mrs. Clinton during the primary (he voted for Sen. Sanders).  Second, there is a clear element of animosity in his tone toward the Clintons and Obama.  We are not sure what exactly is going on there but Carter may be one to watch.  Trump likes unconventional “out of the box” surprises.  Nothing would be closer to an unexpected outcome than sending Carter to North Korea.  This is happening as we are hearing reports that the U.S. is considering the involuntary call-up of reserve pilots.[4]

View the complete PDF

---

[1] https://www.youtube.com/watch?v=yKHUGvde7KU

[2] https://www.nytimes.com/2017/10/22/world/middleeast/tillerson-iran-europe.html?emc=edit_mbe_20171023&nl=morning-briefing-europe&nlid=5677267&te=1

[3] https://www.nytimes.com/2017/10/21/world/middleeast/iran-revolutionary-guards.html

[4] http://www.foxnews.com/politics/2017/10/21/air-force-could-recall-up-to-1000-retired-pilots-after-trump-order.html?utm_source=Sailthru&utm_medium=email&utm_campaign=New%20Campaign&utm_term=%2ASituation%20Report and http://www.defenseone.com/threats/2017/10/exclusive-us-preparing-put-nuclear-bombers-back-24-hour-alert/141957/?utm_source=Sailthru&utm_medium=email&utm_campaign=New%20Campaign&utm_term=%2ASituation%20Report