The Left Leaves

A terror attack in the United Kingdom May 23 killed at least 22, and injured dozens more. As the attack targeted a youth pop concert, a high proportion of the deaths were among children and teenagers. United Kingdom Prime Minister Theresa May immediately cancelled all her ruling Tory Party’s campaign events — national elections are June 8 — so her government could focus on the crisis. The country’s other parties quickly followed suit.

As of yesterday, the Tories had this election locked up to the degree that a generational shift in UK politics was in the offing. If the polls are accurate, the Tories would have eaten deeply into the holdings of other parties not just in England, but in Wales and Scotland as well. Ongoing Brexit talks have justified and energized the Brits separate-and-superior mindset, and Theresa May has been using that energy to reshape the UK political space. That means, among other things, the British Labour party moving into the political wilderness, the de facto absorption of the anti-EU UK Independence party into the Tories, the Liberal Democrats’ return to the fringes of British power, and the evisceration of the Scottish National Party’s stronghold on Scottish politics and an end (for now) of talk of Scottish independence.

That was before the attack.

Between the rally-round-the-flag effect of terror attacks and the fact that the ruling Tories are the law-and-order party, the UK is now on the cusp of a complete overhaul. Barring some truly unprecedented revelations that bring down May and the entirety of the Conservative leadership, the Tories will walk away from the June elections with the strongest showing of perhaps the last century. In the election’s wake, Labour will not simply be weak, it will be gone and it is unlikely to come back in a meaningful way.

What’s going on in the United Kingdom is hardly unique; Center-left parties are collapsing across the developed world. It is a symptom of a wider change in the way we all live.

Contemporary political systems are an outgrowth of the economic structures established by the industrial revolutions of the 18th and 19th centuries.

Before those economic revolutions the world was a constellation of fairly small places. Low-output per hour of work in agriculture forced most of the population to be farmers. Life before semis and railroads and globalized supply chains meant that foodstuffs needed to be lugged around by horse and backpack. Cities — places where you could not grow your own food — were small as well as, well, revolting. Cram a bunch of people in a small space with no running water or plumbing, make them dependent upon food that has to be carried in from somewhere else, and things get gross and violent pretty quickly. In such a world, there weren’t a lot of mass-mobilization politics. Either you were a landowner or other flavor of aristocrat who ruled, or you were a pleb who didn’t get a vote.

The First Industrial Revolution of roughly 1760 to 1820 upended that system. The introduction of mechanized energy such as steam engines enabled us to shift from producing goods by hands to producing them with machines. Such mass outputs increased worker efficiency while concentrating the geography of production. The result was mass urbanization and mass worker concentration. Within a few decades these economic evolutions shifted the balances of power. The “Left” catered to those who provided the labor in the new order, while the “Right” represented those who controlled the land and capital. There are many different ways to categories the Left and the Right, but the transition to industrialization is where the political cleavages in the modern world started, and have remained the most powerful delineating factor in Western politics ever since.

Plenty of folks vested in the pre-industrial order fought tooth and nail against the emerging political landscape, but they faced two insurmountable challenges. First, the winds of history were blowing and you cannot un-invent technology without removing the bedrock of the civilization that supports it (i.e. devolution into anarchy). As the new Lefters and Righters gained power, these older groups fought back. Political instability and even revolutions were the rules of the day. And even when the old-order folks won, its isn’t like their areas suddenly de-industrialized. New challenges arose the very next day until all the old world was swept away.

Second, there was a new country on the scene that had the gall to let the people decide who would be in charge. Those pesky Americans devised a political system — democracy — that was (quite accidentally) able to reshape itself, contain and ultimately harness the new economic-political lines of identification. Democracy quickly became a way to accelerate the shift from the old world of aristocrats, plutocrats and royals to a newer system with a deep economic rationale that enjoyed broader support.

The Second Industrial Revolution of 1860 to 1945 was the equivalent of rocket fuel in a station wagon. Machine tools gave way to assembly lines. Coal gave way to diesel and gasoline. Railways, telegraphs and ocean-going fuel-burning cargo ships took over global commerce. Many of the new developments — in transport, medicine and sanitation — were expressly designed to counter some of the more disgusting aspects of early industrialization. Antibiotics, sewers, electricity and new distribution techs didn’t just make cities bigger, but also removed some of the features that made them death traps when compared to the countryside — accelerating urbanization. The countryside, where Left-Right classifications weren’t entirely appropriate, became systematically less important as populations en masse shifted into the urban worker-capital categories.

This broad system of political alignment then held until about ten years ago.

The financial crisis of 2008 was a watershed because it seized up traditional capital markets. That disruption damaged everything that the economic structures of the industrial revolution sustained: life-long careers (and even jobs), labor unions, traditional manufacturing, employment patterns…and the Left-Right split that represented all those things in the political arena. The 2008 crisis occurred just as computerization was really hitting its stride, and the link between capital and capital-owners has blurred. Unequally distributed wealth isn’t the point — it is that capital is no longer linked at the hip to organized industry. Capital is now free-flowing. It goes to any place in any industry in any volume based on what looks promising.

That is exciting, but it is also disruptive. Less Walmart, more Amazon. Fewer assembly lines, more 3D printing machine shops. Fewer accountants, more TurboTax. Fewer unions, more Uber. Fewer financial firms and more AI-driven stock trading. Fewer supermajors and more tiny firms using infotech to wrestle oil out of shale formations. Fewer landlines and all the labor and mammoth companies that go along with them, more iPhones that just require the odd cell tower. We are now in a Digital Revolution that is redefining the relationship between labor and capital. Sure, it means that you can do more with less and have fancy gadgets, but it also means that anyone who had a stake in the old system — whether a line worker or a bank teller or a secretary or a stock broker or a roughneck — has to abandon not just their job, but their career. And that has political consequences.

The new technologies are far less labor intensive — meaning fewer workers. The new technologies have far lower barriers to entry, so there is no monolithic employer — meaning no unions to support, and no employer to bargain with or fight against. The traditional “Left” just doesn’t fit in the world rapidly unfolding, and so it is collapsing. Everywhere.

  • In the United States the populist uprising that elected Donald Trump is a textbook case of how economic evolution shapes political choice. Line workers — even union workers — deserted the Democrats en masse for Trump. What’s left of the Democrats — and they’ve lost over 1000 elected positions at state and national level since 2008 — is now incapable of taking any stance save a general opposition to all things Trump. That’s not enough to hold, and they face a generational wipeout in the 2018 by-elections that is likely to hand the Republicans their strongest Congressional majority in decades.
  • French presidential elections in May eradicated the ruling Socialists. Their candidate didn’t only not make it to the second voting round, he only garnered an 6% share of the first-round vote. Parliamentary elections in June may well reduce them from the dominant party in the National Assembly to the fourth-largest.
  • The European financial crisis has gutted the political stability of Europe’s peripheral countries. Greece is ruled by the nationalist-communists. Italy will likely have a comedian as prime minister by year’s-end. The Spanish Left is being displaced by a party that takes its developmental cues from Greece.
  • In Israel the economic shift has been so holistic that it has nearly banished the Israeli Labor party — the party that founded Israel — from the Knesset.

The only significant country where the Left is holding any ground is Germany, a country artificially re-constructed after World War II to have a very specific — and durable — political system. And even there the Social Democrats are on course to lose their fourth consecutive election this fall. (Yes, the center-left actually rules Canada — the only place of note that it still does. but Canada both lives in strategic nirvana and is disastrously complicated from a domestic political organizational point of view so I’d not draw too many lessons from the Great White North.)

What’s left of the economic Left is being subsumed by populism, a movement that broadly speaking is unhappy with the current state of affairs, thinks that everyone is out to get them, wants change, wants it now, and wants to use a mass government overhaul in order to force the issue (in the 1930s we would have called this national-socialism). Populism has managed to capture much of the Left’s thunder in a wide variety of countries including — but hardly limited to — Hungary, Poland, Austria, Finland, Israel, France, Italy, the Netherlands and Turkey. Yes, Trump is a symptom of the Populist rise. But so too are Bernie Sanders and Elizabeth Warren. (There are many types of populists. None have ever ended up delivering what they promise.)

It is tempting to say that politics is cyclical and the Left will recover, or that it botched the chance to rule in the past two decades and it just needs a little time in the wilderness to reconnect to its roots, or that the Left can embrace other issues like identity politics and social issues to reinvigorate itself. But that misses the point. The economic Left has lost power everywhere. The grab bag that remains is important and will obviously color political and social evolutions, but it cannot define the era. Such awkward coalitions can garner votes, but not in the quantities sufficient to govern. The term “Left” itself may be appropriated by new and varied causes — the most likely is to support the coalition of those devastated by Apple, Amazon, Uber and the rest — but those are not workers, but instead the opposite. The rubric that has defined the Left for nearly two centuries is gone.

And before those of you on the Right get too excited, just because the Left disappears doesn’t mean the Right wins. The Left is not alone in dissolving into the Digital Revolution. The Right as we understand the term is finished too. Trump won by running against the Republicans. May is in charge in the UK because the traditional Right collapsed in the Brexit vote. France’s Right is in just as much trouble as the French Socialists. The Right parties of Poland, Israel, Austria and Japan are now more nationalist and/or populist than that the classical Right in the labor-capital divide.

It is about to get a whole lot worse. As the global demographic flips into mass retirement around 2022, the availability of capital that has made the Digital Revolution so broad and deep will drastically shrink. Currently, changes in capital allocation are breaking down our “normal” Left-Right political systems, but the Digital Revolution’s advances at least maintaining an economic structure. Remove all the capital that makes the Digital Revolution possible and we’re in for a world of hurt…with populism the only political movement that has traction.

The last time our economic-political systems faced this much evolution and upheaval, the disruption lasted over a century and culminated in the world wars. The issue is that you can’t have normal political parties unless you have a grand vision, and you can’t form a grand vision unless you understand the rules of the game. As the developed world moves into a post-industrial economic system — and one in which the global population structure shifts from young, working tax-payers to retirees — we don’t know what those rules are. And until we do, we cannot begin process of exploring how to rule ourselves.

France Dodges a Bullet…By Catching a Bullet

The results are in:

Emmanuel Macron defeated Marine Le Pen of the National Front by 66% to 34%, making him the youngest president in French history.

Many were worried about the implications of a Le Pen presidency as the right-wing, pseudo-racist, anti-European populist has called bluntly for an immigration ban, a withdrawal from the euro and EU, the severing of most economic connections with the wider world, and a general break with the whole French system since World War II.

But while there were admittedly a couple of big gulp moments during the campaign, I wasn’t ever really that worried about such an outcome. France’s pro-European instincts are still pretty strong, and the French political center is robust as well. As soon as it became apparent that the center-right wasn’t going to go down the rabbit-hole, I was pretty sure that Le Pen didn’t have a serious chance. The bullet would be dodged.

Which isn’t the same as me saying that all is good in the state of France.

Just because the center remains strong in the French electorate doesn’t mean it remains strong in the French political system. In the first of France’s presidential election’s two rounds, the two parties that have ruled France since the formation of the Fifth Republic only scraped together 26% of the vote between them. And Marine Le Pen increased her father’s share of the vote – when he made the second round a decade ago – by half.

So should the French be congratulated, even celebrated, for their election results? Sure. But let’s not get ahead of ourselves. All the trends in play that enabled the National Front to so hugely improve its vote take remain fully in force, and all will push France in a much darker direction in the months and years to come.

Automation at home and abroad continues to erode the earning power and job prospects of French workers. So long as the global trade system and EU survive, the French system’s lack of competitiveness continues to hollow out the French economy. France’s vulnerability to energy shocks continues to deepen.
Europe’s sovereign debt crisis is loads worse than it was in 2007, and continues to sap economic activity in France’s Spanish and Italian neighbors. Inward immigration from France’s colonial legacies continues to flow as those former colonies face issues of systemic collapse. Germany remains shielded from the worst of most of this, and so long as it is the heart of the EU not just geographically, but also economically, financially and politically it will continue to ascend at France’s expense. France is trapped in a system it cannot control and that system is in terminal decline. I’d be scared and angry too.

And let’s not understate the challenge the new president faces. The entirety – yes, the entirety – of the parliament is made up of parties that were just wholly discredited on the national scene. The new president doesn’t have a single legislator in office. The comparison is imperfect, but can you imagine if Donald Trump ran on a third-party ticket to become president? How do you think the Democrats and Republicans would treat his priorities when they hold all the legislative cards?

Sure Macron can try to capture the French imagination (and some seats) in the June parliamentary elections, but so too can Le Pen. And now that one-third of the French electorate has broken the seal and voted for the National Front, it is highly likely that Le Pen’s (massively) more organized and institutionalized party will do just as well as Macron’s neophyte on-a-shoestring En Marche. When we get to the next presidential election, France is likely to have a president with few successes, an ossified and discredited center-left and center-right, and a National Front that has racked up dozens of electoral successes in both national and regional bodies.

Doesn’t take a pessimist to guess how that will turn out.

Part X: Trump Finally Plays a Card

Trump finally played a card with the Syria strike and it was a doozy – whether the messages were intended or not.

The past week saw the rhetoric of President Trump’s campaign messages meet the reality of the office he now holds. Stepping back a little further, April has been a very revealing month — if not somewhat cruel to President Trump’s more isolationist-leaning backers — in terms of what an emerging “Trump Doctrine” looks like.

Attaching the term “doctrine” to various past presidents’ policies is always somewhat of a misnomer as their actions are constrained by a variety of factors, including the unfeeling realm of geopolitics, and are informed by a bevy of inputs most of us could never even imagine.

Voters across the political spectrum were either terrified of, or enraged by, or ecstatic over the idea of a President Trump who would sharply reduce the United States’ global footprint and upend decades of long-standing formal and de facto relationships that have come to define the post-WWII era.

But any ideas of what a Trump foreign policy would or wouldn’t look like blew up earlier this month when nearly five dozen Tomahawk missiles struck the Syrian regime’s Shayrat airbase. So much for all the times candidate Trump decried foolish U.S. military intervention in the Middle East, amirite?Well, not so fast. The missile strike against regime forces in Syria was the very least President Trump could do and still reasonably claim he had done something. And there are zero signals that Washington is preparing to send U.S. ground troops en masse into Syria to fight against both the regime and various jihadi forces.

The reality is that the strike is important because it was the first tangible international action by the new President who has yet to clearly define his strategy and the world is taking notice. Here’s where we stand now:

  • The Syrian regime in Damascus has been warned that any use of nerve agents or chemical warfare in the future risks triggering a U.S. strike. The actual impact the last strike had within Syria is still being debated as details from both the Syrian and US government are fuzzy, but the immediate diplomatic kerfuffle it caused with the Assad regime’s Russian backers was relatively short lived. The U.S.-Russian “deconfliction” line – meant to prevent conflicts from escalating – that the Russians suspended was restored a few days later, with none of the tension so lovingly built up during the previous administration any worse for the wear.
  • On the last point, the Russians suddenly see a cost to their direct actions in Syria that has been palpably absent in recent years. But before you start bursting into renditions of “America, F#%$ yeah!” try and see this from the Russian perspective: your aging, limited military resources are now stretched incredibly thin from Ukraine to the heart of the Levant, and you have a tendency to see enemies across all borders. With the Americans again willing to fling ordinance about, things could get ugly fast.
RIMPAC Exercises
  • Trump’s ordering of the strike in Syria has implications outside of the Middle East as well. For China, the timing could not have been more awkward. As 59 Tomahawk missiles were being launched from U.S. ships in the Mediterranean, Trump was entertaining Chinese President Xi Jinping at his Mar-a-Lago estate in Florida. Following intimate conversations over a “big, beautiful” piece of chocolate cake, President Trump has decided that he will not label the Chinese as currency manipulators after all, but the Chinese delegation is said to have left Mar-a-Lago agreeing to help eliminate the U.S. trade deficit and the North Korean nuclear threat.
  • With all the explosions as of late (including the crater the Americans blew into Afghanistan’s Spin Ghar mountains last week via MOAB), the North Koreans are nervous that they’re next. Pyongyang’s decision to not test a suspected planned nuclear device over the weekend to coincide with the 105th anniversary of founder Kim Il-Sung’s birth could be seen in response to the U.S. Navy moving the USS Carl Vinson Carrier Strike Group to the region. But back a desperate, anxious neurotic into a corner and you might not like what happens next…
  • With all this ordinance on display, the U.S. has outlined, highlighted, and made bold what sort of capabilities will not be on the side of its NATO allies should they continue to fail to meet their funding obligations to the alliance. Trump has changed his tune recently regarding how NATO is no longer “obsolete,” but the new administration has made it crystal clear to both NATO and EU leadership that members can no longer expect US protection essentially for “free.”
Whether or not President Trump or members of his administration intended for all of these things to fall into place following the strike in Syria is of course another topic, but the adults in the room (especially Defense Secretary Jim Mattis and National Security Adviser H.R. McMaster) certainly understand how many opportunities the April 6 strike against Syrian forces have opened up. And given the deference Trump has for “his” generals and an increasing tendency to delegate decision-making during these first 100 days, it’s safe to say that the emerging Trump foreign policy is going to be anything but boring.

Part IX: The First International Challenge

Trump has big foreign policy choices to make this week and they both have world changing consequences.

It’s already been a big week for Trump. He just got his first pair of foreign policy crises.

First, the one that he picked.

Chinese President Xi Jinping will arrive tomorrow at Mar-a-Lago for direct talks with President Trump. We will know within a few days just how hostile the Trump administration will be toward all things Chinese. In these talks, The United States — and by extension, Trump — holds most of the cards: a functional anti-Chinse military alliance, absolute naval mastery of the Pacific, a Japan chomping at the bit for a more aggressive anti-Chinese stance, full command over the security of the global trading system upon which China depends, etc.

It isn’t that China cannot cause the Americans pain, just that any method of doing so obviously invites the Americans to counter in-kind at a higher order of magnitude. Xi is flatly coming seeking a “deal” and the talks are in Florida — rather than Washington or Beijing — so that Xi need not worry about American journalists or Chinese politicos hearing the discussions and potentially casting Xi as being as weak in the talks as he fully realizes he is. So either we’ll get a deal or this is the beginning of the end of the Chinese system in its current form. Personally, I’m popping some corn.

Then there’s the crisis that Trump most certainly did not pick.

Earlier this week the Syrians broke out some of their chemical weapons stocks again and used them on one of the more stubborn rebel positions in the country’s northern Idlib province. Russia quickly provided a modicum of diplomatic cover for its Syrian ally, asserting that a Syrian airstrike merely struck a rebel chemical weapons factory, and so scattered someone else’s chemical weapons.

For those of you who like to obsess about technicalities, chemical weapons depend upon being aerosolized for dispersion. It isn’t that the liquid material isn’t toxic — it’s totally toxic! — but a pint of liquid chemical weapon will kill everyone in a room while the same aerosolized amount can kill everyone in several city blocks. Hit a chemical weapons depot with a conventional bomb and you’ll incinerate far more of the material than you’ll disperse, much less aerosolize. The Russians of course know this and fully realize that the statement isn’t just a lie, but a particularly asinine one.

There’s a method to the madness.

The Russian challenge is the same one they used when invading eastern Ukraine: say something so beyond the pale that you are daring the international community to do something. It leaves everyone — Trump included — with needing to follow one of three paths. First, suck it up and do nothing. Second, deploy tens of thousands of troops to engage in a broad scale war against a country backed by a nuclear power that already has combat troops in-theater and risk thermonuclear escalation. Third, start a drone/airstrike campaign with the express purpose of decapitating the Syrian government, up to and including the assassination of Assad himself.

Option 1 makes you look like a wuss, emboldening Russia (not to mention Syria) to use similar tactics in other theaters. Option 2 bogs you down in a winless, bottomless war that makes the Iraq conflict look simple (and that’s assuming that nothing goes horribly wrong). Option 3 gives up on a stable future for Syria and the surrounding region. It would also be public acceptance of assassination, opening up a Pandora’s box of strikes and counter-strikes all over the world by a panoply of powers.

Say what you will about the Russians, they are very good about presenting their rivals with unwinnable choices.

I never expected the alleged Trump-Putin love-fest to amount to anything. Russia’s geopolitical and demographic position is precarious, but Russia’s tool-box is fairly full. Trump has yet to fully familiarize himself with the awesome raft of tools the U.S. president has in foreign affairs, and his demeanor is somewhat… inconsistent. It’s a combustible mix, not to mention that I personally find the idea that the world is big enough for the Trump and Putin egos to co-exist (darkly) amusing.

What really gets my attention is that these two developments happened in the same week. Xi’s trip has been on the docket for awhile now, and timing the use of a chemical munition wouldn’t be all that hard. While I have zero proof, the timing does appear to be trademark Russian: force the White House to pick a crisis — a buffet of unpalatable choices in the Middle East, or a major politico-economic conflict with another power. Either way, it potentially keeps the Trump administration obsessed with conflicts far from Russia’s borders.

Just don’t forget that no matter what Trump picks, the outcomes are going to be far worse for others. An America engaged in a Syrian conflict is one that generates building disasters for Turkey, Israel, Egypt, Saudi Arabia, Iran and Europe. An America engaged in a head-of-state assassination campaign destabilizes entire continents. An America pursuing a Chinese competition wrecks the entire global supply chain system from raw crude to iPhones.

The only way this doesn’t lead to Disorder is if Trump chooses to look like a whimp.

Part VIII: Keystone and the Method to Trump’s Madness

Trump is turning the government his own personal shade of orange and it may take decades to get the dye out.

President Donald Trump formally signed off on the Keystone XL pipeline on March 24.

While there will undoubtedly be ongoing legal and environmental wrangling (that’s just the nature of pipeline politics these days), the presidential waiver was the final formal step of the approval process. Construction will begin in short order, with completion likely in about two years.

Three things come to mind:

1) The economics of Canadian crude in a world of U.S. shale is questionable, but at least now they aren’t so ridiculous.

U.S. shale is very low in contaminants. In a normal system it would sell for a massive premium, but the speed at which shale crude has come on-line has overwhelmed not just American infrastructure, but global energy trends. From-scratch, shale wells can now begin production in less time than OPEC states take to bring pre-existing spare production back online. The result is that despite its sky-high quality, U.S. shale actually sells for a slight discount to international norms.

Canadian oil sands is more traditional from a pricing point of view. It is thick and gooey and packed with sulfur; it’s one of the lowest quality crudes in the world and as such sells at a steep discount. It also gets sold almost exclusively into the U.S. Midwest, the same area that is awash with U.S. shale crude. The result is that Canadian crudes typically sell at a $10 a barrel discount to U.S. shale at least, and more than that to global norms.

The real problem (for Canadian crude) is production costs. U.S. shale oil full-cycle costs are now below $40 a barrel. Canadian heavy is about double that… and that’s before you consider that Canadian heavy often needs to be railed because there isn’t sufficient pipe transport capacity. The transport difference alone adds $5-10 a barrel more to Canadian heavy’s cost. Keystone XL will reduce that shipping cost to the $2-3 range, in theory making Canadian heavy more competitive over the long term. The production cost differential is still wide enough to likely dissuade any new volumes of Canadian heavy coming online anytime soon, but at least the economics of production will be a bit less out of whack vis-à-vis shale.

2) U.S. industry needs to formally adjust for new crude mixes.

Ten years ago everyone knew that crudes like Canadian heavy were the future, and so everyone retooled their refineries to run on heavy, sour crudes. Then shale popped up and wrecked everyone’s well-laid and expensively-funded plans. Now in some ways U.S. refiners faces the best and worst of all worlds. Best in that the two major input streams — Canadian heavy and shale — can be purchased at discounts to the global norm. Worst in that the two crude streams are about as far apart as concerns quality as is possible and so cannot be run in the same facility.

The solution is blending facilities that mix the two along with a few other inputs to make something a bit more regularized, preferably with enough flexibility that refineries can custom-order a blend that matches their technical requirements as well as the market needs of the day. The problem isn’t just tank farms and dedicated pipelines, but those “other inputs” that help the blend remain blended. Otherwise the mixed crude tends to separate like salad dressing. Spoiler alert: Keystone XL guarantees that such blending facilities are going to be a big growth industry for the next decade.

3) Trump is not a normal president, and he’s becoming less so by the day.

That Trump moved quickly on Keystone XL doesn’t surprise me. What surprises me is that the announcement today came without Trump’s Elon-Musk-style leadup and fanfare. While many media like to lampoon him as, well, eminently lampoonable, the fact is that he is a shifting target who shows no sign of establishing a normal order of business. In the meantime, he is forcing the government to work the way he wants them to.

My contacts in the refining world have already detected a 180-degree shift in the way the Environmental Protection Agency operates. Under Obama, EPA inspectors would drop in unannounced and demand to see everything. Now they are giving weeks of notice for information requests and volunteering that even these looser reporting deadlines are more like squishy guidelines…and that’s before Trump’s 30%+ funding cut to the Agency kicks in.

The State Department has had minimal contact with its own Secretary, Rex Tillerson, who has emphasized personal diplomacy over institutional diplomacy. Both styles have pluses and minuses, but the Trump team is very clearly laying the groundwork for a broad-scale elimination of many of the levers of government power. People criticize Trump for seeming to still be floundering after two months on the job, but I see the greatest civil deconstruction in the history of the Republic. At the speed Trump is moving, it would take a generation of effort to rebuild the bureaucracy should future presidents attempt to turn back the clock. Trump may well have the greatest impact of any president on the structure of government since the New Deal.

And Trump’s efforts are hardly limited to the executive; Congress is firmly in his sights. After some rough back-and-forth with the Republican caucus on the Obamacare replace/repeal, Trump threw up his hands last night and directed Congress to vote up or down on the bill as it stands. His message to conservative and moderate Republicans opposing the reform bill in its current form is a stark one: you campaigned on repealing Obamacare, but now you’re all bitching about the details. So either do it and let’s move on to other things, or break your pledge and reap the whirlwind from your constituents. It’s a stark reminder that Trump isn’t just not really a Republican, but that he ran against the Republican Party.

Trump is merging the Obama’s strategy of direct executive orders that can only be challenged via multi-year lawsuits with the Reagan strategy of building and abandoning Congressional alliances issue-by-issue with a Clintonesque predilection for going direct to the people in order to force everyone’s hands. Yet Trump is governing without a support infrastructure, so he’s both difficult to influence or to hold to account.

It is far too soon to say that Trump will be successful, but considering the enervated nature of the U.S. parties, betting against the new president would be most unwise. Love him or hate him, President Trump doesn’t just have his own style, he is going to rule.

Part VII: Ms Merkel Goes to Washington

How Merkel and Trump get along (or don’t get along) will determine the world’s path for at least the next three decades.

Here it comes.

German Chancellor Angela Merkel will meet with U.S. President Donald Trump tomorrow (March 15). These are the leaders of the two branches of the free world, and how they get along (or don’t get along) will determine the world’s path for at least the next three decades. I’m not hopeful. Two weeks ago the Trump administration issued its new trade guidance, which calls for nothing less than the unravelling of the global trade order.

The key institution is the World Trade Organization, a grouping formed by the United States expressly to manage global trade, most notably by adjudicating trade disputes. The WTO isn’t just some gathering like the G20, but instead a Senate-ratified treaty at the heart of U.S. economic law. In Trump’s new policy outline, which at a few hundred pages is by far the most detailed anything I’ve seen out of the Trump White House so far, Trump asserts that U.S. citizens are subject to U.S. law, not WTO rulings. When the two clash, U.S. law takes precedence. More than the travel ban or the Dakota Access Pipeline or Russians having conversations with the Attorney General, it is the implementation of this decision that will determine how our world will (d)evolve in the months and years to come. The WTO — indeed, the entire trade order — cannot function without the world’s largest market being open, and without the world’s largest navy making imports and exports of everything from iPods to Toyotas to French cheese to Kuwaiti oil safe for everyone.

I warned in the Accidental Superpower that it didn’t really matter to the United States how things unraveled, but that for everyone else “it truly matters whether the American shift from Bretton Woods occurs slowly over a decade of neglect or deliberately in a single [moment] of panicked fury” after the Americans have a really bad hair day. We are very clearly seeing the latter—no Trump jokes intended.

There are few countries with more to lose than Germany, and Merkel must be preparing for her summit with palpable dread.

Germany is not a normal country. Its territories are cobbled-together statelets that historically have had stronger local and regional, rather than national, identities. But whenever those statelets do start to act as one, their sheer heft tends to scare the bejeezus out of everyone else. A fractured Germany is one that falls prey to its neighbors; a unified Germany is one that its neighbors feel forced to tear down. Most of German (which is to say, European) history has obsessed with how to manage the German Question, and the answer has always been either grueling war or equally grueling occupation.

Except when the Americans were in control, that is. The whole point of the Bretton Woods system of free trade was to unify the world’s once-warring countries under a single rubric in order to contain, beat back, and destroy the Soviet Union. In this order Germany was no longer isolated target, but instead an integrated bulwark. With Germany and France and Spain and Italy and Britain and Sweden and Turkey and more all on the same side, the Germans could for the first and only time in their history expand economically without risk of invasion (except from the Soviets, of course). The time since the Bretton Woods era kicked off has not “simply” been the greatest period of peace and prosperity in human history, but it has been the only period of peace and prosperity in German history.

I say this without hyperbole: without Americans underwriting Bretton Woods, there is no free trade. No free trade, no EU and NATO. No EU and NATO, and suddenly Germany is once again exposed to the broad-spectrum competition that is Europe — a competition that Germany is by default the most powerful player, but equally by default cannot possibly win.

Merkel faces the impossible task of somehow convincing Trump that everything that he knows and believes spells disaster for Germany, Europe, and the global system. And that somehow that makes it bad for the everyday Americans, US strategic goals, and Trump himself as well. And to do so without triggering something worse. After all, it isn’t like it is Trump’s goal to deliberately and explicitly tear Germany down. He just doesn’t care.

I do not envy her that conversation.

The timing for Merkel couldn’t be worse. The entire European fabric is shredding, even before the Americans set sail in the other direction.

  • The United Kingdom is leaving the EU, giving fact to the fear that the EU is not Europe’s inevitable future. As London has already launched free-trade talks with the Americans, Canadians, Turks, Indians, Australians, Kiwis and the European Free Trade Association, there is a building horror that the Brits might not be destroyed by Brexit, and should that happen, then what is stopping other rich members from leaving?
  • Relations within the EU have turned acrimonious. A Polish internal spat is throwing a veritable troop of monkeys (and their wrenches) into EU workings, with Warsaw threatening to upset the entire EU order. At issue is the EU’s decision to override a Polish objection to a change of the EU president (the sitting Polish government is angry that the EU’s titular head is a former Polish prime minister from their domestic political opponents). The last time something like this happened, it was Margaret Thatcher using her anger at EU budgeting to stall all things EU for the better part of a decade.
  • The Dutch government — by far the most effective party at patching together EU unity in trying times — is likely not just to fall in elections this Wednesday, but might actually get replaced by the strongly Euro-skeptic party of Geert Wilders, a man who makes Donald Trump look positively calm and inclusive. Similar firebrands have already taken power in Hungary and Poland, seem posed to assert command in Italy, and that doesn’t even broach the topic of Marine Le Pen’s likely first round victory in France’s upcoming presidential elections.
  • Turkey is on the warpath, both figuratively and literally. First, figuratively: A big topic in current European politics is to prevent Turkish politicians from holding political rallies across Europe (typically with anti-European themes). It has gotten so bad that the Dutch government denied the Turkish foreign minister the ability to land his plane last week. As such, the notoriously prickly Turkish government is screaming it will cancel or subvert every single deal the Europeans have made with the Turks in the past decade—President Erdogan has even accused the Dutch of behaving like “Nazi remnants”. Now for the literally: Anti-ISIS efforts in Syria and Iraq are coming to a head outside of ISIS’ capital of Raqqa, Syria and its largest city of Mosul, Iraq. In both cases the U.S. and Europeans have become deeply involved in alliances that involve Kurds, something that so infuriates the Turks that it cannot help but impact Western-Turkish relations more broadly — and Turkey controls how many Syrian refugees can swarm up from Europe’s southeast.
  • Russia is reinforcing its positions not just in the Ukraine border region, but in Ukraine itself. A serious military effort may well be imminent. Putin sees a government in Washington that is testing the NATO alliance even more than he does, and Putin likes what he sees. Others have noticed. In late February the Swedes formally abandoned their post-Cold War optimism, reinstituting the draft.

And while normally I prefer to leave aside personality issues, they are depressingly relevant here. Merkel has a (well-earned) reputation for being methodical, slow to commit, pensive and in general reserved. Trump has an (equally well-earned) reputation for being the exact opposite. If ever there was a time that personal styles would be needed to help make impossible talks possible, it would be now. Instead, we have the opposite.

About the only thing Merkel (and Europe, and the world writ large) have going for them is the slim reed of hope that Trump’s anti-trade policies might not be finalized. Leaks out of the White House point to a “civil war” within the core Trump team between nationalist/isolationist/anti-trade personalities like Steve Bannon and Peter Navarro and more nuanced pro-business personalities such as Gary Cohn of the National Economic Council.

But the emphasis is definitely on the “slim”. The complete absence of strategists such as National Security Advisor HR McMaster or Defense Secretary James Mattis from the conversation, much less the broader debate, is crushingly telling. The United States is the least integrated major economy into the global system. For Washington the creation of the trade order was a strategic gambit with understood economic costs meant to underpin the Cold War alliance, not a plan perceived to generate economic gains. If Trump’s military advisors don’t see themselves as having a role in this trade debate, then that slim reed of hope is just the proverbial last flash before light vanishes from the sky.

Eyes on an Obscure Russian Minority

In The Accidental Superpower I noted that while the Chechens will always be a thorn in Russia’s side, that a different Muslim ethnic group — the Tatars — are the ever-present dagger to Russia’s heart.

Unlike the Chechens who are a semi-cloistered mountain people nestled in the Caucasus and so rarely leave their homeland, the Tatars are modern and cosmopolitan. They sit at the merger of the Oga and Volga rivers — the pair of navigable waterways elevate Russia to something more than just a wide-ranging country endowed with resources. As Accidental readers know, navigable waterways are the bedrock of economic success. They enable a people to establish internal trade, build their own capital, and move up the value-added scale organically.

Both the Oga and Volga are Russian rivers, but their junction is at the Tatars’ homeland. The Tatars also happen to live atop most of the major infrastructure that connects Russia to Siberia. Should the Russians ever lose control of the Tatars, they cease being a regional power, much less a global one.

In the past couple of years, Tatarstan has been simmering. Economic breakdowns, Kremlin confiscations of the regional oil company (Tatneft), and more recently a banking crisis. It’s been on my list to write about, but last night my former employer, Stratfor, beat me to the punch. Strat and I differ on many things of course, but they’re a great one-stop-shop for international news, analysis and intelligence that is so obviously lacking in national global media these days.

I’m happy to say that Stratfor was lost without me when I left back in 2012, but I’m even happier to say that they seem to have found their way in the years since — and are once again churning out some great work. This article, IMO, is emblematic of that.

Russia’s Eyes Focus on Tatarstan by Stratfor

Part VI: Working for Alliance

 

So I was sitting having dinner on the Queenstown wharf last night, minding my own business, when New Zealand Prime Minister Bill English and Australian Prime Minister Malcom Turnbull walked by. Like literally right by. No more than six fee-, er, two meters from where I was sitting.

What is it with the world not leaving me alone on holiday??

Anywho, rugby rivalry aside, there are no two countries in the world that are closer politically, economically and culturally. New Zealand and Oz are brother countries who face many of the same challenges and so typically choose to face them together. The two primes were having their countries’ annual coordination powwow.

From what I can gather from local press, while their agenda dealt with a fair number of local issues, their top foreign policy concern was dealing with the Trump Effect. Specifically, both New Zealand and Australia were founding members of the consortium of countries that negotiated the TransPacific Partnership trade deal (TPP). As the United States was about half of the TPP’s economic heft, both Australasian states were more than a bit disappointed when President Trump nullified American participation in the process. While in Queenstown, English and Turnbull apparently explored ways to proceed with “TPP minus one”, although English himself noted that it wasn’t likely feasible and his efforts could probably just be chalked up to “naïve Kiwi optimism”.

Whether you are like me and you think that China’s days are numbered, or you’re more with the conventional wisdom and so you fear that we will all be bowing to our Chinese masters before long, you probably think it makes sense to diversify your trade portfolio away from all things Chinese. TPP would certainly help do that, and so it isn’t a surprise that the Kiwis and Aussies are groping for a way forward without the United States’ participation.

But this all brings me to a broader point.

Take a look at the map below; it’s broadly is how Washington saw the world at the height of the Cold War. The deep blue countries are the Americans’ back yard — places they were willing to fling nukes over. The medium blue were the core allies in the Bretton Woods system. The orange was the competition, and the light-blues the field of battle. The Cold War was global in scope, so everything was in play. Everything mattered.

Not anymore.

This next map shows how I anticipate the Americans viewing the world in 2020. U.S. perceptions of the world have been evolving slowly away from global engagement since 1992. It’s a process that picked up speed with the 2007 financial crisis, and is now rocketing into fast-forward under Trump. (Note: I put this map together in in 2015 — before the Trump Effect — so this might all come to pass earlier than I initially expected.)

There’s a lot of grey on this map; places the U.S. just doesn’t have a stake in. Those blue shades are countries that IMO it would behoove the Americans to have a constructive relationship, but that’s not the same as saying that the U.S. must have one. U.S. alignments are shifting, and since the stability that the United States imposed upon the world from 1945 to the present was designed to fight the Cold War, there aren’t all that many pieces of it that are going to hold without deliberate efforts from both the Americans and partners on the other side of the table.

So far Continental Europe has demonstrated vividly its obliviousness in this dawning era, while Britain very clearly understands where its bread is buttered. Japan has showcased it comprehends fully the new era’s more transactional nature.

The Kiwis and Aussies are somewhere in the middle. Australian Prime Minister Turnbull had a disastrous first call with Trump which apparently went something like this:

TURNBULL: So, Australia had this deal with Obama where you’ll take some illegal immigrants from us.
TRUMP: What sort of a dumb deal is that? I hate illegals.
TURNBULL: But you’re still going to take them, right?
TRUMP: *insert TrumpTantrumTM*
TURNBULL: Is that a yes?

Not the right topic to use to break the ice with the Donald.

Anywho, the Australian government has long been a very savvy operator because they have to be. Australia has but 24 million people. Its closest neighbor — Indonesia — has ten times that, and once you look at the teeming masses of South, Southeast and East Asia it is easy for an Australian to feel a bit overwhelmed. Canberra’s only option is excellent relations with the United States. I fully expect Australian-American relations to bounce back from what was reportedly a quite nasty diplomatic snafu, but the botched Turnbull-Trump call serves to underline the point.

NO relationship, NO alliance, NO trade deal, and NO relationship is safe. When the Americans rejigger things, there are no sacred cows. The United States wasn’t involved in the first three years of World War II, and they ended up leading Normandy and nuking Japan. The United States didn’t care about Korea, and then a year later had over 300,000 troops on the peninsula fighting Chinese human waves. The U.S. treated the Middle East like a backwater until 9/11, then it fought two hot wars and intervened unconventionally in over 20 countries.

The U.S. doesn’t care until it does. And the U.S. cares until it doesn’t. Its geographic position and military reach enable it to intervene and/or stop intervening in issues that are of core importance to every other country in the world in a matter of days, and right now everything is up for re-evaluation. Even the American alliance with Australia — probably the most worry-free, strategically-simple, culturally-easy alliance the Americans have — can see change.

Well, that’s my morning rant. I’m off to brunch in Wanaka where who knows who I’ll bump into. (Apparently Oprah is in town!)

Shale Gets Ready to Run

A data dump by the International Energy Agency this weekend indicates that OPEC is enjoying its best compliance showing at least since the 1970s, if not ever. Over 90% of pledged oil production reductions have already materialized, with a few countries – most notably Saudi Arabia – overcutting. All together over the course of the past few months, total OPEC output is down just over 1 million bpd. The past two years of low-ish prices have hit non-OPEC producers as well, forcing reductions in their collective output of another 400kbpd. Stores of both crude and refined products have thus dropped across the world. No wonder oil prices have managed to hold strongly over $50 a barrel of late.

The question now is how positive will the impact upon the American shale industry be? In this there are no good guides. The nature of shale has evolved radically not simply since the industry’s modern inception in 2007 (ish), but even more so since the plunge in the price of crude began in mid-2014.

  • Since then the most productive wells have become multilateral, with multiple horizontal spurs going off every vertical well shaft. Since each of these multilaterals is crafted by a single drill, the rig count watch is utterly irrelevant.
  • Micro-seismic techs are enabling operators to take much — if not all — of the guesswork out of drilling and fracking. Such precision drilling means not only looking at the volume of steel used per well or per barrel of output is immaterial, but also that mass layoffs of rig workers can occur with no reduction in oil production.
  • Water intensity per barrel of output continues to shrink as liquids pits are replaced wholesale by mobile water tanks. Less water usage means less cash flowing through the oil sector, gutting one of the last few “reliable” means of indirectly gauging end-output levels.
All these tech changes (and more) push down the full-cycle break-even cost of oil production, and most certainly steepens the production accelerations for future output. But it isn’t “only” technological innovation that is overhauling the industry. There are other factors in play that will have a much more immediate effect.
  • When prices were low, many operators only fracked minimal bits of their wells to start them up — preferring to wait for a price recovery before fracking them up to full capacity. That time is now, but there is no unified data whatsoever on the size of this “fracklog.”
  • Improved seismic techs enable operators to go back to previous wells and drill additional fairways. Such “indrilling” enables new production into old infrastructure, eliminating the need for new pipes, new leases or new negotiations, while generating new and sustained flows with the newest techs available.

Whereas technological changes impact national output figures over months to years in a sustainable way, these more mechanical characteristics give big one-off increases in weeks to months.

The only potential short-term ointment-fly I see is financing. Nearly all the shale operators who survived the price plunge of the past two years did so at least in part by borrowing. Even with prospects now brightening, many of them will find it difficult to take on yet more debt to expand operations. Yet even here things look surprisingly good. Capital flight out of Japan, China and the Eurozone continues to set new records. Shale bonds grant foreign investors a place to park their cash that is backed both by hard assets and revenue streams.

In my opinion shale’s next surge is going to not just hit much harder, but much sooner, than most expect. And it is likely about to get a lot better.

What do Donald Trump, Brexit, the Iranian Ayatollah, EU dysfunction, Japanese constitutional revisions and Chinese President Xi’s efforts to establish himself as emperor-of-all-he-sees-for-life all have in common? They are all great for the shale sector. Global instability of all stripes means more capital flight. More risk means higher oil prices means more stable American operators. More international recrimination means more interest in commodities both as an asset class and a security blanket.

This doesn’t “merely” mean that the output curve for the shale industry will be steeper now than in 2007-2013, but that adding a fresh million bpd to U.S. oil output in calendar year 2017 is a lazily conservative forecast. Shale isn’t just likely to overwhelm the entirety of OPEC’s cut, but the entirety of the global reduction in output all by itself.

And that’s just the start. By end-2017 all those new techs should have percolated throughout the shale patch. Full-cycle break-even prices for shale are already below $40. Give it a couple more years and $25 will be within reach.

And then the real shale revolution gets started.

As to what that looks like, sorry, but you’ll have to read the book. Check it out at this link.

Part V: Watch Mattis, Not Flynn

While the news focuses on the Flynn scandal, Mattis puts NATO – and the global system – on notice.

So apparently whenever I go on vacation the rest of the world has a busy week.

Let’s focus on the United States.

While I was kayaking in Milford Sound, National Security Advisor Lt. General Michael Flynn was excused from his 24-day-old job. Flynn has a reputation for being a bit…volatile and monochromatic, so his departure from what I consider to be the job in the U.S. government that requires the most calm, far-reaching and level-headed thinking isn’t something I consider to be all that bad.

The political issue surrounding Flynn’s dismissal is that he allegedly discussed national security matters with the Russian ambassador, and then lied to now-Vice President Mike Pence about it. If Flynn indeed told the Russians that a Trump administration would take a softer line on all things Russian over the course of a series of conversations, then this may indeed have altered the Kremlin’s response to the Obama administration’s sanctions. Among Democrats in general and more national-security-minded Republicans, this is certainly the biggest foreign policy issue of the new President’s term.

Under normal circumstances I’d agree wholeheartedly, but as I’m sure everyone with a pulse has noticed, we’re not exactly in normal circumstances these days. Instead, a far more critical evolution is taking place.

A personality I take much more seriously than Flynn is the Defense Secretary, General James Mattis. At a NATO defense minister’s summit the day after Flynn’s dismissal (when I was hiking the Kepler Track near Te Anau), the good general put the entire alliance on notice. He flatly warned the allies that they must raise their defense spending – quickly and sharply – or face the Americans backing away from their alliance commitments. Specifically he noted with a degree of subtlety that only a Marine general could muster: “No longer can the American taxpayer carry a disproportionate share of the defense of Western values. Americans cannot care more for your children’s future security than you do.”

In my opinion, Mattis is deadly serious – hell, in my opinion Flynn was deadly serious – and both were/are executing policy not only with the full knowledge of President Trump, but are doing so because it is policy, not because of some quid pro quo with the Kremlin. The Americans are getting out of the global management business, and a rationalization of its alliance commitments – Europe included – is simply par for the course. All that remains is to see how quick and how deep the changes will be.

We might not have to wait long.

It was also reported in the past days that the Russians have deployed the SSC-8 medium-range missiles in violation of the landmark Intermediate-Range Nuclear Forces Treaty (or INF) signed between President Ronald Reagan and Soviet leader Mikhail Gorbachev. The creatively-named treaty bans all short-to-intermediate range (500-1000 km, or roughly 300-600 miles) nuclear and conventional missiles by either party. The agreement served as a stepping stone to more aggressive nuclear arms reductions, and in no way is it an understatement to say that the INF remains the lynchpin of all post-Cold War U.S.-Russian relations.

Looking at a map, it’s easy to see why. The primary beneficiary is Russia (and its predecessor state, the USSR). After the agreement, U.S. military bases sprinkled throughout NATO countries can not serve as launching pads for missiles designed, essentially, to reach Russia; similarly, the removal of such missiles from Russia’s arsenal directly impacts the security of the United States’ European allies. But these missiles simply cannot reach the continental U.S.

While slight mention was made within American media about the Russian’s violation of the INF, the message is being heard loud and clear by NATO. But for all of the prodding and threats by Mattis and the White House, the reality is clear: as the United States remains determined to reduce its global military footprint, Europe faces a Russia already well into its operational mobilization while most of Europe remains functionally disarmed to respond to such a threat.

This weekend is the Munich security conference. The Munich conference involves leading defense and foreign policy thinkers from both the NATO and greater European communities. It has no direct, formal impact – it’s  just a talk shop – but it has a reputation for not only candid discussions, but being a place where top government leaderships announce fairly startling policy changes. In the past German, American and Russian leaders have indicate shifts that fairly dramatically adjusted the regional centers of power.

And this weekend Vice President Mike Pence will be in attendance.