The Weekly Dispatch


January 8th - 14th

Hi all, and welcome back to the Dispatch. This is the second dispatch for 2012, and I’ve made some changes to the format. You’ll notice the summary of the news and the comments are more clearly divided, and I’ve embedded links to the relevant news stories. It’s difficult to summarize the news without adding slant, so I’ve opted to keep my summary to a minimum, which has the bonus of allowing more space for commentary and analysis. Again this week the dispatch took longer than expected, but I think my organization is getting better. It’s still a work in progress, and I thank you all for coming along.

My special gratitude to Harlan and Desiree for their consultation - you guys are awesome. As always, comments are welcome.


The US opened communication directly with Ali Khamenei, the supreme leader of Iran, for the first time in 30 years this week. US diplomats warned against closing the Strait of Hormuz, stating that a closure would result in military action. The Iranian threat follows another round sanctions aimed at stopping Iran’s nuclear program. Meanwhile, another Iranian nuclear scientist was assassinated, the latest in a series of assassinations and explosions targetting Iran’s nuclear program. In response to the attacks, Iran opened another heavily-fortified nuclear site this week.


Iranian-US relations have never recovered from the CIA-backed coup in 1953. The Iranians feel the US and Israel are a threat to their sovereignty, an opinion not without evidence. The Israelis have all but admitted responsibility for a series of accidents, assassinations, explosions, and other setbacks to Iran’s nuclear program. Further rounds of sanctions and military threats are unlikely to deter the Iranians: the current regime feels the only guarantee of security they have is in the form of a nuclear bomb. The real question at this point is how far the Iranians will go: even testing a bomb could be seen as sufficient provocation for either the US or Israel to launch military action.


Pakistani Prime Minister Gilani this week fired the Defense Secretary, provoking a strong rebuke from the Pakistani military. The move further escalates tensions between the civilian government and the military, which have been high since the revelation in December of a memo from the Pakistani ambassador seeking US military aid in preventing a military coup.


So far the Pakistani military has not shown signs that it will attempt a coup, the end of four prior Pakistani civilian governments. They have, however, been pressing the Pakistani Supreme Court to take action against Zardari’s government, hoping to remove the Pakistani People’s Party before elections in 2014. The Guardian put it best: this looks like “a coup by other means.”


Adding to the Nigerian government’s woes this week were nationwide protests over the end of the 50% subsidy on gasoline. One of the world’s largest oil producers, its shoddy infrastructure means Nigeria still has to import most of its gasoline, and the government has declared it cannot afford to continue the subsidy.


Nigeria is the poster child for the Resource Curse: it produces a fantastic amount of oil, but widespread corruption and very poor infrastructure means poverty and inequality are rampant in the nation. The gas subsidy is said to be costing the Nigerian government upwards of 25% of its national budget, but without the subsidy, a gallon of gas now costs $3.50 in a nation where the majority live on less than $2 per day.

Seun Kuti, one of the leaders of the protests, summarized the movement: “We, the people, subsidise electricity for the government by buying generators. We subsidise water by digging boreholes in our homes. We subsidise telephones by owning three mobile phones because we’re not sure which network will be working on which day. Fuel subsidy was our only welfare, and it cannot be taken away.


Note: Burma is also known as Myanmar. The name is disputed. The US and Burma will exchange ambassadors for the first time since 1990 in response to the freeing of 800 political prisoners. The prisoner release is a dramatic move that continues a spree of surprisingly rapid liberalization in the country, which has been ruled by a military junta for 50 years.


After 50 years of repressive rule, the Burmese government has nearly completely reversed course in barely a year, with no motive apparent. The pace of the change and its opacity have left observers wary, but there’s no indication so far that this is anything but a positive development. The US is normalizing relations, but it hasn’t lifted sanctions yet.

European Union

Standard & Poor’s downgraded the sovereign debt of nine different European countries this week. Among those downgraded was France, which lost its Triple-A rating (the highest possible rating), leaving Germany and the UK as the only countries with AAA ratings in Europe. Spain, Italy, and Portugal also got downgrades, with Portugal being relegated to junk status.


The downgrades largely confirm what the market has been saying for some time, and as such are unlikely to have a large effect. Politically, the downgrades could be an issue, but as far as bond-buyers are concerned, the downgrades change very little. Note the S&P was the ratings agency that downgraded US debt recently; yields on US Treasuries barely moved. More interesting than the downgrades is the S&P’s explanation, which noted in part that the austerity measures were doing more harm than good - a sentiment born out by the terrible recent performance of European economies.

For further commentary on the intractability of the Eurozone problem, I’ll defer to John Maudlin, a writer and analyst, who provided some of the best analysis I’ve seen on the matter in his newsletter this week.

US GOP Primaries

Note: For obvious reasons, US domestic matters are the hardest to write neutrally about. I’ll do my best.

The New Hampshire primaries were held this Wednesday, and to little surprise, Romney came in first - this time by a margin of nearly 15%, with 39% of the vote to Ron Paul’s 25% finish. John Huntsman, who had largely skipped Iowa to focus on New Hampshire, grabbed third with 16% of the vote. Rick Santorum and Newt Gingrich shared fourth at 9.4% of the vote, and Rick Perry took the remaining 0.7%, having essentially skipped the primary.

All eyes are now on South Carolina, the next primary on the 21st. Romney is favored to win, but Gingrich and Santorum are both expected to make a strong showing.


As I mentioned last week, everything up until Super Tuesday is just field clearing, so the current results should be taken with a wary eye. Romney continues to be the favorite to win the nomination, but that’s not out of any great swell of support from the GOP. At the moment, he’s the only man in the race who the party thinks could realistically beat Barack Obama, which is why he continues to win the primaries, but the Conservatives, the Evangelicals, and the Tea Partiers are still not particularly thrilled with Romney.

I’m still predicting Romney, though again, until Super Tuesday, it’s still up in the air. Of the remaining candidates, I think the only one that can give a legitimate challenge is Newt Gingrich - it’s possible he could perform as viable candidates in a general election, and the party might just vote for “Anyone But Romney.” (note: an earlier draft included Jon Huntsman as the other “Not Romney”)

US Politics

Obama’s chief of staff William Daley stepped down this week, ending a controversial year-long tenure. As Rahm Emanuel’s replacement, Daley never seemed to connect with either Congress or the White House, and his departure was foreshadowed by a dramatic reduction in responsibilities in November.

His replacement, OMB Director Jacob Lew, is a widely respected technocrat who served as budget director under Clinton and has strong ties on capital hill.


Daley wrote in 2009 that the Democrat’s road to success was through bipartisan deals with the Republicans, and that seems to be the policy he pursued. I’ll leave it to the poll numbers to assess that legacy.


I think the strongest piece of good news this week was from Burma: any occasion to see an end to repression and brutality is welcome, and to me, that outshines an awful lot of the rest of the tensions in the world.

My feeling is that Pakistan will be the country to watch for the next week, as I think it has the most potential for imminent change. Tensions with Iran are getting extremely high, and the buzz growing, but the main driver at the moment are the new sanctions, and until they really start to bite, I suspect that situation will stay on simmer - I don’t expect to see radical new developments in the next week.

That’s the dispatch for this week. Unlike last week, it should still be Sunday for most of you reading this - an auspicious sign for future Dispatches.

Thanks again for reading,