The Markets are Perverse
The global economy is slowing, US earnings reports have been generally unfavorable; so why are the stock markets heading toward an all-time high?
There is a sort of logical explanation; it starts with the glut of crude oil and gives far too much weight to the question of whether, and when, the Fed may begin to raise interest rates. Despite a long period of job and GDP growth, inflation remains close to zero. The oversupply of crude oil has kept energy prices low, with a stable to negative trend; while many of the cost-of-living measures exclude energy cost, low energy prices have an indirect effect on prices in general--for suppliers, and, I would argue, by strengthening the US dollar, which makes purchased objects cost less in dollars (especially imported ones).
So, the Fed looks at flat price trends--nothing to correct there yet. Unemployment going down--it is their secondary goal to allow economic growth to continue. The conclusion that the time is not yet ripe to begin to re-set interest rates upward from their current near-zero values is justifiable. The trick is that Fed members know that they cannot be wholly reactive; because of the time-lag effects of their monetary adjustments, they need to anticipate future trends and act based upon the leading indicators. As the unemployment rate drops, one that the Fed will watch closely will be labor costs; the low labor participation rate which you may have heard mentioned by Presidential campaigners looking for dark clouds is structural and demographic, and shortages in skilled professions may start up inflation's engine. So far, though, there is no imperative to act, though the eventuality of raising rates from the floor level, where they've been for several years, is not in doubt.
Somehow this inevitability does not seem to have registered much with the markets, which respond with these reactions that I would describe as both knee-jerk and perverse: good economic news, in the form of growth or employment, causes the markets to pull back, as the day of rate increases is deemed to draw nearer; while continuation of the slow-growth improving trend pushes the markets ever upward. (I exclude the usual overreactions to individual companies' reports of negative news in their reporting of short-term revenues and profits, and the shocks from abroad, which cause one-day drops but have generally been absorbed.) It would seem that the current rally is due to be erased once the date of the initial Fed rate increases becomes certain. On the other hand, my expectation is that the anticipation--of rate increases' negative effects on the economy--will be much more painful than the reality, and that the Fed would do well to puncture this little bubble in the stock markets, raise rates a single time, then wait for a new equilibrium to develop before making its next move.
A Critical Ally Endangered
We in the US may think our policy is confused in the Middle East, but I would say the top two priorities--containing and reducing ISIS, and restoring peace in Syria by easing out the failing Assad regime--are clear, and generally accepted by all parties. Among the various Presidential candidates of both parties there is lots of posturing about our posture, and less agreement on handling the Iranians, but little in the way of meaningful alternatives to advance our objectives (see below on the "no-fly" option which has been revived by some).
One aspect about which I hear very little intelligent discussion here is our view of the much more complex challenges faced by our second greatest ally in the region (after Israel, given that Israelis are a player in this active war theater, somewhat on the margin, bordering as it does on Syria in the Golan Heights area), and the ally which is most directly involved in the mess. Turkey has the challenge of managing several difficult, interrelated problems simultaneously:
1) Turkey is the front line for the international Syrian refugee problem, sheltering more than 1.5 million, and the point of departure for those among them with the means to try to escape the camps;The last of these is the most acute at present. Turkey had its second general election in months today, in an environment in which President Erdogan sought to play the nationalism card to reverse an electoral defeat in June, in which his party lost its parliamentary majority for the first time in a decade. Erdogan gained a partial victory, restoring his party's majority, but did not gain the two-thirds majority he had originally sought to pass constitutional amendments to lock in more deeply his political advantages.
2) Turkey is the point of arrival for those inspired to try to enter the war theater from outside, and thus the only country with the ability to intercept them, block them, or otherwise impede them;
3) Turkey faces a huge issue, both domestically and outside its borders, of the Kurdish population which seeks greater autonomy and has been the most effective counterforce to ISIS in northern Syria and northern Iraq;
4) Turkey's domestic politics have been roiled by the instability in the region.
Another result in today's election concerned the Kurdish party, perhaps comparable to Northern Ireland's Sinn Fein in being the peaceful arm of a movement which has--for decades--violently resisted the central government. A significant factor in the defeat of Erdogan's party this spring was the emergence of this party as a political force which gained representation (at a minimum10% of the vote) in the national parliament for the first time. The party lost ground but maintained a presence in parliament, so again only a partial victory for Erdogan.
The conditions of the electoral campaign were a state of high tension. A peace rally of Turks and Kurds in the nation's capital, Ankara, was rocked by two suicide bombs which killed hundreds. This great wound exacerbated a tension which had built over months, as Turkey agreed for the first time to facilitate US airstrikes, then responded to a previous bomb near the border by beginning airstrikes of their own into Syria, which seemed to focus more on the Kurdish forces than on ISIS. Many Turks were deeply suspicious of the government's actions and motives; in the aftermath of the Ankara bombing, the opposition claimed that the government's forces of order were more interested in suppressing Kurdish political aspirations than in protecting civilians. The government has attributed the attack to ISIS, but some were less than convinced; political polarization has increased, and restrictions on individual liberties have continued.
It is not an overstatement to say that unlocking Turkey's capability to act effecctively and positively in the region is the key to solving the whole ISIS/Assad mess--at least with regard to Syria. In this sense, the electoral result today could at least provide a stable outcome for the domestic environment. Turkey has been accused of playing a two-faced game, particularly during the desperate battle for the Syrian border city of Kobane between ISIS and the Kurdish forces; the accusation is true, but it simply reflects the complex realities the country faces.
Were it not for the pure evil of ISIS, Turkey would naturally gravitate more to that group, which opposes both of the nation's key foes in the region, the Kurdish nationalists and the Assad regime, the latter of which it blames entirely for the strife. Indeed, there seemed to be an understanding between ISIS and Turkey for months leading into this past season, with Turkish hostages released and Turkey impeding others' use of its territory for attacks on ISIS. Turkey has the largest, best-trained military force in the northern Middle East; with the support of NATO, it could put ISIS out of business in a matter of months, though there would remain the problem of how to fill that power vacuum--Turkey would never do it if the result were to put Assad back in control in Syria.
In the meantime, instead of being part of the anti-ISIS coalition the US has sought to put together in the region, Turkey is pursuing its own objectives. Foremost among them is to create safe areas within Syria and thus reduce the pressure of refugees fleeing the conflict. They have long requested the US, and the West, to establish a no-fly zone within Syria. It is a call that has been taken up by some, but it was always a tall order (due to the anti-aircraft capabilities of the Syrian government forces) that has just become much more complicated with the arrival in the area of the Russian air force.
If the challenges of the US and its coalition and of Turkey were not messy enough, now Putin's Russia has inserted itself into the theater with aggressive and unpredictable actions, raising the geopolitical stakes even higher. That Putin would line up with the Assad regime was a given; Russia has allied with the minority Alawite-dominated Assads for decades, and Syria has given Russia much-desired privileged access to the Mediterranean through its coast. Providing lethal aid to Assad has been done more or less openly all along. A month or so ago, though, Putin switched the focus of his mischief-making from the Ukraine border region to Syria, first stepping up the quantity of aid, then providing direct military assistance.
Putin's comments were all about defeating ISIS, but the initial bombing attacks focused on populated areas outside the control of both Assad and ISIS. Clearly, the targets were not being chosen by the anti-ISIS coalition, but by Assad's clique: their best chance to survive this civil war in power is to eliminate the possibility of any third force, making it a grim choice between them and the monsters of ISIS. There was also an element of intrigue with Iran, too: Russia joined the West in bringing Iran to agreement on its nuclear program, but has also been in the forefront, once the agreement has been concluded, to relieve sanctions there, and Iran and Russia share an interest in the survival of Assad's (anti-Sunni) regime. Indeed, Russia launched cruise missiles from its ships in the Caspian Sea; when one of them fell off course into Iran, the Iranians did not publicly complain.
Most recently, the Russians are trying a little harder not to antagonize the West; they have met with our officials, first at a high level and then at a more technical level, to ensure their sorties will not conflict directly with our own. The Russians are hoping to have their sanctions relieved, too; a key test will be if they can avoid actions which make the flight of refugees even worse than the present, and at the same time assist in the defeat of ISIS. No doubt they will seek every opportunity to thumb their nose at the US, and at their ancient nemesis Turkey.
The latest news is the shocking plane crash in the Northern Sinai of a chartered plane full of Russians returning from vacation. ISIS has claimed "credit" for this atrocity; the investigation has just begun, but the dispersal of the wreckage suggests the plane broke apart in midair, so it may not have been a mechanical failure, and pilot error would seem unlikely given the circumstances. Once again, ISIS' insistence on violating norms of behavior may end up creating a powerful, fervent opponent when it could have avoided that. Even the Russians and their Ukrainian stooges were discreet enough not to brag about shooting down a passenger aircraft when they did it.
+I just invented this term, which combines two words which share the same Latin root, "prov", meaning, to try: "improvisation" and "provocation".