Brighter

Seems the fear of the so-called "hard-landing" in China has been overblown. 

Through these past spring and summer months, a concern often expressed was that, as the Chinese economy made the transition from the robust state investment/export-led model to one based more on domestic demand, overall growth would not only slow, but slow precipitously. In turn, this would exacerbate the fragility of the economic recovery elsewhere in the world, especially in Europe, but also in the resource-based economies like Australia, Canada and Brazil, more or less reliant on Chinese demand for their natural resources. And with US economic growth still too low to make a significant impact on American unemployment, the risk was that the tentative world recovery from the Great Recession of this century could stall, even with the still-massive fiscal and monetary stimulus in place.

The US equity markets, however, would have none of this pessimistic scenario, and instead have continued their upward climb, to all-time highs.  As it turns out, they may well have, once again, anticipated correctly. Chinese growth has no doubt slowed, from the double-digit rates of past decades, but is still likely to come in as high as 8% by the end of this year and into 2014. Excessive slowing appears to have been avoided - Stephen Roach, former Morgan Stanley Asia Chairman, commented recently that "by my count, this is the fifth hard-landing in ten years that has turned out to be a soft landing". Such a view is supported by very recent data - growth is more broadly-based, with not only strong fixed asset investment and industrial production, but also strengthening retail sales and personal income.

Elsewhere, Japan, under Prime Minister Shinzo Abe, is better positioned for growth now than it has been for years. Europe, it appears, is at least not sinking any further (although the calm before this month's German elections may prove deceiving - Greece will need more aid, and Italy's government coalition and economy are, as usual, fragile). American growth remains tepid, and there are fiscal, monetary and public-sector pension uncertainties. But many of the imbalances in the economy have been mitigated, with the corporate sector (including finance, housing and auto) stronger and more resilient, and globally competitive. Under the new Basel capital standards, American banks are holding more, and higher quality, capital; American property prices have adjusted and households have cut their debts; even the federal government budget deficit is falling, rapidly, as growth resumes.

No doubt risks are everywhere; sustainable recovery from the recession is still a work-in-progress. But with America, China and perhaps even Japan all pulling forward simultaneously, and with the fundamental overhaul of financial regulation in recent years, it's safe to say at the very least that there are no Lehman-sized systemic disasters looming.  

It Still Happens

If ever there were an example of negotiation trumping violent confrontation as an effective means of resolving conflict (and, yes, there are a few examples, even today), it is what's happening in Colombia - until very recently, the international poster child for a seemingly permanent state of murder and political anarchy. 

FARC ( Fuerzas Armadas Revolucionarias de Colombia, terrorists who, since 1966, inspired by Bolivarianism, have defended Colombian peasants, and typically utilized murder, kidnapping and the production and sale of drugs to fund themselves) has been talking, mostly in Havana, with Colombia's President Juan Manuel Santo's government negotiators for some nine months, seeking a peace deal. Such negotiations would have not even begun, of course, had the Colombian government not, through a massive, US-assisted security operation, reduced the number of FARC fighters by nearly half over the past decade, to an estimated 9,000, as well as killed several of its senior and mid-level commanders. This is the only reason that FARC is at the negotiating table today. And, it is a considerable understatement to note that negotiations have been tortuous, often cancelled only to resume in a matter of days, and drama-ridden.

Notwithstanding this lurching back-and-forth, the talks persist, and are progressing. Last week, President Santo said, "we have advanced as never before", "hoping" that a final agreement could come as early as the end of this year - none too soon to boost his dimming re-election prospects next May. He also indicated a willingness to initiate talks with the ELN, the smaller of Colombia's rebel groups (now that they have released a Canadian hostage).  

In the interim, President Santo, having launched a strategy to attract foreign investment within a framework of increasingly freer trade, is facing growing protests in the streets of Bogota in support of striking farmers, even to the point of requiring the army to secure the capital, and other cities. Reflecting Santo's policy initiatives, per capita income has nearly doubled in Colombia over the past decade, and growth of the Colombian economy continues unabated. But income inequality is still, not surprisingly, marked. FARC is not beyond exploiting such a gap - hence the civil disorder.

Thus, peace in Colombia, even if in the next few months FARC and the government come together, is not quite yet a done deal.  

Theocracy and Economic Development

America's Central Intelligence Agency describes Iran as a "theocratic Islamic republic". This means Iran has a religious leader, since 1989 the "Supreme Leader", Ali Hosseini Khamenei, and operates under a constitution that states "all civil, economic, administrative, cultural, military, political, and other laws and regulations are based on Islamic criteria". Khamenei is this powerful: he appoints virtually all government cabinet posts, the chief judge and chief prosecutor, members of national security councils responsible for defence and foreign affairs, and, perhaps most importantly, the twelve jurists of the Guardian Council who have the power to, among other things, approve or disapprove candidates for high office, including that of President.

And so it is, within this system of Iranian theocracy (quick primer: the theocracy emerged in 1979 when Ayatollah Khomeini overthrew Mohammad Reza Pahlavi, the Shah of Iran), that a new president was "elected" in June to replace Mahmoud Ahmadinejad, the always volatile, combative and usually beyond-radical public face of the regime. (Ahmadinejad frequently distinguished himself when, for example, he addressed the UN General Assembly, questioning all accounts of the Holocaust, or the 9/11 attacks on New York, and watching as most Western diplomats walked out in protest.)

There is some very early, very guarded optimism in the world (both West and East) that the new Iranian President, Hassan Rohani, may take a somewhat different approach to governing, notwithstanding the still iron framework dictated by Sharia law and the Supreme Leader, within which he must function. There is ample reason that he should.

The Iranian economy, once a brilliant emerging star, with a large, well-educated middle-class - and lots of oil - has foundered under the theocracy. Here's how a current Iranian economic minister, Mohsen Ranani, describes the current state of the economy: "“what we are facing today is an accumulation of 30 years of crises. Crisis in daily and temporary management, crisis in planning systems, crisis in financial and budget systems, crisis in banking systems, crisis in judicial systems and in prisons, crisis in education systems, crisis in production systems, crisis in health systems, and other crises”. Recent IMF reports indicate that, as Iran continues to focus on its nuclear program, and continues to bear Western sanctions, its economy shrank last year, and will do so again this year, while inflation - perhaps as high as 40% - rages. The country's crude-oil output is some 60% below the level in 2005, and its South Pars off-shore gas development is financially and technically dysfunctional.

President Rohani has begun to implement change. He has re-instated a former oil minister, Bijan Zanganeh, under whom, in a previous stint in 1997-2005, oil investment and production boomed. He is hiring back technocrats (to replace theocrats) for the oil ministry, and may even court, through production-sharing arrangements, the expertise of foreign private oil companies. How far he can push this process is the question - sanctions will prohibit significant involvement by the oil majors, and such sanctions will remain until/if there is a diplomatic breakthrough in the dispute over Iran's nuclear program. And, of course, there is now the additional complication of Syria -  Shia Iran fully supports the Assad regime.

As in so many other cases of inept political rule, it would seem that a resumption of growth, employment, and an improvement in Iranians' general welfare and freedom, will need to wait on a new revolution - perhaps an Iranian Spring?

Towards What End

If, when, and, especially, in what manner America strikes Syria militarily is the talk of the world. American preparations are well under way - it has four destroyers placed in the eastern Mediterranean, each loaded with Tomahawk missiles, and likely submarines similarly equipped. And earlier today it authorized Secretary of State Kerry to address the issue, who in extensive remarks, described Syria's President Assad's regime in clear terms as the brutal instigator of a chemical weapons attack in Damascus last week that killed almost 1,500 people, including at least 426 children. It was, according to the Secretary, an "inconceivable horror", to which America will respond "on its own timeline" with or without a UN mandate. Immediately after these remarks, President Obama removed any lingering doubt about a strike, saying the Syrian chemical attack threatened US national security interests. Notwithstanding yesterday's British rejection of possible involvement, the French today reiterated their willingness to assist the Americans.

So the month of September is likely to begin with world powers stepping into the Syrian civil war. The question is, to what end?  The cloud of Iraq, wherein America forced a rapid regime change more than a decade ago, only to experience years of '"boots on the ground", all of which has left Iraq nonetheless mired in sectarian violence, hangs over all foreign policy considerations. And, of course, there are numerous more current cautionary tales. Ridding Libya of the Gaddafi rule led to the murder of an American ambassador, and a country marked by daily violence, a political vacuum, and even a complete breakdown of the further development and export of its vast oil reserves. After a period of Arab Spring, Egypt's economy is collapsing, and the generals once again rule with their proverbial iron fist. Lebanon and Jordan are close to implosion, as they attempt to cope not only with their own sectarian upheavals but also with Syrian refugees. And then there is Afghanistan.

Obama says he wants to "send a signal" to the Assad regime. This is the so-called "limited response" approach to the "inconceivable horror". That America has waited so long, and is even now willing to do so little, suggests that governments in the Middle East, as well as both moderate and extreme rebel groups operating throughout the region, will be fighting amongst themselves for years to come. Little wonder that the "oil price risk premium" persists.   

Markets React

World financial markets have been facing a litany of worries in recent months - has Chinese growth slowed excessively; can Prime Minister Abe revive Japanese growth and prevent regional political tensions from becoming global; can Europe remain a unified political entity, even as the always-fragile Italian government coalition looks about ready to succumb again to Berlusconi antics, and the peripheral EU economies remain depressed; can anyone expect the dead-locked American political system to prevent yet another impending government debt-ceiling fiasco when members of Congress return to Washington next week; and - what is to be done with ever-broadening conflict and violence in the Middle East and northern Africa?        

Western financial markets have been remarkably sanguine to date. In America, until quite recently, they have been trading at or near record highs, and the focus has been on such matters as when America's Federal Reserve authorities could begin to "taper", that is, begin to withdraw some of its stimulative bond-buying activity, and in Europe, what might be expected once the results of the late-September German elections are evident.

But today, it seems markets were finally tipped over the edge, in a very typical way, as a result principally of geo-political concerns - specifically, imminent American and British military action against Syria in response to what US Secretary of State Kerry has described as "undeniable  evidence" that the Syrian regime carried out chemical weapons attacks in a suburb of Damascus. In Europe, all equity markets dropped by some 2% on the day; in America, safe-market havens were strong, with prices for gold and silver, bonds, and oil all up significantly, while equity markets sank. The flight from risk to safety was also evident in emerging markets, with their stock indices all down dramatically on the day.  

Reports today suggest that American military actions against Syria will be focused and limited. Whether political reaction in the Middle East, especially in Iran and Israel, will be similarly restrained, forms the basis for uncertainty with which world equity markets must deal in coming weeks.