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North Korea on the Nile

August 27th, 2012 - 7:34 am

The New York Times is shocked–shocked–to discover that Egypt’s Muslim Brotherhood president wants to bring Iran into a quartet of Muslim countries to manage the Syria crisis. In fact, Asia Times’ M.K. Bhadrakumar, a former senior Indian diplomat, reported this story more than a week ago. There is a bigger, and more frightening picture, including Egypt’s deployment of tanks into the Sinai in violation of its 1979 peace treaty with Israel, and the collapse of Egypt’s economy. “Worse is better,” the Bolsheviks said in 1917: the more hunger and the more chaos, the better the chances for a Bolshevik coup. The Muslim Brotherhood’s intention, it appears, is to turn Egypt into North Korea on the Nile: a starvation in state in which one’s chances of eating depend on loyalty to the ruling party.

Below are extracts from my weekly essay in Asia Times Online. America faces a foreign policy meltdown, the worst since the fall of Vietnam, with the collusion of the Republican establishment as well as the Obama administration. The one thing that might pull America’s chestnuts out of the fire is a successful Israeli strike against Iran’s nuclear weapons program. (Note: Footnotes with hyperlinks to sources can be found in the original on the Asia Times site).

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North Korea on the Nile
by Spengler

Reports that Egypt’s oil suppliers are cutting shipments to the nearly-bankrupt nation coincide with a dramatic diplomatic shift towards Iran by President Mohammed Morsi. Morsi’s attendance at the Non-Aligned Summit in Teheran today denotes the end of Iran’s diplomatic isolation in the Sunni Arab world.

In addition, as my Asia Times Online colleague M K Bhadrakumar noted in his Indian Punchline blog, Morsi proposed to include Iran in a four-nation contact group to resolve the Syrian crisis, along with Turkey, and Saudi Arabia. Morsi’s outreach to Iran at the August 15 Organization of Islamic Coordination summit in Mecca was welcomed by Iran’s Foreign Ministry. [1] [2]

At the same time, Egypt has become a prospective threat to Israel for the first time in more than three decades. The deployment of Egyptian tanks in the Sinai, supposedly in pursuit of terrorists, violates the 33-year-old peace treaty with Israel, and persuades some Israeli analysts that Egypt might threaten Israel’s southern border in the event of an Israeli strike on Iran’s nuclear facilities.

“If Netanyahu finally decides to strike Iran’s nuclear sites, shouldn’t he consider a possible scenario, in which Morsi (soon to visit Tehran for a conference), orders two army divisions to cross the Suez Canal into Sinai?,” asks Amos Harel, the senior defense analyst at Ha’aretz. [3]

American analysts had assumed that Egypt’s massive need for external aid would keep Morsi’s Muslim Brotherhood on Washington’s leash. On the contrary, the Brotherhood indicated its intent to benefit from economic chaos months ago, as I wrote in this space last April (see Muslim Brotherhood chooses chaos, Asia Times Online, April 11, 2012). Now the gravity of the situation is beginning to sink in.

“Just two months after coming to power, Morsi is pursuing a rapprochement with Tehran and articulating a newfound ambition to jettison billions in US foreign assistance dollars and financing from Western financial institutions,” wrote David Shenker and Christina Lin in the April 24 Los Angeles Times. [4]

Economic privation, up to and including starvation, is not necessarily a hindrance to the exercise of power. As the Bolsheviks demonstrated in 1917, the Somali warlords during the 1990s, and North Korea for the past two decades, starvation benefits a totalitarian party ruthless enough to employ it as a weapon of social control. Reports from Egypt indicate that Morsi has begun rationing of daily essentials, reinforcing the Muslim Brotherhood’s grip on power.

The Egypt Independent reports, “The government decided to lower subsidies on oil products from LE95.5 billion [US$$15.5 billion] in the 2011-2012 budget to LE25.5 billion in the 2012-2013 budget by applying a coupon system on butane, gas and diesel in addition to other procedures for rationalizing energy consumption.”

And according to Magda Kankil of the Egyptian Center for Economic Studies, Egypt will move to a ration card system for bread as well. [5] If Egyptians want to eat, or cook dinner with propane, they can apply for a ration card to the local Muslim Brotherhood office.

Egypt spends roughly US$25 billion a year on fuel, and the present subsidy of 95.5 Egyptian pounds is a life-and-death matter for the Egyptian poor. According to the Wall Street Journal on March 22, “Subsidies already absorb at least 28% of Egypt’s budget outlay of 476 billion Egyptian pounds ($79 billion). [6] About two-thirds of that goes toward fuel and energy, with the rest aimed at reducing food prices, particularly for wheat.”

A massive reduction in subsidies combined with rationing will put the existence of half of Egypt’s people under the immediate control of the state. Morsi’s apparent disregard of Egypt’s economic crisis conceals a deeper agenda, namely the entrenchment of the Muslim Brotherhood in the kind of power arrangement that characterizes modern totalitarian states. That is the source of his contempt for American diplomacy.

It is hard to recall an American foreign policy failure so catastrophic, and at the same time so bi-partisan. As M K Bhadrakumar – the only English-language journalist to predict Egypt’s turn – put it in the August 21 Asia Times, the US offered “an invitation to Obama to Morsi to visit Washington. And Morsi is instead traveling to China and Iran.” (See Egypt thumbs nose at US, Asia Times Online, August 21, 2012).


Morsi has undertaken what Schenker and Lin call “a foreign policy shift rivaling the scope of president Anwar Sadat’s expulsion of the Soviets in 1972 and subsequent reorientation to the West” when his country is almost out of cash. Liquid foreign exchange reserves at the Bank of Egypt fell to $5.9 billion in July, enough to cover barely a month of imports.

“Egypt is finding it increasingly difficult to import fuel as foreign banks and traders pull the plug on credit,” Reuters reported August 23. “In the strongest evidence to date of rising fuel import difficulties, traders said Egypt had to cancel a tender to buy crude earlier this month after receiving no bids, and also had to scrap parts of a gasoline import tender because the prices on offer were too high.” [9]

The country’s economy faces paralysis due to an endemic shortage of gasoline and diesel fuel, leading to regular electricity blackouts. Lack of fuel has forced the shutdown of bakeries, leading to regional shortages of the subsidized bread that makes up most of the caloric consumption of half of Egypt’s population living on less than $2 a day. [10]

Egypt received a cash deposit of $500 million from Qatar and a pledge of an additional $1.5 billion after the August 10 visit of Emir Al-Thani to Cairo. The same day, President Morsi purged Egypt’s senior officers and grabbed key constitutional powers from the military. Qatar’s contribution, though, is a stopgap; the tiny emirate has just $20 billion in total resources, less than Egypt’s annual requirement for external financing.

Morsi’s government is negotiating a $4.8 billion loan from the International Monetary Fund, enough to get through a few months – if and when the money arrives.


It has been, or should have been obvious all year that a dual power situation (as the Bolsheviks described it in 1917) has been gestating. The remains of the military-led government controlled the official levers of state, while the Muslim Brotherhood distributed food and fuel on the street. As I wrote on April 11 on this site:

The Brotherhood believes that widespread hunger will strengthen its political position, and is probably correct to believe this. As the central government’s corrupt and rickety system of subsidies collapses, local Islamist organizations will take control of food distribution and establish a virtual dictatorship on the streets. American analysts mistook the protestors of Tahrir Square for revolutionaries. The Muslim Brotherhood now reveals itself to be a revolutionary organization on the Leninist or Nazi model.

The Brotherhood’s revolutionary program has been gestating for some time. As food and fuel shortages emerged in the first months of after the downfall of President Hosni Mubarak last year, Islamist organizations already began to fill the vacuum left by the breakdown of the old civil regime. The Ministry of Solidarity and Social Justice began forming “revolutionary committees” to mete out street justice to bakeries, propane dealers and street vendors who “charge more than the price prescribed by law”, the Federation of Egyptian Radio and Television reported on May 3, 2011. According to the ministry, “Thugs are in control of bread and butane prices” and “people’s committees” are required to stop them. (See Muslim Brotherhood chooses chaos, Asia Times Online, April 11, 2012).

Like the Shah’s generals in 1979 Iran, the Egyptian generals have something to fall back on – the townhouse in Chelsea or the yacht in Monaco. The younger officers who replaced them after Morsi’s August 10 purge have no hope of enriching themselves as their commanders once did, because there is nothing more to steal. In retrospect, the military’s failure to fight back against the Muslim Brotherhood could have been inferred from its behavior since the overthrow of Hosni Mubarak in January 2011. As foreign exchange reserves vanished last year, I asked last October:

Egypt’s economic route calls to mind the country’s military disaster during the 1967 war, when – according to the Egyptian government’s later evaluation – the military collapsed in part because of “the army’s fear of telling [President Gamal Abdul] Nasser the truth”.

It appears at first glance that the army does not want to tell itself the truth about Egypt’s economy. The truth probably is simpler, and more sinister … When the civil societies of developing countries disintegrate, the authorities often appear to be paralyzed. In most cases, the anonymous little men in charge of big functions are hard at work, making down payments on Paris apartments and private jets. Are the Generals Stealing Egypt?, Asia Times Online, October 18, 2011.)


America is confronted by a new and unwelcome set of alliances in the Middle East. Its cluster of allies – Egypt, Saudi Arabia, Turkey, Jordan and Israel – is reduced to only two. Saudi Arabia rails in vain at the “summit aligned towards Iran”, as Emad El Bin Adeeb derided the Non-Aligned movement event on August 23 in the Saudi newspaper Asharq Alawsat. [13]

Israel was wrong-footed by the Egyptian government’s challenge to the Camp David treaty, and is absorbed in a wrenching debate over the merits of a pre-emptive strike on Iran’s nuclear program. Turkey, whose Islamist government was promoted as a model of Islamic democracy by the Bush administration as well as by President Obama, is paralyzed by the chaos on its border, fearful that the Kurdish problem will spill over into its own territory. Jordan’s monarchy hopes to survive by making concession after concession to the Muslim Brotherhood.

Russia plays all sides, negotiating with Israel for the price of denying advanced anti-missile systems to Iran, while sustaining Iran’s allies in Syria’s beleaguered Assad regime. As the world’s largest oil producer, Russia stands to gain from the insecurity of Persian Gulf oil supplies. China watches on the sidelines wondering which of the pieces are worth acquiring.

If and when Iran acquires deliverable nuclear weapons, the Middle East will shift irreparably into a state that Americans barely can begin to fathom. Paradoxically, an Israeli strike on Iran – in open defiance of the Obama administration’s wishes – might offer the only hope of restoring America’s failing position.

A former Israeli diplomat, Yoram Ettinger, draws a parallel to Levi Eshkol’s decision to preempt a building Arab attack on Israel in the June 1967 war. Eshkol, he observed on August 17, “preempted the anti-US Arab axis; devastated a clear and present danger to vital Western interests; rescued the House of Saud from the wrath of Nasser; expedited the end of the pro-Soviet Nasser regime and the rise of the pro-US Sadat regime in Egypt; dealt a major setback to Soviet interests; and demonstrated Israel’s capability to snatch the hottest chestnuts out of the fire, without a single US boot on the ground.” [14]

With Iran neutralized, the Assad regime in Syria would become a friendless, purposeless hulk, and the Morsi regime in Egypt the proprietor of a failed and hungry state. Iraq, absent Iranian influence, would settle down into low-intensity violence without regional implications. Once again, the House of Saud would be rescued from the wrath of an overreaching Egyptian leader and US influence would predominate in the Gulf.

Egypt is a lost cause where Washington is concerned, but it could be a ruined cause for anyone else. As I wrote in May
Interdicting the Brotherhood, in turn, requires an uncharacteristic harshness on the part of American policy. War correspondent Peter Arnett might have concocted the notorious statement, “It became necessary to destroy the town to save it,” supposedly said by an American officer of the Vietnamese provincial capital Ben Tre in 1968. Something like that might be the outcome for Egypt. (See The Horror and the pita, Asia Times Online, May 1, 2012)

It may sound cold, but someone has to say it.

nneled by David P Goldman, president of Macrostrategy LLC. His book How Civilizations Die (and why Islam is Dying, Too) was published by Regnery Press in September 2011. A volume of his essays on culture, religion and economics, It’s Not the End of the World – It’s Just the End of You, also appeared last autumn, from Van Praag Press.

(Copyright 2012 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

If Germany’s political leadership brings legislation to protect the right of Jews and Muslim to circumcise boys, opponents of the rite will fight all the way to the country’s Constitutional Court, the equivalent of America’s Supreme Court, Thomas Pany reports in the German news site Telepolis reports. Opponents of circumcision instigated a legal precedent for a constitutional case by filing charges against a German rabbi in the Bavarian town of Hof. According to Telepolis:

The debate over the legality of circumcision will be pursued further in Germany. It is conceivable that it will be brought all the way to the Federal Constitutional Court at Karlsruhe. If the govenrment brings legislation this fall declaring that infant circumcision is permissible–as a large majority of German parliamentarians seems to wish–provided that it is done with “medical competence and without unnecessary pain”–than it is likely that suit will be brought before the Constitutional court to annul the legislation.

Circumcision opponents are now positioning for standing before the Constitutional Court.

Bavarian Radio (Bayerische Rundfunk) reported today that the the rabbi of  Hof has been accused of assault for performing circumcisions in a complaint brought to the state prosecutor’s office by a local doctor. The doctor was one of six hundred physicians and lawyers who signed a petition against circumcision following the June 27 decision of a provincial court in Cologne defining the religious ritual as “grievous bodily harm.” The last circumcision performed by the rabbi in question occurred years ago, according to the radio station, and the doctor’s complaint appears designed to create legal standing for a future complaint before the countyr’s Constitutional court. Bavarian radio reports that the local district attorney has not yet stated whether criminal proceedings will be brought against the rabbi. Under German law, prosecution–if it occurs–would begin with an Ermittlungsverfahren, that is, a preliminary hearing. The Times of Israel carried a misleading report suggesting that the state prosecutor had already decided to pursue the complaint, and Commentary’s website repeated the inaccuracy.

In an Aug. 9 essay at Tablet, the Jewish webzine, I reported on the campaign by a broad array of German institutions to ban  circumcision, despite the support of the country’s political leaders including Chancellor Angela Merkel:

Merkel has the backing of the leadership of all of the country’s political parties, but her defense of circumcision met a groundswell of protest from German medical and child welfare organizations. Germany’s Child Protection Society (Kinderhilfe) denounced the ritual as “a blank check for religiously motivated child abuse.” The head of the German Academy for Pediatric Medicine, Wolfram Hartmann, warned on July 17, in response to Merkel’s statement, that circumcision causes “lifelong bodily and above spiritual [sic] injury.” Two days later, a spokesman for Germany’s Humanist Association dismissed circumcision as “a relic of times long gone” and demanded that Jews consign the practice to the dust-heap of history, along with corporal punishment of children. Six-hundred German physicians and lawyers signed an open letter to Merkel published July 21, proclaiming that “religious freedom cannot be a charter for violence,” and asserting that circumcision violates the “right of children to bodily integrity and sexual self-determination.”

It is hard to recall an issue that has called forth such fury from German civil society in recent years. And it is far from over. The effect of the court’s ruling can already be felt beyond Germany’s borders; copycat bans on brit milah have emerged in neighboring countries, including Switzerland and Austria. On July 23, two Swiss hospitals announced that they would abstain from performing circumcisions because they were “evaluating the legal and ethical stance in Switzerland,” a spokesman for a Zurich hospital said. A day later, the chief executive of Austria’s Vorarlberg province, Markus Wallner, told regional hospitals to refrain from circumcision for religious reasons “until the legal situation had been clarified” following the Cologne court’s decision. (Wallner backtracked a week later, after Austria’s justice minister declared that parents could not be punished for circumcising infants.)

The reasoning of the German anti-circumcision crusade, I argued, is especially disturbing:

The uproar over circumcision barely conceals a revulsion at the concept of the sacred in all its forms. The German court replaces the Jewish and Christian belief in sanctity of human life and the human body with a perverse concept of rights deriving from bodily proprietorship. In this brave new world, it is legal to bring your grandmother to a Zurich hospital to be euthanized but criminal to bring a newborn boy to be circumcised. It is doubly perverse because the West first learned of human rights, and the rights of newborns in particular, from the Jews. Banish the source of these rights and the notion of rights will eventually turn into a twisted mockery…Erase the line between what is sacred and what is merely utilitarian, and there is nothing in principle to prevent us from subjecting low-value (minderwertig) life to the cost-benefit analysis of the killers. That German physicians and attorneys campaign with such bitter determination to uproot the source of the sacred—the Jewish concept of covenant—from German society is downright chilling. Don’t they remember?

At the Gatestone Institute, a group of journalists with diverse backgrounds and outlooks reviews world events with a view to American security, with special emphasis on the Middle East. Our focus this week: What does Israel do in the context of a debacle in U.S. foreign policy under the Obama administration? Our conclusion is that Israel’s reasons to strike Iran have multiplied with the emergence of a Muslim Brotherhood threat on its southern border and the possibility of an Egyptian-Iranian rapprochement.

Here is the summary of events we began with. Our roundtable discussion can be found at The Gate blog at the Gatestone website.

Israeli President Shimon Peres, supported by a substantial section of Israeli opinion, insists that Israel cannot strike Iran’s nuclear program without the support of the United States. President Obama, as Ha’aretz defense analyst Amos Harel observes, has done everything to dissuade Israel from attacking Iran short of appearing in person before the Knesset. Senior American officials, most recently Joint Chiefs chairman Gen. Martin Dempsey, have been trotted out to assert that Israel can’t stop Iran’s nuclear program single-handed.

The problem is that American foreign policy faces catastrophic failure, or rather a comprehensive set of failures, bearing directly on Israeli security. Not only have sanctions failed to deter Iran from pursuing a nuclear weapons program, but the Islamic Republic has broken out of diplomatic isolation. Turkey, supposedly America’s partner in regional diplomacy, has reached out to Russia and China. And Egypt has reached out to Iran while threatening Israel in the Sinai. China is hosting a summit of the Non-Aligned Movement at which Iran will assume the organization’s three-year rotating chairmanship. Egyptian President Morsi will visit Tehran on Aug. 25 on his way back from the summit.

In our April 12 summary, we concluded that

…the fluid and chaotic situation in the Eastern Mediterranean and the rapidly dwindling pre-Islamist-takeover interregnum in Egypt both argued in favor of the likelihood of an Israeli strike on Iran. The current lack of real equilibrium is favorable for — and even invites — radical game-changing actions. Whatever equilibrium is established in the future (whenever that is) is likely to be much less favorable for Israel and more favorable for Iran, insofar as both Israel and the US will be in weaker positions and their Sunni rivals will be both weaker and poorer.

The shift towards a new equilibrium “much less favorable for Israel and more favorable for Iran” was already in progress as we wrote, with the purge of the Egyptian military’s old guard and its replacement by officers allied to the Muslim Brotherhood. If Israel does nothing, it is likely to confront

1) A major Egyptian military presence in the Sinai in contravention of the Camp David treaty. An Egyptian build-up is already in progress.

2) An open alliance between Cairo and the Hamas government in Gaza, allowing Hamas to acquire new offensive capacities. As Amos Harel observed in yesterday’s roundtable of Gatestone analysts, Israel already faces rocket attacks in parts of the country previously considered immune.

3) An alliance between Sunni Muslim Brotherhood elements in Syria and Iranian-sponsored Shi’ite irregulars, and Hizbollah in Lebanon.

Threats to Israel from the Sinai, Gaza, Lebanon and Syrian borders are likely to worsen as the Egyptian rapprochement with Iran proceeds. Iran’s capacity to retaliate against any prospective Israeli strike will be enhanced and may include threats from Egypt.

The dilemma facing Jerusalem is that Israel can’t live without the United States, but it also can’t live with it. That may compel Israel to maneuver independently of Washington. As Rotem Sella reported on The Gate Aug. 17, there is speculation that Israel may concede the European natural gas market to Russia in return for Russia’s forbearance in delivering anti-aircraft systems to Iran.

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Over at the Gatestone Institute, a team of journalists including me reviewed the increasing chaos in the Middle East and concluded that an Israeli strike on Iran has become more probable.

The Muslim Brotherhood leader and Egyptian President Mohamed Morsi received a $2 billion pledge from the visiting emir of Qatar Sunday morning, and on Sunday afternoon fired the military leadership and announced a constitutional revision reducing the military’s role in the Egyptian government. Whether this is manic overreach or the spring of a diabolical plot remains to be seen. Egypt has a $36 billion annual trade deficit, against earnings of about $5 billion a year from the Suez Canal, an undetermined amount (probably about $7 billion) from tourism, and a few billion workers’ remittances–that is, an annual financing requirement of over $20 billion.

Qatar’s $2 billion is a drop in the bucket; it just replaces the reserves that Egypt lost last month. So is a $3.5 billion IMF loan, under discussion for a year. The Obama administration has been telling people quietly that the Saudis will step in to bail out Egypt, but the Qatari intervention makes this less likely. The eccentric and labile emir is the Muslim Brotherhood’s biggest supporter; its spiritual leader, Sheikh Yusuf al-Qaradawi (who supports suicide bombings against Israel), lived in exile during the Mubarak regime. Qatar funds al-Jazeera television, the modern face of Islamism. The Saudis hate and fear the Brotherhood, which wants to overthrow  the Saudi monarchy and replace it with a modern Islamist totalitarian political party. Qatar has only about $30 billion in reserves and can’t sustain Egypt for long.

Secular commentators in Egypt allege a deeper relationship between Qatar and the Brotherhood. Wrote al-Ahram:

Following the January 25 revolution and the rise of Islamists to positions of power, questions were raised by anti-Brotherhood forces regarding the nature of the relationship between Qatar and the Muslim Brotherhood. Some critics claim that the group received funds from the Gulf state during the presidential race. Morsi was the Brothehood’s candidate, after its first choice Khairat El-Shater was unable to run.

Moreover, other rumours circulated claiming the Brotherhood is planning to rent the Suez Canal to Qatar for ninety-nine years thus undermining Egypt’s sovereignty.

The Brotherhood leadership vehemently denied these accusations.

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Reassuring Romney

August 9th, 2012 - 10:52 am

Along with perhaps 500 other New York Republicans, I squeezed into an Upper East Side catering hall this morning to hear Mitt Romney’s campaign pitch. More important than the words (which we have heard before and we will hear innumerable times again) is the music. More than Barack Obama, Romney stumbles a bit verbally, uses an infelicitous term or a clumsy construction. This occurs more frequently when he speaks about his love for and belief in the United States of America, especially at the conclusion of his pitch. This is the hardest sort of speech pattern to fake, because it reflects a speaker who is actually thinking about what he says as he is saying it, and whose emotions impinge on his delivery.

Romney is not a Great Communicator — he evokes Ronald Reagan less than Jimmy Stewart — but he is utterly and unmistakably sincere. His belief in the recuperative powers of the United States of America, of individual achievement and national greatness, is so passionate that he finds it hard to find words powerful enough to convey it. That’s what makes him so much more persuasive in person than in the cold medium of television.

People don’t buy a product because they believe in the product, but because the salesman believes in the product, an old marketing maxim goes. Americans are having trouble believing in the United States, after the Bush administration fell asleep at the switch and allowed the housing bubble to become a financial crisis, and after Obama’s hope and change turned into “Hope you’ve got some spare change.” As Romney pointed out this morning, small business start-ups are at a 30-year low. Most small business fail, he observed, but the successful start-ups account for most new jobs. Americans, he averred, want to take risks, want to innovate, want to get ahead. He mentioned an upholstering company in Ohio, a furniture rental agency turned manufacturer in Las Vegas, and the rags-to-riches story of North Dakota oil development.

If Americans are having a hard time believing in themselves, they know that Mitt Romney believes in them — and it is an authentic, deeply held, lifelong belief. He believes in them concretely, in their businesses and schools and churches, not in the abstract. And that’s exactly what this country needs: a president who can sell the idea of America back to its original owners, the American people. A slicker candidate would get less resonance from a jaded public. Obama will hide behind the teleprompter and come across coached, rehearsed, and canned; put him in front of an open mike and the risk is that real Obama (“You didn’t build that”) will come out, and it isn’t a pretty sight. Romney knows there is a gap between the founder of Bain Capital and ordinary Americans, but he is struggling to reach across it, because he really believes in ordinary Americans.

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Here’s the video:

Saudis to Muslim Brotherhood: Drop Dead

August 8th, 2012 - 6:29 am

“The uneasy modus vivendi between the Muslim Brotherhood and the military most likely will fail, and probably sooner than later,” I argued this July 9, and the aftermath of the terrorist execution of sixteen Egyptian soldiers in the Sinai peninsula supports this conclusion.  The funeral service for the dead soldiers erupted in rage against the Brotherhood, Al Ahram reports today from Cairo:

In a tense scene, hundreds of Egyptians gathered at Al-Rashdan Mosque in Cairo’s Nasr City district around midday on Tuesday to attend the funeral service held for the 16 Egyptian guards killed at the Egypt-Gaza border on Sunday. Security forces were heavily deployed around the mosque, and several of the surrounding streets were blocked off.

Getting close to the mosque, Ahram Online found families of the killed soldiers, as well as some public figures, mourners and many angry protesters. The group was split between those who had made it inside the mosque to pray for the killed soldiers and the rest who waited outside in anger, chanting almost without pause, and at times fighting with each other.

Protesters mainly chanted against President Mohamed Morsi and the Muslim Brotherhood, describing them as “betrayers of the country” and claiming that the Brotherhood collaborated with Hamas, which they accuse of involvement in the killing of Egyptian soldiers. “Down with the rule of the Supreme Guide of the Brotherhood” and “The Brotherhood are agents and betrayers” were among the slogans that were chanted. The infuriated protesters also kicked out any citizen whom they suspected to be a member of the Islamist group. Most bearded men were labelled as members of the Brotherhood and were forced to leave.

Mohamed Morsi, the Muslim Brotherhood president of Egypt, didn’t show up. His prime minister did and was savaged by  protesters: “Inside the mosque the atmosphere was also electric. Hisham Qandil, Morsi’s newly-appointed prime minister, was present at the prayers and was physically assaulted by protesters. Several protesters threw their shoes at Qandil when he was inside the mosque.”

Crucial to understanding Egypt’s internal wrangling between the Brotherhood-dominated elected government and the military in the wings is the harsh reality of Egypt’s economy: the country is nearly dead broke, and close to the point where it no longer can finance its $36 billion annual trade deficit. Egypt imports half its food, and is the world’s largest wheat importer. Wheat and other food prices went through the roof due to the American drought and poor harvests elsewhere. Egypt is almost out of money. It also has trouble financing its enormous internal budget deficit (around 12% of GDP). The most likely outcome will be a substantial currency devaluation before the end of the year, with a sharp rise in food and energy prices, all of it laid at the door of the Muslim Brotherhood. The military will consolidate its grip over Egyptian politics in one fashion or another. As I wrote in the cited July 9 post: “The economic context is necessary to make sense of Egypt’s politics: it points to an important conclusion, that no path exists to stable rule by the Muslim Brotherhood.”

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When Does Religion Become Illegal?

August 7th, 2012 - 6:12 am

Is it illegal to be a Catholic in the United States? That’s kind of a grey area, after Barack Obama’s Health and Human Services Department issued an Aug. 1 order requiring all employers offering medical insurance to cover “reproductive services,” including contraception as well as abortion drugs (hat tip: www.politicaloutcast.com). Under the “required health plan coverage guidelines,” HHS lists:

All Food and Drug Administration approved contraceptive methods, sterilization procedures, and patient education and counseling for all women with reproductive capacity.

That includes abortion-inducing drugs. If you manage a Catholic institution, you either violate your most basic religious principles or fail to comply. The correct answer, evidently, is that you can be a Catholic at home with closed shutters, but you can’t have Catholic institutions.

It’s still legal to be a Jew in the United States, but not in some parts of Europe. After a June 26 ruling by a Cologne court defining infant circumcision as “inflicting grievous bodily harm,” you can go to jail (at least in theory) for performing Jewish ritual circumcision. Although Germany’s Chancellor Angela Merkel and other political leaders have promised to find a legislative way around the court and uphold religious freedom for Jews and Muslims, policies against circumcision are proliferating. Two Swiss hospitals have stopped circumcisions (although they continue to offer euthanasia). One Austrian province banned circumcision before the Justice Ministry intervened. Now Norway’s ombudsman for children’s rights demands that circumcision be replaced with a “symbolic ritual.”

While a ban on kosher slaughter was narrowly averted in the Netherlands, European rabbis warn that a new wave of attacks on this basic Jewish practice is in the offing. Jews who stand by while America’s largest religious community, the Catholic Church, should remember that we’re next. The Catholic Church is the only European institution that has consistently defended Jewish religious freedom in Europe. It would be hypocritical as well as self-damaging if we Jews failed to do everything in our power to support Catholics against this new persecution.

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(Crossposted from “The Gate” blog at www.gatestoneinstitute.org.)

The correct answer is, “Neither of the above.”

Depending on whom you believe, Egypt’s Muslim Brotherhood will ally with Saudi Arabia (according to Fouad Ajami) or Iran (according to former Indian diplomat M.K. Bhadrakumar. These are mutually exclusive scenarios given the extreme enmity between Riyadh and Tehran, intensified by Syria’s civil war. I don’t believe either scenario, but both of them are worth reading as gauges of the complexity of the Middle East’s descent into chaos. First, Ajami, the tireless cheerleader of the Arab Spring and true believer in Arab democracy (in Tablet last week):

It should have come as no surprise that Egypt’s new president, Mohamed Morsi, made his first official foreign visit to Saudi Arabia. Morsi, a Muslim Brotherhood man, went to Arabia last month for both religious and political reasons: He prayed in Mecca, and then there was a formal summit in Jeddah with the Saudi monarch and his crown prince. There was nothing concealed—the summiteers announced that theirs would be an alliance of “moderate Sunni Islam.” There was no need to mention Iran and its tributaries, the embattled Syrian regime, and Hezbollah in Beirut: For Saudi Arabia, this is the most natural of alliances, a return to the time of Hosni Mubarak when the Saudi-Egyptian axis held sway.

Nowhere does Prof. Ajami mention what the casual reader of any newspaper knows, namely that the Saudis hate and fear the Muslim Brotherhood as much as they hate and fear Iran, because the Muslim Brotherhood is the only force with the potential to overthrow the Saudi monarchy. This remarkable lapse identifies the article as prescriptive rather than descriptive, that is to say, more of Ajami’s wishful thinking. He adds:

In Egypt they would find a natural partner. Egypt had taken time out from the game of nations: It had a revolution to settle, a fight for the makeup of a new order. With the triumph of the Muslim Brotherhood in the presidential election, the Egyptians were ready to return to the regional contest. Egypt is in desperate need of Saudi money, employment opportunities for its vast population, and tourist revenues. The struggle against Iran is to be anchored in the needs of both countries. There is Sunni solidarity at work, but more important, cold reasons of statecraft. American influence in the Persian Gulf and the Fertile Crescent is at a low point, a sectarian Sunni-Shia war has wrecked the peace of the region. The Muslim Brotherhood in Cairo and the Saudi rulers know how to bury their differences in order to fight a Shiite enemy.

The Saudis are cautious about feeding the mouth that bites their hand, however. And after Prof. Ajami’s panegyrics to the Arab Spring, his audience in Riyadh is limited to the staff of the American Embassy. M.K. Bhadrakumar, formerly India’s ambassador to Turkey among other countries, explains why in a blog post last week:

This is a development that holds the potential to shake up Middle Eastern politics — Iranian vice-president visiting Cairo. The two countries pulled down the shutters following the Iranian revolution in 1979 and a dark period continued right till the end of the Hosni Mubarak era. The revolution on Tahrir Square one year ago heralded a thaw, the first sign of which was the permission granted to an Iranian warship to cross the Suez Canal to visit Syria. Meanwhile, the military junta permitted a second Iranian warship to cross the Suez Canal, disregarding the stern rebuke by the United States and Israel (and the annoyance of Saudi Arabia). On its part, evidently with the acquiescence of Cairo, Tehran began inviting a series of Egyptian goodwill delegations from the civil society in a sustained effort to reach out to the various sections — especially the Islamist forces — of Egyptian society. The stakes are indeed very high.

Therefore, Saudi Arabia invited the newly-elected Mohammed Morsi of the Brotherhood to visit Riyadh last month. The Saudis hoped that Morsi would play footsie on the Sunni-Sh’ite front and get Egypt to play its due role in the Syrian crisis. Critical reportage is continuing in the Saudi establishment press, even pitting the Brothers against Egypt’s Al-Azhar in a clever ploy to divide the islamist camp in Egypt. {Al-AZhar is Egypt’s religious establishment.) The point is, Riyadh has the utmost to fear from the Brothers — the spectre of the Brothers spearheading a ‘regime change’ in Saudi Arabia at some point haunts the Saudi rulers. The equations between the Saudis and the Brothers have been a troubled and often-violent one with the former Crown Prince Nayef using brutal methods to smash up the activities of the Brothers on Saudi soil. This is where an Egyptian-Iranian rapprochement at this point becomes a major setback for the Saudi regime. If the Iranian news report carried by Fars is to be believed, Iranian vice-president Hamid Baqayee may visit Cairo to personally hand over the letter of invitation from President Mahmoud Ahmedinejad to Morsi to attend the forthcoming NAM summit meeting in Tehran.

Bhadrakumar’s report contains invaluable background, but it leaves out something obvious: Once in power, the Muslim Brotherhood’s Mohamed Morsi cannot afford to antagonize Saudi Arabia, because Egypt is living hand-to-mouth on Saudi subsidies. With a $36 billion annual trade deficit, soaring food prices (Egypt imports half its food), and just $7 billion in liquid foreign exchange reserves, Egypt is at the brink of economic disaster. Droplets of Saudi money are keeping it just this side of the brink. By the same toke, Ajami’s suggestion that Saudi help could get Egypt out of its economic mess is whimsical. The kingdom simply isn’t going to fork over tens of billions of dollars a year to support a government that might turn out to be its worst enemy in the future.

What will happen for the time being is ambiguous. Morsi will maintain contact with all the enemies of the Saudi Monarchy but do nothing dramatic to offend the Saudis; the Saudis will continue to back the Supreme Council of the Armed Forces and look for opportunities to clip Morsi’s wings; Egypt will continue to suffer crippling shortages of fuel and spot shortages of food as its economic position deteriorates; and Iran will make overtures to the Muslim Brotherhood and look for opportunities to help it subvert the Saudi monarchy. The most probable outcome is that Egypt’s military will assert control with Saudi financial backing and suppress the Muslim Brotherhood. and the Egyptian-Saudi alliance will be restored on the basis of the SCAF. Saudi Arabia will pay the bus fare of Muslim Brotherhood fighters to fight Basher Assad’s regulars in the Middle Eastern equivalent of the Eastern Front, and the Syrian meatgrinder will grind up the Brotherhood’s fighting capacity. The Turks will help because they depend on Saudi finance, too.

For more background see my July 10 essay in Asia Times Online, “The Economics of Confrontation in Egypt.”


Bill Gross is Half Right About Equities

August 3rd, 2012 - 3:53 pm







Bill Gross is half right about equities
By Spengler
[Note: Asia Times' site was down for maintenance a good part of the week, and some readers may have missed this. So it is cross-posted from Asia Times Online].
PIMCO managing director Bill Gross got the financial world’s undivided attention with his “stocks are dead” pronouncement July 31. There is some truth to the statement: expected returns are declining across all markets. But the market does not look at returns, but rather risk-adjusted returns. What has changed is not just the returns, as Gross correctly observed, but also the risk adjustment.

On July 23, my firm Macrostrategy LLC published a study of the new equity valuation that sheds light on the problem that Bill Gross emphasized. Given the controversy it seems worth sharing this paper with a broader public.

Visible and reliable cash flows trade at an unprecedented premium as bond yields collapse. Valuations of utility, tobacco, energy trust and other big dividend payers are stupidly rich and are likely to remain so. A sea-change in equity valuations has put a premium on secure cash flows while amplifying the effect of uncertainty. It is possible to measure these changes by a number of statistical means, some direct, some indirect.
Apart from the number crunching, it’s worth recalling the Soviet-era joke about the listener call-in program on Armenian radio. A listener observes that in Marxist theory, the present era of socialism will give way to the glorious future of communism. The question is: Will there be money under communism? After considerable delay, Armenian Radio replies: Rightwing revisionists claim that there will be money under communism and leftwing extremists say that there will be no money. The dialectical solution is that some people will have money and others won’t.

The same applies to stocks: In the present era of crony capitalism and state encroachment, some equities will be dead and others won’t. We are living through an unprecedented shift to risk aversion.

As we see in Exhibit 1, the most reliable predictor of equity price returns in the past two years has been volatility – the least volatile sectors have the highest returns. The horizontal axis is the average implied volatility of SPDR ETF’s corresponding to major S&P sectors.

Exhibit 1: Implied Volatility vs Two-Year Price Returns, Major S&P Sectors

Source: Bloomberg

Volatility (at least the VIX index) is low, but risk aversion is high. How are we to explain this? Volatility as measured by standard deviation of returns assumes a normal distribution of returns, whereas investors know that the distribution is far from normal. That explains why equities have paid such a high price for volatility during the past two years.

Exhibit 2: Implied Volatility vs Returns (Data for Exhibit 1)

Source: Bloomberg 

It is a bad time for the market when utilities trump other sectors, but they did so during the past two years (technology came close, but without Apple would have lagged far behind). Shown in Exhibit 2 are price returns only; when dividends are included, total returns to utilities rise by another 8%, bringing utilities’ two-year returns to 30%.

Another sign of times is the fact that utilities and consumer stables traded in lock step with Treasuries during the past three years – a noteworthy break from past trading patterns. Exhibits 3 and 4 below show a close relationship between bonds and the stocks with the most stable cash flows, namely utility and consumer staples. The scatter graph of bond yields against stock prices in these two sectors shows a more-or-less straight line relationship.

Exhibit 3: Utility Stocks Trade with Treasuries During the Past Three years …

Source: Bloomberg

Exhibit 4: … So did Consumer Staples

Source: Bloomberg

Exhibits 3 and 4 show daily data for the past three years. If we take a much longer sample, though, the linear relationship between utility stocks and bond yields turns out to be an anomaly of very recent vintage. The little spike jutting out to the left on the chart in Exhibit 5 is the recent correlation of utilities and bonds. It didn’t used to be that way. On the contrary, for the most part utility stocks traded inversely to bond yields.

Exhibit 5: 10-Year Treasury Used to Trade Inversely to Utilities: 1989 through Present

Source: Bloomberg 

This is all the more remarkable given that the broad market is getting more inversely correlated with bond prices, as per Exhibit 6.

Exhibit 6: Correlation of Bond Yield and S&P 500

Source: Macrostrategy, Bloomberg

Exhibit 6 tells us, in effect, that the stock market didn’t care much about bond yields during the 1990s. In the days of unlimited hopes for the cyber-future, bond yields could do whatever they wanted, and the stock market didn’t care. During the 2000s, though, as Treasury bonds became a store of value and a safe harbor investment, the stock market cared a great deal about bond yields. Better said, both stocks and bonds cared about the same thing, namely, getting out of the path of risk.

Exhibit 7: The S&P becomes more correlated with the 10-Year Treasury as the 10-Year Treasury Yield Falls

Source: Macrostrategy, Bloomberg 

I had to look at Exhibit 7 a few times before my eyes would focus. Econometrically, there is little doubt that the falling 10-year yield corresponds to a greater sensitivity of stocks to bond yields.

As bond yields fell, stock prices became more positively correlated with bond yields, that is, stocks tended to fall further when bond yields fell.

That is another way of saying that the market became more risk averse. After the fact that seems obvious, but it’s useful to get the license plate of the truck that ran us over.

The market isn’t shunning stocks: it is shunning uncertainty. We saw that there is a clear, linear relationship between volatility and sectoral returns during the past two years. More importantly, we detect an entirely different trading pattern in stocks with visible, reliable cash flows (utilities and consumer staples): these sectors of the market trade increasingly like bonds. The broad market, though, trades in the opposite direction of bonds (risk aversion causes bond yields and stock prices to fall together.

This bifurcation of the market, finally, is something new and unwelcome. It implies an aversion to uncertainty of a kind that we have not seen in two generations, and a willingness to pay increasing amounts for secure cash flows that we have not seen in a very long time.

Exhibit 8: Price Rise in Utility Stocks Is Entirely Due to a Higher Price for Earnings

Source: Macrostrategy, Bloomberg 

With a 70% dividend payout ratio and stagnating capital investment, the long-term outlook for utilities earnings is poor, but investors continue to pay a higher price for them – comparing them directly to the alternatives in the bond market. In other words, expected returns for secure investments are falling, while the market is shunning risk investments in general.

It is no news that entrepreneurship has been depressed for the past several years. The attitude of the federal government is at least partly to blame, as the furor over President Obama’s “You didn’t build that” speech makes clear. Whether other factors are to blame – the aging of the prospective pool of entrepreneurs, the 40% reduction of average household wealth, or international competitiveness – is hard to measure.

What we can measure, though, is the remarkable extent to which risk aversion has changed equity valuations during the past several years. It is sobering to consider the implications for equity market performance as well as economic growth.

Spengler is channeled by David P Goldman. His book How Civilizations Die (and why Islam is Dying, Too) was published by Regnery Press in September 2011. A volume of his essays on culture, religion and economics, It’s Not the End of the World – It’s Just the End of You, also appeared last fall, from Van Praag Press.