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Generational Dynamics Web Log for 5-Jan-2016
5-Jan-16 World View -- President Obama may have to choose between Saudi Arabia and Iran

Web Log - January, 2016

5-Jan-16 World View -- President Obama may have to choose between Saudi Arabia and Iran

European and Wall St stocks fall sharply, following China

This morning's key headlines from

Sectarian Sunni-Shia split deepens over Iran - Saudi split

Shia protesters against Saudi Arabia holding posters showing Nimr al-Nimr in Najaf, Iraq, 100 miles south of Baghdad (AP)
Shia protesters against Saudi Arabia holding posters showing Nimr al-Nimr in Najaf, Iraq, 100 miles south of Baghdad (AP)

After attacks by Iranians on the Saudi embassy in Tehran, including setting the building on fire after looting the computers and documents, the Saudis cut diplomatic ties with Iran, as we reported yesterday. On Monday, the Saudis announced that they would end all air traffic and commercial relations with Iran. Bahrain and Sudan also cut all ties with Iran on Monday, and the United Arab Emirates (UAE) downgraded its relations with Iran. Other Sunni Arab countries – Kuwait, Qatar and Oman – did not follow suit.

The Iranian attack was triggered by Saturday's execution on terrorism charges of 47 people, including Shia scholar Mohammad Baqir Nimr al-Nimr, along with 46 Sunnis. The Iranians, and the Shias in general, are particularly infuriated by the message that Shia terrorism and Sunni terrorism are equivalent. Shia protests continued in Iran and around the region.

The storming and burning of the Saudi embassy in Tehran has divided Iran's government. The hard-liners, generally represented by the older generation that survived the 1979 Islamic Revolution, see this as a victory. But for the moderates, generally represented by the generations growing up after the war, this is an embarrassment for Iran. Iran has a history of storming and looting foreign embassies for political purposes -- a major violation of international law. Iran created the 1979 hostage crisis by allowing students to storm the American embassy and take the 52 American diplomats hostage for 444 days. In November 2011, Iran's Revolutionary Guard attacked the British embassy in Tehran, forcing it to close. (See "30-Nov-11 World View -- Iran relives its glorious past as students storm Tehran's British embassy") Reuters and CS Monitor

Hezbollah-Israel violence growing on Lebanon border

The regional turmoil caused by the Saudi-Iran split is giving Lebanon's terrorist group Hezbollah an opportunity to initiate an attack on Israel across the Israel-Lebanon border.

On Monday, Hezbollah set off a large bomb on the border, targeting Israeli armored vehicles. Israel army responded with cross-border artillery fire at targets in Lebanon. According to an army spokesman, "We have opened artillery fire, and created a smoke screen to cover the area. We are in control of the incident."

Israel's army has been concerned for some days that Hezbollah is preparing to launch an all-out attack on Israeli territory in the northern Golan Heights, and so has been engaged in an artillery bombardment for four days. Hezbollah has promised revenge in retaliation for Israel's assassination last month of Samir Kuntar, a former Hezbollah commander.

Furthermore, some reports indicate that Hezbollah officials are increasingly stressed by growing military cooperation between Russia and Israel with respect to the war in Syria. We've reported a couple of times in the last month that Israel has been bombing Hezbollah targets in Syria, including a weapons convey near Damascus, evidently with the approval of Russia. There are also reports that Israel is providing intelligence to Syria about anti-Assad rebels in southern Syria. This alliance directly threatens Hezbollah, whose only raison d'ętre is to attack Israel and the West, and it's thought that Hezbollah may be initiating an attack on Israel in the hope of derailing the alliance. Needless to say, this kind of reasoning is very dangerous, and could result in a new regional war. Jerusalem Post and Daily Caller and Debka

President Obama may have to choose between Saudi Arabia and Iran

The growing split between Iran and Saudi Arabia is a major new problem for President Obama's plans to bring peace to the Mideast.

Obama had been pushing for one "peace process" to bring peace to Syria, and another "peace process" to bring peace to Yemen. Multinationals committees for each of these peace processes were scheduled to meet later this month. In both cases, both Saudi and Iran officials were to be part of the negotiations. But now, both of those peace processes are in chaos.

President Obama has been openly siding with Iran against Saudi Arabia since the start of the "Arab Awakening" in 2011, when he pressured Egypt's long-time leader Hosni Mubarak to step down. Since then, the Saudis have been increasingly angered by and contemptuous of Obama's policies. The culmination of this contempt followed the Iran nuclear deal with the West, which was achieved when the administration was perceived to repeatedly back down to Iran's negotiating demands. ( "15-May-15 World View -- Obama repudiates the Carter doctrine at bizarre GCC meeting")

As I mentioned above, Iran is especially infuriated that Nimr al-Nimr was executed along with 46 others as terrorists, sending the message that Shia terrorism and Sunni terrorism are equivalent. This message is intolerable to Iranian officials, and Saudi officials would have known that. This suggests that they performed this mass execution to send an unmistakable message to Obama that enough was enough.

Starting with his "apology tour" in 2008, Obama had fantasized that he could bring peace to the entire Mideast. As has been increasingly clear in the last few years. Obama has no clue what's going on in the world, and this is one part of it. From the point of view of Generational Dynamics, the Mideast was headed for a sectarian war that couldn't be prevented, so the approaching Mideast can't be blamed on Obama, as some of his opponents claim. But he can be blamed for dissipating all of America's influence and prestige by a policy which was no more realistic than tilting at windmills.

So the Saudi-Iran split is producing bitter problems for Obama. Obama has thrown the Saudis under the bus, and has pandered to the Iranians, so neither of them trusts nor believes him. And yet, events are moving quickly, and at some point Obama may be forced to choose.

Long-time readers know that almost ten years ago I predicted, based on a Generational Dynamics analysis, that Iran would become our ally and the Saudis our enemy. ( "9-Nov-15 World View -- Political crisis in Iran grows over nuclear agreement") This analysis seemed crazy at the time, but in the last few years, but it has been increasingly true in recent years, as Obama clearly has favored Iran over the Saudis. It would be strongly against trend for Obama to side with the Saudis against Iran, and so when Obama is forced to choose between the two, the chances are enormously greater that he'll choose Iran. Washington Times

Residents of Tel Aviv Israel in panic after Friday's gunfire attack

On Friday of last week, a gunman opened fire in Tel Aviv, Israel, on of the busiest arteries in the city and a popular hangout for both locals and tourists. The shooting spree began at the crowded Simta Bar, where young Israelis were gathered for a birthday party, then continued at a restaurant next door before ending at the bustling Sidewalk Cafe. Two people were killed.

The suspected gunman is a 31-year-old Arab-Israeli citizen named Nashat Milhem. Police have thus far refrained from calling the shootings a terrorist act, saying that Nashat Milhem’s motives are not yet known and that his modus operandi was not necessarily that of a terrorist. His father, a volunteer policeman, called police after seeing security camera footage of the attack on television and recognizing his son. Milhem has not been caught, and there's a massive manhunt in progress. According to reports, the Israelis have asked for help from the Palestinian Authority in finding him.

Residents of the area are close to panic because Milhem for years worked in the area as a delivery man, and has an intimate knowledge of streets and buildings in the city, so he may be living in an empty apartment he knew about. This is leading to fears that he might emerge and repeat his gunfire attack. As a result, many residents are staying at home, and keeping their children out of school. Jewish Telegraphic Agency and Washington Free Beacon and Jewish News

European and Wall St stocks fall sharply, following China

The Dow Jones industrial average closed about 275 points lower, or 1.58%, for its worst start on the first day of the year since 2008. Earlier, the index fell 467 points, or more than 2.5%, temporarily on pace for its largest percent decline on the first trading day of the year since 1932. European stocks closed sharply lower, with the German DAX 4%, and the STOXX Europe 600 closing 2.5% lower.

It appears that European and American stocks were following the Shanghai stock market on Monday. Shanghai stocks fell 5%, triggering a circuit breaker that closed trading for 15 minutes. But after lunch, stocks another 2%, and trading was quickly ended for the day. Analysts blamed the plunge on bad manufacturing data the came out on Monday.

There are concerns that closing trading is going to result in panic selling on Tuesday.

China's Shanghai stock market appeared to be in a full-fledged crash in the middle of last year. China's government responded with an almost unbelievable set of interventions -- forbidding government owned corporations from selling stocks, arresting people who "spread malicious rumors" (like "stocks are slumping), or who "meddle" in the stock market by selling stocks. In addition, Every day around 2 pm, the Chinese used government-backed funds to make huge purchases of shares in large capitalization companies. ( "2-Sep-15 World View -- China leads a worldwide stock selloff")

As I wrote last year, it's impossible for the government to cause, prevent or stop a full-fledged stock market crash. The Chinese government was able to stop the Shanghai slide last year, by intervening so thoroughly that it wasn't really a market any more, but they didn't (and couldn't) do anything about the underlying imploding bubble and except prop it up for a while. At some point, the implosion will have to continue, and it's possible that that time is now.

I listened to numerous analysts on Monday explain why Wall Street stock fell so sharply. A typical opinion was the following (paraphrasing): "The Chinese plunge shouldn't have happened, because the bad manufacturing data was really expected. For the same reason, the Wall Street plunge was only temporary, and once investors look at the fundamentals and how cheap stocks are, 2016 should be a very good year for the stock market."

I heard several variations of that, and it's so ridiculous that it's laughable. By very careful wording, the Shanghai bubble was not mentioned at all. And Wall Street stocks are not only not cheap, but they're in a huge bubble. Needless to say, the words "bubble" and "price/earnings ratio" were not mentioned by any of the analysts on Monday.

S&P 500 Price/Earnings ratio at 22.95 on December 31, indicating a huge stock market bubble (WSJ)
S&P 500 Price/Earnings ratio at 22.95 on December 31, indicating a huge stock market bubble (WSJ)

As I've repeated many times, Generational Dynamics predicts that we're headed for a global financial panic and crisis. According to Friday's Wall Street Journal, the S&P 500 Price/Earnings index (stock valuations index) on Friday morning (December 31) was at an astronomically high 22.95. This is far above the historical average of 14, indicating that the stock market is in a huge bubble that could burst at any time. Generational Dynamics predicts that the P/E ratio will fall to the 5-6 range or lower, which is where it was as recently as 1982, resulting in a Dow Jones Industrial Average of 3000 or lower.

Update: The Shanghai Stock Market recovered slightly on Tuesday morning, after the Chinese government injected $19.9 billion into the banking system, to provide liquidity to push stocks back up. CNBC and Bloomberg

(Comments: For reader comments, questions and discussion, see the 5-Jan-16 World View -- President Obama may have to choose between Saudi Arabia and Iran thread of the Generational Dynamics forum. Comments may be posted anonymously.) (5-Jan-2016) Permanent Link
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