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Jack Devine's Winter 2018 Intelligence Report

TAG President Jack Devine gives his Winter 2018 Intelligence Report covering Trump one year later, the economic outlook, North Korea, Iran, Saudi Arabia, Russia, China, and Latin America.

Jack Devine’s Winter 2018 Intelligence Report

Trump One Year Later

January 20th marked President Donald Trump’s highly controversial first year in office. No matter one’s political persuasion, it has been a remarkable year in which Trump received an unprecedented amount of media attention, here and abroad, largely on the negative side of the scale. While it’s hard to calculate, with any degree of precision, just how much Trump’s domestic political support has shifted, it seems clear that he has sparked a high level of grass-roots activism among the opposition. Whether it’s sustainable through the mid-term congressional elections this November is an open question. The other wildcard will be the political impact on the voters of the recent wide-ranging congressional tax cuts. In this environment, the mid-term elections will be hotly contested, and the outcome a squeaker, even if the electorate “vote its pocketbook.”

Politics aside, as the cement hardens around the foundation of the Trump administration, it is becoming more formidable at home and in exerting its specific interests abroad. From North Korea and Pakistan to Israel and Saudi Arabia, whether one agrees with him or not, Trump is making his mark. It is a mistake to underestimate how much Trump’s power has grown in the past year as well as how much more control he has over the instruments of government, including congress and the major national security agencies. The Trump government is now in place. 2018 will almost certainly produce a major crisis abroad which will test the President’s mettle and domestic and international standing. How Trump performs will define more clearly how he will be viewed at home and abroad going forward. The flash points are many, including North Korea, Iran, Mexico, Venezuela, Turkey, Pakistan and, of course, Russia and China. Trump’s maneuverability is certainly limited by Special Counsel Mueller’s prolonged investigation which will tie Trump’s hands for months ahead. The sooner the investigation is concluded the better for all.

Economic Outlook

The U.S. economic outlook for 2018 is positive, with the stock market reaching new heights, unemployment low, and the recent congressional tax cuts for corporations and some individuals likely to give a short-term boost to overall economic growth. The biggest litmus test will be whether large sums of corporate capital held abroad will be repatriated and reinvested into the American economy, which could be quite beneficial. Still, the long-term impact of the congressional tax cuts on the economic forecast and the U.S. federal deficit remains uncertain. By lowering the corporate tax rate from 35 to 21 percent, America is now more competitive with other markets. Trade tensions are already high but could increase further as well. Still, the global economic outlook for 2018 is currently positive and predicted to be up by approximately 3 percent after a stronger 2017 than expected. China and India have projected GDP growth rates of approximately 6 and 7 percent, respectively, in 2018. However, by some estimates, if bad debt is taken into account, China’s real GDP should be roughly half the official estimate, which could be a bell-weather for the future.

North Korea

In North Korea we face the most severe existential threat since the Cuban Missile Crisis. Because there is no realistic military solution, and no viable scenario in which Kim Jong-un will dismantle his nuclear program, the key is to slow him down. The good news is that in response to Trump’s hard line, Kim has blinked. His New Year’s Day overture to South Korean president Moon Jae-in provides a path to the negotiating table. We should get behind it.

Iran

The Iranian government seems to have gained the upper hand for now over the predominately economically driven protests that erupted in numerous smaller cities earlier this month. However, the government will need to make internal economic changes to maintain stability, including addressing the issue of high youth unemployment. If Washington plays its cards right in this delicate period, the Trump administration might find that Iran now is more vulnerable and less resistant to Trump’s demands. The result may be an opportunity for Trump to achieve a “better deal.” Iran, in turn, would keep the nuclear deal and much needed economic flows intact.

Saudi Arabia

The battle for dominance between Sunni Saudi Arabia and Shia Iran will continue to shape politics across the Middle East. The battle at hand is existential in the minds of both regional super-powers. In Saudi Arabia, the new crown prince, 32 year old Mohammad bin Salman, has prosecuted a bare-knuckled power grab in the guise of an anti-corruption and social reform movement. In the process, he has taken on a wide array of formidable political and religious figures in the Kingdom. While he can count on the crucial support of his father, the King, and Washington, the crown prince is in danger of over-extending himself. Washington must remain alert for destabilizing blow-back.

Russia

On the Russian front, increasing friction is inevitable, despite Trump’s inclination to move toward closer relations. Geopolitical realities now put us at odds with Russia in the Middle East, Europe and over the use of cyber campaigns. Putin has shown great cunning in protecting and projecting historic Mother Russia’s influence on the world stage despite his weak economic position at home. He has regained control over Crimea and eastern Ukraine and established a foothold in the Middle East through Syria and Iran. However, his meddling in U.S. and European elections was foolish. Putin’s actions served to strengthen economic sanctions against him, when his ultimate goal was the reverse. Russia is now more marginalized in the West than at any time since the end of the Cold War. No matter what the outcome of the Mueller investigation, we will need to chart a new course with Russia on how best to deal with its meddling in the political process in the US and among our allies. Russian influence will remain strong in border areas, Syria and to a lesser degree Iran. On the home front, Putin could face increasing political difficulty without significant economic improvement or political reforms, which are highly unlikely especially ahead of the upcoming Presidential election in Russia.

China

China’s 19th Communist Party Congress further solidified the formidable position of President Xi Jinping. Yet it is inevitable that by rapidly consolidating power through his anti-corruption campaign, Xi has threatened other entrenched interests. We should be alert for internal repercussions. On North Korea, Xi will ultimately disappoint Trump, choosing stability on his borders over forcing Kim Jong-un’s hand through meaningful sanctions. On the world stage, and in Asia in particular, China will attempt to step in where the U.S. is perceived to have pulled back. Whether it will succeed is an open question.

Latin America

Corruption will continue to be a major concern and electoral issue in Latin America which has several presidential contests in 2018, including in Colombia, Mexico and Brazil. The Odebrecht corruption scandal involving the construction giant was the greatest example of corporate bribery in 2017, touching politicians throughout the region, from Brazil to Colombia, Ecuador, and Peru. Look for other major corruption scandals to emerge in 2018, particularly as elections get closer.

In Mexico, corruption allegations against President Enrique Peña Nieto could seal the deal for the left-leaning, nationalist Andrés Manuel López Obrador. With anti-American sentiment running high in Mexico voters may well look to López Obrador as an alternative. But the possible election of López Obrador should concern markets as much as US government officials, who might see an economic crisis on the southern border if NAFTA talks fail or if the next Mexican president backs away from market-friendly, macroeconomic policies. Already, the political pressures are great, and we should expect volatility to increase as we get closer to the July 2018 election date.

Looking Forward

2018 is likely to be as turbulent as 2017, if not more so. The economy will continue to strengthen, but the political arena will be fraught with unending problems and polarization. Count on a major defining crisis abroad and several surprises, but remain optimistic about the future.

If you or your firm would like an individualized consultation or information, please contact Jack Devine at The Arkin Group.

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