Does Syria Matter?

The Senate Foreign Relations Committee gave its blessing to President Obama’s plan to take limited action against the Syrian regime for using chemical weapons against its own people.   A full Senate vote is expected in the next few days and will likely pass.  Barring any hiccups in the House, the bombs could start falling as soon as next week.

Whenever the words “Middle East” and “war” get mixed in the same sentence, people get nervous.  It’s a messy and complicated part of the world with ever-shifting alliances and unlikely bedfellows.  Devoutly Sunni Saudi Arabia supports the secular military regime in Egypt, while constitutionally secular Turkey supports the deposed Muslim Brotherhood.  In Syria, a secular nationalist regime is supported by radical Shia Iran and Orthodox Christian (and formally communist) Russia.  And Lebanon?  Its political arrangements resemble something from the Godfather.

You might think that hatred of Israel is the tie that binds, but even this is a half-truth.  Though the two countries have no formal relations, Israel and Saudi Arabia have become allies of sorts, and rumors have flown in recent years that the Saudis have given the nod to the Israelis that it might <wink wink> be ok for their jets to cross Saudi airspace en route to bombing Iran’s nuclear facilities.

This is why an airstrike on Syria gives us the jitters.  The fear is that, given how complicated the relationships are, a “limited” response could escalate into something much bigger, dragging in other regional players such as Iran, or even Russia.  Colin Powell warned George W. Bush that if he broke Iraq, he owned it.  No one in Congress or the White House wants to “own” Syria.

So with all of this as background, should investors worry about Syria?

Not really.  You should watch the headlines and be aware that events can change quickly.  But consider the following:

  1. The Western response is intended to punish the Assad regime but not remove it.  Assad will not escalate and give the West an incentive to remove him…particularly since he is winning the war.
  2. Syria’s options for retaliation are few and likely ineffective.  Could they attack Israel in the hopes of rallying the Arab street?  Maybe.  But Saddam Hussein tried that in the first Gulf War to little effect.
  3. Iran is not likely to join the fray.  Think about it.  If they sit tight, their ally in Syria will take some damage but will hold on to power.
  4. Vladimir Putin’s Russia likes to antagonize the West, but this isn’t the 1980s. Russia has little to gain from letting this escalate too far, particularly given that their ally is winning the war.
  5. Syria is not an oil-exporting country.  Unless Iran enters the fray and closes the Straits of Hormuz—which again, is unlikely—any spike in the price of oil should be a temporary blip.

There are plenty of macro risks out there to consider.  Front and center is the Fed’s tapering of its quantitative easing program, and Europe’s sovereign debt debacle is the crisis that never seems to end.  But Syria is not something you spend time worrying about.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management. Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”

The Nicaragua Canal: China’s Secret Motive

I first saw the Panama Canal in action in 2002.  Though nearly 90 years old at time (and soon to be 100 years old at time writing), it was an impressive piece of engineering to behold even by modern standards.  A series of locks lifts ships 85 feet above sea level and then lowers them again on the other side.  And it does it through some of the least hospitable terrain on the planet.

You absolutely cannot underestimate the importance of the Panama Canal to the modern global economy.  The existence of the Canal has done more to promote free trade and globalization than all of the international summits in history.  It has massively reduced costs and transit times and allowed for much tighter economic integration between the countries of the Americas and between the Americas and the Old World.

The Canal currently handles about 5% of all worldwide shipping traffic—and it would be substantially higher were it not for the fact that the Canal is currently running at maximum capacity, pending the opening of a new, wider lane set to open in 2014.  The new lane will accommodate significantly larger ships and is expected to double the Canal’s current capacity.

Note: The Canal is something that would make any red-blooded American proud.  It was started by the French—who ended up giving up on it due to engineering difficulties and a high mortality rate for their workers.  It took American innovation and engineering prowess to get the job done.

Proposed Nicaragua Canal Route
Proposed Nicaragua Canal Route

Yet recent moves by China add a new wrinkle to this story.  Even while the capacity of the Panama Canal is being doubled, a Chinese company is in serious discussions with the Nicaraguan government to build a rival canal.

The cost?  $40 billion and 11 years of construction.

Based on economics alone, it’s hard to understand the Chinese motivation.  Panama nets about $1 billion per year in tolls on its Canal and has the ability to undercut any potential rival on price.  The Canal expansion—which, again, doubles capacity—cost just $5.2 billion.

China may be betting that world trade will be high enough to justify two Central American canals by the year 2025, but I believe their motivation is less economic and more geopolitical.

The Panama Canal has been under the control of the Republic of Panama since 1999.  But under the original treaties, negotiated by the Carter Administration, that ceded control to Panama, the United States retained a permanent right to defend the Canal if its openness and neutrality were ever at risk.  The Canal may belong to Panama, but the United States still considers it a vital asset necessary for national defense.

Could China have similar motives in Nicaragua?  It would appear so to me.

In Nicaragua, China has the potential to essentially bribe one of the poorest countries in the Western hemisphere into being a loyal ally.  By some estimates, a new canal could double the country’s GDP per capita.  And Nicaragua is not a country known for being friendly to the United States.

Will the canal happen?  Maybe, maybe not.  We’ll see.  But if it does, it should benefit the world economy by increasing capacity, speeding up transit times, and, presumably, forcing Panama to lower its tariffs in order to compete.

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Review: The Revenge of Geography

“The present, as permanent and overwhelming as it can seem, is fleeting,” writes Robert Kaplan in the introduction to The Revenge of Geography: What the Map Tells Us About Coming Conflicts and the Battle Against Fate.   “The only thing enduring is a people’s position on the map.”

As a country built with a spirit of self-reliance and an ideology of free will, Kaplan’s idea of “the map as a country’s destiny” might seem a little offensive to American readers.  But the United States is itself a case in point.  It is the United States’ isolation, bordered by two oceans, that allowed it to develop virtually unmolested for the first two centuries of its independence.

And as disappointing as it might be to American patriots who remember the Cold War, Kaplan’s colleagues at Stratfor has always maintained that the Soviet Union’s eventual defeat was inevitable.

Even if Ronald Reagan had never become president and escalated the arms build-up that led to the Soviets throwing in the towel, geography had already sealed their fate, at least according to Stratfor’s analysis.  Due to Russia’s lack of seaports—and the ease with which enemies could block access to the few that Russia has—it was always going to be easier for the United States or Britain to contain Russia than vice versa.  In an age of nuclear missiles and air power, geography may matter less than it once did.  But the world is still far from flat, and geography still very much matters.

Students of history no doubt remember that it was the Russian winter and bleak landscape that defeated Napoleon Bonaparte’s invasion, not the Russian army.  As continental land powers, both Russia and Germany have an appreciation for geography that few other countries would appreciate.  As Kaplan writes,

As heirs to land power, Germans and Russians have over the centuries thought more in terms of geography than Americans or Britons, heirs to sea power.  For Russians, mindful of the devastation wrought by the Golden Horde of the Mongols, geography means simply that without expansion there is danger of being overrun.  Enough territory is never enough.  Russia’s need for an empire of Eastern European satellites during the Cold War, and its [more recent] use of military power, subversion, and the configuration of its energy pipeline routes all designed to gain back its near abroad…are the wages of a deep insecurity. 

But Germans, at least through the middle of the 20th century, were more conscious of geography still.  The shape of German-speaking territories on the map of Europe changed constantly from the Dark Ages through modern times…   Historically changeable on the map, lying between sea to the north and Alps to the south, with the plains the west and the east open to invasion and expansion both, Germans have literally lived geography.

Robert Kaplan has had a long and distinguished career as an analyst on geopolitical issues, and he currently writes for George Friedman’s global intelligence service Stratfor.

I reviewed Friedman’s The Next 100 Years, and his follow-up The Next Decade.  Though I have never fully forgiven Dr. Friedman for some of his more outlandish forecasts—such as a Japanese-Turkish military alliance attacking America from bases on the moon—I continue to recommend both books as two of the more thought-provoking long-term forecasts in print today.

If you liked The Next 100 Years or if you enjoy reading Stratfor geopolitical insights, then The Revenge of Geography is a book you will want to add to your reading list in 2013.

Readers might notice some similarities between Revenge and another book I reviewed, Ian Morris’ Why the West Rules—For Now. 

It was Morris’ contention that it was “maps, not chaps” that led to eventual dominance of the West over the globe.  In other words, it was the conditions of geography and the chain of events that followed it and not some innate cultural superiority  that eventually led to British warships shooting their way up the Yangzi River rather than Chinese warships shooting their way up the Thames.  (Adding credence to this view, Kaplan notes that Europe has a coastline that is 23,000 miles long—long enough to encircle the earth—full of natural harbors and that Europe has a higher ratio of coastline-to-landmass than any other continent or major region.)

Kaplan’s focus is very different—and tends to focus around the impact that major mountain ranges have had on the development of the peoples in and around them—but his conclusions are remarkably similar.  In situations where man-made borders based on politics and ideology (such as the former East and West Germany or the current North and South Korea) come into conflict with natural borders based on geography and culture, it is the map that determines the outcome.

Kaplan reserves some of his most controversial comments for North America, and particularly the relationship between the United States and Mexico—and the role that geography plays.

The United States has been overly fixated on the Middle East since the September 11, 2001 terror attacks.  The Obama Administration has since tried to “re-pivot” American policy towards East Asia and the Pacific.  But what about Latin America?

It would seem that the American attitude towards Latin America is best summarized by an off-the-cuff comment that President Nixon once made to a young Donald Rumsfeld: “Latin America doesn’t matter.”

Kaplan might beg to differ.  Paraphrasing the views of other policy experts, Kaplan writes,

While the United States was deeply focused on Afghanistan and other parts of the Greater Middle East, a massive state failure was developing right on America’s southern border, with far more profound implications for the near and distant future of America, its society, and American power than anything occurring half a world away.  What have we achieved in the Middle East with all of our interventions since the 1980s? … Why not fix Mexico instead?

Aside from the obvious point that Mexico might not want to be fixed by its northern neighbor or that the “fixing” might be better done by Mexican citizens themselves than by outsiders, Kaplan does have a valid point.  The United States shares a long border with Mexico, and the realities of geography mean that our destinies are linked—regardless of prevailing political views about immigration.   As Kaplan writes,

It is in the Southwest where the United States is vulnerable.  Here is the one area where America’s national and imperial boundaries are in some tension: where the coherence of America as a geographically cohesive unit can be questioned.  For the historical borderland between America and Mexico is broad and indistinct…

Why does this matter?

Mexico and Central America constitute a growing demographic powerhouse with which the United States has an inextricable relationship. Mexico’s population of 111 million people plus Central America’s of 40 million constitute half the population of the United States… 85 percent of all Mexico’s exports go to the United States, even as half of all Central America’s trade is with the U.S…

The destiny of the United States will be north-south, rather than the east-west , sea-to-shining-sea of continental and patriotic myth.

Kaplan is not so much delving into mass-immigration scare statistics as he is emphasizing the growing importance of our southern neighbors to our own globalized economy.

Again returning to geography, Kaplan notes that Mexico has far more natural borders internally between its various regions than it does with the United States.  Baja California and the Yucatan Peninsula (home of Cancun, Cozumel and many of Mexico’s other famous beaches) are separated from the rest of the country  by sea and, in the case of the Yucatan, by jungle.  And northern Mexico is separated from Mexico City and the central highlands by desert and mountains.

Kaplan notes something that I have noticed in my own travels.  Northern Mexico is very different than southern Mexico.  The people are every bit as distinct as New Yorkers and Mississippians, and they don’t particularly like each other.

Northern Mexico, including the large business hub of Monterrey, is gritty and industrial with a strong “get it done” mentality.  It’s people, by and large, are rugged individualists and very entrepreneurial.  As Kaplan notes, Northern Mexico is responsible for 85% of all U.S.-Mexican trade.

If you can understand Spanish, watch how norteños from Monterrey are portrayed in Spanish-language television.  They’re generally hard-nosed, no-nonsense small businessmen who, in contrast to the urbane residents of Mexico City, have no interest in or time for cultural pursuits.  Oh, and they’re usually wearing an obnoxiously-large cowboy hat and flashy boots.

Kaplan sees a “borderland” culture along the Texas-Mexico border that is distinct from both the U.S. and Mexican heartlands.  It is a hybrid culture, mostly Spanish-speaking but with “American” attitudes towards business and commerce.  Both northern Mexico and the southwestern United States are subtly separating from the rest of their respective countries.

What is the potential result of the interaction between geography and demographics along the U.S.-Mexican border?

Kaplan cites University of New Mexico Professor Charles Truxillo’s prediction that, by 2080, the states of the American southwest and Mexican north will secede and form a new country of their own—La Republica del Norte.

We’ll see about that.  In any event, I agree with Kaplan that the realities of geography make some degree of melding between the countries inevitable.

All in all, The Revenge of Geography is a worthwhile read for anyone with an interest in geopolitics.  I don’t agree with all of Kaplan’s conclusions, but he gave me plenty of fodder for thought.  If reading a 350-page tome is not to your liking, check out Kaplan’s writings at Stratfor.

This article first appeared in the HS Dent Forecast.

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The Greek Debt Crisis In Historical Perspective

Greece is no stranger to economic crises such as the current one. The country has been in debt since its independence and has gone through a cycle of borrowing and defaulting numerous times. Foreign powers have always had an interest in maintaining Greece’s stability, so previously they always agreed to refinance its debts. The only new factor in Greece’s ongoing crisis is that the country is not as strategically important to outsiders as it was before the end of the Cold War, so foreign governments are not as interested in loaning Athens money.

With Greece again roiling world financial markets, it can be useful to step back and get an historical perspective.  Greece has been here before, and if history is any guide this will not be the last time.

If Greece has developed something of a bailout culture, it is because there has always been a Western power with a geopolitical interest in bailing the country out.  Whether it was Britain attempting to keep Tsarist Russia in check or the United States looking to best the Soviets in the Cold War, Greece has always had a patron.  By virtue of its strategic location in the Eastern Mediterranean, Greece mattered.

I’ve written favorably about geopolitical forecasting firm Stratfor and its prolific founder, George Friedman.  I wrote reviews of Friedman’s two most recent books (Book Review: The Next 100 Years and Book Review: The Next Decade) and continue to recommend both.

Today, I recommend you read Stratfor’s analysis of Greece’s debt woes, which first appeared on as “Greece’s Continuing Cycle of Debt and Default“:

The ongoing financial crisis in Greece is a familiar situation for Athens. Greece has been in debt since its war for independence from the Ottoman Empire in the 1820s, which means international creditors and foreign sponsors have played a role in Greek finances, politics and economic development since then. Even though Greece has failed to achieve the expected gains from the reforms its Western creditors have demanded it make in order to pay back its loans, foreign powers have always had a strategic need for Greece and have thus refinanced or forgiven its debts despite numerous defaults.

Indebted from the Start

The modern state of Greece was born after 11 years of fighting against the Ottoman Empire (from 1821-1832). However, it was not until Western intervention in 1827 that the conflict turned decidedly in Greece’s favor. The war had disrupted commerce in the Eastern Mediterranean, and France and the United Kingdom were concerned that a power vacuum in the region would give the Russian Empire an opportunity to expand and gain direct access to the Mediterranean. They thus sought to balance any expansion of Russian power by positioning themselves strongly in a newly independent Greek states. When Greece finally achieved its independence, it was these three Great Powers — France, the United Kingdom and Russia — that negotiated the terms of that independence.

Despite the nationalist origins of the Greek conflict, the Treaty of Constantinople — negotiated by the Great Powers in 1832 — declared the Kingdom of Greece an absolute monarchy and appointed a Bavarian prince, Otto, as monarch. Since the 17-year-old Prince Otto was a minor when he was named monarch, a council of regents consisting of three Bavarian advisers who came to be known as the “Troika” — incidentally, the same term used for the International Monetary Fund (IMF), European Central Bank and European Union officials today — were appointed to rule in Otto’s name. One member of the Troika was particularly instrumental in establishing the framework for the new country: former Bavarian Finance Minister Josef Ludwig von Armansperg, who ultimately was appointed prime minister of Greece when Otto assumed the throne.

During the fight against the Ottomans, Greece accumulated a large external debt — a debt on which it defaulted in 1826, greatly restricting the new country’s ability to access international credit. The United Kingdom, France and Russia agreed to loan the new country 600 million francs. As a condition of the loan, the three countries maintained diplomatic representatives in Athens who were heavily involved in the creation and oversight of the Greek government. The Great Powers wanted to see immediate returns on their loans after the new country began taking shape. However, the only immediate source of internal revenue for Greece was agriculture. Loans were given to farmers to expand cultivation on land that was nationalized after the war. The financing terms of the state loans, which required a 3 percent down payment in cash, combined with an immediate and heavy tithe on the lands’ production, forced most agriculture laborers to borrow from the few private individuals who had access to large amounts of capital — mostly the wealthy members of the Greek diaspora and the merchant class. This created a cycle of debt wherein the state’s attempts to pay off its international debt resulted in an increasingly indebted population…

Greece in Modern Times

By the end of World War II, Greece, along with its European sponsors, was in economic ruins. In March 1947, the United Kingdom had to end the financial assistance it had provided Greece in varying degrees since the 1820s. However, the Communist insurgency that engulfed Greece immediately after World War II once again presented the threat of Russia (now the Soviet Union) controlling strategic points in the Eastern Mediterranean. This made Greece strategically critical to the single remaining Western superpower: the United States, whose military and economic aid to Greece during the Cold War prevented Communist forces from gaining influence in the country. In 1981, Greece became the 10th member of the European Economic Community (the predecessor of the European Union). After this, Greece received large loans and subsidies from the European bloc in addition to aid from the United States. Nonetheless, by the early 1990s, Greece’s lack of economic growth and massive budget deficit led the IMF and European Commission to supervise the country’s finances.

A Familiar Position for Athens

Greece’s current problems — a large external debt, high defense expenditures, a political system entrenched by its ability to provide its supporters with continual patronage, a capital-poor and import-dependent economy, an ineffective tax collection system, exclusion from international credit markets and the forfeiture of its fiscal sovereignty to external creditors — are problems Greece has faced throughout its modern existence. It has been in major powers’ strategic interest to ensure Greece’s stability since its independence from the Ottoman Empire, but it seems that nearly 200 years of international interest in developing the Greek economy has not done much to change Greece’s circumstances.

Article by Stratfor.  Full article can be viewed at “Greece’s Continuing Cycle of Debt and Default.”

Some things never change, though Greece’s strategic importance to the West perhaps has.  Greece has far less value as a military, diplomatic, or trading partner than, say, neighboring Turkey.  It will be interesting to see if, for the first time in two centuries of welfare payments, the West finally cuts Greece loose.


Military Spending by Country

With outstanding U.S. debt fast approaching 100% of GDP and budget deficits continuing to yawn stubbornly wide, the next president and congress will have some unpleasant decisions to make.  Spending will have to be cut.  But from where? Social Security and Medicare will come under debate, as will most discretionary spending.  But the elephant in […]

With outstanding U.S. debt fast approaching 100% of GDP and budget deficits continuing to yawn stubbornly wide, the next president and congress will have some unpleasant decisions to make.  Spending will have to be cut.  But from where?

Social Security and Medicare will come under debate, as will most discretionary spending.  But the elephant in the room that no one wants to acknowledge is the U.S. military (see figure).

Top 10 Countries by Military Spending, 2011


Spending, $bn

World Share, %

United States


















Saudi Arabia












Source: The Economist, April 7, 2012

The United States currently accounts for nearly half of all world military spending. Its military budget is more than eight times that of China and fourteen that of Russia.

The United States requires a large, muscular military to defend its economic and diplomatic  interests abroad.  Having a powerful army and (more importantly) navy is essential to maintaining credibility.  But during times of economic austerity, unpopular questions of “how big is enough” will start to be asked.

The automatic spending cuts that were part of the grand bargain between Barack Obama’s White House and the Republican-controlled House hit the military budget hard.  In an election year, neither party will want to see them implemented.

But once the election is over, even the most hawkish of republicans will have to accept that sacred cows like the military will have to be touched if the United States is to get its finances under control.  And with a smaller military, expect a more modest foreign policy.  It’s a whole new world, dear reader.