Catastrophic Weather Is Wreaking Havoc With Insurance. These Companies Can Handle the Storm.
Backed by nearly $1 trillion in capital and rising premiums, insurers might actually profit off the coming wave of catastrophic weather.
This 1 Fitness Number Might Be the Most Important. What to Know About VO2 Max.
While fitness watches offer an estimate of your VO2 max, they might not be as accurate as an actual test.
Dreamstime
When it comes to fitness and even longevity, there is one number to rule them all: VO2 max.
The number measures the maximum amount of oxygen a person can use during intense exercise. A person awaiting a heart transplant might score below 10 while a world-class endurance athlete might be above 70 or even 80. Many health experts consider it the single best indicator of cardiorespiratory fitness, and research has found it correlates to longevity as well.
“The relationship between VO2 max and all-cause mortality is quite good,” says Dr. Michael Joyner, an anesthesiologist and fitness expert at the Mayo Clinic. “The odds of dying in the next 10 years are markedly low if your VO2 max is high.”
So what is VO2 max and why is it such a good measure of total health?
For starters, the test measures how multiple systems of your body function during hard exercise, including your heart, lungs, muscles, and veins, according to Dr. Kerry Stewart, a clinical and research exercise physiologist at Johns Hopkins School of Medicine. People who score well are less likely to have diabetes and high levels of LDL, or so-called bad cholesterol, and more likely to have high levels of HDL, or “good” cholesterol.
The American Heart Association in 2016 issued a scientific statement recommending that an assessment of cardiorespiratory fitness be considered a key vital sign in evaluating a person’s heart disease risk and overall health. It said that cardiorespiratory fitness was “was a potentially stronger predictor of mortality than established risk factors such as smoking, hypertension, high cholesterol, and Type 2 diabetes.”
High cardiorespiratory fitness is also linked to lower rates for certain types of cancer, according to the National Cancer Institute. It also appears to help people already diagnosed with cancer. “Research findings have raised the possibility that physical activity may have beneficial effects on survival for patients with breast, colorectal, and prostate cancers,” the institute said.
The positive news is that you can increase your VO2 score. How? By exercising. The harder you push yourself, the more you can improve your score. Even brisk walks around the neighborhood could lift the scores and health of millions of inactive Americans.
How can you measure your VO2 max? The most accurate tests are done in a laboratory where you are hooked up to a mask that measures oxygen consumption as you exercise. If you are on a treadmill, you are told to walk or run faster and faster until your oxygen consumption stops rising. If you go beyond this point, you will increasingly be using anaerobic energy—which doesn’t burn oxygen—and you will have trouble sustaining it for long periods.
Today, some fitness devices, including Apple Watch and Fitbit, can estimate your VO2 max score based on your heart rate and, in some cases, the speed you are moving. They aren’t as accurate as a laboratory VO2 max test, say doctors Joyner and Stewart. “They are reasonable estimates based on reasonable algorithms,” Joyner says.
VO2 is commonly measured in milliliters of oxygen consumed a minute per kilogram of body weight. An average adult might score 35. Endurance athletes can be twice that or even higher.
Sometimes, cardiorespiratory fitness is expressed in METs, a measure of metabolic energy. (METs are calculated by taking your VO2 max score and dividing it by 3.5.) One MET is the amount of oxygen a person uses while seated and at rest. If your exertion level rises to two METS, that means you’re using twice as much oxygen. A VO2 max of eight to 10 METs is considered healthy for an average adult, while one of less than five METs is considered worrisome.
“People who have more severe disease generally can’t achieve five METs worth of work,” Stewart said.
Women, because they tend to have less muscle per kilogram of body weight than men, usually score lower, though the best female endurance athletes still post high numbers. And just as with men, higher VO2 scores for women correlate to athletic performance and mortality.
VO2 scores decrease as people age because their maximum heart rate declines and they lose muscle mass and thus burn less oxygen. So a score that would be low for a woman in her 20s might be an elite score for a woman in her 70s.
To calculate VO2, The Apple Watch uses a combination of heart rate, weight, age, other personal information and walking or running speed to measure cardiovascular fitness. It is accurate within an average of one MET of an actual VO2 max test, according to Apple.
If you walk on sand or uphill or anything that makes walking or running more arduous, that will make your Apple Watch VO2 max score appear worse. Also, if you take medicines that slow your heart rate like beta blockers or calcium channel blockers, it will make your score appear better. The Apple Watch asks you to list any heart-slowing medicines, and then makes adjustments for them.
It used to be that you had to exercise to calculate VO2 max on an Apple Watch. But an Apple watch is now set up so that you can get a score from walking around. Your score appears in the Apple Health app, in the heart section under cardio fitness.
Fitbit also estimates your VO2 max score from your resting heart rate, age, sex, weight, and other personal information, and uses it to calculate a fitness level between one (poor) and six (excellent). If your Fitbit connects to GPS, you can obtain a more precise score by going on a run.
How hard is it to improve VO2 max score? That depends on your fitness level. Someone who is inactive could improve their VO2 max through moderate exercise and make a significant improvement in their health.
Fit people have to push harder. That means either exercising longer or exercising harder. Or both. The Center for Disease Control recommends that adults get 150 minutes of moderate exercise or 75 minutes of vigorous exercise a week. You can get additional health benefits by doing two or even three times as much exercise, but there are diminishing returns. Dr. Joyner says, “You get 70% to 80% of the benefits by following the CDC’s basic guidelines,” he says.
Lifting weights can also help your VO2 score. That’s particularly true for older people who have lost muscle mass and replaced it with fat. Weights can help reverse that process.
And one of the fastest ways to improve your VO2 max is to lose weight.
For those who are serious about improving their VO2 max, Joyner recommends that they add interval training to their routines. A popular approach now is 4×4 interval training, where you do four intervals of intense exercise, separated by rest between each interval.
“In general, for any person to reach their personal biological upper limit, they need to do interval training,” Joyner says.
This 1 Fitness Number Might Be the Most Important. What to Know About VO2 Max.
While fitness watches offer an estimate of your VO2 max, they might not be as accurate as an actual test.
Dreamstime
When it comes to fitness and even longevity, there is one number to rule them all: VO2 max.
The number measures the maximum amount of oxygen a person can use during intense exercise. A person awaiting a heart transplant might score below 10 while a world-class endurance athlete might be above 70 or even 80. Many health experts consider it the single best indicator of cardiorespiratory fitness, and research has found it correlates to longevity as well.
“The relationship between VO2 max and all-cause mortality is quite good,” says Dr. Michael Joyner, an anesthesiologist and fitness expert at the Mayo Clinic. “The odds of dying in the next 10 years are markedly low if your VO2 max is high.”
So what is VO2 max and why is it such a good measure of total health?
For starters, the test measures how multiple systems of your body function during hard exercise, including your heart, lungs, muscles, and veins, according to Dr. Kerry Stewart, a clinical and research exercise physiologist at Johns Hopkins School of Medicine. People who score well are less likely to have diabetes and high levels of LDL, or so-called bad cholesterol, and more likely to have high levels of HDL, or “good” cholesterol.
The American Heart Association in 2016 issued a scientific statement recommending that an assessment of cardiorespiratory fitness be considered a key vital sign in evaluating a person’s heart disease risk and overall health. It said that cardiorespiratory fitness was “was a potentially stronger predictor of mortality than established risk factors such as smoking, hypertension, high cholesterol, and Type 2 diabetes.”
High cardiorespiratory fitness is also linked to lower rates for certain types of cancer, according to the National Cancer Institute. It also appears to help people already diagnosed with cancer. “Research findings have raised the possibility that physical activity may have beneficial effects on survival for patients with breast, colorectal, and prostate cancers,” the institute said.
The positive news is that you can increase your VO2 score. How? By exercising. The harder you push yourself, the more you can improve your score. Even brisk walks around the neighborhood could lift the scores and health of millions of inactive Americans.
How can you measure your VO2 max? The most accurate tests are done in a laboratory where you are hooked up to a mask that measures oxygen consumption as you exercise. If you are on a treadmill, you are told to walk or run faster and faster until your oxygen consumption stops rising. If you go beyond this point, you will increasingly be using anaerobic energy—which doesn’t burn oxygen—and you will have trouble sustaining it for long periods.
Today, some fitness devices, including Apple Watch and Fitbit, can estimate your VO2 max score based on your heart rate and, in some cases, the speed you are moving. They aren’t as accurate as a laboratory VO2 max test, say doctors Joyner and Stewart. “They are reasonable estimates based on reasonable algorithms,” Joyner says.
VO2 is commonly measured in milliliters of oxygen consumed a minute per kilogram of body weight. An average adult might score 35. Endurance athletes can be twice that or even higher.
Sometimes, cardiorespiratory fitness is expressed in METs, a measure of metabolic energy. (METs are calculated by taking your VO2 max score and dividing it by 3.5.) One MET is the amount of oxygen a person uses while seated and at rest. If your exertion level rises to two METS, that means you’re using twice as much oxygen. A VO2 max of eight to 10 METs is considered healthy for an average adult, while one of less than five METs is considered worrisome.
“People who have more severe disease generally can’t achieve five METs worth of work,” Stewart said.
Women, because they tend to have less muscle per kilogram of body weight than men, usually score lower, though the best female endurance athletes still post high numbers. And just as with men, higher VO2 scores for women correlate to athletic performance and mortality.
VO2 scores decrease as people age because their maximum heart rate declines and they lose muscle mass and thus burn less oxygen. So a score that would be low for a woman in her 20s might be an elite score for a woman in her 70s.
To calculate VO2, The Apple Watch uses a combination of heart rate, weight, age, other personal information and walking or running speed to measure cardiovascular fitness. It is accurate within an average of one MET of an actual VO2 max test, according to Apple.
If you walk on sand or uphill or anything that makes walking or running more arduous, that will make your Apple Watch VO2 max score appear worse. Also, if you take medicines that slow your heart rate like beta blockers or calcium channel blockers, it will make your score appear better. The Apple Watch asks you to list any heart-slowing medicines, and then makes adjustments for them.
It used to be that you had to exercise to calculate VO2 max on an Apple Watch. But an Apple watch is now set up so that you can get a score from walking around. Your score appears in the Apple Health app, in the heart section under cardio fitness.
Fitbit also estimates your VO2 max score from your resting heart rate, age, sex, weight, and other personal information, and uses it to calculate a fitness level between one (poor) and six (excellent). If your Fitbit connects to GPS, you can obtain a more precise score by going on a run.
How hard is it to improve VO2 max score? That depends on your fitness level. Someone who is inactive could improve their VO2 max through moderate exercise and make a significant improvement in their health.
Fit people have to push harder. That means either exercising longer or exercising harder. Or both. The Center for Disease Control recommends that adults get 150 minutes of moderate exercise or 75 minutes of vigorous exercise a week. You can get additional health benefits by doing two or even three times as much exercise, but there are diminishing returns. Dr. Joyner says, “You get 70% to 80% of the benefits by following the CDC’s basic guidelines,” he says.
Lifting weights can also help your VO2 score. That’s particularly true for older people who have lost muscle mass and replaced it with fat. Weights can help reverse that process.
And one of the fastest ways to improve your VO2 max is to lose weight.
For those who are serious about improving their VO2 max, Joyner recommends that they add interval training to their routines. A popular approach now is 4×4 interval training, where you do four intervals of intense exercise, separated by rest between each interval.
“In general, for any person to reach their personal biological upper limit, they need to do interval training,” Joyner says.
The Manufacturing Boom’s Hidden Costs
The U.S. has embarked on its most aggressive industrial policy since the Cold War as it grapples with the twin threats of a rising China and climate change. The pivot has accelerated a manufacturing revival and spurred investment that will reshape key parts of the economy. But it comes at a cost, threatening to keep inflation higher as the nation makes more goods and imports less.
Industrial policy—loosely defined as government support for strategic industries through tools such as tax credits, subsidies, and tariffs—has been out of favor since the 1980s, under the assumption that free markets work best. Indeed, the U.S. has spent much of the past decade taking China to task for a heavy-handed role in its economy.
But the shortages created by the pandemic, increased competition from a newly aggressive China, and weather disasters that put a focus on climate change have forced a rethink of the nation’s role in the economy. That has paved the way for almost $2.4 trillion in U.S. funding over the next decade through a trio of bills: the Creating Helpful Incentives to Produce Semiconductors and Science (Chips) Act, aimed at re-energizing the domestic semiconductor industry; the Infrastructure Investment and Jobs (IIJ) Act; and the Inflation Reduction Act (IRA), which includes subsidies for clean energy and measures to spur innovation aimed at lowering emissions.
The U.S. is no stranger to industrial policy. Alexander Hamilton favored tariffs and subsidies to diversify the economy beyond its agrarian roots. More recently, investments into the Defense Advanced Research Projects Agency, or Darpa, helped birth the internet—and the companies that sprung up as a result. The agricultural sector has long had government support, and the U.S. has stepped in to help stabilize banks, most recently in this past spring’s efforts to rescue regional banks.
For the Biden administration, industrial policy is a way to make U.S. companies more competitive and less reliant on far-flung supply chains. “We are having a sea change in how we think about the role of government and the economy, its tools and purposes—a spectrum shift in both parties,” says Scott Kennedy, a China economy expert at the Center for Strategic and International Studies think tank. “There’s a growing view that because [China has] stepped on the scales and changed the game, we have no choice but to step in.”
The shift brings opportunities for investors as these policies supercharge a manufacturing renaissance and create innovation hubs. As the IRA and Chips Act hit their first anniversary this summer, investors see some of the biggest opportunities in renewable energy and electric vehicles; industrial firms like Eaton (ticker: ETN), Siemens (SIEGY), and Emerson Electric (EMR) could benefit from the energy transition or the need to automate as companies move production away from the lowest-cost spots. Companies needed to build out infrastructure and new plants, and companies like aggregate-materials maker CRH (CRH) also stand to benefit.
“We hope we end up with more resilience, but it’s a less efficient world, probably with more inflation, higher costs, and more supply-side constraints because of the fragmentation in global supply chains,” says Michael Spence, a senior fellow at the Hoover Institution and professor of economics at New York University.
Mark Zandi, chief economist at Moody’s Analytics, says globalization shaved O.1% off yearly inflation in the 20 years before the Trump administration’s 2018 tariffs, as manufacturers took advantage of lower costs in China and elsewhere. As production moves to higher-cost areas such as the U.S., he says annual inflation could be boosted by 0.1% to 0.3%.
Goldman Sachs has put a $1.2 trillion price tag on the climate legislation alone. Still, economists in a paper from the Brookings Institution this past spring stressed that the cost depends on factors including how the private sector responds to tax credits for clean-electricity generation and storage, the price of solar panels and wind turbines, and even whether companies can get factories permitted and connected to the electricity grid.
Economists don’t see the U.S. headed down the path of the more heavy-handed industry policy used in Europe or China. Relative to its economy, China spends on industrial policy about 10 to 20 times that of the U.S. government.
Investment is already pouring into the U.S. from domestic and foreign companies. For example a group of auto makers—including General Motors (GM), Honda Motor (HMC), Hyundai Motor (5380.South Korea), BMW Group (BMWYY), and Stellantis (STLA)—are investing $1 billion through a joint venture to build charging ports across the country, while Ford Motor (F) has partnered with battery maker SK On to build three battery plants in the South. About 270 new projects have been announced, amounting to roughly $130 billion in investment and creating about 90,000 jobs. Many are in red states, giving economists confidence that even a return to Republican rule won’t lead to a wholesale reversal of the trend.
Strategists see more industrial spending ahead as companies capitalize on climate legislation and declining renewable-energy costs. Making supply chains more resilient and bringing production closer to home has been a popular topic on recent company calls with investors. Capital spending rose for the ninth straight quarter in this year’s second quarter. “The investment has skyrocketed and is still unraveling,” says Dimple Gosai, head of U.S. ESG strategy at Bank of America.
Manufacturing shrank as globalization gained sway, with the U.S. losing 5.7 million factory jobs from 2000 to 2010. Now, as industrial policies add to a revitalization of manufacturing, goods could begin to gain share back from services, which now account for about 80% of gross domestic product.
The energy sector, which once accounted for 15% of GDP, is down to 3%. Afsaneh Beschloss, economist and founder of investment firm RockCreek, sees the potential for it to triple—one reason her firm has been investing in companies related to the energy transition, like those that help reduce water usage or distribute solar energy. Evelyn Chow, senior research analyst at Neuberger Berman, sees higher earnings for companies like Trane Technologies (TT) and Emerson Electric as industrial policy accelerates trends that were already benefiting the companies.
While Gosai doesn’t expect the U.S. to overtake China by 2035 in the electric-vehicle and battery race, she says the U.S. industrial-policy push is an opportunity for investors. “North America is going to be the epicenter for EV-related investment, with twice the growth rate [of investment] in China,” Gosai says. As EV battery capacity in the U.S. increases, it should add about half a percentage point a year to capital spending growth in manufacturing—a boon for U.S. companies such as Rockwell Automation (ROK), Fortive (FTV), and Eaton.
Much of that investment is being targeted to certain areas of the country. Some see a “battery belt” that stretches through Michigan, Indiana and Ohio, down through Kentucky, and across Tennessee, Georgia, and the Carolinas.
These projects also bring high-paying jobs that don’t require a four-year college degree, potentially rebuilding the middle class and helping to narrow wealth and income gaps. But it could also boost inflation in the near term, as finding skilled labor poses one of the biggest challenges to industrial policy. The IRA, for example, requires workers and subcontractors hired on projects to be paid the prevailing wages and benefits in that area for a specific position. Taiwan Semiconductor Manufacturing (TSM) has delayed production in its Arizona chip plant to 2025 because of difficulty finding skilled workers.
Schneider Electric (SBGSY) is expanding its manufacturing in North America, investing $200 million as it sees increased demand for products needed for the energy transition and as companies try to become more sustainable. Finding workers and local suppliers is a challenge. “It’s not just where there is labor; it has to be the right level of competency, and there have to be the community colleges and engineering colleges to support that,” says Kenneth Engle, senior vice president of global supply chain for Schneider.
Schneider is expanding its campus in El Paso, Texas, adding a fourth building because it has four expanding factories. That could help retain workers by giving them a career path and the opportunity to advance to new jobs. Engle has also been working with state and local officials to build the local-supplier ecosystem.
Tackling these challenges doesn’t come cheaply, especially as companies duplicate supply chains to build in buffers or move production to higher-cost areas—a marked change from the industrial strategy of the past, driven by efficiency and costs.
Companies could also face additional costs as countries increase the use of tariffs and restrictions on critical goods and to harden their defenses against competition. The U.S. and allies like Japan have restricted China’s access to critical chip-making technology, and France is on the path toward possible tariffs on Chinese electric vehicles.
Nathan Sheets, a former Treasury official who is now chief economist at Citi, says the impact of these policies on economic growth, inflation, and productivity won’t be known for years. He adds, “It’s a form of insurance. It doesn’t save you money in the short run but reduces a big downside risk.”
Birkenstock’s IPO Makeover: How a PE Firm and a Rich Investor Made Sandals Hip.
It may strike you that delving into Birkenstock with the stock market in turmoil is a tone-deaf, last-gasp-of-summer frivolity. Yet the circumstances of this maker of Teutonic-hippie-cum-hipster sandals are emblematic of what concerns not only culture vultures but also hardcore investors right now.
First and foremost is the likelihood of a Birkenstock public offering next month—barring a dramatic extension of the late-summer swoon. Beyond that, though, Birkenstock’s path forward speaks to consumer brands and trends, leverage ratios, the business of private equity, and the second-wealthiest man on the planet, to boot—if you’ll excuse the pun.
That this ancient footwear maker has managed to dodge initial-public-offering bankers, and their predecessors, for almost 250 years—since the first registered family shoemaker, Johann Adam Birkenstock, began cobbling in the burg of Langen-Bergheim near Frankfurt in 1774—is just one facet of the company’s remarkable story. That Birkenstock now looks to be going public, speaks not only to the persistence of bankers at Goldman Sachs and J.P. Morgan, who according to Bloomberg are working on an offering—both firms decline to comment—but also the irresistible power of the almighty dollar.
Yes, dollar not euro, because Birkenstock is looking to list in New York, since U.S. exchanges generally convey higher valuations, which, bankers hope, in the case of Birkenstock, will be up around $8 billion, or some five times annual revenue. Clearly, a valuation not for the faint of heart—or in this case, tender of foot.
Though the billionaire Birkenstock brothers Christian and Alex retain a 40% stake in the company, a majority is now controlled by—you guessed it—a private-equity firm, L Catterton, which is in the business of funding, buying, and selling consumer brands, including the likes of P.F. Chang’s, Peloton Interactive PTON +5.71% (ticker: PTON); RH RH –3.50% (RH), the former Restoration Hardware; and, most recently, the “home run IPO” of online beauty company Oddity ODD +1.31% (ODD). L Catterton is singular beyond just its business focus. Co-founded in 1989 as Catterton-Simon Partners by leveraged-buyout pioneer and former Treasury Secretary William E. Simon, the firm changed its name to Catterton in 2001, a year after Simon died.
Even more salient, in 2016, Catterton merged with the PE arm of LVMH Moët Hennessy Louis Vuitton MC +0.20% (LVMHF), the luxury behemoth controlled by Bernard Arnault, the world’s No. 2 rich guy (after Elon Musk). As such, the letter “L”—a nod to LVMH—was added to form L Catterton. Five years later, L Catterton, now with a personal investment from Arnault, bought Birkenstock for some $4.9 billion. L Catterton co-CEO Michael Chu joined Birkenstock’s board along with Arnault’s son Alexandre.
As a private-equity veteran said to me, the LVMH tie supercharges Birkenstock not only with capital but also with a luxury/consumer global network. A person close to Birkenstock highlighted the opportunity to grow in Asia, which is “still largely untapped.”
And, as I’m sure you know, Birkenstocks are hot. The once ugly-duckling therapeutic sandal (mit socks!) has become go-to footwear for the likes of Reese Witherspoon, Leonardo DiCaprio, Katy Perry, and Usher, and the company has collaborated with Dior, Manolo Blahnik, and Valentino. Birkenstock’s new plastic versions have been selling so briskly that it’s hard to find certain size/color combos.
Then there was the auction of Steve Jobs’ brown suede Birkenstock Arizonas not long ago that fetched $218,000. And, as Jobs liked to say, just one more thing: Barbie! In case you missed it, Birkenstocks figure in a pivotal moment in that hit movie.
READ MORE UP AND DOWN WALL STREET
Leaving all of that aside, though, what are we to make of this company and its prospective IPO?
First, note that as stocks rallied this year, IPO bankers began dusting off names like Instacart and United Kingdom chip designer Arm, which are now ready for September’s IPO calendar. Others, like payments company Stripe, are reportedly waiting in the wings.
As for Birkenstock, L Catterton isn’t providing numbers, or commenting on the IPO, and the S-1 hasn’t been filed, but we can get a peek at some financials from Debtwire, which provides results for holders of the company’s publicly traded bonds. A June report shows Birkenstock’s net sales growing 19% year over year in the first half of 2023 to $704 million, while adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, climbed 11%, to $245 million. According to a Birkenstock bondholder presentation, the company delivered a compounded annual growth rate of 22% in Ebitda and 18% revenue growth from 2018 to 2022. (Revenue for 2022: $1.34 billion.) Sales growth this year looks to be below trend, due to price hikes in previous years and constrained supply. The latter should be mitigated next month when Birkenstock opens a new factory.
The company does carry significant leverage, since the buyout was funded in part by $1.6 billion of high-yield debt, which was recently upgraded by Fitch and S&P, citing “high revenue and profit growth.” Birkenstock has paid down debt, but still has a gross leverage ratio of 4.3 times, which, Fitch notes, makes “Birkenstock’s credit profile weaker than that of Levi Strauss LEVI +0.21% (LEVI), which also has is concentrated in one brand but is much greater in scale and more diversified by product. This, together with substantially lower leverage of below 3.5 times adjusted for leases, results in a higher rating for Levi Strauss.”
As for comparable companies, Crocs has a market capitalization of $5.8 billion, not far below what L Catterton and its bankers seek to get for Birkenstock, yet Crocs has over $3.5 billion in annual revenue and is worth 1.6 times revenue, far less than what the bankers hope Birkenstock is worth.
Morningstar analyst Jelena Sokolova likes the Birkenstock business but thinks that the IPO “valuation looks on the high side,” especially when she compares it with a footwear company like Dr. Martens (DOCS.UK) “which now has a market cap of $1.9 billion on a comparable revenue.”
Grizzled Up & Downers are undoubtedly aware that with the shining exception of Nike (NKE), footwear companies in all of their variants—retailers, manufacturers, fashion lines—generally haven’t made for winning investments. Recall that Warren Buffett’s “worst deal” was for Dexter Shoe.
And yet, betting against Birkenstock is tantamount to wagering against Arnault. That’s a call I wouldn’t want to make.
China’s Market Reforms Aim to Lure Investors to Stocks and Bonds. They May Not Be Enough.
It’s reform season in China. Various arms of the government are mobilizing in a campaign to juice a lackluster post-Covid recovery. The China Securities Regulatory Commission pitched in Aug. 18, with a long list of proposed measures to “boost investor confidence” in the country’s volatile securities markets.
In better times, with Westerners clamoring for access to Chinese stocks, this might be a big deal. The CSRC floated changes from longer trading hours and lower transaction fees, to “encouraging” share buybacks by listed companies. In the current ultrabearish environment, such moves look, along with most of Beijing’s other market tweaks, like putting a Band-Aid on a gunshot wound.
“There’s nothing really game-changing here,” says Logan Wright, head of China markets research at Rhodium Group. “You’ll still have overwhelming dominance of momentum-chasing retail investors.”
On macroeconomic paper, now would be a perfect time for Chinese investors to pour money into stocks and bonds. Household savings in the No. 2 economy have mushroomed by 60%, or about $7 trillion, since prepandemic 2020, says Andy Rothman, an investment strategist at Matthews Asia.
Many savers have lost confidence in the go-to investment of recent decades, real estate. Housing sales were flat in the first half of this year, despite the lifting of zero-Covid restrictions. “People are paying down mortgage debt as fast as they can,” Wright says. “The story in China is deleveraging.”
Some of those mattress trillions might head into stocks, if people trusted them to secure their future. Building that trust will take more than regulatory fiddles, though. “Chinese equity markets actually have surprisingly efficient infrastructure,” says Diana Choyleva, chief economist at China-focused Enodo Economics. “But internally they are perceived more like a casino.”
That perception tends to be self-fulfilling. The iShares MSCI China ACNYA –0.36% exchange-traded fund (ticker: CNYA), which tracks onshore stocks, rose by two-thirds in a year to February 2021, and has lost it all since then.
The CSRC also whiffed on a change that could be meaningful to global institutional investors, Wright adds: easing China’s requirement that securities trades be settled immediately, a so-called T+0 regime. Most developed markets allow two days for funds to change hands (T+2); the U.S. is shifting toward T+1.
That said, China is inching toward improved market structure, and not always inching. In February, the CSRC jettisoned its system of approving every initial public offering individually and signing off on pricing. Domestic markets responded with a world-beating $31 billion worth of IPOs in the first half of 2023.
The hot market allowed promising tech companies like Nexchip Semiconductor (688249.China) and Semiconductor Manufacturing Electronics (688981.China) to raise capital outside of a state banking system that favors fellow public-sector enterprises. “Everything over the last several decades has been designed to funnel savings into state-owned companies,” Rothman remarks. (Nexchip and SME have both lost value since their market debuts.)
At the other end of China’s financial spectrum, IPOs could ease the worrisome burden of local government debt by floating regional assets on stock markets, Rhodium’s Wright says. “The local government funding vehicles may manage assets that have a return, like a toll road or bridge,” he says. “Raising equity in these will be part of the solution.”
Those are prospective long-term benefits. Reviving flailing Chinese markets will first require a positive mood shift to get that $7 trillion back in circulation, and/or investment. Where that comes from is hard to say.
Weekly Market Update: Markets strain to interpret data, earnings, and Fed speak
Nvidia, retailers, deteriorating EU economic data and Chairman Powell’s Jackson Hole address headlined another choppy week of trade. Early on, US Treasury yields continued to climb bringing the US 10-year back above 4.3% to a 15-year high, and the long bond within a handful of basis points from 4.5%. Banks and retailers weighed upon the major indices through a myriad of earnings reports and another swath of cuts to US bank ratings by S&P. Another monster earnings report from Nvidia did little for overall sentiment as the shares barely finished in the green the day after they reported.
Global interest rates backtracked modestly lower and stocks jumped higher midweek, after EU PMI services readings came in worryingly weak. US manufacturing PMI data also saw new orders decline for the first time in six months. On the whole the data provided ammunition for those still forecasting a recession and kept yields in check heading into Jackson Hole. Chairman Powell's speech made it clear he did not intend to take a sledgehammer to the market’s expectations like last year. The speech kept the Fed’s optionality open, but it ultimately leaned slightly in favor of the hawks. Perhaps unsurprisingly, additional rates hikes were not taken of the table and Powell mentioned nothing about future rates cuts. Importantly, even though he outlined why the Fed sees core PCE continuing to come down, he also emphasized they are going to be sensitive to signals the economy may not be cooling as much as expected. The 2-year yield moved up towards 5.10% while futures markets held steady projecting about a 50% chance of an additional 25 bps hike this year in the wake of Fed officials’ commentary from Wyoming. The US dollar firmed to the strongest levels in about 2-months. For the week, the S&P rose 0.8%, the DJIA was off 0.4%, and the Nasdaq gained 2.3%.
Corporate earnings reports this week revealed difficulties at many retail chains. Numerous retailers noted weakening consumer conditions in their quarterly results, with many continuing to lay much of the blame on ‘shrink’, notably Dick’s which cut guidance based on growing theft. Macy’s and Nordstrom also discussed rising credit card delinquencies as an area of concern. Several large firms announced new headcount reductions, including Charles Schwab and T-Mobile, which said it would cut about 7% of its workforce, amounting to 5,000 jobs lost. Boeing shares were volatile after a report of yet another manufacturing issue with some new 737s, even as the company prepares to restart deliveries to China after a four year hiatus. Nvidia did its part to show that big tech remains strong, reporting another blowout quarter with eye-popping guidance based on the tectonic shift in data centers toward AI and ‘accelerated computing.’ UPS announced it reached a deal with its union that will substantially bolster worker pay over the next five years. Meanwhile the auto industry remains in contentious negotiations with the UAW, whose members authorized a potential strike action if a contract can’t be reached by the mid-September deadline. In M&A news, the US Steel saga continued to unfold as Esmark backed away from bidding out of respect for the USW, which is supporting the Cleveland Cliff's offer.
SUN 8/20
(CN) CHINA PBOC MONTHLY 1-YEAR AND 5-YEAR LOAN PRIME RATE (LPR) SETTING; LEAVES 5-YR UNCHANGED AT 4.20% (NOT EXPECTED) CUTS 1-YEAR BY 10BPS TO 3.45% (less than the 15bps cut expected)
USD/CNY (CN) China PBOC sets Yuan reference rate: 7.1987 v 7.2006 prior
MON 8/21
(US) WSJ's Timiraos: Higher productivity and increased deficits could raise the ‘neutral’ rate of interest, limiting Fed cuts
TTF Recent strength in European gas futures being attributed to seven working days' notice to take industrial action by Australia's Woodside Energy Group workers; Could plan to strike as early as Sept 2nd if no progress during Aug 23rd's talks
(JP) Japan MOF raises assumption for its long-term interest rate from 1.1% to 1.5% for upcoming FY24/25 - Japan press
(TW) Taiwan July Export Orders Y/Y: -12.0% v -15.5%e (11th straight decline); Expects August orders -13.9% to -10.2% y/y; Expects Q3 better q/q
TSM Affirms FY23 Rev -10% in USD terms [guided on July 20th] - DigiTimes
(US) Pres Biden said to be considering a meeting with Saudi Arabia Crown Prince at G20 summit on Sept 9-10th to talk about deal, which could include US security guarantees for Saudi Arabia, and normalization agreement between Saudi Arabia and Israel - press
ESTE To be acquired for ~$18.64/shr by Permian Resources in $4.5B all-stock deal; Permian Resources to issue ~211M shares of common stock; Sees the deal highly accretive to key financial metrics before synergies
AAL Pilots union approves new 4-year labor contract which would result in $9.6B incremental costs for American Air over duration - press
SCHW Plans cost cutting including headcount reduction of undisclosed size; Sees $500M in ARR savings - filing
BHP.AU Reports FY23 Underlying Net $13.4B v $13.8Be ($23.8B y/y), Underlying cont ops Profit $12.9B v $13.9Be, Underlying EBITDA $27.96B v $28.4Be ($40.6B y/y), Rev $53.8B v $65.1B y/y
(US) S&P downgraded multiple regional US banks citing "tough" operating conditions
TUES 8/22
(UK) JULY PUBLIC FINANCES (PSNCR): -£7.5B V +£11.3B PRIOR; PSNB (EX-BANKING GROUPS): £4.3B V £5.0BE
ATVI *UK REGULATOR CMA: MICROSOFT SUBMITS NEW DEAL FOR REVIEW AFTER CMA CONFIRMS ORIGINAL DEAL IS BLOCKED; Statutory deadline for a decision is Oct 18th
(TW) Taiwan Ministry of National Defense spokesperson Sun Lifang: No comment on unconfirmed social media reports of a catastrophic Chinese nuclear sub accident in the Taiwan Strait; So far I have not heard any confirmation - press
BIDU Reports Q2 $3.11 v $2.57e, Rev $4.70B v $4.66Be
(US) WSJ's Timiraos: Fed officials aren't likely to be patient if inflation stabilizes above 3%; Current and former Fed officials think changing the target now would be a big mistake
COTY Reports Q4 $0.01 v $0.02e, Rev $1.35B v $1.31Be; Says beauty demand remains resilient with no signs of tradedown; Notes ongoing 'premiumization trends' entering FY24
DKS Reports Q2 $2.82 v $3.75e, Rev $3.22B v $3.22Be; Cuts EPS guidance citing elevated inventory shrink, an increasingly serious issue impacting many retailers; Announces business optimization to streamline cost structure
PEB July operating results were in line with expectations; July occupancy 77% v 77% m/m; July Total Rev flat y/y; Tropical Storm Hilary did not cause any material damage, but there were cancellations and early check-outs - investor slides
M CFO Mitchell: Speed at which increase of delinquencies rate within the credit card portfolio occurred since last earnings call was faster than planned, across all stages of age balances; Difficult to combat external factors such as credit card delinquencies could affect ability to reach low double-digit EBITDA margin in 2024 - earnings call
(US) AUG RICHMOND FED MANUFACTURING INDEX: -7 V -10E; All three of the spending indexes decreased
(US) JULY EXISTING HOME SALES: 4.07M V 4.15ME
URBN Reports Q2 $1.10 v $0.89e, Rev $1.27B v $1.25Be
UPS Teamsters ratify 5-year UPS contract, raising wages for full and part time workers
(US) Weekly API Crude Oil Inventories: -2.4M v -6.2M prior
(AU) AUSTRALIA AUG PRELIMINARY PMI MANUFACTURING: 49.4 V 49.6 PRIOR (6th straight contraction)
(JP) JAPAN AUG PRELIMINARY PMI MANUFACTURING: 49.7 V 49.6 PRIOR (3rd straight contraction)
USD/CNY (CN) China PBOC sets Yuan reference rate: 7.1988 v 7.1992 prior
WED 8/23
(JP) Semiconductor Equipment Association of Japan (SEAJ): July chip-making equipment Y/Y: -12.6% v 8.9% prior
(FR) FRANCE AUG PRELIMINARY MANUFACTURING PMI: 46.4 V 45.0E (7th month of contraction); Services PMI at 30-month low; Employment increased at the slowest pace since Jan 2021
(DE) GERMANY AUG PRELIMINARY MANUFACTURING PMI: 39.1 V 38.8E (14th straight contraction); Services PMI enters contraction for the 1st time in 8 months; Rates of input cost and output charge inflation ticked up in many months, driven by fuel prices
(UK) AUG PRELIMINARY MANUFACTURING PMI: 42.5 V 45.0E (13th straight contraction and lowest since May 2020); Services PMI enters 1st contraction in 7 months
FL Reports Q2 $0.04 v $0.05e, Rev $1.86B v $1.88Be; Pauses dividend; Cuts outlook citing softening in trends in July
KSS Reports Q2 $0.52 v $0.24e, Total Rev $3.90B adj v $3.90Be; Remains committed to strengthening balance sheet and to maintaining current dividend
ADI Reports Q3 $2.49 v $2.53e, Rev $3.08B v $3.09Be; Guides Q4 light noting customer inventory adjustments mentioned last quarter have accelerated
(EU) JPMorgan analyst now expects ECB to pause at Sept meeting (prior view was for a 25bps hike) after disappointing Services PMI data
(IN) India reportedly set to prohibit mills from exporting sugar in 2023-2024 season - press
June Trucking Conditions Index (TCI) -6.29 v -3.75 prior (most negative since November) - FTRintel.com
(US) AUG PRELIMINARY S&P MANUFACTURING PMI: 47.0 V 49.0E (4th straight contraction)
(US) DOE CRUDE: -6.1M V -2.5ME; GASOLINE: +1.5M V -0.5ME; DISTILLATE: +0.9M V +0.5ME
(RU) Russia says 8 people killed after private jet crashed in Tver region north of Moscow; Reportedly Wagner leader Prigozhin was on board - press
(US) TREASURY $16B 20-YEAR BOND AUCTION DRAWS 4.499% v 3.954% prior, BID-TO-COVER 2.56 v 2.56 PRIOR AND 2.51 OVER LAST 8 AUCTIONS
X Esmark says will not make a bid for U.S. Steel, out of respect for USW, which supported the Cleveland Cliff's offer
CVS Launches Cordavis, unit work directly with manufacturers to commercialize and/or co-produce biosimilar products
NVDA Reports Q2 $2.70 v $2.09e, Rev $13.5B v $11.2Be; Guides Q3 very strong; Board approves additional $25B share buyback program (2.1% of market cap)
NVDA CFO: Cloud provider GPU demand is accelerating; Demand is tremendous; Has visibility into next year for demand; New restrictions would have no material effect - earnings call
NVDA CEO: World has about $1T of installed data centers which is now transitioning to AI/accelerated computing, with about $250B in capital spending annually going mainly into AI/accelerated computing - conf call Q&A
BA Identifies a 737 manufacturing issue, says it is not an immediate flight safety issue: Finds fastener holes that don't conform to specs; Will impact near term deliveries
(CN) China 2023 new infrastructure spending expected to hit CNY2.6-3.0T - Chinese press
THRS 8/24
(ZA) South Africa President Ramaphosa: Leaders adopted BRICS Summit declaration; Confirms to invite Argentina, Iran, Saudi Arabia, Egypt and the UAE to join BRICS bloc; effective Jan 202
(US) White House expected to disclose early next week (Aug 29th) the first 10 prescription drugs selected for Medicare price negotiations; To be the first-ever direct negotiations between Medicare and pharmaceutical manufacturers - Politico
(CN) China Securities Regulator (CSRC): China urges longer-term funds to help stabilize stock market - meeting with state pension fund, big banks and insurers
(UR) Reportedly Ukraine army chief Zaluzhniy told US officials his forces are on the cusp of a breakthrough in counteroffensive - US financial press
(US) JULY PRELIMINARY DURABLE GOODS ORDERS: -5.2% V -4.0%E; DURABLES (EX-TRANSPORTATION): 0.5% V 0.2%E
(US) INITIAL JOBLESS CLAIMS: 230K V 240KE; CONTINUING CLAIMS: 1.70M V 1.71ME
TMUS Planning to reduce the size of its workforce by just under 7% or 5K positions; Affirms outlook - filing
(US) Aug Kansas City Fed Manufacturing Activity: 0 v -10e
(US) Atlanta Fed GDPNow: Raises Q3 GDP forecast from 5.8% to 5.9%
INTU Reports Q4 $1.65 v $1.38e, Rev $2.71B v $2.64Be
WDAY Reports Q2 $1.43 v $1.25e, Rev $1.79B v $1.77Be; Raises FY guidance
AFRM Reports Q4 -$0.69 v -$0.86e, Rev $446M v $404Me; Notes delinquencies declined Q/Q
JWN Exec: Earlier in Q3, sales trends have decelerated at both banners; Delinquencies could result in higher credit losses in H2 and into 2024; delinquencies are rising gradually - conf call
(JP) JAPAN AUG TOKYO CPI Y/Y: 2.9% V 3.0%E; CPI (EX-FRESH FOOD) Y/Y: 2.8% V 2.9%E [slowest pace since Sept 2022]
FRI 8/25
(AU) WOODSIDE ENERGY' UNIONS ENDORSE PROPOSED IN-PRINCIPLE LABOR AGREEMENT AT AUSTRALIA’S BIGGEST LIQUEFIED NATURAL GAS (LNG) EXPORT TERMINAL; Will not engage in any strike action while process to finalize deal takes place
(CN) China said to issue nationwide guidance rules to ease mortgages for some home buyers; Proposes that local governments can scrap a rule that disqualifies people who’ve ever had a mortgage, even if fully repaid, from being considered a first-time homebuyer in major cities - press
CMCX.UK FY24 Trading Update: Subdued market conditions have continued through August with trading and investing net revenues trending 20% lower y/y
(EU) MOMENTUM GROWING FOR ECB PAUSE IN SEPT AS RECESSION FEARS RISE, BUT DEBATE STILL OPEN - PRESS CITING ECB SOURCES
(DE) GERMANY AUG IFO BUSINESS CLIMATE SURVEY: 85.7 V 86.8E (lowest since Oct 2022)
NOVOB.DK Semaglutide 2.4 mg shows large reductions in heart failure-related symptoms and physical limitations in people with heart failure with preserved ejection fraction and obesity
3328.HK Exec: China real economy credit demand remains fairly weak - post earnings comments
Redfin report: July pending home sales rose 0.7% m/m to the highest level since the start of the year on a seasonally adjusted basis; July total number of homes for sale (active listings) -3.9% m/m, -19.5% y/y
(CN) China PBOC confirms guidance on relaxing residential housing loans
(US) AUG FINAL UNIVERSITY OF MICHIGAN CONFIDENCE: 69.5 V 71.2E
(US) FED CHAIR POWELL: PREPARED TO RAISE RATES FURTHER IF APPROPRIATE; REAL RATES ARE POSITIVE AND WILL PROCEED CAREFULLY; WILL REMAIN RESTRICTIVE UNTIL INFLATION SUSTAINABLY SLOWING - JACKSON HOLE REMARKS
3333.HK Applies to resume trading on Mon, Aug 28th as it has fulfilled the resumption guidance - filing
(US) UAW MEMBERS VOTE TO AUTHORIZE A RIGHT TO STRIKE AT GM, FORD AND STELLANTIS (AS WIDELY EXPECTED); DEADLINE FOR CURRENT CONTRACT EXPIRATION IS SEPT 14TH
(US) Weekly Baker Hughes Rig Count: 632 v 642 prior (-1.6% w/w) (7th straight decline)
Israel's 'Dirty War': The Dark Side of the Abraham Accords – and Why Saudi Arabia Wants to Join
During the decades when Israel was shunned by much of the world, it found friends – and customers for military products – in unsavory regimes. Are the Abraham Accords a repeat of 'Operation Condor'?
In view of conflicting media reports about the chances of success of the tripartite negotiations between the Biden administration, the State of Israel and Saudi Arabia to draw up a normalization agreement between the latter two countries, one should look at the last decades and understand that such an accord is inevitable – but has a dark underside to it. A historical examination of how other countries have severed and renewed their relations with Israel indicates that the danger to the rights and freedoms of hundreds of millions of civilians should normalization be achieved.
Relations severed
After the State of Israel’s founding in 1948, it immediately engaged in providing military and civilian aid to countries worldwide, many of them with dictatorial and military regimes, with the aim of establishing diplomatic relations, and counteracting what would become an ongoing campaign to eliminate Israel physically and politically.
In a nutshell, the main spoiler of Israel’s international aspirations was Egypt, under the leadership of Gamal Abdel Nasser, who became its ruler in 1956; subsequently Libya played a similar role, after Muammar Gadhafi came to power, in 1969. Egypt wielded its political, military and economic power to dissuade other states from establishing relations with Israel, or to cut or downgrade existing ties. Gadhafi used mafia-type methods, threatening to destabilize regimes that had ties to Israel. The Arab pressures were successful, and after the wars of 1967 and 1973, dozens of states, with both non-Arab Muslim and non-Muslim populations, officially severed or downgraded their relations with Israel. These were not just African countries. While today BDS, the boycott, divestment and sanctions movement, is successful in preventing international pop stars from performing in Israel, Arab countries, under the leadership of Egypt and Libya, over the years, for example, successfully imposed oil embargoes on countries and sanctions on companies that did business within Israel, and even managed to force European governments to limit their relations with it in certain realms.
Following the waves of severed relations with Israel after the wars, Israel looked elsewhere and was largely successful in keeping and strengthening its ties with regimes ostracized by other countries, among them the leadership of apartheid South Africa. Israel also established strong ties with military juntas in Latin America during their various “dirty wars” – the internal campaigns they waged from the mid-1970s to the early ‘80s to eliminate domestic political opponents. The military regimes in the so-called Southern Cone of Latin America launched an effort called Operation Condor, in which they cooperated in locating, capturing, torturing and eliminating opposition and guerrilla activists. For its part, Israel helped each junta separately in implementing Operation Condor in its territory, but unlike the involvement of the United States in that effort, there is no evidence that Israel was involved in the overall coordination of the operation.
Relations renewed
After Israel and Egypt signed the Camp David Accords, in September 1978, Israel was liberated from its main “spoiler,” and slowly, other states began renewing or establishing relations with Jerusalem. As has been reported over the years in Haaretz and other media outlets, with many countries, this renewal was based on Israel selling military services and equipment, and more recently surveillance technology, even to murderous regimes.
In the 1990s, with the end of the Cold War, the signing of the Oslo Accords with the PLO and the peace agreement with Jordan, what was a trickle became a wave. Israel was able to resume and build relations with most countries of the world, but still encountered difficulty in normalizing its ties with Arab and non-Arab Muslim countries. However, it became clear that the continued demand of the Palestinian leadership that such countries avoid joining this wave, was lacking any credibility. The PLO not only normalized its relationship with Israel, but the Palestinian Authority became an important subcontractor in administering Israel’s apartheid regime in the West Bank and the Gaza Strip. That made it politically easier for other countries to negotiate with Israel and agree with it on normalization steps.
This bogus nature of such anti-normalization didn’t begin during the Oslo period, but several decades earlier, when many countries may have severed formal relations with Israel, but continued doing business with it. One example is Chad, a country with a Muslim majority that officially cut ties with Israel in 1972, and renewed them only in 2019. Yet, a document prepared by Israel’s Ministry of Foreign Affairs in May 1985 and recently declassified by the State Archives, states that as early as 1982 Israel, initiated contact with Chad’s then-dictator, Hissène Habré. The following February 1983, an agreement was signed with him, according to the 1985 document, on “Israeli military assistance to Chad in manpower and equipment, and also for establishing a secret Israeli mission in Chad.”
At the time, President Habré was responsible for mass murder, disappearances and rape within his own country, leading in 2016 to his conviction by an international tribunal for crimes against humanity. Habré was overthrown in a 1990 coup, but in 2008, his successor, Idriss Déby, bought armored vehicles from Israel whose roofs were fitted with devices for mounting machine guns. Déby, a former head of the country’s military, was in the midst of a bloody civil war when he purchased the vehicles. After the publication of reports and images of these vehicles in the media, Chad admitted their purchase from Israel and reported it to the United Nations.
Changing interests
It was not only a lack of credibility that undermined Palestinian leaders’ demands that Arab and non-Arab Muslim countries avoid normalization with Israel, but also a lack of feasibility due to the changing interests of those countries. Two historical events in the second decade of the 21st century changed the picture in the direction of rapid normalization with Israel. One was Iran’s decision to increase its regional provocations and other subversive activity, and the other was the Arab Spring of 2011. Despite their disputes, most Arab and non-Arab Muslim countries have come to the conclusion that they must cooperate in order to fight Iran’s regional power grab and also to rebuff any signs of a resurgence of the Arab Spring: that is, they must fight movements seeking to instigate regime change. One of the most prominent players among those latter groups is the political-Islam movement and ideology, and in particular the Muslim Brotherhood and its affiliates, although the greater movement’s ostensible commitment to democratic values differs from country to country, and in some of them its “success” means only replacing one dictatorial regime with another.
Since the Oslo Accords, and in light of increasing involvement and activity on the part of Iran and political Islam – and specifically the radical Palestinian version of the Muslim Brotherhood, the militant Islamic Hamas organization – those forces have replaced the PLO as Israel’s main archnemeses. This is a historic reversal. If David Ben-Gurion invented the doctrine of the “alliance of the periphery” – which included extending Israeli aid to regimes like that of the shah in Iran – now Israel is working with Arab and non-Arab Muslim countries to rein in Iran, while helping those countries maintain the stability of their own tyrannical regimes, while they in turn help Israel maintain its own own tyrannical regime in the West Bank.
The United States fully shares Israel’s opportunistic position and strategy regarding this historic reversal of interests; this was not just a whim of former President Donald Trump. Evidence of this was mentioned by Maj. Gen. (ret.) Amos Gilad, a former longtime senior member of the Israeli security establishment, who for years was involved in building Israel’s relations with Arab and non-Arab Muslim countries, as well as maintaining ties with America, in an interview aired in political commentator Nadav Perry’s podcast, on April 16, 2023 .
In response to the question of how Israel should relate to Saudi Arabia in light of the 2018 murder of journalist Jamal Khashoggi and the dismembering of his body, Gilad answered, “I, who have dealt a lot with Arab countries, have come to the conclusion that the State of Israel should do everything to strengthen ties with Arab countries without really considering the regimes there. There is no chance of there ever being a democracy in the Middle East, except for Israel... The regimes, such as in Egypt, Saudi Arabia, Jordan, the principalities and the Emirates, are stable regimes, [and] their stability serves the national security interests of Israel and the entire free world, even the Americans understand this.
“The difference between the United States and China is that the United States doesn’t need oil, unlike in the past, and an administration like that of President Biden gives high priority to democratic values. But I see a moderation in the American attitude toward the Arab world... Biden also reached out to [Saudi Crown Prince] Mohammed bin Salman... I detect a more sober attitude there, even vis-à-vis Egypt; they [the Americans] hardly condemn the Egyptians.”
In an article that Gilad published in Cyclone (a Hebrew publication of the The Institute for Policy and Strategy) in February 2021 to mark the 10th anniversary of the Arab Spring, he wrote: “The understanding has been internalized both in Israel and in large parts of the international community that an accelerated opening of the political systems in the Arab world to democratic processes could lead to the rise of radical forces, led by representatives of extreme political Islam.” Prior to that, at a December 2019 conference of the Israeli military industries, Gilad had said: “The problem is, how do you deal with revolutions? ... Any Israeli military equipment that contributes to building a force that could be used to attack Israel, given a revolution there [in an Arab country], is undesirable and should be prevented. Everything related to regime stability – and here moral questions arise about using it against opponents [of those regimes] – I support preservation in Israeli aid.” Moreover, Gilad added, “We also have incredible security cooperation with the Gulf countries, Saudi Arabia.” That is, as long as there is no fear that Israeli knowledge and weaponry will be used against Israel itself, Israel should not limit its exports for fear that it will be used for internal repression.
The concept, Gilad explained, stands at the heart of the Abraham Accords and of emerging agreements with other Arab and non-Arab Muslim countries. According to this arguably racist strategy, since the states in question are not ripe for democracy, and in order to help preserve the “free world” and/or Western civilization – the United States and Israel should help their tyrannical regimes when they resort to violence to suppress opposition elements, journalists, women and other minorities. Political Islam has replaced the “communist threat” and Iran has replaced the USSR. These are the same self-righteous arguments that were used to justify America’s war in Vietnam, and the military aid the U.S. and Israel provided, for example, to the Pinochet junta in Chile when it perpetrated crimes against humanity in the 1970s and ‘80s. Now they are being summoned to support the geopolitical reorganization of the Middle East and North Africa.
‘Operation Condor 2.0’
Long shuttered is the School of the Americas in the Panama Canal, where the United States trained tens of thousands of officers from across Latin America, many of whom returned to their countries during the Cold War to participate in military coups, mass torture, murder, rape, genocide and terrorism. But, according to what Maj. Gen. Gilad noted in Perry’s podcast, most of the officers in the Arab countries’ military are still being trained in the United States, in an effort to preserve their regimes’ dependence on the latter, and to prevent their transition to full reliance on China. It is clear that the spreading of democratic values is not of high priority in the American officer training program. The nonprofit news organization Intercept has confirmed that U.S.-trained military officers, most of them in Muslim-majority states, have taken part in 11 coups in West Africa since 2008, most recently in Niger. Following the Abraham Accords and other normalization agreements entered into by Israel, in addition to its providing sophisticated surveillance and weapons systems to a variety of problematic regimes, army officers from those regimes will likely receive training and intelligence from Israel as well, which the latter has acquired and developed also thanks to its oppression and control of the Palestinian population.
All these developments will not guarantee the stability of Arab and non-Arab Muslim dictatorial regimes, as their existence will always be conditional and challenged. A clear example of this is Egypt, which receives the most U.S. military aid after Israel, and is still one of the most unstable countries in the region. The greatest enemy of the Egyptian people is their own regime, which wastes its huge human and natural resources and is focused on a ceaseless war against the majority of citizens who do not belong to the elite that rule the country. To maintain the appearance of stability in Egypt and other regimes in the region, an endless cycle of oppression and violence is necessary. In situations like these, if they feel it is necessary, such regimes won’t blink – that is, there will be many more horrific cases like the murder of journalist Khashoggi.
Unlike the role it played in the 1970s and ‘80s in Latin America, nowadays, as part of “Operation Condor 2.0” in the Middle East and North Africa, Israel will not be a secondary actor but one with a leading role in its overall coordination. As with heroin, these regimes will become addicted to Israeli surveillance equipment, weaponry, training and intelligence, and will only pay lip service to the Palestinian issue. This time the fight to maintain the stability of the regimes, including the stability of Israel’s own apartheid regime vis-à-vis the Palestinian population, will be waged with more advanced technology than the Uzi machine guns and Galil rifles that were peddled by Israel for the elimination of masses of opposition and leftist activists in Latin America. And yet, in its essence, it will still be the same “dirty war.”
There's No Economic Reason for Saudi Enrichment. The Real Question Is: What Does MBS Want?'
David Albright of the Institute for Science and International Security was often quoted by Netanyahu as a critic of Obama's Iran deal. His latest warnings on a deal with Riyadh, however, will probably find a less receptive audience in Jerusalem
On Tuesday, President Biden’s National Security Advisor Jake Sullivan made sure to lower everyone’s expectations of an Israeli-Saudi breakthrough. There’s still a long way to go, he said, before the administration can announce any real progress on this front. That much is clear to Netanyahu as well, but the prime minister won’t lose hope. After all the ups-and-downs of his career, he still expects one last lifebelt that will save him from the actions of his own extremist government.
Netanyahu believes peace with Saudi Arabia will be a death blow to the protest movement against his current coalition. He thinks that the Gulf's oil money will flood the Israeli market, erasing the local economic damage caused by his judicial overhaul and bringing back some of his disappointed supporters who have vowed to leave Likud over pocketbook woes.
The Saudis have presented three key demands to the United States: a NATO-style defense pact; access to advanced American weapons; and U.S. support for a civilian nuclear project. For Israel, the last demand is the most problematic one.
Public debate on the issue grew louder this week after Ron Dermer, Netanyahu’s closest adviser, told PBS that Israel won’t necessarily oppose nuclear enrichment on Saudi soil. Several experts on nuclear proliferation who spoke with Haaretz following Dermer’s interview expressed strong reservations about his position, warning that Saudi enrichment on the kingdom’s own soil could lead down the road to a nuclear arms race in the Middle East.
Those voices are now joined by David Albright, one of the world's most prominent experts on this issue, who leads the Washington-based Institute for Science and International Security. Last decade, Albright criticized Iran’s conduct and the Obama administration’s nuclear agreement with the Islamic Republic; as a result, Netanyahu and Dermer often quoted his observations in briefings to Israeli and international media outlets. But they probably won’t be quoting what he has to say this time.
Albright told Haaretz that he supports American involvement in producing a civilian nuclear program in Saudi Arabia, and even thinks the U.S. should consider “bending the rules a little bit” to make it happen. But providing enrichment capabilities to the Saudis on their own soil, he warned, is something else entirely.
The Saudis, he explained, say that they have vast reserves of underground uranium that they can utilize. “They may have it, we can’t say for sure, but there’s another question – is it economically and commercially viable to recover it from there? I would argue it’s clearly not. Russian enrichment is cheap compared to what the Saudis would need to pay to do everything on their own. There’s justified resistance to seeing enrichment spread to other countries, as a general practice, but especially in cases where it doesn’t make sense economically for a country to do their own enrichment.”
Albright says the lack of economic reasoning raises the concern that Saudi Arabia may have other plans in the long run. He brings as an example the Iranian case: “What’s true for Saudi Arabia is doubly true for Iran. Their enrichment is very expensive, and they’re not even bothering to pretend there’s an economic motivation behind it. Certainly the Saudis could try the same path – declare civilian purposes but actually have their program prepared for a time when they’ll decide to transform it for military purposes.” Saudi Crown Prince Mohammed bin Salman, it should be noted, said in 2018 that he wants his country to match whatever nuclear capabilities Iran has.
Albright also disagrees with Dermer’s comment to PBS that if the U.S. won’t provide the Saudis with everything they want, the kingdom will turn its back on Washington and receive nuclear enrichment capabilities from another country, like China or France.
He says that, while the Chinese option can’t be ruled out, such a move will carry big risks for both sides. China, he explains, will be providing its nuclear technologies to a country with a decades-long history of military and intelligence cooperation with the U.S., while Saudi Arabia risks massive retaliation from the U.S. Congress. Albright adds that for a leader who wants to repair their standing in Washington, this move will achieve the exact opposite. As for France, Albright believes that as a liberal European country, it will demand the same terms from the Saudis as the U.S. does.
He thinks that the more disturbing alternatives would be that the Saudis will try to procure nuclear capabilities from either Russia or Pakistan. Albright points to the Iranian reactor in Busher, which uses Russian technology and “has got all kinds of safety problems,” as an example. Still, he believes that if the Saudis tried this path of action, the U.S. will have ways to block it. “You can tell the Saudis that we’ll put an embargo, we’ll use sanctions, we’ll provide no more military equipment – you have leverage there.”
A preferable policy, from his perspective, is to tell the Saudis that the U.S. does want to cooperate with them on nuclear energy production – but to set clear red lines from the start. “The enrichment part is very complicated, and if they can’t justify it economically, it makes no sense to do it,” he says. “It will be perceived very negatively by other countries, which have agreed over the years to American constraints on their own nuclear programs.”
It’s not clear, however, if the Saudi crown prince would accept such conditions. In the past, the most important question in Israeli politics was: What does Netanyahu want? Not anymore. The prime minister’s current intentions are incredibly transparent: He wants to weaken the Israeli judicial system, end his own corruption trial and break the massive Israeli protest movement standing in his way. A historic agreement with the Saudis will help him achieve these goals, and therefore, he’ll agree to pay almost any price – except perhaps in the Palestinian arena, where concessions could endanger the support of his far-right coalition partners.
The same cannot be said of MBS. His intentions are still uncertain to Israeli decision makers, who admit that they’re struggling to understand his recent moves. On the one hand, he continues to discuss the normalization deal with top Biden administration officials. On the other hand, he met with Iran's foreign minister last week, and announced the creation of an envoy position representing Saudi Arabia to the Palestinians a week prior to that.
One view inside the Israeli establishment is that MBS isn’t very enthusiastic about a normalization deal – certainly not as much as Netanyahu and Biden, both of whom see this issue through an electoral-political lens. “MBS tells himself: I’ll put up maximalist demands, almost impossible for them to accept,” says one Israeli official involved in the talks. “If the Americans and the Israelis agree, that’s great. If not, they will be responsible for the failure of the negotiations.”