The Confidence Game

If you own stocks, anywhere in the world, there’s a good chance that the markets’ wild ride this week upset your stomach. But, worried as you were, you probably felt some confidence that the US and European economies are relatively stable, that governments in those places know what they’re doing and are relatively transparent about it, and that markets would recover.


Now consider a day in the (not-so-distant) future when a market meltdown begins not on Wall Street but in China. Imagine further that when that day comes, China is the largest economy on earth (by some measures, it already is). Will you be as confident in China’s leadership and markets are you are in the US and Europe’s?

A few thoughts:

1. In China, all the big political and economic decisions are made behind closed doors by seven men — the Politburo Standing Committee. No one alive today has ever lived in a world where the largest economy on earth was governed in such secrecy.

2. Last week’s stock market rollercoaster started in part because of expectations that the US Federal Reserve will soon raise interest rates to keep the economy from overheating. Investors don’t like higher interest rates, but they know how the Fed works and what it wants to achieve. The Fed has a responsibility to explain its decisions. Imagine the uncertainty when investors are instead hanging on the words of China’s central bank, where decisions must be approved by politicians who feel no need to explain their actions.

3. Starting this year, Chinese stocks are included in the MSCI EM index, one of the largest indices of stocks from “emerging market” economies. Because many American pension funds hold the MSCI EM Index, they — and maybe you — now have direct exposure to China’s domestic stock market for the first time, even if you’re not aware of it.

4. Today, China’s economy appears strong, but many analysts say economic statistics produced in that country are more vulnerable to political manipulation, particularly at the local level, than stats from countries like the US, Germany, or Japan. In fact, several Chinese provincial governments admitted recently that they faked their GDP data for 2016. Investors shrugged off this news because they’re confident in smooth sailing for China’s economy. But what happens when the waters get choppy and investors get queasy?

5. Investors know that, in a crisis, China’s leaders will worry about political stability first and the credibility of state-generated information a distant second. So even if China produces accurate info, will panicky investors believe it? How long will it take for confidence to be restored?

Confidence is the fuel that powers economies forward — at the local, national, and global levels. Today, China and its economic engine inspire confidence. That may no longer be true on the day when real trouble shakes an economy governed by secretive leaders who care more about political survival than the credibility of the information they share with the world.

That day is coming.

The Paris Call for Trust and Security in Cyberspace launched in 2018 with the commitment of signatories to stand up to cyber threats like election interference, attacks on critical infrastructure, and supply chain vulnerabilities. Last week, on the first anniversary of the call, the number of signatories has nearly tripled to more than 1,000 and now includes 74 nations; more than 350 international, civil society and public sector organizations; and more than 600 private sector entities. These commitments to the Paris Call from around the world demonstrate a widespread, global, multi-stakeholder consensus about acceptable behavior in cyberspace.

Read More at Microsoft On The Issues.

What is a SPAC and how does it work?

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In recent years, Republicans have come to dominate most of the state legislatures in the US. Ironically, it was during the Obama-era that the GOP made major headway in states that had long been considered safely blue. State legislatures are now redder than they've been in nearly a century, and in most parts of the country, one party holds all the levers of power (governorship and legislatures). For the first time since 1914, there's only one split legislature in the entire country: Minnesota. To be sure, some state races are bucking the trend: Kentucky and Louisiana, both deep-red states, recently elected Democratic governors. Here's a look at how Democratic and Republican control of state legislatures has evolved over the past four decades.

Forty years ago, Islamic extremists angry at the Saudi government's experiments with social liberalization laid siege to the Grand Mosque of Mecca, the holiest site in Islam.

To regain control, the House of Saud had to strike a deal with key conservative clerics whose blessing they needed in order to send troops into the mosque . The monarchy agreed to roll back all liberalization at home, and pledged to actively fund the spread of conservative wahhabi Islamic teachings around the globe.

To understand better how the repercussions of those choices are still with us today, we put some questions to Yaroslav Trofimov, chief foreign affairs correspondent for the Wall Street Journal, and author of the magnificently written 2007 book The Siege of Mecca.

His answers have been lightly edited for clarity.

Why is it important to mark the 40th anniversary of the siege?

YT: We are at a historic moment once again in Saudi Arabia, with Crown Prince Mohammed bin Salman openly talking about how he wants to rectify the errors of 1979 and bring the country into a more socially liberal system. And he has done a lot already, allowing women to drive and lifting many other restrictions, allowing pop concerts, cinemas, tourism — all those things that remained banned in Saudi Arabia because of the 1979 deal between the House of Saud and the clerics. We are obviously talking about social as opposed to political liberalization now, as the kingdom's political system remains as oppressive as ever.

How did the event change Saudi Arabia's society?

YT: The 1979 events gave the upper hand to religious conservatives for nearly four decades, freezing the social reforms and keeping the kingdom's population under control of the religious establishment and its Vice and Virtue Police. That had repercussions in every sector, most notably education, which created a new generation steeped in ultra-conservative Islamic values. It is only after the 2001 attacks [of 9/11] that this began to change, with the most dramatic erosion of the clerics' power happening since 2016.

How did the siege affect Riyadh's foreign policy?

YT: The new pact between the clerics and the House of Saud also meant that the Saudi oil money was to be used to spread its ultra-conservative version of Islam around the world, at the expense of more moderate and open interpretations. That changed the discourse in Islamic countries all over, and indirectly fostered the rise of extremism.

The siege came a few months after the Iranian revolution, how did that play into things?

YT: There was a lot of confusion at first, as the US blamed Iran for the Mecca events and Iran blamed the US. But, all in all, the siege taught the Saudi royal family that the best way to confront Iran's aspirations to lead the pan-Islamic revolution was to stoke Sunni sectarianism that dismissed Iranians as not really Muslim because of their Shiite faith.

That became a point of convergence between the supporters of Juhayman [al-Oteibi, leader of the siege], the Saudi clerics, and the Saudi government. And we see the repercussions of that rise of Sunni-Shiite sectarianism across the region today.

Saudi Crown Prince Mohammed bin Salman says he is trying to move Saudi Arabia back onto the pre-1979 course of social liberalization. Is that possible?

YT: Well, empirically it is happening. I refer you to the piece I just wrote from Saudi Arabia for the WSJ. Times are changing and the influence of social media and the internet in general on young Saudis is massive, opening up their minds. Also, hundreds of thousands of young Saudis have traveled to the US to study on King Abdullah scholarships in the past decade, bringing back fresh ideas.

So far the backlash to the changes in the kingdom has been very limited. The question is: is Prince Mohammed dragging a reluctant kingdom into modernity, or was the society changed and reachable all along? We'll see what happens in the coming years.

In many ways the Siege of Mecca is the story of unintended consequences: of leaders tolerating (and even supported) extremists who ended up turning on their masters. Is there a comparable situation today that worries you?

YT: Well, history is full of unintended consequences. Did Putin expect Ukraine to harden as a nation-state and decisively turn toward the West as a result of his [invasion of the country] in 2014? My guess is no: he expected it to crumble.

On the question of jihadists, I think countries have learned since 2001 and since the rise of Islamic State that extremist proxies are dangerous. How long will that lesson hold?

Time will tell.