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Geopolitical Trends with Long Term Horizons, July 2017 thoughts.

July 10, 2017

Geopolitical Trends with Long Term Horizons, July 2017 thoughts.

By Lushfun

North Korea.

All that military equipment that has been moved, positioned, armed and readied for action is not there for naught. The drills held by the U.S. in the air, and Japan and South Korea in the sea are most likely a part of a larger simulation. We can only speculate that after an extreme wave of bombing by strategic and tactical bombers into the oblivion, tomahawk barrages from the sea there will likely be landings deep into North Korean territory. If one looks back at “Desert Storm” with Iraqi generals essentially moving aside once the push occurred, one can to a degree gauge that if communications are cut off and the perception of the center of command being destroyed, resistance on the line of control especially in light of significant destruction pre-emptively wrecked upon the abilities to project and conduct operations would make it more likely for sections of the front to be taken over with low resistance. Whatever one may think about the resilience and self-reliance, brainwashing and belief, there is an underlying realization that the other side in the South is just as Korean as the North, thus the factor of being treated well after giving up arms, is on an innate psychological level present. This is one of the reasons the leader of the North has to act so ‘decisively’ to reinforce the ideological and repressive machine of the state to defend against such a forced ‘reconciliation’ on the Korean peninsula.

My sense on Chinese involvement occurring is that if they cross the border and become entangled the reputational losses from combat and economic suppression during said involvement would completely outweigh the current or future potential of a unified Korea that is in alliance with the U.S. Distance from South Korea to major cities in China from a missile ranger perspective would not change materially. Reputational loss for China in the client state being absorbed by the South while significant would be survivable. The problem for China is that it does not understand or wants to for that matter that plausible deniability for having North Korea use nukes on any neighbors or military assets be it Japan, South Korea, or U.S. forces is too much of a liability to continue. Having an ability to say the North Koreans are crazy and thus they can retaliate or pre-emptively strike with ballistic missiles is a non-starter nor a defensible long term position on world stage. No country can accept random threat project from another continuously while the later country attempts to blackmail them via this potential use of force for leverage into extracting subsidies or concessions.

China, Russia, South Korea, Japan, and U.S. will all benefit once the North is gone. Economically the integration will stimulate the regional economy. Militarily if the border is not militarized the declines in military spend by the united Korea and U.S. in the region will be re-directed to better uses.

Syria and Kurdistan

It is becoming obvious that longer term Kurdistan is emerging. Contrary to popular belief in my view the beneficiaries of Kurdistan existing are U.S. and Iran. While U.S. may use new bases in a client state for force projection and leverage with neighboring states, Iran would be a significant winner. Iran would gain access to an emerging country which it would be able to supply from the North-South corridor as it struggles against Turkey. Longer term the economic ties may become significant. It is extremely apparent that the Syrian and Iranian routes of supply to the emerging Kurdish state would be the least antagonistic. Syrian route would funnel supplies from Europe and U.S. while Iranian route would funnel supplies from Russia and China. All of these actors may not necessarily want Kurdistan to emerge but the economic imperatives of their struggling economies and the profit motive would provide impetus for supplies to flow. It is slowly becoming apparent that Syria would be divided in one way or another.

If Turkey forces this division via force involvement and projection to liquidate the Afrin pocket near the North-West it would significantly accelerate Kurdish state emerging. The reason for this is that there would be no ability by the Syrian state to accept this involvement while simultaneously claim responsibility for the people living there. Ergo, if the people in those provinces are on their own than the Syrian state abrogates responsibility, even if it states otherwise. Turkish pressing to create a cordon-sanitare would backfire in the sense that it would provide leverage for both U.S. and Europe to retaliate in the politico-economic sphere. While one may think sanctions are not possible for a NATO member, one may be mistaken. The likelihood of retaliation is the suspension of financial access and/or trade preferences that are not treaty codified, or outside the EU-Turkey customs union. The mistake Turkey is making is thinking that it will be ‘paid’ for compliance in Syria. If there is an offensive in Idlib and the armed groups there are pushed into Turkey or elsewhere, there is no likelihood that Afrin will be traded for said event, nor that it would even have to be offered… In the long term the only answer to preventing a Kurdish emergence is to support and strengthen a Syrian state that would be able to prevent Kurds from break away. The viability of changing to this path for Turkey is a misnomer, yet it would mollify half of the opposition in the form of Russia, Iran, and Syria, with the U.S. having to accept Kurds existing as part of Syria. However, if Kurds are going to be pressed out then the choice for the U.S. will become to pick between what its’ strategic goals are which align with Kurds or to negotiate with Ankara. In my view the likelihood of former dominating the later is very high, unless the framework that integrates Kurds exists without destroying them.


What the Turkish government is oblivious towards is that the coalitions on the ground cannot support their position nor exchange with them, simply because longer term Turkish position is untenable. Neither the maintenance of it from geopolitical leverage of others nor sustainability in going against said coalitions is not present. If Turkey attempts to play it’s own game going full bore into conflict it may create a systemic payoff for both the Russia-Iran-Syria coalition and the U.S.-Europe-Kurdish coalition to not only push them out of Syria but to capitalize on said misstep. So far the impetus for action and the timeline for having leverage and using it for Turkey is closing.

From a Kurdish point of view while the loss of Afrin would be bad from a tactical stand point, in the geopolitical sense it would reinforce the necessity of a Kurdish state in their coalition. Syria would be de-jure divided due to inability to provide security to all its’ subjects especially after the civil war. Here the trade offs for Iran from the U.S. and to Syria as well for accepting a de-jure partition while it is occurring de-facto due to Turkish intervention would become paramount. While Turkey may end up having control on the ground it would wind up with a consensus of most if not all the actors in drawing up a map that systemically undermines it’s position precisely due to the intervention it makes to eliminate such an outcome. In the longer term it would not be able to not only to enforce said control but would be forced to give up even more concessions than it would be ready or willing of yielding.


Any thoughts, suggestions, opinions welcome.

North Korea under liquidation? and why it may be?

April 25, 2017

North Korea under liquidation? and why it may be?

by LushFun

It is becoming readily apparent that the North Korean project is coming to an end. Both U.S. and China are signaling some sort of an agreement of no longer tolerating the regime as it currently stands. Both the nuclear posturing and the blackmail against both U.S. and China in order to gain economic means has slowly but surely skewed both to curtail engagement with the North Korean government. The tactical and strategic value North Korea may have had has been overturned by both technology and cost of confrontational tension on the ground, in the form of troops, and other military assets committed by U.S., China, South Korea, Japan and others.

Why now? Well considering the desperation of the regime once all economic “subsidies” in the form of “aid” for the promise of non-proliferation or other promises which the North Korean regime violated it became clear that the consensus between U.S. and China is the key element in ending things as they have been for decades. Giving up positioning of U.S troops above the 38th parallel and other weaponry does not impede nor endanger in any way commitments by the U.S. to its’ allies. Technological progress made proximity to the front lines more or less obsolete by more advanced weaponry, it did not however remove the ideological nor face saving value carried by giving up an “ally” even one that is more or less independently playing everyone against everyone else.

Ideological value removal from the global arena is another interesting aspect. Juche Ideological purge from the global milieu. Furthermore alleviation of confrontational dynamic in the region that is tied to something other than strategic, tactical, core economic, and realistically based interests creates a far more reasonable ability to come to terms with others as the amount of random variables and players is reduced. Speculation on cost of removal one may expect certain savings that will be re-directed to more poignant points of contention in the region.


Unified Korea as a stimulus project may provide; U.S., China, Russia, Japan and others in the region that may be able to participate in both infrastructure and other build outs that would be carried out to re-connect it to the South upon various levels. Ergo fiberoptic cable for internet, steel and other aspects, nuclear reactors or other energy and electricity producing infrastructure, and so on will need to be built providing hundreds of billions in demand both direct and indirect to the global and regional markets.

If China and/or U.S. succeed in removing the regime and re-integrating two Koreas, there will be a shift in the world stage. Perception of both powers will change and both will gain standing. Vacuum that is taken up by North Korean doings today will be taken up by someone else. All the time spent focusing on it as a problem along with other resources will make a considerable unseen influence in how we see new things presented to us. The context of difference on the world stage will lower.

Enjoy the summer


Changing Dynamics of Global Trade

February 9, 2017

Changing Dynamics of Global Trade


An existential economic crisis from spoilage of global debt that is having the asset base behind it turn into a swamp is essentially upon us. While professing of the “death” of Petrodollar and it being replaced with Gold or some other aspect ratio will not fix the overall problem. Creation of demand that is solvent without emission of some sort of controlled monetary base that is tied to something else. This is the crux of the matter. Pretending that gold fixing of oil to gold will manifest itself in solvency of the global demand via manifestation of consumers is an illusion. All this does is create a venue, yet another venue which lessens that overall pressure on credit everywhere that has become the be all solution in all matters of commercial and personal exchange.


Imagine for ea moment that almost all future consumption is insolvent because the amount of it has been pulled forward via credit creation is absolute to such a degree that the only way to create it again is to destroy the tie that binds. That may be a solution but everything and everyone involved will not and cannot allow this to happen, since the whole mechanism is integrated into the beneficiary cycle of actors whom cannot and will not be able to adequately adapt to the coming “clearance”.


It is fascinating to look at all sorts of prices that are beginning to come down due to consumer non-participation via inability to bid. As the whole chain shock takes place in supply and production chains there is huge impetus to alleviate it somehow. On the global scale governments will attempt to manipulate the process until it comes unglued and defenestrates those manipulators into the abyss.


Even countries like Russia or Saudi Arabia that have oil production will want to be able to have some sort of creation mechanism for emission that is not tied to a static product. Nor is it viable long term since it will not adequately accommodate technological progress and alleviate the strain necessary for growth mechanisms during the phase of technological implementation cycles.


Here we reach the problem of gold reference point being the be all and end all of the global trade and clearance system. Elasticity during clearance phases of the cycle when the economy is crashing and when it is growing beyond the ability of funds to adequately support its’ growth is nil. Nobody realizes this aspect at all. This will be apparent during phases of conflict since when gold trade stops and countries go to ‘mobilization’ war footing economies there is no inflation since backing of production is implicit by the explicit need present in the country to survive. Ergo, if one takes this aspect and applies it into segmentation of various processes one can understand how certain industries emerge even though no overt funding takes place, yet covertly they exhume that necessity which stimulates their need via mechanisms unseen until they take their place in some meaningful space within the economy. Startups are not these mechanisms since all they do is streamline technological clearance to already existing problem possibilities. However new fundamental metals or energy products or theoretical advances seem to be the vehicles where these things can manifest themselves.


On the cusp of this creation mechanism one can speculate several interesting thoughts. Imagine for a moment that just like with Schrodinger’s Cat where the Cat is simultaneously alive and dead in a single moment of time, we have trade mechanisms tied to a single and infinite exchange mechanisms of some form of clearance be they Petrodollars, Gold Fixed Exchange, Imaginary Money, or some other facilitator. Now for a moment imagine that on the hop from a single clearance mechanism there is a bifurcation into a multitude of various mechanism that is both more stable since the clearance of one mechanism will become elastic towards not its’ availability but its’ desirability and other factors. Ergo a sort of Ferris Wheel with Hub and Spoke Models that is constantly changing shape and direction of those spokes where alleviate pressure on a various sprockets in the turning wheel of trade, growth, and global development.


Be well dear reader.


World in Flux

January 31, 2017

World in Flux


Europe is slowly coming to a faulty realization. But the reality is far harsher than what they think.

“The world has entered into highly unstable times and Europe is sitting over quick sand. This may absorb the entire European construct in no time without any warning; a small, minor random event will be enough. A butterfly can flap its wings in Beijing, causing a storm to tear Europe apart.”[1]

The dichotomy here is that their perception is that this is an externally caused ‘tumult’. It is not, nor has there ever been. Europe is suffering because of Europe first and foremost. Inability to answer and deal with the times is the problem. Placing blame on other countries vying for their own interest is stupid.

Most troubling is the inability to form even national plans of action in regards to re-positioning internal ‘rules’ and conditions of operations for people. Germany is in complete financial hunger games moment.

“Germany’s top regulators met about 50 envoys from foreign banks on Monday to explain how they could move business to Europe’s biggest economy after Britain leaves the European Union, German financial watchdog Bafin said.”[2]

It is fascinating that the expectation to hold a monetary center once Euro Zone collapses due to debt issues is the paramount issue. I am certain all those banks will have something in Germany, BUT the flow of money will not be taxed by Germany nor flow to Frankfurt. The issue here is that the financial taxes on trading Europe inacted and the amount of control they like to exercise. Neither issue invites confidence. Hidden aspect that nobody realizes that is coming is the clearance of trade goods and services in the markets will become a sovereignizing issue, thus control will shift to the export market. Fairly obvious in the U.S., China, and other places.

The question nobody asks after Euro Zone and EU falls apart is what national interest blocks will the continent have? Since interests of the Nordic countries, Eastern and Central Europeans, Western Europeans, and Mediterranean nations all have different priorities. This extreme divergence is the unknown and how it manifests Is the fear of the elites since during this time those whom direct and lead get to shape things for the future.

Most importantly people ignore the stories that haven’t been in the news. Lybia, Yemen, Egypt, Greece, and others have severe problems that impact Europe, yet it is all quiet. People continuously ignore what is in front of them to look at what is shown them via media pictures.




Be well reader

Geopolitical Trends for January 2017

January 12, 2017

Geopolitical Trends for January 2017


Europe is shifting right which is fairly apparent by now. Quite a few elections should

occur this year from France, Germany, Netherlands, Norway, and Czech Republic.

Italy may also have a very big upsurge in popular shift with the 5 Star movement

likely to do well unless things are “adjusted” against them.


U.S. should finally have change at the helm in a few weeks. The fear of directional

change it is having on other global actors is interesting.


Turkey may reap a peace dividend if the agreement on Syria holds. In the past three

months the lira depreciated against the dollar by about ~17%. Deficits it has are

widening which was more or less understandable, energy and payback of debt in

foreign currency by enterprises and other actors is what is driving it in my view.

Reforms that will transition it into an presidential republic from a parliamentary

one are taking shape.


Two thoughts. It will stabilize and streamline decisions that need to be taken. Dissent

if squashed unabatingly may completely destabilize the country into civil war. I am

going to provide an example.Russia ended the war in Chechnya by coming to

agreement with the population, ergo at least half of the locals on the ground

supported re-integration and terms proposed by the central gov’t. How and through

what operations it was achieved afterwards is secondary. Turkey on the other hand

attempted and for a time succeeded using this model as well with the Kurds. However,

as of right now it is apparent that the compromise was breached a while ago and the

terms of reconciliation are simply not going to be followed by either side. Turkey will

attempt to purge any dissent in political sphere which will leave only the military

outlet for those locals on the ground. Perception that external communities of Kurds

that are already integrated into Turkish society is enough to coalesce the issue is false.

There has to be an agreement with the poor populous instead of the “elites” of that

society that is essentially outside.


Syria seems to be slowly transitioning into a positionary war. Which means that in the

next few years the processes will shift from military to politics even if no gains are

made on the ground by either side.


Korea is quiet even though the political process there with the impeachment and other

corruption scandals are gaining steam. What people ignore is during times of turmoil,

actions that were thought of as impossible can occur because leadership devolves

downward. This occurred in Ukraine after the presidential overthrow, when the

“acting” president essentially ordered military operations against Donetsk and

Lugansk. Focus should be made on the interregnum if Park leaves office and someone

assumes transitional duties. The Unification of Korea(s) is the event people

significantly discount. Note the headline “North Korea will declare WAR now” in the

express paper. Just saying the likelihood increases for this action.


The pressure on North Africa is bound to increase significantly once deportations occur

and migrants can’t get to Europe. The effect it may have will not be apparent for some



Yemen is also forgotten. Problem with it, is that Saudis’ do not understand the

dynamics around them and have no consideration of the global influence around them.

Right now there is a chance to come to terms and “gracefully” agree to end the conflict.

Perhaps it will be seen as a loss but one that is recoverable from. In two to three years

it may be possible for Yemen to actually claim victory through force. If the Yemen

offensive fails, and it will due to various factors favoring those on the other side from

terrain, morale, initiative, maneuverability, and so on, there will eventually come a

simple question. Why back a looser? This question will be asked by the global

community that supported the conflict when it was begun. Changing the narrative

after cumulative losses will not be possible. Mentality in the east of “my way or the

highway” without realizing that sometimes giving something is better than losing

everything, will take precedence. My expectation is the conflict will spiral out of

control, completely unexpectedly. Especially since China is beginning to establish itself

in Djibouti on the other side of the Bab-el-Mandeb.



Be well dear reader and take care.






Housing Interest and Income.

January 5, 2017

Housing Interest and Income.

What many ignore in the interest rate aspect when gauging housing affordability. Ergo, measuring the rate increases in mortgages a la decline in purchasing power and increases in mortgage payments, will be compounded by several factors. Overhead costs, such as: property taxes, water, and others will continue to move higher by government necessity until implosion forces them down, somehow.

In order for inflation in “assets” like housing to hold up pricing and push them up there needs to be a wage-inflation spiral, which thus far cannot materialize due to the jobs not being available for people. Not even mentioning the increases in salaries for those already working.

If during the course of this year 2017 we get to 5% to 6% rates for mortgages housing prices should get some reality into them. Ahem. Historically those are reasonable rates but check for yourself

Another factor most people ignore is the slow exit of Freddie and Fannie will eventually occur. By this I mean the taxpayer will one way or another curtail exposure in both entities. Both FHFA and GAO will slowly push for reduction of possible exposure to the entities. Securitization of debts produced and sent to Freddie and Fannie will decline, while debts issued by them should decline as well. Ergo, banks and others will have to hold more on their books by virtue of not being able to sell and keep servicing thus churning loans and refinancing. Refinancing is essentially imploding since those whom could, already did, and rates already moved up significantly to lock everyone in their place.

Two more interesting aspects most people ignore. The massive amount of private investment capital that went into single family residential and general public housing that is going to be locked in until they decide to exit, which usually precipitate a stampede out. Considerable inventory that was most likely hidden by refinancing that was solvent until rates moved up, but won’t be once payments need to come from real earnings instead of appreciating re-financing to pay for their carrying costs.

Be well dear reader.



Trump Presidency Ramifications.

November 9, 2016

Trump Presidency Ramifications.

Today as the markets open to an agony of negativity, people should be quiet positive about the future. Whom is president matters only in the sense if of belief in those people fulfilling the functions they were elected to do, ergo bargain on your behalf and keep you secure as a nation. Presdients do not impact your own personal success that is still up to you. Struggle, hard work, and perseverance on the part of you, alone or part of a collective group is what brings success or failiure.

It is uplifting to see some sort of change or feedback into the system from the electorate and population at large which was called stupid and moronic, by the powers at large. It is very absurd to know what is best for someone without letting them have some sort of representation they can believe in. It is tough to rectify ethics and morals in system which plays favorites or established division income so ingrained in society that it eats at the core of said society to make it rot as floatsam in a swamp. Perhaps some of the changes we experience will not be politically correct, but they will benefit the majority of the populous in this country, and that is what national leaders are elected to do after all. Lead others and ensure the ability to prosper and be secure in your person or property as we live our lives.

Foreign entanglements need to end.

Taxes need to be brought into line.

Privacy needs to be restored.

Government bureaucratic layers peeled back.

Turkish Economic Conundrum and Kurdish Emergence

September 15, 2016

Turkish Economic Conundrum by LushFun


Contrary to popular opinion that money wants tranquility and quiet of most emerging

markets Turkey held up the most, especially if one were to take into account currency

fluctuations. This is in light of all the political tumult of the past several years. It has been

one of the relatively stable emerging markets, especially in regard to foreign exchange


This is likely to begin to end. It has less to do with politics but with the overall

orientation of the economy. Ergo, export oriented economic growth reliant on foreign

participation in various sectors; from tourism, energy, manufacturing, logistics services

and so on. Balance of trade will have a tough hurdle to climb in being able to make up

tourism currency flows and export market losses. Oversaturation of global markets and

increased competition make marginal producers the expendable capacity that gives up

utilization and operating fund flows to other participants. In some ways Turkey is reacting

to these aspects by fostering a more flexible financial system by expanding Islamic banking

and pushing down rate policy. However, there is a big problem on the horizon.

Coming dollar bond maturities in the financial sector that will begin to come more

frequently from the beginning of 2017 will pressure foreign reserves. This will create a drag

on the financial system since many of the banks have borrowed in foreign currency, U.S.

dollars and Euros mostly. It is very likely that the outflows of these funds will have a

multiplier effect on the Turkish economy that will magnify the pressure on the Euro/Lira

and U.S.Dollar/Lira, exchange rates. Posture of Turkish economy currently would have a

tough time adapting to these headwinds. A competitive devaluation in an environment

where utilization of factories and productive assets is levered via an ability to arbitrage

marginal demand in key industries, such as: tourism, construction, logistics, food

production may work over long periods of time. But, during a short to intermediate period

it would impact the ability of raw material imports, marketing, and other facets. The

coming crunch may influence a severe devaluation in Turkey over a two year period, to align

purchasing power carried by its’ potential markets of export, Russia and former Soviet

States, and the Middle East.


Math that is fairly straightforward. Total foreign reserves were around 112 billion dollars of

which 19 billion dollars were gold, about 1 billion in SDRs and the rest in other convertible

currencies, mostly dollars and euros. Ergo, 92 billion dollars with a rolling 12-month

rolling deficit of -27 billion dollars. At around 2-3 billion dollars in deficit a month Turkey

will face tough choices in the coming 18-24 months if one considers the contingent

liabilities of its government, corporate sector, and financial firms at around 74 billion

dollars. Something somewhere will have to give to curtail the outflows in light of lower FDI

and balance of trade aspects.

Three internal pressure positions have to be resolved. Lower growth and unemployment in

regard to marginal slack due to trade and tourism disruption. Immigration and

non-integration of culturally different minorities, ergo, Kurdish population and the

millions of Syrians whom are now living in Turkey. Finally Turkey will have to reconcile

capital constraints in the financial sphere either through capital controls or injecting of

capital that has to come from somewhere to offset the maturities of upcoming debt. Note

the last aspect is slowly but actively gaining some traction with attempts to entice FDI into


various sectors and a formation of sovereign wealth fund, but thus far it has not brought

the necessary results.


All three internal positions come against external political vectors. We can reconcile them

as following. North that includes the Post-Soviet space, South that involves Middle-East

and Africa, and West that include Europe and U.S.. Western vector is coming into increased

scrutiny due to conformity and compliance expectations that are in conflict with Turkish

power verticals being established to posture society for stability during the shifting phases

of re-configuration of politico-economic re-alignments. Abandonment or attempts to

significantly leverage away will put in danger the financial system and disrupt the last

remaining export markets Turkey is now dependent upon, while it mends its other outlets.

Contention for economic and political representation in light of the decline by minority

elements that are the most marginal on the economic curve; Kurds and Arab refugees from

Syria has to be addressed to mollify both the Western vector and situation at large.

Thus, Turkey is relegated to push forward maximalist leverage upon focal points where

minimalistic returns can be garnered. In some sense this is a path of desperation where

each of their external vectors may extract optimal concessions. Each concession will limit

the flexibility of future trade-offs and we can see this in Russian reconciliation position

that will lower the amount of Saudi and other financing that contends with other

geopolitical positions in the region.


There is one player that has the maximum amount of leverage that can provide Turkey with

breathing room, via opening of markets or capital participation. China, has the most

leeway to leverage a position in the economic space. Albeit, there would have to be an

integration into a larger scope system to yield out results that would make this

interventions worthwhile. Thus, Russian reconciliation ties into this tandem to create a

land bridge that would make it possible to approach such a proposition. However, the

economics of such a proposition are moot even under the best circumstances.


Right now we can see there is a hidden temporal constraint. It is tied both to economic

imperatives and necessity to stabilize the social structure into conformal amplitude that

could allow for development. Turkey still has a few cards it may play. NATO exit or frozen

participation may provide certain concessions but they would not be long term fixes. It may

freeze participation in EU customs agreement which be a fairly destructive undertaking,

closing the last market outlet it has. Such an event is highly unlikely though.


Certain hypothetical events do come to mind. If Turkey threatens to leave NATO, where

would it go? It is possible that it would be able to reposition into CSDP(Common Security

and Defence Policy) before exiting NATO, which would ameliorate differences with

European members, such as; Greece and other Balkan states, while simultaneously provide

it with the aegis of remaining part of the West, but on different terms. A bridge to

re-configure the relationship that would perhaps provide funds and gravitas to both EU

and Turkey. Granted the likelihood of this event is negligible it would allow a far more

flexible relationship to both parties in their foreign policy and solve short and intermediate

problems. It would also effectively provide Europe an exit strategy from NATO similar to

the Brexit event, only on a different strategic plane. It may also solve Turkish procurement

and technological problems, especially if one considers they already participate in some

OCCAR(Organisation for Joint Armament Cooperation) programs. An event such as this

would require major concessions from Turkey and Europe but would allow a competing

alliance that is under NATO umbrella but without compliance issues.

If we look at foreign policy Turkey aligned with, we can clearly see a policy where the

foundation backed into dominance to put forward an agenda that others should coalesce

into. This proved to be a failure for various reasons. An integrationist approach to gain

from overarching agreements between states would have yielded more robust results with

fewer strains while removing a winner take all mentality. It is obvious that transitioning to

integrative approaches that are feigned at by the leadership right now are a matter of

survival and once freedom of action returns, defecting to a different strategy may likely

occur. Trust internationally to view Turkey as a consistent actor is fairly low. Dependence in

trade, weaponry, raw materials, technology, capital, and other aspects, puts forward an

increasingly deterministic and opportunistic action map.


What does Turkey want from the United States? Even if Gulen was given up it would not

address any of the problems Turkey currently faces, other than provide it with expendable

clout. Access to a swap line from the Federal Reserve similar to what the ECB received

(during 2008 crisis) to bridge maturity gaps and secure a financial transition would be

extremely enticing. However, the likelihood of Turkey providing compliance guarantees

would be questionable. Technical transition and development assistance for local armament

industry is also unlikely.

If we put ourselves into the position Turkish leadership is currently in, we can somewhat

understand how their directional prerogatives change as various problems need to be

solved. Influence from migrants that fled into Turkey is completely ignored but it creates a

background of internal economic competition under the auspices of collapsing export

market outlets. Likelihood of civil conflicts expanding from current suppression attempts

by the regime in South-East is increasing. Agreements that could have allowed cooperation

were abandoned in light of attempts to re-format the regional relationships completely. Yet

the gains that were prescribed from said change of relationships are now necessary to

alleviate the strain on socio-economic actors. Re-conciliation is now a necessity instead of

an option, and yet the terms became far worse than before. There is a great need to

consolidate the body politic to generate enough cohesion in Turkey for the transition, which

we can somewhat glimpse right now. Interest groups will have to be brought to an

understanding that flexibility to placate their interests is much lower, which in my opinion

is going to be quiet unlikely. Under resource constraints nationalists, secularists, and other

–ists will press their political clout to undermine others on economic planes to gain

consolidation in various areas. Bringing objectivity to keep them all at bay away from

pressing their opponents too much, resulting in capital flight will be a very tough


Hypothetical scenario for devaluation is as follows. Balance of payments deficit erodes

reserves closer to Forex liabilities(debt). Forex deposits in the system are taken to procure

material or service imports necessary by their owners. Banking system as a whole has

Forex outflows with Forex maturity mis-match which begins the devaluation process as

flows are directed one way to close out the maturities or purchase obligations by economic

actors externally. The crisis begins before the Forex liabilities(deposits) and borrowings

derived from them mature in the system. This can be seen in the example with Belarus. One

can see that maturities were set to be paid back after the devaluation crisis was under way.

We can also see from Malaysian example that it is possible to overcome these tumultuous

periods if one is pre-emptive in how the economy is positioned. The problem for Turkey is

at this juncture there is an attempt to foster growth and not to impede it in any way.

Towards winter if energy prices spike in regard to natural gas prices and balance of

payments begins to turn significantly negative investor confidence may begin to wane. As

curtailment of FDI gains momentum, herding impact of foreign investors will manifest in

the short term portfolio investor space, as they will begin an exodus slowly at first and the

forex flows will begin to increase outward even as balance of trade deficit shrinks. FDI was

what held up the balance of payments in 2015 (p25). FDI has turned down significantly,

if/and/or when it turns negative to cover credit used to deploy those funds in the first place,

there will be a significant strain and necessity to make tough choices on the part of Turkish

government. Pre-empting an investor exodus via the Malaysian example may be better if it

is done before their exit is underway and any psychological panics develop. Once investors

head for the exits cutting them off from an exit would create pandemonium and exacerbate

the possible impact, magnifying the damage to the Turkish economy. Dynamic in shorting

Turkish Lira Bonds in order to satisfy hedged exposure by FDI investors and portfolio

investors, especially large institutional ones, will be the prevailing headwind under a

culminating scenario, in all probability these hedges would have been established prior to

digressing macro factors influencing the flows and by cutting off the marginal investor,

Turkish gov’t would essentially strip liquidity from these instruments precipitating the

actual devaluation and rate spikes.


Kurdish Emergence

Kurdistan is getting closer and closer to emerging as a national entity. There are only

questions of when, how, and in what form it will emerge. Shifting foreign ties influencing

Turkey reinforce the necessity for a Kurdish entity to exist from the point of view of United

States and Europe. Not only have the Kurds been armed and organized into a fighting force

both in Syria and Iraq but they have been provided backing in some form from both U.S.

and EU. Turkish compliance thus far prevented that backing from imparting on Turkish

national interests, however, this is most likely at an end. Whether Turkey attempts to

blackmail NATO in addition to EU, no longer allows for a stable calculus in regard to its

actions. Desperation in order to cure economic, social, international, and other conflicts

simply detract from the ability to bargain in good faith and follow through on promises

provided. This has become apparent to both EU and U.S. interests in the region. Others,

Saudi Arabia, Qatar, U.K., Egypt, Jordan, etc. are coming around to view Turkish influence as

destabilizing and will most likely side with the idea of pushing them out of the region. How

that is done is another matter.


While, Turkey did negotiate with two out of three entities in Iraqi Kurdistan it is the

third entity which proliferated in Syria, that is on the cusp of being reinforced by foreign

interests. National emergence of a new sovereign and perhaps unified Kurdish entity

provides leverage that may be extremely long term in the region. Considering ramifications

from the military coup attempt in Turkey, long term purges in the armed forces, and

general decline in morale there would need to be a significant effort to re-integrate the rift

between the armed forces and polity at large to impede the situation from spiraling out of

control in the South-East of Turkey.


Syria will most likely give up the North to a new Kurdish entity under pressure from

the West. When this event occurs the ramification will be apparent to everyone. A buffer

state between Turkey and the Middle East will emerge, that will throw its’ weight into a

conflict of massive proportions, that was previously directed southward will be pushing

north. Benefits of such an entity for the West are very large. Destabilization of Turkey and

recognition of the new entity will go hand in hand, since any agreements crafted in regard

to Iraqi Kurdistan by Turkey and other Kurdish ‘isolationist’ actors will be broken.


One has to understand that thus far the proportions of the Syrian civil conflict were

perhaps half to a third the proportion of the possible conflict that may conflagrate Turkey.

This is based simply on the amount of forces in the region Kurds can bring to bear in sum

total and country population sizes in regard to possible contentious groups. Ergo,

approximately 300-500 thousand if one includes Syrian, Iraqi, and Turkish, Kurd

amalgamations, while a population intensity of around 20-40 million. Considering the

terrain and the possible scope and width of the area in question, the disruption would be

significant. Another influence point, that Turkey under-estimates are the possible

sanctions West could bring to bear against it, similar to what happened with Russia. This

point is completely ignored and in a sense Turkish government is quiet oblivious to such an

occurrence. In regard to forcing a solution and peace processes after the beginning of full

scale conflict, Turkey will be directed after some time by economic fallout it will be forced to

bear, especially if one overlays multiple events into single timeframes.

Kurds as an entity will have balance of power shifts that will favor their expansion(s).

Economic cooperation from the West, technical and military assistance, certain guarantees,

and the overall background of inverted situational parameters by their adversaries. It is

important to keep in mind, that just because one is an important state in the region, one is

not an irreplaceable actor. In the world of national interests irreplaceable actors don’t

exist. If one were to be objective the ability of a “Greater” Kurdistan to exist will provide

tremendous leverage to anyone whom will be given access to project power from said

entity. If one imagines having basing rights for airfields and port facilities to an entity that

is going to be dependent on your cooperation for the next two, three, or more decades to

form institutions and gain recognition and trade ties from hostile surrounding actors.

Hence the ability to shape and shift foreign policy through that foreign entity, especially if

conjunction of interests aligns over said time frames persist.

Catalysts on the horizon for acceleration of said emergence. While Turkey did go

through political turmoil and trade turmoil, it has mostly been spared a financial turmoil

that permeates a significant balance of payments crisis. It is likely that such an event will

occur in the coming few years and wreck havoc on the fragile stability that is eroding in the

business sector. Once the cumulative factors overlap they will create an impetus that is

internal in nature for separatism by the South-Eastern polity that has economic

imperatives. Imagine for a second that the Turkish national entity is under sanctions,

monetary control imposition, and social unrest. In these circumstances as the outlet to

compromise and negotiate a flexible solution is beyond reach due to internal political power

struggles, there will be only one solution for the fringe groups. That is to exit the entity.

Under such a background of cumulative constraints, being outside the system will outweigh

being part of it.

Kurds are slowly being induced in the direction of unified political field. Irrespective

of control in various regions, there is a push for an overarching position regarding

fundamental political framework that would accompany a sovereign entity. “Young Syrian

Kurds launched a new initiative on April 1 to give voice to the Kurdish youth who demand a

unified Kurdish position amongst political movements in Syria.” is one of a number of such

attempts to unify social strata. PUK-Gorran party unification in Iraq creates a platform

where an aggregation of national interests condenses the political spectrum behind itself to

create a more manageable push in directing initiatives. In light of these changes it is

apparent that “isolationist” Barzani(KDP) political entity will have to back initiatives they

have shied away from, or risk being eroded in the political spectrum. If a referendum were

to actually occur in Iraqi Kurdistan it would create a platform unto which other extra-

territorial groups could attach themselves. Either; politically, deterministically,

idealistically, or in other ways that would further their aims to carve out an entity.






Kurdish Emergence References:



Puerto Rico bankruptcy? Why and Where does it go next?

May 2, 2016

Puerto Rico bankruptcy? Why and Where does it go next?


by Lushfun


Some questions arise from the coming ‘bankruptcy’ of Puerto Rico, which technically cannot go bankrupt. New York and Texas have as government workers about 1 out of every 7 people in their civilian labor force, while Florida is at 1 government worker out of every 9 people. Puerto Rico is at around 1 government workers out of every 5 people. While this number has gone down from 2008 or so it did so with migration off the island. So from around 1.133 million people 229 thousand are government employees. Which hides the fact that quite a few of the industries on the island are essentially government owned and run. The quiet reality is that there is simply too few dollars entering the island and the economy has been set up in such a way as to make it impossible for it to recover. Bailing the island out will only make certain that the next time the funds needed are larger and will not solve the problem. Structurally the way it operates has to change and the whole distribution of money within the system through essential government control of all if not most major industry will end one way or another.

It does not matter that the wages are lower than in the U.S., it does not matter that the island has “tax incentives” for businesses to operate upon it. What does matter is that the nepotism and regulations on the local level essentially make certain that investing in a foreign country is more likely to succeed than in the local economy. Sales tax becoming VAT of over 10% and other improvements to make the dead economy keel over are paving the way for insolvency. Tourism is dead precisely for the fact that costs for tourists are not competitive with any and perhaps all Caribbean countries. Why would a tourist pay New York prices for steak and wine in Puerto Rico?

Where will insolvency lead? Well theoretically when payments shut down due to them being re-directed to pay creditors government employees will no longer be paid. There will probably be court battles that are ongoing and future going but none of this will make disruptions go away. If the debt Puerto Rico was nullified tomorrow, none of the structural problems go away. The sales/Vat taxes will still be there, the tourism sector will still be dead, the government overhead will still be there, and insolvency in major enterprises will persist.

It is very likely the pension debt Puerto Rico has will be nullified, or to put it more realistically pensions will stop being paid because the amount of cash coming in will not be enough to cover them. Real Estate market will have to have a complete collapse for any enticement for non-island money to pour into it.


The truth is Puerto Rico will be a test case to a degree. Of How, When, What, and to what degree things can be turned on or off and the consequences of said actions in regards to a population. Yes, I know this sounds terrible but I am an observer and my opinion is just that. I think in a certain way there was a perception by the government in PR that they could have the last say while the flows of money were kept going to ‘stabilize’ the everlastingly ‘deteriorating’ situation. The reason I say this is that funds required to keep the system afloat increase constantly as expenses rise even in a contracting economic environment. I wonder if the governor of PR ever considered making a Plan B or a Plan C where the only way out was to abrogate pensions and get rid of at least half of government workers. It would have been possible to restructure things were there some realistic movements 8 years ago, but alas wait and prey is what occurred. True there were a significant decline in government workers, but it was in the context of an exodus of people out of the island. I think to a degree the governor will be deprived of financial ability to maneuver and will be sidelined in the matters of making decisions in that sphere, and the rest will flow out of these constraints.

“The Authority will ensure the payment of debt obligations, restructure the workforce of the Commonwealth government, and reduce or freeze public pensions. It will also supervise the entire budget of the Commonwealth government, including its pension system, legislature, and public authorities; and all leases, union contracts, and collective-bargaining agreements.”*link on bottom*

Hopefully whatever happens the people of Puerto Rico will do well and it will pass quickly.


Be well dear reader, stay healthy, and hopefully summer will visit us soon.



Status economics and ideological regression

April 8, 2016

Status economics and ideological regression

by Lushfun


If one slowly skims through the decay of global ‘growth’ and the economic implosion underway there seem to be three or even more paths that are coalescing together.


Path One.

Social groupthink is disintegrating as based by rating implosion via TV and other channels of mass conditioning. This carries with it dis-anchoring of what it is to mean of a person to belong to a specific socio-economic group. Don’t get me wrong the rich know they are rich and the poor know they are poor. The problem is in the meaning that carries forth for the people in between. These meanings are not just disappearing or being shaped into things we know nothing about but are diverging into aspects we have no understanding of in theory. Ergo imagine you are making seventy grand a year but can’t afford to buy any “assets” due to overhead such as; student loans, rent, food, insurance costs, and so on. Theoretically you are productive, yet you have no benefits other than the ongoing treadmill of your life, in an, as is condition. Without meaning or some foundation people in such ‘constraints’ burn out. This is easily seen in the treadmills of HR departments that are harvesting skill-set graduates into motion within a set environment where they have low-to-no growth prospects but are niche contributors, easily replaceable yet have no way of influencing their environment since their time constrained. Meaning is displaced by being, and there is no big idea to fill the void for people to create some sort of foundation upon. It is no longer ‘necessary’…



Path Two.

Social norms of what people can, may, or should do is going away. There is no religious constraint even for the fairly religious strata in society, it is simply replaced by either “I am going to get mine whatever it takes” in relation to some object, or a completely random set of behavior that makes people operate in the grey-zone of society while pretending to comply with society at large. Only fear of what may or may not happen is constraining these outward manifestations, but only to a degree. Monetary excess by some is dangled in front of public at large, while images of gluttony bombard the advertising channels of the internet, TV, radio, and other venues for the destitute to feast upon. There is some sort of idiotic self-righteousness that is put forth through the delivery of want for the sake of want because of want in idealism of want. Yet, even for people on the screen these things are hollow.


Path Three.

Trade and businesses are leveraged for growth in a world of imploding demand. There is no expansion of the cycle in the future unless there is a big wipe-out of inventory and credit overhead that will not go away to allow for the cycle to re-set. Even a big war would not solve this, since any aftermath demand will quickly be saturated due to better technological progress and access to raw materials already stock piled. There is no new way of doing things that allows consumers to consume without bending future demand forward by constraining credit. Other thoughts do not enter central banking heads for there is no other way to solve things in their mind. We are approaching the wall and it is us.


Imagine a world where costs are growing daily but income is imploding monthly. How long will such a world last? It may outlast you or I but it cannot outlast itself. Perhaps, prospects of evolving into some new way of social interactions is underway but I doubt it. Society is extremely set in operating the way it can, until it can’t no longer.



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Financial War is over, we all lost.

April 1, 2016

Financial War is over, we all lost.

by Lushfun


Extracting future value into the present via leveraging credit up the pyramid scheme is likely at its’ end. U.S. financials are slowly crawling back into reality as their losses are becoming more clear. Non-performing for auto and student loans are periodically glimpsing at us and we feel the attempt by capital to automate as much as possible to extract the fleeting dollars of consumer demand into profits to keep alive their perceived solvency.


China is slowly emerging from a capital investment boom that turned bust and will lead to a deflationary tornado of pain for every actor involved. Consumers are being hit with higher prices and fleeting jobs as global demand for most product implodes. Cities of empty apartments that are unaffordable by most locals won’t be filled until they flood the market and clear at rock bottom prices. Unfortunately even if that does occur some won’t be able to afford ongoing costs with infrastructure and related upkeep as it relates to these buildings. Nationalism is periodically used to re-direct the energy of anger at the problems that aren’t being solved. Tariffs that are now being erected will only increase barriers faced by Chinese goods abroad


Japan is imploding as it monetizes its’ debt and consolidates the robbery of the elderly citizenry. It destroyed the hope of any new generation sprouting through wage stagnation and repressing its’ youth and the job market they participate in. It keeps attempting to push through inflation and the success it gains is reciprocated by the confiscation of purchasing power of its’ population. Yen is strengthened every time it is revealed that negative rates of monetized bonds essentially reduce the volume of its’ debt.


Europe is approaching Japanese solution to the same problem. Too many bad debts, too little capital for the banks to absorb them other than by making the destitution of the population an institutional priority. Europe is slowly attempting to exchange old problems for new problems in an attempt to reduce the number of problems by increasing the number of problems. I know complicated stuff, but it apparently does not work. Whom knew. Elite seems to be focused on furiously doing nothing, because attempting to lead or actually solve anything is not possible without upsetting someone. It seems strange to most bureaucrats and leading politicians that doing nothing is the right thing to do because it forces discipline, and outward scape-goating for self-created problems. There is a fundamental consensus that there has to be consensus even if the problem becomes deadly to functionality and well being of the system at large it may not solve it, for that solution may undermine the system, and whom knows where that will lead?


Across the spectrum the youth has been bamboozled by education that does not give fundamental skills or knowledge, student loans that create indentured servitude, and job market that provides meager-to-non-existing wages or ability to build up a career or an ability to survive in the system as it currently exists.

The elderly have been swindled by the mortgages and financialization of their savings into the perpetual investment holes of fluctuating markets, while being provided negative real rates of return throught the suppression of interest rates. Healthcare costs have been given the ability to carry loan shark growth rates in order to put to good use anyone falling into the system that needs care to suck out any savings they have.

Ah the bright future ahead of us, looking at the blazing sun where the global warming is shining bright, although it seems kind of cooler these past few decades. I know soon the message will change but until then we have this amongst a myriad of other useless distractions. Perhaps when virtual reality becomes the norm we can be provided virtual government services for which we pay real money but until then we can simply imagine them as they should be.

Strange times are upon us, and yet the vortex of yesterday is slowly making its way toward the horizon of the future. It is catching up with all the stupidity and pyramid schemes built on the numerical impossibilities tied into the weaving threads of corruption. Things always come undone at the worst possible moment, the question is; For whom?

Money, China, Consumers, and Cash Cycles.

March 24, 2016

Money, China, Consumers, and Cash Cycles.

by Lushfun


There seem to be a strange dissonance between purchasing power available for consumers and it being embedded in the monetary system globally. As division of available free cash was pledged to more and more long term ‘capital’ in the form of loans, bonds, and other forms there formed an idea that further and further division in favor of capital would occur indefinitely and at higher exponential rates, FOREVER. Alas, we live in a finite system. Every country that attempts to industrialize rapidly runs the risk of going into an adverse cycle both in the industrial sense and cash conversion sense. Ergo it will begin to deploy factories and capacity into a rapidly declining purchasing power environment from the consumer front, as was the point of entry for China.


What would be the fix for an environment such as this? Division of cash flows between capital and labor to re-balance participation rates in the cash cycle. Giving people ability to participate more broadly in the economy would require jacking up rates to implode asset prices and give more churn in the transactional sphere. This will not happen of course.


Devaluation games such as the one China is attempting do not work. They do not work for several reasons. Competitiveness for export products through devaluation does not rise, since generally products that are embedded in the export product have to be brought from the outside at real world prices, which have their own variations in price. Devaluation is an attempt to sequester purchasing power in the capital sector at the expense of the labor sector and the consumer at large. Ergo, it attempts to create an environment where capital that was spent on excess capacity can be profitable at the expense of the environment in which it operates, because its’ destruction is feared more than the consequences of externalities emanating from these actions.


Long term and short term these costs that appear to be inconsequential, but they destroy not just the capital in question but the overall ability of the economy to function and compete in said industry. The reason is that excess capital will be competing with depreciating capital that will gain from technological progress through the cash cycle and become more cost efficient and far more dynamic. It is tantamount to a surrounded army getting more and more reinforcements as it is getting slowly annihilated while the equipment is uses is going back in time and the adversary is slowly getting newer and newer stock.


Participation in financial markets in allowing the Yuan to float will not make it enticing for those buying it as an instrument. The reasons for these are many but the most common are it maintaining purchasing power long term, ability to have instruments that provide you with yield that is over and above inflation in said currency, and ability to use it as an asset purchasing mechanism globally. Expecting others to share in the depreciation in order to grow out the monetary base and fill it with purchasing power is a folly. It is very erroneous to think that nomination of a denomination gives it convertibility or acceptability, a market does this but it has to have ease of entry and exit.


We shall see what happens.


Turkey Dark Decade ahead? (a satirical escapade)

March 18, 2016

Turkey Dark Decade ahead? (a satirical escapade)

by Lushfun

A huge statue of Turkish former leader Erdogan is going up in Trabzon, “Bless that man” says one local named Ahmed, “if it weren’t for him none of this would have been possible” he exclaimed as his eyes welled up in emotion. It seems fitting that Laz autonomous republic under Russian guidance was formed and incorporated into Armenia giving it access to maritime trade. Once the denunciation of Treaty of Kars occurred and Kurdish independence was recognized by the United States, Russia, and Iran borders of Turkey were considerably changed. Syria regained most of Hatay province except for parts in the north that were given to the Kurds to establish maritime access. Between ten and fifteen million refugees went to Europe where their relatives helped them integrate into society. Germany had its’ population swell to 95 million as it was the most obvious choice. Most of the new arrivals were being settled in the state of Yeni Ankara formerly known as Lower Saxony.


While a blessing for some it was a true disaster for Turkey. Chaos that occurred after invasion of North-Eastern Syria and Iraq created a shock in financial markets. Lira began to plunge precipitously as most of foreign capital began to flee, capital controls were imposed and overnight it went from 3 to the dollar to 7, after a week it hit 10 and you could not get dollars anywhere but the black market, foreign reserves were almost completely depleted in futile attempts to prevent the unwinding and to refinance industry. European Union bureaucrats were running around screaming about “stability loans” and “immigration prevention subsidies” but the tumult that was unleashed could not be put back as it was before. Bread shortages occurred after two months because Russia would not export grain and other producers had already sold their forward.

On the front the army was being decimated and massive casualties collapsed any semblance of structure. The insurrection of Kurdish rebels in many places all over South-East and elsewhere created pandemonium. When the flag of PKK the ‘terrorist organization’ that Turkey tried to destroy went up in Gaziantep the expeditionary front collapsed. All reserves were thrown to re-establish Adana-Sivas-Samsun line of defense. Three hundred thousand casualties occurred when retreat north was enveloped from various forces in two cauldrons that were decimated. Millions of displaced were shutting down traffic and paralyzing the country. People went to the streets in every city demanding something, anything, but to no avail. Panic consumed every facet of daily life as famine broke out.


That was ten years ago.

Today in the year 2027 Turkey a country of 43 million people with good relations with all its’ neighbors is back on the path to prosperity. Lira is at 2 to the dollar after it was denominated and three zeros were removed, years ago. Confederation of the Straights that was modeled after Switzerland, Kurdish Republic, Syria, Laz AR within Armenia, all have good trade relations established after the government in Ankara collapsed and a treaty of complete capitulation was signed. President Erdogan in a fit of rage as he was rallying the parliament in Ankara had a stroke, but the one after him was a tranquil man that enjoyed the rebuilding process. Reparations of $150 billion dollars and 1500 tons of gold were almost completely paid off to all the actors including Cyprus which was reunited after Turkey evacuated troops from the island.


Hopefully this was somewhat entertaining and enjoyable read with food for thought.


Be well and enjoy spring.

Central Bank Olympics

March 14, 2016

Central Bank Olympics

by Lushfun


We are witnessing battle after battle on the monetary front. Central banks are in dire attempt to hide away asset losses in clouds of easy money and negative rates assessable to the inner circle. Europe has found a way to side step its’ mandate and prop-up assets and it’s magnificently leveraged banks along with them. For a time of course.

If and when rates are increased by the Federal Reserve we will witness a considerable wave of actual money run for the exit towards U.S. and elsewhere where the books aren’t as cooked nor the asset liquidation cannot occur.


The crux of the matter is that the consumer is dead, borrowing isn’t turning over, and non-performing loans are piling up. Yet, assets are being stock piled as their usefulness depreciates away in the winds of time. It is fascinating to see the bottomless pockets of electronic account mechanisms be filled and refilled to battle the actual real demand that is waining and contracting due to their intervention. All purchasing power has already been sucked out from the plurality of those that had it, however there is still an attempt of banks to somehow, someway, save themselves for another day. By this point there could have been some sort of an orderly auction mechanism to gradually liquidate portions of assets that could have garnered something, anything. This begs a very rational question. Are these assets really worthless? Assuming anything worthwhile has been already sold and re-packaged into something else, perhaps what is remaining is simply holes in the non-existing capital that prevents the complete destruction of the savings (deposit) base. In some sense this is where the pathway leads.

However, one would question the existence of savings if purchasing power does not exist in relation to being tied to said savings.

If you have money but you cannot afford to buy anything with it without credit do you really have money?

So letting asset prices implode as they should have would restore some balance in the cycle of supply demand and otherwise. The ever present garnishing of the purchasing power by the financial system, seems to have gone too far. Appropriation of contingent liabilities tied to said ‘assets’ in relation to the ever increasing demand in the future that will never materialize due to these actions only creates a further gap of space we must fall through to reach reality.

Three outcomes are simultaneously slowly occurring.

1) Parallel monetary systems where these assets are worthless and nullified. I am not talking about Bit-Coin because it is tied to notional currencies directly via exchange mechanisms. What I am talking here is purchasing power tied to non currencies and non governments.

2) Demand required for profitable industry does not supply enough liquidity to carry expanding debt loads. Ergo, companies that can produce and make money have to reduce debt loads since expanding it to buy back shares or issue dividends cannot be prudently expected to last through payback of debt AND capital(machinery etc.) needs. a) This removes profitable debt that brings revenues to the financial system and removes an asset that could be conveyed for monetary liquidity. b) Repayment of debt reduces the amount of money in the system since most of the funds are parked at the Central Bank since their redeployment into real economy is in question. Thus reinforcing the likelihood of of purchasing power snapback.

3) Flows through the system are making it systemically weak in establishing a post-moment reality. Ergo, imagine asset liquidation begins to occur and other non liquidating assets start clearing at those levels as well. Access to get credit would be nil for some time for most participants, so alternative mechanisms will spring up to provide said funding. If you are forced into using part of assets you get as currency to function and the system becomes significantly entangled where one business owns part of another to supply it with inventory and so on along the chain to address liquidity that nobody has access to anymore. Even in an improving environment dis-entangling the system will be problematic.


Be well dear reader and enjoy the clouds.


Brazil, Petrobras, and Leverage.

March 7, 2016

Brazil, Petrobras, and Leverage.

by Lushfun

Hopefully Brazil makes it out of the path it is upon today, but my sense it is unlikely. What is happening is something similar to Russia when western sanctions went into effect and credit refinancing became unavailable for oil producers and other firms as a whole. The difference is that Russia had reserves which could be used to do the refinancing in order for those firms to not implode, and drag the rest of the industrial chain that is reliant upon them into dire straits. What also makes a difference is the amount of leverage those firms had, Lukoil and Rosneft combined had less than half the debt that Petrobras has today, while production was probably larger per firm while reserves are probably similar per firm. Even if one compares Petrobras to Conoco Phillips which produces similar amounts but probably has less reserves, there is a quick realization of the difference in debt burden.


As we speak Petrobras owes somewhere in the ballpark of about 130 billion dollars in debt, around 75% of it is denominated in dollars, 5% in euros and rest in reais. The problem is not the debt per se, but the maturity waterfall. Starting next year around 16-17 billion has to be paid back annually, it is likely that refinancing would be costly from a paying rate if it was available say at 8 or 9+ percent but it is also likely it is not available as questions regarding the validity of books and sustainability of cash flow at current oil prices will make underwriting unlikely.


The impact on Brazil at large just from this one company is not to be understated. If your commodity exports fell in value due to prices and your external reserves are under pressure due to debt maturities there may be an issue with meeting the regular import and export requirements if there is a mismatch that forces you to go insolvent with the outside world by having a shortage of external currency to CLEAR your transactions. Hence the isolvency issue arising in the future say a year or two from now. Note that I didn’t even bring up issues regarding Brazil sovereign debt itself nor other firms such as Oi or Braskem which themselves have issues.


Devaluation is a symptom of attempts by the government at large to create an environment where the purchasing power of the public is re-directed to pay-down or refinance debt to both internal and external holders by freezing the aggregate purchasing power EXCEPT for the transitional amounts. The mistake longer term is that this creates lack of trust for the home currency and reinforces foreign funding since the devaluation in home currency would be looked at as a undeniable fact of life. My rationalization of reis strengthening in light of investigation into corruption schemes is the fact that it will force some cure into the public breach of trust by the government at large. It would be better if companies that cannot survive their debt fail and be essentially given to the bond holders at large once they do, this would prevent a external debt crisis in the future and allow the government to simply reshape the fiscal constraints in regards to these companies to regain their lost equity. In regard to Petrobras at least. Most of these assets are worth 2, 3 or even less times than they were when the debt was taken on, even if you discount current equity to zero. Even Petrobras is probably worth half to two-thirds of its’ debt load or probably around 80 billion in my view in regards to today and possibly foreseeable future.


The long term problem of government attempts to shape how debt is pushed outward while control of desirable institutions is kept is that it expends a very real ‘financial trust’ that creates harsher costs for every actor that needs capital other than the favored institutions. Longer term even if local lenders swap into shares the debt waterfall maturity problem does not go away neither for the company or the country as a whole. The marginal impact of paying tens of billions of dollars in a month would eliminate a lot of reserve power needed longer term to operate in a global context.


Why is this dangerous? Considering the overall situation I’ll provide an example. Imagine you are a miller of grain into flour and everyone around you is going bankrupt (competition wise). Your bank requires higher rates of interest for the equipment you have financed and the grain you buy on the world market with U.S. dollars. Everyone around you whom provides you with a service or machinery is in a similar situation and requires higher prices for their products and in a sense you have to buy some of those services & goods to operate. You in turn will require higher prices for flour to break-even, as the market buys less products as a whole because the economy is declining you need higher margins for lower volume of goods for the survivors to compensate the marginal destruction of capital that occurred in the system. Now imagine the whole supply and production chain reeling from similar winds and having capital needs that are being closed by the market refocusing on larger actors. Top down you have structural problems in regards to necessity to change the big companies for them to remain alive, but bottom-up you are sending a cyclical message as those companies with leverage get wiped out and those without capital run out of product or machinery to operate. In a sense business becomes costlier, volumes implode, margins collapse, supply chain destruction permeates, and access to raw materials if they are external becomes questionable if you have no foreign exchange outside the country. This creates a push for those that do to take them out from the bottom and pressures those at the top to close that venue. In a sense something that Argentina experienced. Mistake in focusing the direction of credit is that once the cycle in that particular industry turns against you, all credit is at risk since what was focused will not be paid back in risk-adjusted terms, nor in greater purchasing power. Thus one industrial overexpansion garners an overall industrial over contraction. The way out is not forcing credit availability since that will never flow evenly to where it is needed, but to allow the most solvent firms to survive and allow the break up of the most inefficient and insolvent. The problem is that whom decides whom is insolvent or inefficient and generally the financial sphere wants those to survive because those are the ones whom owe it credit.

How fast things occur? Well that depends on maturities and if they bunch up in certain months this year and next. How much of ‘hot money’ leaves, this is money that is in funds or by international or institutional investors parked in stocks, bonds, etc. in Brazil’s markets. Essentially hot money is foreign deposits of foreign investors that a country would be returning that they invested into the country. According to IMF, reserves are ~360 billion with convertible currencies ~333 billion for January 2016. If one goes to the bcb Chapter V.28 External Indebtedness indicators there is more clarity. If one goes to line 31 you gain some scope of how fast things really occur. Over 2015 debt service over exports rose from 39.1% to 64.6% coming in at 66.1% for January 2016. You could say a 50% growth a year, perhaps over this year it goes to 100%. You could take line 31 of debt service over goods and service exports that grew at a 66% clip over a year so you would end up with ~90% using that number. These are the actual flows into the country, the reason I look at them and not other things is because if you have to pay in foreign currency for maturities and your service costs do not go away you are limited to your reserves and the number between your left over flows. Currently reserves more or less match external debt. However, I am going to give some food for thought.

Imagine a following scenario over the course of the year, maturities of short term external debt at around 55 billion dollars, hot money outflows of say another 50 billion dollars, with balance of trade outflows of say another 45 billion, and you roughly halve the reserves from 330 to 180 billion dollars. A year later you’re left with 30 billion. So roughly two years of reserves currently. But since markets are forward discounting mechanisms, and politicians are presently rationalizing people the later tend to distribute reserves in such a fashion that the former generally are overoptimistic about what is currently happening.


In 2009 Brazil instituted a 2% fee on foreign investment capital on entry, what happened most likely is some of that issuance moved abroad. What they do not capture is the credit shifts in regards to these aspects. Imagine if you issued capital abroad and then lent it to your own firm from the subsidiary that is not wholly owned. Theoretically if the company defaults the subsidiary would become the holding company and take over the parent since it is owned by other non-related investors. I know very unlikely but imaginative scenario, however at that point the capital base of the country flips and those foreign claims you thought you had on paper are no longer yours{from a country view} from every legal stand point the foreign entity{that may have same owners} is now the owner of this firm and you essentially exported capital since you are forcing it to flow where the people that own it cannot allow it for their livelihood depends on it.

How does any of this matter? Well if you gradually clamp down on foreign exchange reserves and companies that need to use them cannot, they will attempt to front run the event. Ergo the miller above will likely shift his available capital at least partly to finance his future grain buys, however he will try to do so with credit to himself so that capital is not ‘frozen’ in the country and he can no longer use it. Thus over a period of time the country incentivizes more capital to be brought out while associated credit tied to said capital brought in, which in the long run will make flows more unstable. Precisely what they are attempting to regulate away.


Be well, dear reader and look into the sky, the clouds are good.



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