The Opera Ain’t Over III
Show me the incentive and I will show you the outcome – Charlie Munger
The “terrorist industrial complex” is an insanely profitable system of parasitic rent extractors built up over at least 50 years. It creates massive frictional costs in energy, security, and governmental oversight and the people that profit from the complex don’t want to give up the gains. Please keep this in mind when analyzing “news and analysis” on the Middle East. The media pushes narratives; it doesn’t provide information to make objective choices.
Furthermore, global leaders and especially leaders in Iran, Iraq, Oman, Yemen, Somalia, and Ethiopia have risen to power not for their ability to improve the lives of their people but because they have proven adept at extracting rent from the system by providing the services that allow the complex to function. At the top, these aren’t fanatics; they are self-interested agents of their own interests.
The main beneficiaries seem to have addresses in London, Paris, Washington, Tehran, Jerusalem, Dubai, Geneva, Frankfurt, Beijing, Singapore, and many other places across the globe. Bankers, traders, financiers, government leaders, intelligence services, paramilitary service providers, elected officials, and many others eat at the trough. They have money, power, and every incentive to keep the gravy train running.
Low Energy Prices Are the Key
Technology has given us this wonderful opportunity to have low energy costs. We have to seize that, rather than keep debating and discussing and fighting over it – Michael Porter
Trump has chosen to attack the entrenched interests in the “terrorist industrial complex” by conducting operations in the Caribbean, South America, and the Persian Gulf and these are not interests you can afford to engage in a war of attrition. He has to win and win decisively or they will destroy him and his family.
The American System can only succeed by guaranteeing cheap energy which means eliminating the terrorism premium on oil and gas along with the climate change premium. He doesn’t have time for everlasting negotiations with Iran.
To keep oil prices contained, the White House has been drawing on the Strategic Petroleum Reserve, which is down to 46% of capacity. The US is going to need to start filling it again before much longer.
When combined with the need to keep oil prices low heading into the mid-term elections, the US military must act quickly to wrap up the Iran question. Taking Kharg Island and holding it in trust while directing the cash flows from oil exports is the only path to victory. My point since April has been that the US military has to set the conditions before they can make the move; the endless theater of dealmaking has purchased that time.
Setting the conditions includes clearing the Strait of Hormuz of mines, discovering the locations of Iran’s high-speed fleet of attack craft, determining the locations of missile and artillery batteries in the mountains above the Strait, and clearing some of the excess shipping trapped in the Persian Gulf. Presumably, this has been done.
Europe seems to “support” Iran’s efforts to collect up to $2 million per passage through the Strait of Hormuz. Of course they do! It will allow them to keep the “terrorist industrial complex” well-funded and European influence intact. If the Trump Administration agrees to these fees, then the entire enterprise will have been a failure for the US.
These are the same Europeans who wouldn’t help keep the Persian Gulf open and tried to limit Operation Epic Fury at every turn. Their previous actions and now support for tolls tells us everything we need to know about their position.
By preemptively supporting Iran’s right to collect tolls, they hope to normalize the tax before the final battle even begins. Instead, I expect the Trump Administration to collect tolls in the future to fund the US Navy’s presence in the region.
If the US can successfully take Kharg Island and control Iranian oil exports, I believe it will mark the beginning of the end for the Eurodollar markets to be replaced by dollar-backed stable coins. The Eurodollar markets are unregulated and the SWIFT system has been abused by political interests for decades. Settling global oil transactions with stable coins will starve the bad actors in global financial centers.
At the same time, I think bitcoin could continue to decline. Whether by design or by chance, bitcoin has evolved into a transaction mechanism for nefarious activities. I suspect that it was created to destroy trust in the US dollar but its origins are too nebulous to form a definitive opinion.
My thesis on bitcoin is only starting to coagulate but I’m starting to wonder if its price level will give us a way to quantify the success of the US government’s efforts to stamp out global drug trafficking, arms trafficking, and illicit oil sales. If we think of bitcoin transactions like we consider the velocity of money, a decline in the number of illicit transactions, in theory, should lead to declining demand for bitcoin.
Yes, I know bitcoin represents a path to get capital out of totalitarian realms such as China but if we consider such uses as a constant flow of demand, the change on the margin could mark success or failure in cleansing the global financial system of bad actors. If nothing else, it’s a fun theory to work on.
The Task
Oh, I am heartily tired of hearing about what Lee is going to do. Some of you always seem to think he is suddenly going to turn a double somersault, and land in our rear and on both flanks at the same time. Go back to your command, and try to think about what we are going to do ourselves, instead of what Lee is going to do – Ulysses S. Grant
Whenever I publish on Zerohedge, I read the comments section because there are people who read my stuff that have perspectives I value – in addition to the hilarious assaults on my intellect. One common theme of the previous two parts is that a combination of drones and artillery will decimate the ranks of US Marines landing on Kharg Island.
While drone technology has changed the shape of the battlefield, there is a perception that the US is unprepared to counter these threats which is a mistake. Drones can be countered two ways – network disruption and with directed energy weapons – both in the US arsenal. This includes combating so-called “Jellyfish Swarms”.
The USS Tripoli and USS Boxer both carry the F-35B which has the AN/APG-81 Active Electronically Scanned Array radar plus Distributed Aperture System cameras. This allows the US to see everything on the battlefield and to immediately direct counterbattery weaponry. Any attack on Kharg Island will undoubtedly include a heavy commitment of aerial assets and electronic countermeasures.
The US will not invade Iran apart from some islands. None of the US Navy’s heavy transport ships are in theater which means no invasion. The USS Lewis B. Puller and USS Miguel Keith, both Expeditionary Sea Bases, are in the Arabian Sea which indicates a limited incursion into Iranian territory.
The US has already hit Siri Island with cruise missiles in response to a missile attack on Gulf shipping as well as similar attacks on Iranian coastal installations. These territories will need to be controlled in the near future. The US choice of where to respond supports my Kharg Island thesis. It was a preview of what to expect.
Conclusion
No terms except an unconditional and immediate surrender can be accepted – Ulysses S. Grant
If you are attempting to analyze the Iranian situation without considering the broader struggle, you are missing the picture entirely. The Trump family will be destroyed if he takes half-measures in this fight and the pattern of his actions suggests to me that he understands this.
The only possible victory for the US is to wrest control of the Middle East away from the colonial powers that created the borders following the fall of the Ottoman Empire over 100 years ago. Don’t forget that it was Eisenhower that first moved against Britain, France, and Israel’s attempt to take the Suez Canal from Egypt in 1956.
It was also Eisenhower’s intention to introduce nuclear power in the region to be used for desalinating water from the Mediterranean Sea and Persian Gulf for farming, ensuring colonial independence. It never happened.
The former colonial powers in Europe are in extreme decline. France lost the African Sahel for good earlier in the decade and Britain is on the verge of social collapse. A loss of influence in the Middle East will be the final nail in their coffin which is why the broader battle represents an existential crisis for entrenched interests across Europe.
I know nothing about President Trump or his family but I can see his incentives clearly. If he fails to act decisively, his family will lose everything and that’s a powerful motivator. He has placed himself and the country in this situation which is why half-measures are not an option.
If the US succeeds in controlling Iranian oil revenue, the “terrorist industrial complex” is going to be starved of capital. We should see this in the price of bitcoin and ultimately economic depression throughout Europe due to banking failure. For the world, the result should be lower oil and gas prices.
The financialization cycle is over after 125 years. The future is about re-building a destroyed industrial base, not about trading crypto and Mag 7 stocks. If you’re interested in learning more, visit us at https://geovestadvisors.com/ and give us a call.
Philip M. Byrne, CFA