Lessons from Lebanon

How to Terraform Your Country in a Few Easy Steps. [The Rude Awakening] October 20, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Lessons from Lebanon - Lebanon is a fascinating country just north of Israel. - Unbeknownst to many, it was a Christian country before it became a Muslim majority. - Lebanon is why diplomats shouldn’t draw straight lines on a map. --------------------------------------------------------------- [Sean Ring] SEAN RING Happy Friday! Lebanon, a small but intricate Middle Eastern nation, lies perched on the Mediterranean coast and packed with many religious, ethnic, and political complexities. Understanding Lebanon’s religious demographics offers more than a slice of historical pie; it’s a full-course meal with economics, geopolitics, and culture layered in. The Background First, some background. Lebanon is a sectarian-based society. Religious identities are deeply interwoven into the country's political fabric, dating long before the modern Lebanese state emerged. Historically, the Maronite Christians had considerable influence and majority status in Lebanon, especially in the Mount Lebanon area. This influence was fortified during the era of the Ottoman Empire when Lebanon was part of the greater Syrian region. Under the Ottoman millet system, which was a framework for allowing religious communities to govern themselves according to their laws, the Maronites enjoyed a reasonable amount of autonomy and safety in the mountainous regions they inhabited. The Sykes-Picot Agreement Fast forward to the 20th century, when the French took control of Lebanon after World War I as part of the infamous Sykes-Picot Agreement. It’s a deal as notorious in the Middle East as subprime mortgages are in the world of finance. The Sykes-Picot Agreement was a clandestine deal that redrew the map of the Middle East and laid the groundwork for a century of turmoil, geopolitical chess, and economic opportunism. Remember it well, as it’s one of the reasons David Fromkin named his bestselling book The Peace to End All Peace. For a start, the Ottomans had ruled much of the Middle East for centuries. Their empire was a sprawling mass that incorporated a variety of ethnic, religious, and cultural groups. The one thing that united them? They were subjects of the Sultan in Istanbul. Sykes and Picot, however, saw the Middle East through the lens of strategic interests, access to vital resources (you guessed it - oil), and good old colonial exploitation. They weren't concerned about the Shia or Sunni, the Kurds or the Arabs; they were looking at the geopolitical chessboard and wanted to place their pieces wisely. [Rude] Credit: [( So, the agreement went like this: Britain would get control over what are now Iraq, Kuwait, and parts of Jordan. France would get modern-day Syria and Lebanon. Palestine would be under international administration because of its significance to Christians, Jews, and Muslims. Maps were drawn, and lines—oh, those notorious straight lines—were etched onto the canvas of the Middle East with the nonchalance of a graffiti artist tagging a subway train. The problem? People live in those etchings. People with histories, cultures, and traditions that didn't fit neatly within those straight lines. The Kurds were split among Turkey, Iraq, and Syria. The Sunnis and Shias found themselves sharing future battlegrounds. Christians in Lebanon found themselves in a Francophile state, distanced from their Arab hinterland. Sykes-Picot didn't just allocate territory; it sowed the seeds for conflicts that would rage for generations. [A $608 credit has been applied to your account.]( [Please click here to learn how to claim it.]( — Customer Service, Paradigm Press [Click Here To Learn More]( Lebanon, Specifically Under the French Mandate in Lebanon, the French colonial powers favored the Maronite Christians. Their majority status was institutionalized when creating the modern Lebanese state in 1943. This new state, larger than the historic Mount Lebanon, was a cocktail of religious groups, including Sunni Muslims, Shia Muslims, Druze, and, of course, Maronite Christians. The 1943 National Pact, a gentlemen’s agreement, if you will, was Lebanon’s attempt at power-sharing. The unwritten accord specified that the president would be a Maronite Christian, the prime minister a Sunni Muslim, and the speaker of the parliament a Shia Muslim. This quid pro quo aimed to acknowledge the Christian majority while accommodating the Muslim populace. However, there was one critical flaw: this power-sharing model was established based on a 1932 census, which was never updated. Why? Because the religious demographics were changing, doing a new census was tantamount to opening Pandora’s box. Now, let’s get into the demographic shift itself. Several factors contributed to the change from a Christian majority to a Muslim majority in Lebanon. First, different Muslim and Christian communities had varying birth rates, with Muslims outpacing Christians. (Sound familiar?) Secondly, urbanization and modernization had an impact. The booming city of Beirut attracted a large Sunni Muslim population, altering the religious balance. But the game-changer was the Palestinian influx. Those Palestinians, Again… The arrival of Sunni Palestinian refugees after the 1948 Arab-Israeli war and subsequent conflicts led to a further increase in the Muslim population. The Palestinians added numbers and a volatile political ingredient to Lebanon’s complex religious recipe. The tension reached its zenith during the Lebanese Civil War (1975-1990), a destructive conflict that shattered the country and left it deeply scarred physically and spiritually. When right-wing pundits ask why Muslim countries aren’t taking in Palestinian refugees, this is part of the answer. The war brought further demographic changes. Many Christians emigrated, leading to a decline in their population percentage. This diaspora has continued, with many Lebanese Christians residing abroad, from Sydney to São Paulo. Fast forward to the 21st century, and the Muslim majority is an open secret, yet the political system still operates as if it’s 1943. Add in the Syrian crisis, which has led to an influx of Muslim refugees into Lebanon, and the demographic kaleidoscope turns once again. Wrap Up From an economic and geopolitical angle, this shift is seismic. Lebanon is a case study of how changing religious demographics reflect and affect socio-economic stability and political alliances. America needs to take note. Europe, at least the Western part, is already lost. With the rise of Iran-backed Hezbollah, a Shia group, as a dominant political and military force, the U.S. and the West must re-calibrate their strategies in the region. For instance, the petrodollar recycling mechanism, a cornerstone of U.S. dollar hegemony, becomes shaky when geopolitical allies become complicated frenemies. In sum, Lebanon’s shift from a Christian to a Muslim majority is filled with historical contingencies, colonial legacies, and geopolitical intricacies. And it’s far from over. We see the unintended consequences of colonialism, the pitfalls of power-sharing based on religious identity, and the undeniable influence of demographic changes on economics and geopolitics. Understanding Lebanon isn’t just an academic exercise. It’s essential for anyone looking to navigate the complexities of Middle Eastern geopolitics, global finance, or even the labyrinthine networks of power and influence that shape our world today. After all, in our interconnected global village, a tremor in a small Middle Eastern country can send shockwaves across capitals, markets, and war rooms. We’re in the middle of one of those shockwaves right now. Have a great weekend. All the best… [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( In Case You Missed It… Good morning Reader, I was looking through my old files and remembered that I hadn’t told you this story yet. When people ask me why I’m so against shorting options, this is what I tell them. I’ll elaborate on what can happen — though admittedly very rarely does - when you’re short volatility and you don’t know what you’re doing. The Rogue Trader Nick Leeson was an ordinary boy from the ordinary London suburb of Watford. He was going to live an ordinary life until he got the opportunity to work in The City. That’s The City of London, where serious international banking gets done. It’s the British bastion of capitalism, whose profits pay for the folly of the British Welfare State. But Nick didn’t have the right background or proper accent to succeed there. So, when he was given the opportunity to move to Singapore, he jumped at the chance. As a side note, when mediocre bankers are sent from London to Hong Kong, they’re pejoratively called FILTH — Failed In London, Try Hong Kong. Hint, hint… Nick got on a plane and went to Singapore, where he was simultaneously named a floor trader and Head of Settlements. In the early 90s, that nonsense could happen. Let me confirm: it means he was responsible for checking his trades. And yes, you’re right; it was a recipe for disaster. Without overegging the pudding, let me get straight to the trades that brought down Barings Bank, HM The Queen’s Bank, in 1995. Much of this is by memory, as my edition of Rogue Trader, Leeson’s autobiography, was lost in one of my many moves. Thus, any errors are my own. [[Revealed!] New AI Opportunity Bigger Than The PC?]( [James Altucher]( Just imagine being able to turn back the clock to the 1980s – right as a new technology known as the PC was getting its start… Seeing the promise of the PC – and captivated by Microsoft’s technology – an early investor decides to put in $500 during the company’s IPO in 1986. As of today, that $500 investment would have turned into a fortune worth over $1.6 MILLION. I bring this up because we are at the dawn of a new innovation which could be even BIGGER than the PC. [I’m talking about artificial intelligence, or AI](. According to Yahoo Finance, “we are on the cusp of a technological revolution that will fundamentally change how we live our lives.” And you have the chance to invest on the ground floor… [Click here now to see the 3 tiny AI stocks best positioned to profit](. [Click Here To Learn More]( Straddle This! I’m going to proceed in a plain English manner, not making it too geeky or Greeky. If you’re a pro, please forgive me for the oversimplification. First, let’s get long. [chart] This is the payoff profile of a long call position at expiry. It’s a bullish trade. In this case, the call buyer pays $5 per share for the right to buy 100 shares later at $225. Therefore, the breakeven point is $5 + $225 = $230. The buyer can only lose his premium, no more. That’s still 100%, to be sure, but it’s not as much as he may lose holding the shares. The upside is unlimited. Think TSLA call buyers and how much they made in the recent past! Next is a long put option. [chart] A put option is where the buyer has the right to sell shares at a specific price in the future. In this case, the buyer paid $6 for the right to sell these shares for $225. This is a bearish trade, as the buyer must think the price will decrease. The breakeven point is $225 - $6 = $219. That is also the maximum gain, as it’s not unlimited (though it’ll feel almost as good)! So, a long call and a long put, separately, are directional trades. But what happens when we put them together? Remember, these calls and puts will have the same underlying, strike price, and expiry. [chart] Et voila! You’ve got a volatility trade! That is, you’re long volatility. (I always write the “volatility” next to the payoff profile to make it easier for grads to remember.) Looking at that payoff profile, you see something obvious: it doesn’t matter which direction the underlying goes, as long as it goes far. So, you’ve got the unlimited gain potential from the call. And you’ve got the limited but substantial potential gain from the put. Thus, there are two breakeven points. This will be the strike price plus and minus the combined premiums. The upside breakeven point is $225 + $11 = $236. The downside breakeven point is $225 - $11 = $214. As long as the underlying either goes up beyond $236 or down below $214, you will make money. Of course, the pros will manage these trades minute to minute and adjust accordingly. However, this is something retail investors, who have other jobs, will find exceedingly difficult to do. But for now, know that a long straddle is a long volatility trade. Derivatives Are a Zero-Sum Game Derivatives are a zero-sum game. That means no wealth is created or destroyed by trading them. Of course, there are winners, and there are losers. It’s capitalism at its very finest. But overall, nothing is lost. That means if you can buy a straddle, then someone must have sold it to you. Someone like, say, Nick Leeson. To illustrate, let’s take the long straddle we just looked at and flip it upside down. [chart] It’s the exact same trade but from the seller’s perspective. Let me ask you this: what’s the best thing that can happen to the seller? Answer: nothing. Literally. If the straddle expires at $225, the seller will keep the $11 per share premium. Anywhere else, he doesn’t maximize his gain. Below $214 and above $236, he loses money. Again, if a pro entered this trade, he’d keep his eye on it and manage it accordingly. He can use stop-loss orders, close out a side, or turn the straddle into an iron butterfly. Don’t worry about these things right now. Because if your name is in God’s book on a particular day, he will get you no matter what. And that happened to Nick Leeson. How Straddles Killed Nick Leeson and Barings Bank Leeson was already down. He was supposed to be running an arbitrage operation, taking no risk. But he couldn’t help himself. Leeson already racked up millions in losses. Moreover, he was losing nearly from his first day in the office in 1992. It just turned 1995, and he was running out of options - no pun intended. So how could he get that money back without incurring much more risk? Boom! He could sell straddles! That would let him take in the premium from both the calls and puts. The markets are quiet anyway, so it’s a sure thing. The date was January 16, 1995. Leeson sold a bunch of straddles on the Nikkei Index. He probably went to Harry’s Bar on Boat Quay after work, thinking all was well. Incidentally, Harry’s is next to my favorite SG watering hole, The Penny Black. Harry’s used to have a plaque on the bar that read, “Here sat Nick Leeson.” I saw it myself! Then, in the early hours of January 17, 1995, the unthinkable happened. The Kobe Earthquake struck. [chart] Leeson, already down GBP 208 million, was crushed. The Nikkei gapped down on the open. Of course, the call options would expire worthless, but he was now short deeply in-the-money puts. To counteract this, Leeson bought futures as the market “couldn’t go down anymore.” But, of course, it did — much, much more. Nick Leeson’s losses totaled GBP 827 million, about $1.4 billion. That doesn’t sound like much now, but it was enough to wipe Barings, The Queen’s Bank, from the map. A friend once told me of an event he held in Singapore. A member of the Royal Family was present to open the event. My friend pointed out the window onto Raffles Place and said, “That’s where Barings office used to be.” The reply was, “My family lost a lot of money that day.” That is the story of Nick Leeson, told as plainly and as “Greeklessly” as I can. It’s a great cautionary tale to retail options traders and professionals alike. Heck, it can be said that Leeson inadvertently wrote today’s derivatives regulatory structure. The upshot is there are far better, less risky and less stressful ways to participate in the market than by shorting options. Have a great day today! All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com X (formerly Twitter): [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@rudeawakening.info. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. 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