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Will It Start An Economic Hurricane on the Other Side of the World? | The Houthi Butterfly Flaps Its
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Will It Start An Economic Hurricane on the Other Side of the World? [Morning Reckoning] January 04, 2024 [WEBSITE]( | [UNSUBSCRIBE]( The Houthi Butterfly Flaps Its Wings Asti, Northern Italy
January 04, 2024 [Sean Ring] SEAN
RING Hi Reader, Now that my parents are only half a mile away, long-forgotten memories have flooded back. Thanks to my mother’s unimpeachable cooking skills, I’m again enjoying all the trappings of my youth. One such happiness is eating simple pasta and tomato sauce. Sure, my mother’s lasagna is second to none, but that’s more of a holiday dish. (Indeed, I rolled home after Christmas dinner. It's too bad Pam and Micah had to push me uphill!) Another favorite is bow-tie pasta. But as I was helping Micah with his homework a few weeks ago, I learned that farfalle means “butterfly” and not “bow tie.” We always called farfalle pasta bow-ties. Was this a case of mistaken vocabulary? Not at all. In Emilia-Romagna, a region in Northern Italy near Il Piemonte, farfalle are known as strichetti, the local word for "bow ties.” It reminds me of an old Venetian joke. “What’s the most common foreign language spoken in Venice?” “Italian.” My ancestors must’ve taken the bow-tie name across the Atlantic in the old days. Speaking of butterflies, an unlikely one has been flapping its wings near the Suez Canal. And it may just cause a financial hurricane in the United States. [ Strange and Powerful AI Project Revealed]( Jim Rickards was recently passed some urgent new intelligence involving a $10 million A.I. project … That could have a massive and direct impact on your life. Everything you need to know is in this 2-minute AI briefing . [Click here to play his urgent message now.]( [LEARN MORE]( The Butterfly Effect Houthi rebels are the new Somali pirates. Imagine a bunch of goatherders, who are pissed off at Israel over the Gaza bombing, stopping world trade. It’s improbable. Unlikely. Fatuous, even. And yet, here we are, talking about everything Joke Biden needs to bury if he (or his body double) wants to win in November. The Butterfly Effect is when a very small change in initial conditions that creates a significantly different outcome. In 1950, Alan Turing noted: "The displacement of a single electron by a billionth of a centimeter at one moment might make the difference between a man being killed by an avalanche a year later or escaping." There is no need to wonder what Turing would be thinking if a bunch of Houthis were sitting on the cliffs lining the Bab Al-Mandeb Strait, lighting off cheap drones and rockets at any Israeli or Israel-aligned ship. If you’re Russian or Chinese or anyone aligned with the Global South, pass “Go” and collect $200. From the December 22nd edition of the [Rude Awakening]( On our editorial call on Wednesday, ex-naval aviator and Paradigm’s venerable historian Byron King mentioned something I hadn’t considered. Byron said - and I’ll paraphrase - that the Houthis were using $100,000 drones to attack commercial shipping in the Red Sea, while the US Navy was using $1 - 4 million rockets to shoot those drones down. You don’t need a mathematics degree to see why experts think this unbalanced exchange of munitions will eventually pressure the Pentagon. Well, thanks to these Houthis, we’re heading back to the water routes of the 1860s! Why Americans Need to Care About This… And Think Carefully. You may not yet recognize the Bab Al-Mandeb Strait I mentioned earlier. That’s the waterway a ship needs to travel through to get to the Suez Canal. If the Strait is blocked due to rocket fire and the subsequent suspending of maritime insurance, then the Canal is inaccessible. And that means you’ve got to sail around Africa for goods to reach Europe and the West. Credit: [The Cradle]( The military angle is easy enough. From [The Cradle]( While the US military is successful at producing expensive, technologically complex weapons systems that provide excellent profits for the arms industry, such as the F-15 warplanes, it is not capable of producing enough of the weapons needed to actually fight and win real wars on the other side of the world, where supply chains become even more critical. But the economic warfare is even more dreadful. Impact on Shipping Costs Shortest Route The Suez Canal offers the most direct sea route between Asia and Europe, significantly reducing travel time and distance compared to the alternative Cape of Good Hope route (around the bottom of Africa). When the canal is inaccessible, ships are forced to take this longer route, increasing travel times by weeks and fuel costs exponentially. Fuel Costs Longer journeys translate directly into higher fuel consumption. This additional cost is invariably passed onto consumers, raising the prices of goods transported via these routes. Charter Rates The canal closure often leads to a shortage of available shipping capacity. Ships tied up in extended voyages reduce the supply of vessels available for other routes, driving up charter rates. This, in turn, inflates shipping costs, a burden that the consumer again bears. Congestion and Delays The aftermath of a canal closure typically involves significant congestion and logistical backlogs. This can lead to substantial delays, further disrupting shipping schedules and increasing operational costs. Breaking the Supply Chain Just-in-Time Inventory Modern business models, such as just-in-time inventory systems, rely heavily on timely and predictable delivery of goods. The closure of the Suez Canal disrupts these delicate systems, leading to widespread shortages and inefficiencies. Perishable Goods The delay in shipping routes particularly impacts the delivery of perishable goods. This leads to wastage and disrupts food supply chains, affecting markets and consumers globally. Manufacturing Delays Industries dependent on specific components, such as automotive and electronics, are significantly impacted by delays in the delivery of these parts. This halts production lines, leading to broader economic repercussions. Global Interconnectivity The closure of the canal highlights the deeply interconnected nature of global trade. A disruption in a single yet crucial location can have far-reaching effects, impacting various sectors and economies worldwide. Inflationary Pressures Increased Transportation Costs The surge in transportation costs due to longer shipping routes and heightened fuel consumption contributes to overall inflation, as these costs are typically transferred to the consumer. Supply Shortages Disruptions in supply chains can create shortages of various goods. According to the principles of supply and demand, reduced supply often leads to increased prices, contributing to inflation. Speculative Increases Anticipation and speculation about delays and shortages can trigger preemptive price increases. These speculative actions can exacerbate inflationary pressures even before actual shortages occur. Economic Recovery Post-Pandemic In a post-pandemic world, where economies are in various stages of recovery, the closure of a critical trade route like the Suez Canal compounds existing challenges, such as labor shortages and heightened consumer demand, further fueling inflation. Broader Economic Implications Global Trade Dynamics The Suez Canal's role in global trade dynamics is multifaceted. It's a conduit for goods and a barometer for global economic health. Its closure signals deeper issues in international trade relations and economic stability. Energy Markets The canal is also vital for the transport of oil and natural gas. Its closure can disrupt energy markets, leading to fluctuations in energy prices globally. This domino effect affects industries and consumers alike, as energy costs are a fundamental component of almost every economic activity. Long-Term Strategic Changes Repeated disruptions may prompt companies to reassess their supply chain strategies. This might include diversifying shipping routes, increasing inventory levels, or even reshoring some manufacturing operations. While these strategies can mitigate risks, they also come with increased costs and complexities. Environmental Impact Longer shipping routes increase costs and have a significant environmental impact. Wrap Up Whether you own a business or are just looking after your investments, it’s paramount that you keep abreast of this situation. Yes, a bunch of goatherders has just thrown a monkey wrench into the world's economic works. But this also represents an enormous opportunity to profit if you keep your head about you. Look at the energy and transportation sectors. Look at precious metals. Look at other tangible assets and commodities, like copper. While the Houthis are wreaking havoc on the West, you can protect your investments and profits before most people even know what’s happening. Good hunting! All the best, [Sean Ring] Sean Ring
Contributing Editor, The Morning Reckoning
feedback@dailyreckoning.com
X (formerly Twitter): [@seaniechaos]( [Urgent Notice From Paradigm CIO Zach Scheidt!]( [Click here to learn more]( Hi, Zach Scheidt here… I’m the Chief Income Officer at Paradigm Press. With inflation raging (and showing no signs of coming to an end any time soon), almost everyone in America is feeling the pain in a big way. Which is why, several months ago, I set out on a big mission… my goal was to create a [complete, step-by-step plan to surviving and beating inflation]( … one that anyone could take advantage of. Today, after hundreds of hours of research, I’m revealing all of my findings. [Simply click here now to see how to survive America’s deadly inflation crisis]( . [LEARN MORE]( In Case You Missed It… Watch Out: FOMO Trading Is Back Greg Guenthner, Editor [Greg Guenthner] GREG
GUENTHNER Good Morning Reader, FOMO is finally back! Fear of missing out is one of the most powerful forces in the market. When conditions are just right, FOMO latches onto our lizard brains, leading to terrible investing decisions. We chase overbought stocks, fall for dubious stories and scoop up shares of some of the most risky, speculative garbage companies we can find. What could possibly go wrong? Well… everything, of course. To be fair, I’m not knocking stock market speculation. After all, I’m a trader. I have no trouble buying less-than-perfect stocks or flipping shares of fundamentally challenged companies. Different stocks and sectors fall in and out of favor all the time. And improving or deteriorating fundamentals have little to do with short-term performance. Market conditions and narratives are the main determinants of how a stock will perform over shorter time frames. Consider the broader market narratives and how they’ve evolved since late 2022… Many stocks — including mega-cap leaders Apple Inc. (AAPL) and Tesla Inc. (TSLA) — were in free-fall in December. Investors had endured a painful correction lasting the entire year. Not only were the averages in bear market territory — the popular Covid Bubble stocks had been decimated. Anyone heavily concentrated in these names was sitting on huge losses — far deeper than the 20% correction in the S&P and 30% drop in the Nasdaq Composite. It’s safe to say that most (if not all) investors were less than enthusiastic about stocks heading into 2023. Then, a funny thing happened. The market rallied. A few weeks later, stocks were still zooming off their lows. But no one believed it. We’ve talked about these early-stage bull moves before: the disbelief rallies. After a few failed relief rallies leave overeager buyers stuck in their trades, most folks simply give up. Then, when a rally does finally stick, the market’s cried wolf so many times that most investors simply don't trust the move. They sit on the sidelines and wait for the market to prove itself. This perfectly describes the market action during the first quarter. Most analysts, fund managers, and individual investors simply did not believe that the rally would last. Instead of buying stocks, they waited for the market to roll over. But the averages weathered their first meaningful pullback in February. They also survived a banking crisis the very next month — and even rallied into the second quarter. In fact, every single time the so-called experts said the market would roll over, we saw another rally. Now we’re finally seeing investors come around to the idea that the market has turned a corner. But not everyone is happy about it. The Chase is On! “People will hate on a stock-market rally,” a recent Bloomberg Surveillance note begins, “They'll say it's fake, or just a handful of tech stocks making everything look better than it is. But the bottom line is, the S&P 500 and the Nasdaq — and especially the Nasdaq 100 — are up significantly, despite all the naysayers, and that alone is enough to drag cash in.” There’s that FOMO talking again… It’s not only retail investors getting “dragged in” to this rally. The pros are also getting sucked back into stocks. Fund managers who missed the earlier stages of the rally that began in January are significantly lagging their benchmarks. If you’re managing money and you’ve been twiddling your thumbs worrying about elevated valuations in this group, you might be in a bit of trouble here. The runaway performance of the big tech names has created a hold your nose and buy situation that’s powering this rally higher into the summer months. As Citigroup’s Stuart Kaiser explains in that very same Bloomberg piece, “We are reluctantly staying in the tech trade.” In other words, get onboard — or your job might be in jeopardy. Now, we have the strongest stocks attracting even more attention. Mega-cap tech, semiconductors and artificial intelligence names are rolling as summer approaches. Can the good times keep rolling? Or will these trends run into some trouble as the summer heat approaches? Buying Into the Summer Doldrums Now that the herd is backing up the truck and pushing many market leading stocks to new 52-week highs, we should take a moment to see how the S&P fares during a typical pre-election year. Don’t get too hung up on the S&P’s performance perfectly mirroring the pre-election year composite. The trend is what counts. And so far this year, it’s closely followed a typical pre-election cycle. Next, take a look at how the composite behaves at the end of the second quarter. In a pre-election year, the S&P typically tops out at the end of June and remains in a range until an end-of-year push in November - December. Will the market follow the blueprint this year? I doubt it will match up perfectly. But the composite does give us a general idea of what we could expect as this rally matures. The market loves to get everyone bulled up at the wrong time. No one wanted anything to do with stocks when they were ripping in January. Now, they’re buying with both hands into a potential short-term top. Best, [Greg Guenthner] Greg Guenthner
Contributing Editor, Morning Reckoning
feedback@dailyreckoning.com Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Sean Ring] [Sean Ring, CAIA, FRM and CMT]( is a former banker and financial educator and is the editor of the Rude Awakening. Sean has trained interns and graduates from Goldman Sachs, Morgan Stanley, Citi, Bank of America, Standard Chartered Bank, DBS (Singapore), the Abu Dhabi Investment Authority (ADIA), Bank Indonesia (the central bank), HSBC, Barclays, RBS, and BlackRock. He knows the global economy is being corrupted by forces that most people can't understand and has used his unique and worldly experiences to help people navigate the markets. [Paradigm]( ☰ ⊗
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