The Houthi Butterfly Flaps Its Wings
Sean Ring

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.

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!

 
My story starts in Hasbrouck Heights, New Jersey, where I grew up. My childhood was idyllic. I never thought I'd leave the Heights. Well, maybe just for college. When I was searching for colleges, I only looked within a hundred miles or so. I wound up going to Villanova. I stayed there for four years and earned — their word, not mine — a finance degree with a minor in political science. After that, I went to work on Wall Street. I had a menial job at Paine Webber to start, but then I got my first real Wall Street job at Lehman Bros. (before its collapse, of course). I worked there in Global Corporate Equity Derivatives as an accountant, believe it or not. Honestly, I hated the job back then. I didn't know how spreadsheets worked — yes, even with a finance degree. (Now I'm a Microsoft Excel nut. I think it’s one of the most extraordinary things ever invented.) After that, I moved to Credit Suisse, who sent me to London — the center of global operations for banking. I was young. Not only did I love the city for being a Candyland for alcoholics, but I also needed the international experience to cancel out my mediocre grade point average to get into a top 25 U.S. business school. Somehow, though, I stayed for a decade, until I discovered London Business School. There I earned a master’s (HA!) degree in finance. My next job was as a futures broker, which I utterly loathed. When I had enough, I took a year off — pub crawling around London and pissing away my bonus money. Then I figured out that I needed a new job. So I went to work for a company called 7city Learning, where all of the best finance trainers were working. I had no idea about any of that, but imagine walking into the 1927 Yankees locker room and being taught how to hit. I spent my time teaching all the traders exams, the graduate programs of the various big banks and then the CFA Level 1 review courses. Yes, that's the only level I've passed. I hate that exam. I never really wanted to run money anyway. In 2009, my boss asked me to move to Singapore to help build the business in Asia. Then I went to work for another financial training company where all of my friends had migrated. Around the time I was getting bored of Singapore, my old bank asked me to work at talent development for them in Hong Kong. Nearly three years later, I moved to the Philippines, where I started an EdTech startup called Finlingo. Along the way, I’ve racked up a ton of qualifications — I am a CAIA, FRM and CMT, amongst a few other things — but they don't mean anything. All that matters are my experience, my connections and my takes on things. So every day I'm going to do my snarky best to inform and entertain you.

dailyreckoning.com