First, we want to wish all clients, referring consultants, business colleagues, and all our readers a safe journey with good health as we commence 2024.
Next, since this discussion will be about the defense of our country, let me first make a “compliance” disclosure. The US Equity ETF portfolio starts the year with an overweight position in aerospace-defense. As you read this missive, the reasoning may become apparent. For me, it is already compelling. In my opinion, we are already engaged in a modern version of war.
The national political dysfunction has placed the country’s national defense in jeopardy, in my opinion. And in so doing, it encourages bad actors to misbehave. While our nation’s preeminent defense capability is still salvageable, the risk is rising. Nero fiddling while Rome burned is an apt metaphor for Washington’s fiddling while the world exhibits a growing tendency toward warlike behavior.
Here’s where we are.
We still don’t have a completed federal budget. And a small number of Congressmen will now determine if we’ll see a repeat of House Speaker McCarthy’s ouster, now aimed at Speaker Johnson, or if we will witness some other type of Chaos Caucus shenanigans. For McCarthy, it was a gang of 8, led by Florida Congressman Matt Gaetz. I will have more on him in a future missive.
To get to the most recent temporary budget agreement, it took the same type of bipartisan workaround under Speaker Johnson as it did under Speaker McCarthy. That is why the federal government didn’t have to shut down before the holidays. Note that the political on-again off-again schedule is now running around the military pay dates. Aaargh! The same workaround was true for the passage of the annual National Defense Authorization Act (NDAA), which was held up for months. That basic bipartisan defense package was passed, but the additions to it are still being held hostage. Until this year, national defense was considered exempt from partisan political wrangling. Democrats and Republicans agreed that the national interest should take priority over partisan political matters. Under current budget rules, defense may be cut if there is no final budget agreement, unless there is a bipartisan agreement to exempt defense from the culture war haters’ political squabbling.
There are three links at the bottom that describe what happened in the 11th-hour session before Congress left town for the holiday break.
Let’s get to the evidence of war.
There are two shooting wars in the world, one in Europe and one in the Middle East, and there are multiple developing threats elsewhere. For a discussion of a possible future war number three, see Sam Rines’ discussion on Venezuela-Guyana (“The Hidden South America Oil War & The enerGY Spread,” https://www.cumber.com/market-commentary/hidden-south-america-oil-war-energy-spread).
Recent news about Ukraine’s successful Crimea naval attack is a powerful statement in favor of Ukraine’s tenacity in defending itself, while Russian vulnerability is exposed. Russia is conscripting more young men at younger ages. Russian disruptive disinformation is expected to ramp up in 2024 to include interference in the American election cycle. Putin’s own “re-election” is assured, as his opposition is either dead or moved to Siberia (literally).
Add to all this the threats to global shipping as the war in the Middle East spreads.
This House Chaos Caucus budget behavior comes as the United States is organizing a maritime strategy in the Red Sea and beyond. Iranian missiles have been launched by the Houthi faction in Yemen at Israel, at ships traversing the Red Sea, and in the direction of a US warship patrolling the area, the USS Carney. Yes, a probable attempt to sink an American warship with an Iranian missile fired from Yemen. Please note that the French destroyer on location there has also had its experiences with Iranian drones fired from Yemen. (See the resources list at the close of this commentary.)
Additional reports of attacks on shipping by Houthis are coming nearly daily. BP, Maersk, and others have temporarily ceased using the Red Sea and Suez Canal because of the Houthi war risk. Ships have been attacked in the Indian Ocean, as well. The shipping risk is spreading daily. The rerouting of ships and higher-war-risk maritime insurance premiums have raised shipping costs by more than $10,000 per container (hat tip Joe McAlinden, www.mcalindenresearchpartners.com), and that number is rising with each new event. Note that the largest ships carry 24,000 containers. For some of the deep details see www.Maersk.com and observe the shipping notices and press releases. More specifics are here: “Container rates hit $10,000 as ocean freight inflation soars in Red Sea crisis, https://www.cnbc.com/2023/12/21/container-prices-hit-10000-freight-inflation-soars-in-red-sea-chaos.html.
We track shipping threats worldwide. Here’s one reported in the Wall St. Journal: “U.S. Says Iran Drone Struck an Oil Tanker Near India,” https://www.wsj.com/world/middle-east/u-s-says-iran-drone-struck-an-oil-tanker-near-india-db4a1233?st=8z3d2n4k09xssql. Here’s an excerpt:
“The motor vessel Chem Pluto, a Liberia-flagged, Japanese-owned, and Netherlands-operated chemical tanker was struck at approximately 10 a.m. local time today in the Indian Ocean, 200 nautical miles from the coast of India, by a one-way attack drone fired from Iran,” a Pentagon spokesperson said in a statement. The Chem Pluto, which was loaded with refined products, was sailing from Jubail in Saudi Arabia to Mangalore in India when it was struck 200 nautical miles southwest of Veraval, India. The attack also prompted an Indian Navy ship to head toward the vessel to provide assistance, said Christopher Long, intelligence director at Neptune P2P.
Long said the attack took place 1,530 miles from Yemen, within reach of the Shahed 136, an Iranian attack drone used by the Houthis that can fly up to 1,600 miles. Whoever was behind it, “This incident is a game changer due to how far from land that it happened,” said Long, a former British Navy officer in the Persian Gulf.
Dear readers, in my opinion the United States and its allies are engaged in war. This is not the time for politicians to screw around with the defense budget. In my opinion, the Hamas, Houthi, Hezbollah, Iran connection is so obvious that you would have to be politically blind not to see it.
If you need additional convincing, there is this Dec. 26 X (Twitter) post from US Central Command: “U.S. assets, to include the USS LABOON (DDG 58) and F/A-18 Super Hornets from the Eisenhower Carrier Strike Group, shot down twelve one-way attack drones, three anti-ship ballistic missiles, and two land attack cruise missiles in the Southern Red Sea that were fired by the Houthis over a 10-hour period which began at approximately 6:30 a.m. (Sanaa time) on December 26. There was no damage to ships in the area or reported injuries.” (https://twitter.com/CENTCOM/status/1739746985652158755)
I expect war to be a major topic as the election cycle progresses in America. Here’s why. So far, a few ships have been hit but none sunk. The number of attacks increases daily. So does the range and sophistication of the Iran-sourced, Houthi-launched missiles and drones. Think about the impact of a direct, Iran-backed, Houthi missile strike that sinks a container ship with 20,000 containers. We are already witnessing daily attempts to do that. We are already witnessing huge American defense maneuvers to prevent an actual direct hit. And we are witnessing a theater of air force and naval military operations that is now thousands of miles wide. It will only take one direct hit to ignite this conflagration. That is my opinion. Now here’s some more evidence in the resources list.
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Resources on US national defense and the congressional defense bill
“Senate passes $886 billion defense spending plan with pay raises for troops, Ukraine aid,” https://www.usatoday.com/story/news/politics/2023/12/13/senate-oks-886-billion-defense-bill-with-pay-raises-ukraine-aid/71840431007/
“House sends defense bill to Biden, despite conservative anger over spy powers, culture wars,” https://www.politico.com/news/2023/12/14/house-sends-defense-bill-to-biden-despite-conservative-anger-over-spy-powers-culture-wars-00131765
“House passes defense policy bill, a rebuke of GOP’s far-right fringe,” https://www.washingtonpost.com/national-security/2023/12/14/house-defense-bill-ndaa/
“Putin waits for Trump to negotiate Ukraine without EU,” https://www.euractiv.com/section/politics/news/putin-waits-for-trump-to-negotiate-ukraine-without-eu/
“AMERICA’S STRATEGIC POSTURE: The Final Report of the Congressional Commission on the Strategic Posture of the United States,” https://armedservices.house.gov/sites/republicans.armedservices.house.gov/files/Strategic-Posture-Committee-Report-Final.pdf (PDF file)
Resources on Houthi-Iranian aggression in the Red Sea
“Who Are Yemen’s Houthis and Why Are They Attacking Israel?” https://www.bloomberg.com/news/articles/2023-10-20/who-are-yemen-s-houthis-can-they-strike-israel
December 9, 2023 statement of the Yemeni Armed Forces (Houthis): https://twitter.com/dana916/status/1733533823160274976?s=20
“Yemen’s Houthis warn they will target all Israel-bound ships in Red Sea,” https://www.aljazeera.com/news/2023/12/9/yemens-houthis-warn-they-will-target-all-israel-bound-ships-in-red-sea
“U.S. warship deflects Houthi drone attacks in the Red Sea,” https://www.youtube.com/watch?v=WFd2brM_Yhg
“How the USS Carney Is Fighting Off Iranian Attacks in the Middle East | WSJ Equipped,” https://www.youtube.com/watch?v=aBJ2TpRa83k
“Houthi Attacks on Commercial Shipping in International Water Continue,” US Central Command, https://www.centcom.mil/MEDIA/PRESS-RELEASES/Press-Release-View/Article/3605010/houthi-attacks-on-commercial-shipping-in-international-water-continue/ We recommend that readers sign up for the Centcom releases as a source to follow events without the distortions of disinformation.
“Hamas's Cheap, Makeshift Drones Are Outsmarting Israel's High-Tech Military,” https://www.bloomberg.com/news/articles/2023-12-19/israel-s-advanced-defenses-are-pierced-by-makeshift-hamas-drones-in-gaza-war
“Inflation, Oil Exposed Amid Red Sea Crisis. What It Means for Rate Cuts,” https://barrons.cmail20.com/t/j-e-sitkdht-dytihjxdl-r/
Excerpt:
About 12% of global trade passes through the Bab el-Mandeb Strait at the southern end of the Red Sea – it’s just as important as the Suez Canal on the northern end. Some 10% of the world’s oil, 8% of liquefied natural gas, and 30% of container shipments use the narrow passage of water, according to Marco Forgione at the Institute of Export and International Trade in London.
“Who made millions trading the October 7th attacks?” https://www.economist.com/finance-and-economics/2023/12/05/did-hamas-make-millions-trading-the-october-7th-attacks
“War Risk Insurance,” https://www.cumber.com/market-commentary/war-risk-insurance
“Gaza Is Making Oil and Gas Markets Twitchier,” https://www.wsj.com/business/energy-oil/gaza-is-making-oil-and-gas-markets-twitchier-f822da43
David R. Kotok
Chief Investment Officer
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