World Shipping Risk Is Worsening

The graphic below is a Bloomberg-sourced depiction of what is happening to global shipping rates. (Hat tip to Cumberland’s Dan Himelberger for his help in finding the correct chart.)  The chart therein is worth a thousand words. About 45% of Europe’s shipping normally goes through the Red Sea and Suez Canal. And a major source of revenue for Egypt’s government is Suez Canal transit fees.  Note that it takes a few months for these higher costs to get into the final prices paid for anything that uses shipping by water for transit.  So, we haven’t seen any inflation shocks yet.  This is a changing situation that is worsening daily. 
 

 
Let’s segue.   Here’s a US Central Command advisory for January 9, 2024. (I try to read these daily as received.) 
 

(https://twitter.com/centcom/status/1744898491917492690?s=12&t=LFKFffCQXRqJrDrqt0OO9Q)
 
And segue again.  Here’s a link to a Dec. 19, 2023, US State Department release on the 10-nation consortium assembled to defend the Red Sea and global shipping activity from the Houthi attacks: 
 
“Joint Statement on Houthi Attacks in the Red Sea,” https://www.state.gov/joint-statement-on-houthi-attacks-in-the-red-sea/ .   Note that as of this writing the number of nations is up to 14.
 
And the last segue.  Here’s an excerpt from a JINSA Analysis briefing on the Houthi situation:

·  On January 9, the Iran-backed Houthis conducted one of their largest-ever attacks on commercial vessels in the Red Sea, launching 18 attack drones, two cruise missiles, and a ballistic missile at areas in the Red Sea through which dozens of commercial vessels were transiting at the time. Though a combined effort of F-18/A fighter jets deployed from the USS Eisenhower, an additional three U.S. warships deployed as part of the USS Eisenhower Carrier Strike Group, and a British warship in the area intercepted every projectile, the attacks demonstrate that the United States and its partners have not deterred the Houthis. The Houthis have not been deterred despite the December 18 announcement of the formation of a U.S.-led multinational maritime task force to protect commercial vessels in the Red Sea, Operation Prosperity Guardian.         ·  The successful interception of all the projectiles underscores the importance of continued U.S. naval vessel deployment to the region to protect one of the world’s most vital waterways for global commerce. The USS Eisenhower Carrier Strike Group that intercepted some of the projectiles was deployed to the Eastern Mediterranean in October and deployed to the Red Sea just four days ago.                  ·  However, a perpetually defensive posture towards the Houthis will likely fail to impede further Houthi attacks. This reaffirms the importance of “a clear US willingness to launch consistent, forceful strikes in Yemen that target the Houthi fighters and Iranian assets there to hold the Iranian regime directly accountable for the aggression it enables,” as VADM Mark Fox, USN (ret.), VADM John W. Miller, USN (ret.), and JINSA Assistant Director of Foreign Policy Ari Cicurel recently argued.  ·  The Biden administration has not yet redesignated the Houthis as a Foreign Terrorist Organization (FTO) after having delisted the terrorist group in February 2021 and despite saying on November 21, 2023 that it was “exploring” a re-designation.  ·  As JINSA Policy Analyst Yoni Tobin noted in a recent NatSec Brief, “re-designating the Houthis would be an important display of U.S. resolve against Iran, the Houthis’ primary benefactor, and demonstrate greater U.S. willingness to target Iran’s interconnected web of regional proxies on multiple fronts.” (“Israel’s Operation Swords of Iron Update 1/10/24, https://jinsa.org/jinsa_report/israels-operation-swords-of-iron-1-10-24/)

 
I continue to view the situation as an expanding regional war. This is not a skirmish.  This is a war.   That’s my opinion.  For others, a 9/11 or Pearl harbor or Falkland Island’s Invasion or Kiev, Ukraine bombing, or some other type of event is needed to make it an actual war.
 
So far, no large ship has been sunk. So far, no oil tanker has been exploded.   So far, the bridge on a container ship hasn’t been demolished.  So far, American and allies’ warships that have been repeatedly attacked have repelled all attacks.
 
In my opinion, it is only a matter of time until something changes, and the US and its allies alter their passive defensive action plan. When and how cannot be predicted. Meanwhile, a rising economic cost is being imposed on the entire world by the Iran-backed Houthi faction in Yemen. 
 
And while this all occurs, the defense expenditures needed to fully confront these threats are being held up in the House by a dozen far-right House Members who threaten Speaker Johnson, a member of their own political party.  The most recent iteration of the defense interim funding is about $80 billion short of what is needed and requested.  Some critics may accuse me of “talking my book.”  So be it.  I would rather have a peaceful world.  But it sure doesn’t look peaceful to me.
 
I personally believe the Congress and the country have the means to fully fund the nation’s defense and its role in the world. I’m not in charge and can only observe the dysfunctional American political focus on culture war issues instead of real shooting-war global events.

Below, find Central Command's Friday morning release which speaks for itself.
 

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For a further detailed take on the Houthi shipping attacks situation, we offer this substack by history professor, Heather Cox Richardson, "Letters from an American," dated January 11, 2024 that includes a bevy of cited sources to support her post: https://heathercoxrichardson.substack.com/p/january-11-2024

Finally, we'll close with this excerpt and link to Barron's Daily newsletter dated January 12, 2024: https://barrons.cmail20.com/t/j-e-sdylldd-dytihjxdl-r/

It’s not just the impact on markets that’s being felt. The implications for global supply chains are also beginning to take greater effect as shipping companies have been forced to take longer routes to avoid the region.

Tesla said it would halt production at its Berlin factory for two weeks because the crisis is causing disruption to transport ships, leaving the electric-vehicle maker with a shortage of components.

The situation in the Red Sea is one that global markets can no longer ignore.

We remain overweight the defense sector in the US Equity ETF portfolio.

 

David R. Kotok
Chief Investment Officer
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