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The Red Sea Situation Is Worse Than It looks

Portfolio Armor's Photo
by Portfolio Armor
Tuesday, Dec 19, 2023 - 11:55
Map showing the difference in distance between the Cape and Suez Canal routes.

Under-Appreciated Risks Of The Red Sea Crisis

As Zero Hedge reported yesterday, despite the U.S. military's new operation to protect shipping in the Red Sea from Houthi rebel attacks, many cargo ships are switching to the 40% longer route around the Cape of Good Hope in South Africa. Aside from the increased costs to global shipping, and the risk of America getting into a shooting war in the Mideast, there are some additional, under-appreciated risks.

Is The Market Paying Attention? 

Although Zero Hedge has been covering this issue prominently, mainstream financial media hasn't been. 

What Happens To Egypt? 

Our friend Aristophanes makes a good point in his long post on the Red Sea situation, that to the extent Iran is arming the Houthis, who are driving shipping traffic away from the Suez Canal, Iran can exert leverage on Egypt in ways that can make the Israel-Gaza war worse. 

Here's the key part: 

A massive share of Egypts income comes from the Suez Canal. This broke a record in 2022 at 9.4 billion USD, which is almost 30 percent of their annual revenue. If the Suez is closed, they aren't making money.

The Egyptian Government is also stressed from multiple angles. They have a refugee crisis on their border with Sudan, but particularly topical right now is their land border with Gaza. The Rafah Crossing is the only link into Gaza that is not controlled by Israel. Iran having a quarter of the Egyptian economy by the balls unless the US intervenes, means Iran has leverage over what gets into Gaza. If you use your imagination, this could include anything from chemical weapons in Syria, to a dirty bomb or even a nuclear weapon from Iran being not beyond the realm of the possible. This is a nightmare scenario for the US because such an event might force a more tangible military commitment in the region than we already have.

Can South Africa Even Handle The Increased Cape Traffic? 

Ernst van Zyl, the head of public relations at Afriforum, points out that South Africa's port infrastructure has trouble handling its current shipping traffic. 

While The Market Ignores This 

So far, the market seems unperturbed by the worsening situation in the Red Sea. We've been taking advantage of the current calm to place a few short term technical trades on names that look poised for breakouts in the near term. We placed two yesterday, and have one teed up for later today. If you'd like a heads up when we place it, feel free to subscribe to our trading Substack/occasional email list below. 

 

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