The Global Supply Chain is in Dire Straights
A few years ago Peter Ziehan had a best selling book called, “The End of the World is Just Beginning.” In it he theorized that the systems that had been set up post-world war II no longer made sense and were breaking down.
The U.S. Navy essentially made a deal with the free world that if they stood with America against the Soviets, the U.S. Navy would ensure free and open sea lanes for trade. The Navy would fight pirates in Somalia, send the fleet through the Taiwan Strait and cross Kadaffi’s line of death.
And for the past 70 years this arrangement has worked. That said, the situation is changing rapidly. The Soviet Union is gone.
The American people’s desire to protect the world’s oceans has dissipated. Recruitment in the armed forces is down so far that you can now join the Navy without a highschool diploma or even a GED. Generation Z is openly mocking the idea of joining the military.
Ironically, China is the main beneficiary of the global free trade system. The U.S. which carries the burden has the least ocean going trade of any G-20 country. Our biggest trading partner is Mexico, with Canada second, and China third.
Furthermore, China is 80% dependent on global trade whereas the U.S. number is somewhere around 18% with again, most of that in North America.
I’m not saying that the U.S. would be happy without Chinese suppliers. Jeep, for example, has 14 international suppliers who in turn have multiple suppliers all run on very tight assembly line schedules.
We saw how supply chain disruptions caused havoc in the economy during the pandemic.
In Ziehan’s latest video which you can find here: https://www.youtube.com/watch?v=dtrFTV3ZKDw he lists the current supply chain hotspots. These include the Black Sea, the RedSea, the South China Sea and the Panama Canal (due to drought) as well as the reinvigoration of traditional pirate zones like the Malacca Strait and the Gulf of Aden.
Ziehan also talks about the Ghost Fleet which is running dark on the high seas insured by China, India or Russia for the purpose of transporting Russian oil and other commodities to avoid sanctions and stay below global radar. The question is what if anything the U.S. Navy will do when one of these ocean-going, black market tankers gets into trouble.
No one knows but we will soon find out.
What Zeihan doesn’t mention, what almost nobody is talking about, is that the Houthis have achieved something never before seen in history. They have created a naval blockade of a strait without a navy. Drones costing $400 each have effectively rerouted shipping between the Mediterranean and the Indian Ocean.
The combined might of the U.S. and the U.K. have not been able to do anything about it. Yemen is big at 204,634 square miles with 1200 miles of coastline. Unless our Biden can gin-up an Iraqi style invasion the situation will only get worse.
In the past countries like the U.K, Germany, or the U.S. would have to invest a significant amount of GDP into building a Navy big enough to stop shipping. And yet the Houthis who live in subsistence level poverty have managed to do it. This does not bode well for the future of global free trade.
It does however work for global shipping companies who are now commanding high rates and adding weeks to their voyages. I’ll tell you more about that next week.
All the best,
Pro Trader Today