Alan Von Altendorf Blog | War hedge: Perth Mint | Talkmarkets

War hedge: Perth Mint

Date: Saturday, April 2, 2016 10:15 PM EDT

I don't wish to be chronically dour, but we should reflect on survivorship bias and consider if the next Too Big To Fail black swan might be the Middle East and North Africa ("MENA") and particularly the Kingdom of Saudi Arabia ("KSA"). What's at stake is over half of the world's oil & gas reserves. Japan, Korea, Germany, and France are all dependent on exports from MENA. Russia is involved in Iranian and Syrian military defense, and the U.S. militarily guarantees an opposing team: KSA, Qatar, Kuwait and other Gulf Cooperation emirates. The split is roughly Shia vs. Sunni -- but I'd like to call your attention to another factor.



In this section of the World Terrorism Risk map published by EU insurance giant Aon in 2014, KSA is ringed by threats to stability and safety. The sad truth is that terrorism flows from KSA oil wealth. 17 of the 19 hijackers that attacked Manhattan and the Pentagon were Saudis. We blamed Osama bin Ladin, a Saudi cleric. The black swan of a KSA collapse is serious business. The Kingdom sits astride the shrine of Mecca and the world's most reliable oil province.

As a thought experiment, what happens if KSA collapses? How does it happen?

War. Not just proxy conflicts in Syria and Yemen, I mean real war, with all-out ferocity, total commitment of military forces by regional powers like Turkey and Iran, drawing Russia and the U.S. into a nuclear stalemate, mutually unable to pull the trigger. It's not the end of the world if Iran and KSA destroy each other. Russia has an economic motive to eliminate MENA oil & gas export. The U.S. is not going to field its Army to defend KSA. If Israel is threatened, they will act unilaterally and proactively with or without covert U.S. help.

What follows real Middle East war is immediate crash of manufacturing in Japan and Korea, followed by Germany and France. Certain suppliers will make hay selling weapons, aircraft and software. Export guarantees and other financial shenanigans will mask the rot, but war will literally freeze the Far East, Europe, and America in as few as 6 months. Brent could go to $250 bbl and push Britain and France to implode as democracies.

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