America’s “Suez moment” has arrived

Don Edgar considered himself extremely lucky.

It was early in the morning on November 6, 1956, and the World War II veteran turned journalist for Britain’s Daily Express was one of just two reporters invited to witness Britain’s invasion of Egypt.

Standing on the bridge of a British warship, Edgar wrote that it was “the most impressive military operation the British had put on for many a year, with parachutists, marine commandos, tanks, aircraft, and a naval bombardment.”

Naturally he would say so. Edgar was British.

The rest of the world, however, was not terribly impressed. And the United Nations– along with the US, Canada, Australia, and more, raced to condemn Great Britain for its aggression.

Britain naturally felt justified. Egypt had recently seized the Suez Canal– one of the most important waterways in the world linking the Mediterranean and the Red Sea.

For Britain, the Suez Canal was a critical transport route for Saudi oil, not to mention a major asset; the British government had purchased a 44% stake in the canal back in the 1870s for a mere 4 million pounds, and the annual dividend soon exceeded their entire purchase price.

So, when Egyptian President Gamal Nasser nationalized the canal in July 1956, the British weren’t willing to take that lying down. To them it felt like theft. Prime Minister Anthony Eden called it “piracy”, and he was willing to go to war to take the canal back.

Unfortunately for Eden, he underestimated the Egyptians’ resolve to fight. Nasser responded by blowing up dozens of transport and cargo ships, effectively clogging up the canal and rendering it useless.

Eden also didn’t count on the immense global backlash… and not just diplomatically.

It was bad enough that pretty much every country on earth, from the United States to the Soviet Union, joined together in denouncing the invasion.

Britain was also severely punished by financial markets. Foreign capital fled the country. The British pound plummeted. Both the stock market and the bond market crashed.

It was absolutely brutal. Britain’s main stock index fell 170 points, roughly 8% in the span of ten days. Bond prices fell by 15% and bond yields surged as a result. And the British government had to burn through roughly 15% of its total foreign reserves ($279 million at the time) just to keep its economy afloat.

Britain simply didn’t have the economic resources to withstand such intense financial pressure– much of which was inflicted by the United States. So, the Brits quickly backed down and accepted the ceasefire terms dictated by the UN.

What started as an almost patriotic mission to reclaim British patrimony ended in a humiliating withdrawal– and one that left no doubt in anyone’s mind that Britain was no longer a major superpower.

Financial markets do crash from time to time, often in reaction to government policy or some exogenous event. But it’s extremely unusual to have the trifecta, i.e. a major decline in the stock, bond, AND currency markets, simultaneously.

For example, if a government announces a major tax increase, then most likely the stock market will suffer a sudden decline. Higher taxes are bad for business, and valuations will take a hit.

But higher taxes would make bonds a more attractive investment (since the additional tax revenue makes the government more creditworthy).

So, stocks would fall, yet bonds would benefit.

As another example, slashing interest rates would typically be perceived as good for business… so stocks would rise. But the reduced rates (which may invite higher inflation) could be perceived as bad for the currency… so the dollar might drop as a result.

There are always trade-offs, and capital tends to move in/out of various asset classes.

But again, it’s extremely unusual for all of these assets to decline, so dramatically, at the same time. And it’s usually a pretty clear sign that capital is fleeing your country, i.e. foreign investors are pulling a lot of money out, quickly.

Usually if this freak occurrence does take place, it happens to some little banana republic. Zimbabwe and Venezuela come to mind.

But for a wealthy, developed country to suffer such financial humiliation is extremely rare… and signals that something has gone terribly wrong.

Again, this happened to Britain during the Suez Crisis. It also happened to Japan after their big crash in the 1980s.

Even the US was humbled in 1971 when the dollar was taken off the gold standard; the Dow Jones Industrial Average fell 7% that August, the bond market fell (i.e. bond yields rose by more than 100 basis points), and the dollar lost 15% against other major currencies.

The US was able to recover back in the 70s, however, because it managed to maintain its position as the global reserve currency– and even still, it took a decade of stagflation before they managed to right the ship.

This month we witnessed the same pattern. After the Liberation Day nonsense, the US stock, bond, and currency markets all crashed (and gold surged to $3500 as a result). Substantial foreign pressure mounted.

And, at least for the moment, it appears that the US government is capitulating; just like Britain in 1956, the US government lacks the financial sturdiness to withstand the pressure.

Also, just like Britain in 1956, this may be the moment that future historians mark as the end to US global primacy.

It seems naive to think that the rest of the world will simply move on and forget about Liberation Day. Most likely this fiasco will accelerate the US dollar being displaced as the world’s dominant reserve currency.

No one knows yet what that new system will look like. And it’s because of the “I don’t knows” that gold surged to a peak of $3500.

Central banks have been the key driver of that trend, because, while they don’t know what the next reserve currency will be, they do know that they’ll be able to trade for it with gold.

I still believe this long-term trend will hold, i.e. central banks will continue to trade their US dollar reserves for gold.

But at the moment, gold is looking a bit overbought; its surge in price has been nearly a one-way street, and I wouldn’t be surprised if there were a short-term correction.

On that note, it’s very difficult to find anyone today who is bearish on gold… and when everyone has jumped on the same bandwagon, I start getting a bit nervous.

Fortunately, there are still a number of absurdly cheap gold companies, like mining, service, and streaming businesses, that are trading at ridiculously low multiples.

We’ll talk about this more next week.

Source

Simon Black is an international investor, entrepreneur and permanent traveler. His daily letter is both educational and entertaining, and we suggest that those who want unbiased, actionable information about global opportunities sign up for Sovereign Man’s free, actionable newsletter at http://www.SovereignMan.com.

From Simon Black of SovereignMan.com

Source: https://www.schiffsovereign.com/trends/americas-suez-moment-has-arrived-152688/