The Black Swan Strikes Egypt

The Black Swan Strikes Egypt

I did not want to enter the whole Egypt topic because I try to keep my political views separate from my site. Once I decided this was a topic I must discuss, I planned on writing this piece earlier, unfortunately my computer crashed and I had to wait a few days. I reasoned that this topic is so important to commodity prices I must discuss it.

Anyway you probably have read a million articles about Egypt and are thinking what does this financial blogger know about this issue? Well actually I am very in-tuned to politics and mid-east politics in particular. I have lived for years in the region and have close family there. In addition, I listen to several journalists and reporters who have much better sources and a much better understanding of the situation then 99% of the media.   I have made several correct predictions about the whole situation before the media.  On Friday I commented on SeekingAlpha:

If Mubarak survives which I am praying he does even though he is a dictator (unfortunately there is no alternative) he will have to appoint Omar Suleiman as successor, there is no way Gamal would be accepted anymore. He already fled the country.

This Top Value Hedge Fund Is Killing It This Year So Far

Stone House Capital PartnersStone House Capital Partners returned 4.1% for September, bringing its year-to-date return to 72% net. The S&P 500 is up 14.3% for the first nine months of the year. Q3 2021 hedge fund letters, conferences and more Stone House follows a value-based, long-long term and concentrated investment approach focusing on companies rather than the market Read More

Several hours later it was confirmed that Mr. Suleiman would be named the first vice president of Egypt that Mubarak ever made. It was widely assumed that Mr. Suleiman who is currently the head of the General Intelligence Service would be successor to Mubarak after being named Vice President. Suleiman is also liked by the army although not necessarily the people. This could have been a lucky 1 out of 85 million guess, or could show that I understand the major players in the country.

I also made several predictions about the region including Egypt, Yemen, and Saudi Arabia last year-click here.:

Egypt is a very important country, there is no doubt that Egypt and Saudi Arabia are by far the most influential Arab countries. Egypt has the largest population in the Arab world and strongest army, and Saudi Arabia has their massive oil reserves.

The Obama administration is making a terrible decission in encouraging President Mubarak to step down. The only people who could fill the vacum is the Muslim Brotherhood.

The Muslim Brotherhood is largely popular and has been banned from Egyptian parliamentary for many years. The White House supposedly has met with the Muslim Brotherhood. One reporter off the book stated that Mubarak and Suleiman are stunned by the President’s actions. The President is not alone, top Republicans leaders have applauded the Obama administration’s approach.

For a second it must be discussed what a democracy would look like in Egypt. This is not to insult anyone from Egypt or Muslim, I am merely stating that forwhatever reason the population there (which is beyond the stcope of this article) is quite radical. According to the latest Pew Poll December 2010:

At least three-quarters of Muslims in Egypt and Pakistan say they would favor making each of the following the law in their countries: stoning people who commit adultery, whippings and cutting off of hands for crimes like theft and robbery and the death penalty for those who leave the Muslim religion.

What type of democracy would this be? It likely would be a popular one that would not ensure human rights. What many people miss is that democracy does not only mean elections, it also means that the Government protects the peoples’ rights. I doubt Egypt will end up a democracy that protects the rights of people.

In addition, it is quite telling that the Coptic Christians who live in similiar economic condition to the Muslim Egyptians are supporting Mubarak. The group sees the writing on the wall if Mubarak falls.

Now that the Muslim Brotherhood looks like they will take power commentators are trying to portray this group as moderate. This can hardler be farther than the truth (at least to main steam Americans). The Muslim Brother has threatened as one of their first courses of action to Prepare Egyptians for war with Israel.

Now this does not mean a major war will break out, although this possibility cannot be ruled out. There have been five wars between Israel and Egypt; 1948;  the 1956, 1967, The War of Attrition, and the 1973 war. However, even if it does not lead to war it will lead to massive tension and a stronger Gaza in Hamas, which will make peace efforts much harder.

To get to the main point Egypt controls the vital Suez Canal. One can see how vital below how vital the canal is for shipping goods inter-continentally.

suez canal

However, the most dangerous fact about the revolution in Egypt and US foreign policy, is the reprecussions it will have across the mid-east. Tunisia, which overthrew its dictator several weeks ago might now also become an Islamic dictatorship. I know much less about Tunisia than Egypt but here is an interesting article on the topic-via reuters.

With Egypt falling the real fear is that the second most powerful country in the Arab world, Saudi Arabia could fall. The fighting in Yemen directly effects Saudi Arabia, which are neighboring countries. This was detailed in the piece posted on SeekingAlpha above.

The king of Saudi Arabia is 86 years old and very sick, and it is not clear who his successor will be. He might not even last to apppoint a successor. Saudi Arabia’s population hates the Government, and they will likely be inspired by the revolution in Egypt. If Egypt’s Government can fall, the people will reason why not our Government? This is one of the reasons why I bitterly opposed the Obama’s proposal to sell $90 billion in advanced weaponry to the Saudi Government.

Iran will surely forment the unrest in Saudi Arabia. The two countries are bitter enemies. Saudi Arabia has the world’s largest oil reserves. The small gulf states like Kuwait, Qatar and others also have large oil reserves. If Egypt and Saudi Arabia fall these two countries certainly can be next.

Coupling the current hostility with Iran, and Venezuela; and the possible fall of many nations with large oil supplies, the result could be a catastrophy to world oil prices.

Commentators claim that a country will always act in its self interest even if it means not standing for its principles. This is usually true but not always. The Palestinians launched an Intifada even when the economy was booming. After Israel crushed the terror cells in 2002-2003 violenece in the West Bank has largely subsided. Now that the economy in the West Bank is booming the Palestinians are relcutant to launch another uprising. However, originally the Palestinians did launch an uprising while the economy was doing well, and this demonstrates that countries do not always act rational.

Iran is another country which is acting defiant despite the great economic benefits of cooperating with the West. If Iran simply gave up its Nuclear program or ensured it was only for civilian use they could offer a lot to the West. They have a large educated population and have huge oil and gas reserves. However, Iran is being defiant and is paying the price, inflation is rampant with bread prices up over 200%, diesel 800%, and gas 300%.

To go back further, when Nazi Germany invaded the USSR, Hitler did not use a rational policy in Ukraine and Poland, but since the Nazis were so sure of their racial superiority they treated both populations as slaves. There is no time to get further into this issue.

Besides commodity price increases, there is another lesson to be learned. No one predicted this uprising. Every commentator gave their top ten predictions just several weeks ago for 2011. The risks that most commentators cited were; further crisis in the EuroZone, weak US housing and unemployment numbers, inflation, China overheating and many other issues. No one predicted that there would be an uprising spreading across the Arab world.

Investors should learn that the future is uncertain and no one can predict the next black swan. Holding a lot of cash on the side line and investing at stocks trading far below their intinsic value is the only medicine that works in turbulent times.

All comments that are not derogatory or racist are welcome.

Disclosure: None

Updated on

No posts to display