All eyes have turned to Egypt as the political situation has caught the world’s financial markets off guard. The turmoil in Tunisia was merely a blip on the radar screen but the significance of Egypt is an entirely different matter. So much capital has been thrust at maintaining the status quo in Egypt that many financial analysts have been lulled into a pre-Minsky complacency: Stability breeds a false sense of comfort. The emerging markets have been the repository of the Bernanke QE2 program as low rates have led to the search for higher yields and let potential risk be damned or rather rationalized away by dusting off the models of Long Term Capital Management.
It has been a theme of NOTES FROM UNDERGROUND that 2011 would be a period where the world would realize a MAJOR DIVERGENCE within the realm of EMERGING MARKETS. Not all economies are created equal. They are not all endowed by their investors to the continued high rates of return on supposed low-risk investments. Now, the airwaves are being filled with the weak analysis of so many Middle East experts. The footage of riots in Cairo provide the imagery to make every news ANCHOR gush with enthusiasm and fear.
How will events play out in Egypt and what effect will it have on the U.S. and the other main players in the region? IT’S WAY TOO EARLY TO TELL. The present situation will, without doubt, cause great anxiety in the autocratic regimes of Jordan, Saudi Arabia, Yemen, Kuwait and others. If history is a guide, the first response will be for the autocrats to clamp down. Those regimes that have enjoyed power for so many years do relinquish their authority because of pictures of rioting in Cairo. The crown may begin to rest uneasy upon the heads of Middle East monarchies but not to the extent of relinquishing power. Much talk will fill the airwaves because it has to. So, if markets react to every picture and statement, we are in for a week of tremendous volatility. However, be very careful in reacting to every piece of jibberishness that rolls off the tongue of the freshest expert from central casting.
Another angst-inducing event in the EMERGING Markets was a Bloomberg piece about a failed Russian Bond offering. The Russian Finance Ministry sold only 25 percent of a 30 billion BOND offering as investors are demanding higher yields to compensate for rising inflation. The RUBLE sold off on Friday in the wake of this negative news but we will watch to see if Russia finds some support in the fallout from MIDDLE-EAST uncertainty as the Russians are the world’s largest oil producer.
Canada should also be on our radar screens as it is a very secure energy provider and any rising concern should force all energy users to be securing supplies if the situation would to become more volatile. Going back to Russia, the markets are going to be alert as to just how high yields have to rise to attract the needed capital to fund this years deficit. The government need to raise 1.7 trillion RUBLES, according to the BLOOMBERG article. With the increased volatility in the EMERGING markets, it will be interesting to see just how high rates will have to rise. It is amazing how a picture of the pyramids can make one so easily forget the acropolis.
Tags: Egypt, emerging markets, Jordan, Kuwait, Middle East, QE2, ruble, Russia, Saudi Arabia, Tunisia, Yemen
January 31, 2011 at 6:49 am |
Several efforts have been made warning of the present action. The Saudi & UAE/Abu Dhabi have reluctnatly put funds together in “food security” but invested in places like south Africa of which the natives took the crops. The way forward is to provide nutrition, shelter & jobs. So far true to their ancestors thinking runs backwards to common analyzing therefore conditions will get worse before any forward reasoning can prevail.
January 31, 2011 at 7:42 am |
Thanks for your thoughts Mr.Charlie Andrews—it was the French view to let them eat cake but as Marx reminds history appears first as tradegy and second as farce—nice to hear from you