The following “Top 15 tables” from the E.I.A. provide a comprehensive geopolitical perspective of the crude oil market. You can see who is benefiting and who is taking pain from the increase in crude oil prices. The data are from 2008 but the ranks probably haven’t changed much. (click here if table is not observable)
Take a look at the chart we’ve constructed from the Bureau of Labor and Statistics 2009 Consumer Expenditure Survey. It conveys a sense of how Egypt’s poverty combined with the sharp rise in food prices sparked the political revolt against the Mubarek government.
The chart illustrates how the lower income groups in the U.S. really get squeezed when food and gas prices rise. In the U.S. the average annual income for the consumer units (households) measured is $62,857, where food expenditures consume a little over 10 percent of income.
But averages distort the true picture of what is really going on as only 15 percent of consumer units fit into this income group. Many have drowned in pools of water where the average depth is only 11 inches deep. Almost one third of the households in the U.S. spend close to or more than 20 percent of their annual income on food.
Remember this the next time the market cheerleaders and policymakers tout core CPI and dismiss food and energy inflation. It may also help explain the rise in social angst in U.S. society. (click here if chart is not observable)
The world seems caught in a race between a dark age Malthusian struggle for resources and a technological revolution producing advances which will help resolve the conflict of the world’s growing population and diminishing resources.
Both have collided and pushed Egypt to the brink of political revolution. The technology of Facebook and Twitter has channeled and organized the anger of the Egyptian people over rising food prices, among other things.
You should know us by now that we place our bets with technology and try our best to reject the dark side of the blogosphere, where some seem to have a ghoulish obsession with all things Malthus. We believe in evolution, and have children, after all, and therefore have no choice but to be optimistic about the future.
We’re also realists and see the potential of technology and understand the power of the markets to solve what appear to intractable problems. We have also learned it’s very unwise to bet against these forces by making a linear projections into the future.
We wrote a few weeks ago about vertical farming as the future of agriculture. Here is another informative video on hydroponics, which has been a growth industry in California for years. We think that if the shift in relative prices for foodstuffs is perceived as permanent (and jury is still out on this proposition) there will be massive capital expenditures in these types of technologies.
(click here if video is not observable)
Here’s an interesting chart showing cropland values versus the CRB foodstuffs index. Note how farm values were caught up in the 2004-08 real estate bubble, increasing 58 percent while foodstuffs as measured by the CRB were up only 15 percent. The 27 percent increase in food prices in 2o10 has allowed cropland valuations to catchup.
(click here if chart is not observable)
A couple of cool heat maps to illustrate what worked in January. The ETF map shows the U.S. outpaced the emerging markets with energy and select tech leading the way. Europe bounced big with Spain’s country ETF, EWP, up 14 percent and Italy’s, EWI, up over 10 percent.
In the S&P 500, independent oil and gas companies had a big month, led by EOG Resources which increased 16.58 percent for the month. Large caps performed well led by XOM, GE, and IBM, all up over 10 percent for the month. (click here if charts are not observable)
This is one reason why we believe the Renminbi will never be a serious contender as a reserve currency. Full liberalization of the capital account results in a loss of independence and control and it’s hard to see the government allowing it anytime soon. We’ll get more confident in the Renminbi’s role when we see more political reform in China. The Wall Street Journal writes,
Internet censors also appeared Sunday to have deleted almost all of the comments posted beneath the few limited reports on the unrest—mostly from the state-run Xinhua news agency—that have been published on Chinese news sites in the past few days.
The strict online controls illustrate the party’s concern that the Internet is providing China’s citizens with a new means of information and organization that could challenge its monopoly on power, as has happened with other authoritarian governments in recent years.
Here is Fareed’s take on Egypt.
We don’t have much to say about this week’s performance other than the main equity indices in the U.S. and some in Europe made post crisis new highs before being hit on the political plague coming out of Egypt. Interesting that the Russell 2000 was up for the week, which tells us there are just not a lot sellers out there and those who shorted the Russell last week were forced to cover.
Commodities x/foods remain relatively weak although oil and gold bounced Friday on geopolitics. The emerging equities, especially Latin America and India continue to get hammered. Brazil and India were down over 3 percent for the week.
There is tremendous noise and commentary about what is taking place in Egypt. Though chaos and anarchy currently reign, this is not an anti-American Islamic revolution. This was started by the twitter generation. The Egyptians want change and democracy not fundamentalist Islamic law. We even hear reports of Muslims and Christians working together.
The Arab Street has been perceived as passive and afraid to stand up to bullies. This was reinforced somewhat by what took place in Iraq after the fall of Sadaam. The bloggers and Facebook sparked this and Egyptians have had enough of repressive government. This is an earthquake that will send tremors and could spread throughout the Mid-East and, we believe, could embolden the modernists in Iran and result in toppling the Islamic regime.
We see the possibility of positive end game here though the road will by rocky and filled with fear, uncertainty, and volatility. Let’s hope and pray the positive plays out.
Watch Apache (APA) to get a sense of what is really happening in Egypt. The company receives almost 30 percent of its revenues from the area. The stock rallied hard into the close on Friday.
This is no time to be a hero, however. The markets are over extended, political risk is on the rise, and uncertainty is increasing. We lightened up on longs, increased shorts and took some oil and gold on Friday. We’ll let the markets come in and are making a shopping list.
We just don’t think equities get pounded as hard as many are expecting. This will surprise and catch the shorts offside. In the meantime we’re staying long political risk through our gold position as it looks like the yellow metal has put in a bottom at $1311, which is our stop loss. Stay nimble, stay ready.
(click here if charts are not observable)
