On Egypt

For many years now, Egypt has been a ticking time bomb. It is a bomb packed with the incendiary elements of militant Islam and a large population of young people suffering from high unemployment as a result of a corrupt dictatorship weighing on the economy. Toss in one of the highest population densities in the world, with over 90% of the people of Egypt crowded together up against the banks of the Nile, and you have all the necessary fixin’s for trouble.

Especially with the head thug, Hosni Mubarak, now of an age more suited to nodding off in a sunny corner than going head to head with a determined opposition. That he has not been seen in public or gone on national media to address the nation since the protests began could be interpreted by some that he’s gone soft – always a very dangerous perception in that it only emboldens the opposition further.

Supporting that point, Mohamed ElBaradei, his most outspoken critic, has left his sanctuary in Vienna to join the protesters in the streets of Cairo – the equivalent of poking a finger in Mubarak’s chest while mouthing, “Yeah, and whaddaya gonna do about it?”

For the record, though I tend to be skeptical of UN functionaries, as ElBaradei certainly has been, I rather like the man. He may be a bureaucrat, but he’s clearly a moderate and in favor of instituting basic human rights – a big improvement over Mubarak or his only other possible successors, the Muslim Brotherhood and the military, which can never be ruled out.

In support of the democratic protesters, Secretary of State Hillary Clinton stated that the Mubarak regime was “stable,” and VP Joe Biden, speaking on PBS Newshour, could be heard mumbling past his shoe leather that Mubarak was no dictator and shouldn’t resign.

(To be more accurate, Biden might have said that Mubarak is “our dictator,” which makes everything fine.)

Meanwhile, the Egyptian government yanked the cord on the Internet and flipped the switch on the mobile phone network in an attempt to keep whatever happens next from being quickly disseminated through Egypt and around the world.

If a dozen protesters fall and no one reports on it, did it really happen?

While we are trying to get “on the scene” reports from Casey Research readers in the area, from the sidelines it seems to this casual observer that the endgame for Egypt is well underway.

If ElBaradei is still drawing breath this time next week, something I would place money on only if offered substantial odds, then his rather bold reach for the golden ring of power might just succeed. At this point, however, things could just as easily swing to either the Muslim Brotherhood or to the military. Should either of those two outcomes occur, expect a sharp crackdown.

Or Mubarak might just get his game face back on, in which case… it’s still going to involve a sharp crackdown.

So I’m pulling for the one more hopeful scenario, that ElBaradei – or, more correctly, the oppressed masses – end up on top. Of course, if he wins, the man and his supporters may not be too warmly inclined toward the unhelpful U.S. government. That said, any ill feelings are likely to pass quickly – $1.5 billion in annual U.S. aid is a lot more effective than a dozen roses in resolving such spats.

But what of the broader implications of what’s happening in Egypt? For that, I’d like to share some relevant quotes from an article on Egypt written in the March 2006 issue of our International Speculator by my dear partner and resident seer, Doug Casey…

• 1. Tourism, roughly 5% of GDP. In Egypt, this means foreigners taking pictures of monuments built largely between 3,000 and 4,500 years ago, capital provided by the locals' distant ancestors. And it means other foreigners lying on Red Sea beaches, provided by nature. They keep coming, but every few years they're scared away when a tour bus is bombed or machine-gunned.
     
     
  2. Remittances. Egypt's most reliable export is workers, who send money home to their families.
     
     
  3. Oil. Net exports ran at roughly 300,000 bpd during the last couple of decades, but now the fields are in steep decline, and net exports are down to only 100,000 bpd, on the way to zero by the end of the decade.
     
     
  4. The Suez Canal, built in the 1860's courtesy of Europeans. It is becoming less important as ships get larger (too large to use the Canal) and air transport grows.
     
     
  5. Foreign aid.

You've got to ask yourself about any place, but especially about a country like this: how do the 80 million people survive? What do they produce? Guesstimates are that in ancient times Egypt supported a population of about 6 million, and rather comfortably for the era. In those days almost everyone was a farmer, and the annual flooding of the Nile insured both water and nutrients for crops that made Egypt the breadbasket of the ancient world.

There are still plenty of farmers in Egypt, but since the Aswan High Dam was built by the Russians in the '60s, the Nile doesn't flood anymore. Today the dam generates about 12% of the country's electricity, but it's silting up with the estimated four million tons per year of alluvial fertilizer that flows down from the highlands of Ethiopia and Uganda. Now Egyptians have to buy a million tons of chemical fertilizer per year. Of course, a gigantic river that floods everything annually doesn't fit well with an industrial society. When 95% of the country's people live within 12 miles of the river, it's one thing for them all to get wet if they're dirt farmers walking behind oxen, but something else if most of them are living in apartments.

So, the Aswan Dam is a mixed blessing in many ways. Although philosophically I'm of the "pave the planet" school, since I believe mankind's ultimate destiny is in the stars and that the Earth is an insignificant mote in the cosmic scheme of things, I'm naturally suspicious of mega-projects built by economically illiterate socialist governments. They may wind up destroying enough capital to keep people trapped on this planet, like serfs in a medieval village. Militarily, the dam is a boon for Israel. One small nuke and the entire country will be washed into the Mediterranean. Literally.

But farming and the dam, while important, don't bring money into the country. There are basically five things that keep the place going:

Unfortunately, none of these things are a sound foundation for prosperity. They're not economic pillars, they're reeds.

… No one with any sense has much confidence in government figures, certainly not those from struggling Third World countries. But, to use an old saw from this part of the world, it's not hard to read the writing on the wall, and it's scary. The population is growing at something like 3.5% per year. And unemployment is about 25%, which means that the ranks of young, unemployed, unmarried males-unquestionably the most dangerous creatures ever to have walked the Earth, including T-Rex-are swelling. Meanwhile, when you look at the five income sources listed above, you can see that Egypt is relying on nothing but accidents of history and nature, and on the kindness of strangers.

My view, from a strictly economic perspective, is that Egypt is a disaster in waiting. But the same is more or less true of all the Islamic countries (with the minor exceptions of the Emirates and Malaysia). All of them, like Egypt, produce little that can be traded. Economically, all are saddled with gigantic, entrenched, concrete-bound bureaucracies that serve no useful purpose whatsoever, but do stop anything productive from happening. Politically, they're all basically authoritarian, one-party states. Sociologically, they're all highly traditional, conservative and, outside major cities, tribal.

Technologically, there's zero innovation; practically everything more recent than 18th-century products either is imported or made under license and with foreign capital.

Doug then goes on to a wonderful dissertation on the fundamental reasons why these Middle Eastern countries have remained stuck in the Dark Ages – blaming it on the entrenched roots of religion. However, as I am trying to avoid the usual onslaught of outraged emails, I’ll leave it there.

(For those of you who are paid subscribers to the International Speculator and are not offended by philosophical musings about the nature of monotheistic religions, you can read Doug’s article on Egypt in full in the archives for March 2006.)

While one can, as Doug did, look at a trend in motion and ascertain a very probable outcome – in the case of Egypt and the other stultified countries of the Middle East, the outcome being the proverbial top blowing off the pressure cooker of the tightly controlled, corrupt and inefficient economies – it is not so easy to predict the knock-on consequences. For example, if ElBaradei and his allies succeed, as have the pro-democracy protesters in Tunisia, it could light the fuse on regional unrest that quickly flows into the big oil producers, including Saudi Arabia, Iraq and even Iran. At the flare-up point in a major oil producer, especially Saudi Arabia, one has to imagine both oil and the precious metals moving much higher in a hurry.

But then… just maybe… moderate new governments could emerge that know that their political fortunes rest largely on promoting a more broadly based and successful economy, which can only happen by lightening the hand of government.

Though the trend of the past half-century has certainly been for more government at the expense of individual freedoms, it is not set in stone that the trend must continue to the point of widespread collapse. If the oppressed of the Middle East can muster the will to finally rise up and throw the bums out – mullahs and moochers alike – then maybe there’s hope for the rest of us.

Of course, if there were actually an unleashing of free markets around the world, given that it must come at the expense of out-of-control governments, then owning precious metals might not be quite so important and prices would fall. But there’s a long way to go between here and there, and it is highly unlikely that the ruling elites will go so quietly into the night.

In any event, unlike most of what people spend time paying attention to these days, this is certainly a drama worth watching.

Is there an investment opportunity in this? As you can see in the chart here of the Market Vectors Egypt Index ETF (EGPT), the unrest has caused the Egyptian stock market to sell off sharply.

A small speculation that things will be resolved in favor of the democratic opposition, or even by Mubarak agreeing to some sort of compromise, could make for a quick rebound and a tidy profit. And the returns could keep piling up as the blossoms of the free market begin cropping up in Egypt.

That’s the upside. The downside is that if either the Muslim Brotherhood or the military end up with the prize, the bottom could be a long way off. The EGPT ETF is currently selling for $16.24 a share. So, maybe set a stink bid at 20% below that, to see if you can’t pick up shares even cheaper as the situation reaches a crescendo. Mind you, that is not an investment recommendation, just an idle thought for the adventurous among you.

On Gold

Despite any number of reasons why precious metals should have been powering higher, a number that I touched upon in my recent article State of Denial, they have been on something of a slide of late, as have the associated precious metals stocks.

As I don’t need to tell you, dear reader, corrections and pullbacks during any secular bull market are inevitable.

Using the steepest correction we’ve seen in the last couple of years – 27% – as our guide, and the recent high of $1,421 in early December as our benchmark, a 27% haircut would put the downside at $1,037.

Frankly, I don’t think we’re going to get there. As I write, gold is trading up $27 at $1,341 (silver is up $1.00 to $27.91), and the resource stocks are bouncing back nicely as well… even though the broad stock markets are in full retreat, with the DJIA off 150 points at the moment.

Staying on the topic of gold, it is essential to note that none of the harpies bedeviling the economy have been slain. None.

The bad debt from the real estate crash remains unpaid, and sovereign debt has only grown. The housing market is on life support, with 95% of all real estate loans having been backed by Fannie, Freddie or the FHA over the last year (translation, there is virtually no private-sector real estate lending anymore). Meanwhile unemployment is firmly cemented to the ceiling, and annual federal deficits are running at $1.5 trillion – roughly 50% above revenues.

As for any possible solutions, deciding to neither lead, follow or get out of the way, the political response to the balled-up economy is as spineless and ineffective as ever. Even the Republicrats are debating how to cut $100 billion from the deficits without suffering voter backlash. In other words, plugging the hole in the spending dyke isn’t even being discussed, let alone trying to tackle the $14 trillion in outstanding federal debt or trying to head off the tidal wave of $50 trillion more in locked-in social obligations speeding toward the economy.

To anyone worried about gold trading at $80 off its recent high – just 6% from that high – I only have three words.

Get a grip.

The Moscow Bombings

In the November 22, 2010 edition of these musings, I wrote an article titled “Airline Security” in which I shared an observation that the new abnormal for airline security was compressing passengers in unsecure areas that made soft targets for groups with dark intentions and the capacity to act on those intentions. Quoting that article…

There's something else that anyone with even modest powers of observation will notice when watching the current security process. And that is that the screening causes a large backup just outside of the security area.

At Washington Dulles – and that airport is far from the worst of them – the security screening results in 500 or so people being compacted together in a small area, between roped-in queues. And probably half of those in line are pulling wheeled carry-ons. I hate to say it, because I abhor violence in all its forms, but it's just a matter of time before someone pushes a button on the handle of their wired up carry-on and takes out the entire crowd.

And then what? Ban all carry-ons? Move the security out to the curb? Or to regional substations?

As a result of the Moscow airport bombing, which occurred outside of the secured area, I found my mind returning to the question of, “And then what?” And something dawned on me that I hadn’t contemplated when writing the original article.

Namely that the Moscow attack, and the next one to follow – as it certainly will – are almost certain to lead to the widespread implementation of a National ID here in the U.S., and in all the countries with the technological wherewithal to pull it off.

Thereafter, as you arrive at the airport – and maybe any public venue – you’ll be asked to present your ID to be scanned for a quick check against a national database containing your particulars, prescreened against security-driven algorithms.

So what, some dear readers are thinking. Nothing to hide, no problem.

But make no mistake, the mechanism, once in place, will only speed along the process of the complete loss of privacy and freedom. Imagine a world where every single penny you spend, and everything you spend it on, are recorded. Where every book you buy, every website you visit, every transaction you make in every financial account you own is tracked. Every trip you make, every drug you take, the government will be watching you.

In the beginning, it will all be very benign and spun as being in the public interest, coming as it will in the aftermath of another “event” such as occurred in Moscow. But once the tool of National ID – which really is just a more convenient front-end to the systems already in place – is up and running, it would be foolish to not expect it to be used to its full capability. And as the development of the system will be driven by national security apparatchiks, it’s safe to assume it will look under every rock you touch as you wander through life.

Of course, such a development won’t be complete until cash transactions become illegal. On that topic, I came across an article today on PrisonPlanet.com titled California Residents Hit with Government Ban on Paying by Cash. And I quote…

Residents of Discovery Bay, California will be the first in the country to be officially denied the right to use cash to pay for public services, in a move that echoes the Department of Homeland Security’s drive to depict those who use physical money as potential terrorists.

As reported by the Contra Costa Times recently, from May onwards, residents will no longer be allowed to pay water bills or purchase park permits after the Discovery Bay Community Services District board voted to ban cash transactions for all services.

Anyone paying for such public services must do so with a credit/debit card, a check or money order.

The declaration on all US money bills that “This note is legal tender for all debts, public and private” will no longer apply in Discovery Bay when it comes to paying the government.

The same article has a link to a video from the Department of Homeland Security designed to train people to spot suspicious behavior at hotels, one of the tip-offs being wanting to pay with cash.

You can read the article and watch the video here.

Such ponderings may seem a bit “on the fringe.” But, at least in my opinion, this is of great importance in the grand scheme of things, even though there is little you can do about it just now – other than trying to stay ahead of the curve by internationally diversifying your assets.