Egypt – WHAT NEXT?

The unrest in Egypt is causing jitters around the world as investors ask – what next? First, we have to look at the main reason for the uprising in both Tunisia and Egypt. Both of these governments have been authoritative for years with repressive governments and high unemployment. So the question is why now? In our opinion, the big reason for the uprising is higher food prices. This inflation has been occurring for several reasons: easy US monetary policy (because commodities are priced in US Dollars), growth in earnings in emerging markets causing greater demand for food, and a drought in Russia that caused it to halt any exports of wheat out of the country. So Egypt, with their desert and inability to grow crops for all their people, is suffering more than others because of rising food costs. People are hungry. Brazil, India and China are also experiencing food inflation and all three have raised interest rates in the past few weeks to curb inflation and avoid social unrest. This action is having an impact in those countries as their respective stock markets have fallen in value since November. The US stock market has advanced during this same time.

We do not yet know the outcome of the unrest in Egypt, but we are watching closely how it unfolds. Will they go the route of Turkey (democracy) or Iran (theocracy)? Egypt is more secular than Iran and has a highly educated populous and, we believe, the populous will turn the government into looking more like Turkey than Iran which would be a good outcome for Egypt. However, the certainty of that path is unknown as of yet. If it goes the other way, we will be looking at those ramifications and adjusting our portfolios accordingly. In our last update, we mentioned that we thought the stock market was overbought. The correction last Friday did help to alleviate some of that froth, but in our opinion, investor sentiment is still too positive – which is negative for the stock market. Some more froth needs to be taken out of the market and we believe Egypt could be a reason for that lack of investor confidence.

Sincerely,

Your THOR Team