Like most investors, I spent the weekend watching television trying to make sense of events in Egypt. First I tried American news networks, but quickly tired of them. Anyone care that a guy swallowed a quarter? Will Charlie Sheen survive rehab? If you want to know what’s going on anywhere in the Middle East, you tune into Al Jazeera’s English webcast.
I watched slightly scared reporters interview the crowds. Why are you rioting? There were the standard fare answers about corruption, incompetent leadership and the giant divide between the rich and poor—all true. What really struck me was the complaint about food prices. These guys blame the government because the price of wheat is up. If you have lived in a society where the government is responsible for your problems, you just assume that the government screwed this one up as well.
It brings up a comment that a friend made when describing Tunisia’s recent revolution. If you deprive people of democracy, basic human rights and their honor—they will cower and hide from you. If you deny them housing and economic opportunity—they may be upset. If you deny them food—they have no choice but to rise up and take it any way they can. People can live without a lot of things—food is not one of them.
Ben Bernanke has a view of the world where you can meet every crisis with money printing. If your worldview is confined to risk assets like the equity market, you are probably correct. Unfortunately, there are side-effects to this sort of strategy. Think of a fire hose—you can point it at a target and soak it, but you spray everything in the vicinity. Eventually, the water runs down the street and gets other things wet—things that you want to keep dry. The fire is largely out in equity land, but the water is now flowing into all sorts of places. It is flowing into precious metals. It is flowing into energy and it is now flowing into agricultural commodities.
Here in the first world, rising food prices are a nuisance. We shrug our shoulders and go on with life. In developing economies, food costs are a significant portion of someone’s total expenditures. A small increase in prices goes a long way towards destroying a family’s disposable income. A Bernanke induced food spike can overwhelm such a family. The scary thing is that food prices are just starting to run. This will get a whole lot worse in the near future. Bernanke is implementing QE2 yet QE1 has barely filtered its way through the system. We saw what happens when wheat goes from $5 to $8—people riot to feed themselves. What happens when wheat doubles from here? What if it triples? It won’t effect my standard of living much—people in the developing world will revolt.
The Egyptian government isn’t stupid. They’ve been scared of inflation for a while. There’s a reason that they’ve kept their discount rate at 8.5% for 16 months now. However, there is only so much you can do when Ben Bernanke is armed with the world’s largest water cannon and the wind is spraying a bit of it at you.
In Tunisia, it is fitting that a fruit vendor was the flash-point for the revolution. In Egypt, food is once again the issue. Kuwait has promised food subsidies to its people—they understand what Bernanke is up to. Around the world, expect more hungry people taking to the streets. Expect more crises. The fire is out, but Bernanke wants to smother the world in so much liquidity that there can never be another fire—ANYWHERE!
What are the investment implications? Make sure your overseas investments are in safe countries. Just because there is growth, that doesn’t mean that it’s politically stable growth. Expect higher food prices. The lesson for dictators seems to be that you cannot stop a riot once it starts. It’s much better to keep people fed. The only way to do that is to stockpile food ahead of time. For years, countries have ran-down their food stockpiles. Those will be dramatically restocked in the next few weeks. Volatility will increase dramatically over last year. If someone tells you that they know what will happen in Egypt, they are lying. No one has a clue what will happen—no one. Expect the unexpected.
Most people have this view that Mubarak’s reign is done and this is a good thing. I would caution that both statements need to be proven out. For starters, until Mubarak declares it’s over, it isn’t over. More importantly, there’s no way to know what comes after Mubarak. Remember, the Romans were happy to be relieved of Tiberius, until they learned a bit about the new guy—Caligula.