Egypt is not Just an Exogenous Event

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I was watching the financial networks after the “Egypt sell-off” and some commentators such as Larry Kudlow and a few of his guests mentioned the Fed’s easy money policy as at least a partial cause of global food inflation. Of course I attribute it to the unworkable symbiotic relationship between China and the US and consider those countries monetary policies to be a major part of the food and input goods inflation issue. Today this is causing great harm just to sell a few months supply of Treasury issues at artificially low rates. Is it really because of shortages? Not especially.

domestic rice and wheat
source: Credit Suisse

James Cramer, on the other hand, called Egypt an “exogenous” event and admitted some surprise. Some commentators, including the Administration, just ignored the food inflation element of this disorder. Incidentally, "exogenous" is defined as a "change or event that comes from outside the model and is unexplained by the model." What a sham and a farce.

crb index

Obviously I am in complete disagreement with this, but the mere fact that so much of the conventional wisdom doesn’t get this, or simply dismisses Egypt as a backwater instead of something critical and part of a pattern, is fundamental to the solid bear case. Bet on the “exogenous event” sham at your peril. This is why these events come as a whodathunk surprise to the James Cramer types. In fact there was a strange delayed reaction to the selling trigger in Friday’s action.

Although there is no way to predict an actual date, I was alerting my readers about this possibility on Jan. 19 in Ninja Inflation:

  • A short week after Tunisia’s government was tossed out on food riots, corn and wheat once again spikes to fresh highs.  The pace continues on the “popular revolt” front — translate food riot — as Sudan gets shaky.  So far the inflation ninja in Jordan has been subjected to “peaceful demonstrations.”  I believe there is a speculative, hoarding element adding to this caused by too much easy money / “stimulus,” but there is also a fundamental supply and production problem [Global Food Chain Stretched]. This, in turn, will drive serious political economy problems.

In case of any doubts or confusion about what transpired, look closely at monthly spending by category in Egypt:

monthly spending

Back on Oct. 28, I set the stage by talking about rice. Of course, it could have just as well been grains. “We should also being tracking rice as a key commodity. This will affect conditions in emerging and third-world countries. Right now, it is just outright inflationary; but if it starts spiking on QE2 machinations, watch for food riots, disorder and even revolution.”  On Oct 2, I wrote: “I don’t see stranguflation as benefiting these markets at all, as it is disruptive when local populations can’t afford food, and often this results in riots and civil disorder”.

I ultimately believe the big shoe to drop will be in China or possibly India.  India is not homogeneous like Egypt.

I said on Dec. 28th,  ”My focus has been on a China bust, but India seems to be suffering from classic hyperinflationary conditions in food. Vegetable prices have been reported as jumping 16% in just a few days. This is a big story in the emerging market story, and to just ignore it is astonishing.”

In watching Egyptian news footage, it appears these gente (folks) had a purpose to create havoc, but in the midst of it all I sensed some unwritten nationalist respect in play for other Egyptians: frustration and an intent, yes, but not hatred. I think that is why security forces and military made only light appearances, and stayed mostly out of the fray.

In India, food riots could lead to religious fighting, and then just to outright killing of neighbors who are different. India has a long history of this. Since India is a high-profile, darling developing nation, this kind of shock would blow those markets up and be a real lesson to the exogenous-event cognoscenti.

Although we may see civil disorder and food riots in China, I suspect this plays out as a defacto labor strike that the exogenous event crowd is totally unprepared for. The Chinese New Years starts Feb. 3 and unless big bounties [Foxconn's big wage increase] and large pay increases are offered, these workers will just stay in the countryside and avoid the expensive speculative urban areas. There they can help relatives with the crack up boom hoarding going on. [WSJ: Chinese Take A Cotton to Hoarding]. This “strike” will rapidly shut down production in China.

Elsewhere in the Middle East, there has already been trouble in Oman that could spark a geopolitical spike in oil and further amplify the hole both China and India are dug into. I would caution speculating on oil at this point, however, because I suspect hoarding there as well. When the China downturn becomes glaringly apparent, there could be a commodity liquidation. The wild card would be QE3, which would result in a lethal combination of collapsing economies and severe crack up boom inflation.

aug10_1792.jpg

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