The rioting and general taking to the streets and the resulting increasing oil price has surprisingly not unraveled our markets to any great extent at the time of this writing. This is surprising given the elasticity of our markets to bad news in the recent past. I monitor the VIX, which is a reading of stock market volatility. It shows a reading of around 17 which is pretty low. Why have market participants not reacted more? More after the jump...
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This is something that has been brewing for some time. It appears that the unrest is fairly universal in Egypt. Hosni Mubarak represents the National Democratic Party. Since 1967 they have had “State of Emergency” powers. That tells me most of what I need to know. With power concentrated in the hands of a few in the ruling class, eventually a population has had enough. The most they can do is throw rocks, cause havoc, and be generally unruly as they do not have widespread access to firepower to overthrow their perceived oppressors. The root of their troubles appears to be economic. Their annual gross domestic product per person is around $6,200 according to JP Morgan. The similar US statistic is approximately $40,000. Their unemployment rate is perpetually high. Elections appear to be rigged with the National Democratic Party gaining over 80% of the electoral seats. Eventually the masses become fed up and they are doing it now. What are our risks in the marketplace?
There is not so much a risk to oil shut-off from Egypt. They are not a major world producer. The bigger oil risk is when those who oppose non Muslim control of anything move in to take advantage of the power vacuum. This is a real risk. I will take the conservative stance and assume that it will happen to some large extent. Could this disrupt the oil flow? Perhaps. More likely is that it will create the perception of risk and oil prices will rise. They appear to have already risen in reaction to the unrest. Since we are forced by regulation to import the majority of our oil, we will be affected by prices and disruption. According to the International Energy Agency, a $10 increase in oil price has the potential to cut US GDP by 0.3%. Oil prices affect our economy similarly to a tax. They increase the cost of consuming and doing business as they are passed on ultimately to the consumer. JP Morgan estimates that a GDP growth rate of 5% is necessary to cut the unemployment rate by 1%. You can then imagine that with oil’s price increasing, the outlook for our recovery slows by a not insignificant amount.
All of this is used in the portfolio recommendation process.
Please feel free to contact me at 952-230-1340 if you have any questions or concerns.
Take care,
Chris
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
