Norhill Wealth Strategies

Egypt’s New Government

On Feb. 11th, 2011, Hosni Mubarak resigned from the Presidency of Egypt. He was likely pushed out by the military. He took over after the assassination of Anwar Sadat. Since that time, he has been a stable yet autocratic leader. Egypt has been a reliable partner and supporter against the US war on terrorism. It has also been a hedge against Islamic aggression toward Israel. Yet the Middle East is now in a greater era of uncertainty than ever. Over 92% of Egypt’s businesses are unregistered mom and pop establishments. Therefore not afforded the protections of the rule of law. This means not only can they not get loans, tax relief, mortgages, and protection from police, but they also cannot avail of any government aid programs. The biggest problems in Egypt is not political, it is infrastructure. Egypt has few institutions.
There are many who believe Egypt will transition as a democracy, but end up with another autocratic totalitarian government. Contrary to Obama administration positions about the benign aspirations of the Muslim Brotherhood, 67% of Egyptians support it. Only 3% support Israel with another 77% willing to abrogate the Egypt-Israeli peace treaty. There are few other legal organizations able to step in to the current political vacuum except for the Muslim Brotherhood. This group is also the genesis of both Hamas and Al Qaeda. Ayman Zawahiri, the second in command to Osama bin Laden, started his extremist evolution with the Muslim brotherhood.

This is especially worrisome since 11% of all world shipping moves through the Suez Canal. If an Islamic extremist government takes over in Egypt, they would likely hold the Suez Canal hostage in an attempt to manipulate Western democracies. This would work only for a short time since shipping would simply reroute towards the Cape of Good Hope in Africa bypassing the Suez Canal. It would also have a short-term impact on world oil prices.

Deflation or Inflation?

Its popular now for the Obama administration, and the Fed, to report inflation at 2.6%. But the real inflation numbers are far higher. Oil has increased in only 90 days from $85 a barrel to $95. According to Dan Rice of Blackrock, oil could increase to $120 per barrel this year. Unleaded gas in the US would move very quickly to $6 per gallon if that happens. This likelhood plays in the hands of alternative energy promoters who believe only expensive gas will move the US towards alternative energy sources. Commodities like wheat, soy and other foodstuffs have increased dramatically. The real reason behind the Egyptian trouble was a 200% increase in food prices. Some of this increase is due to the Feds quantitative easing policies. As the Federal Reserve prints money, it makes commodities around the world more expensive. This is because the dollar is the world’s reserve currency, and commodity prices are denominated in US dollars.

Unemployment

The drop in US unemployment from 9.4% to 9% is welcome but possibly an illusion. According to economist Jim Fitzgibbon of Highlander Funds, the unemployment report was seasonally adjusted to be positive while the non-seasonally adjusted data is far worse. The non-seasonally adjusted unemployment data increased from 9.1% in November to 9.8% in January, the exact reverse of administration announcements. For more information, go to the Bureau of Labour statistics for the truth. According to Fitzgibbon, the number of jobless was not reduced, yet the total workforce was decreased. Without seasonal adjustments, the 39,000 payroll increase would’ve been closer to a loss of -52,000.

Shoppers break out the plastic

The light slate of economic news this week dealt with rising demand. Higher oil prices and a healthier appetite for spending led the U.S. trade deficit to increase in December, as imports grew more than foreign demand for U.S. exports. Increased spending also translated to higher consumer borrowing. In international news, political unrest in Egypt continued for a third week, disrupting the country’s economy and keeping its stock market closed.

Consumers borrow more

In a spending mode for the holidays, consumers loosened their purse strings in December much more than expected. Total credit outstanding rose more than $6 billion, compared with a consensus forecast higher than $2 billion. December represented the third straight month of higher total consumer credit balances. Perhaps even more significantly, revolving credit (primarily credit card debt) increased for the first time in more than two years. Nonrevolving credit also grew, but at a slower pace, as sales of new and used vehicles were relatively steady.

Trade gap widens

The U.S. trade gap expanded to $40.6 billion in December, in line with consensus expectations. The dollar value of both exports and imports climbed to levels last seen more than two years ago-a sign that the global economic recovery is proceeding. But import demand, led by rising crude oil prices, grew even more than overseas demand for U.S. goods and services. Notably, imports from China decreased, suggesting that the gradual appreciation of China’s yuan relative to the U.S. dollar is having an impact on demand. For the 2010 calendar year, the strengthening economy and rising demand-including for imports-were evident in the nearly $500 billion deficit for total goods and services, almost one-third higher than the $375 billion trade gap in 2009.

The economic week ahead

A broader menu of economic reports is on tap beginning on Tuesday with retail sales and business inventories, followed by producer prices, new residential construction, industrial production, and the latest minutes of the Federal Reserve’s Open Market Committee on Wednesday. Consumer prices and The Conference Board’s leading economic indicators are scheduled for Thursday.
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Markets Update

For the week ended February 11, the S&P 500 Index rose 1.4% to 1,329 (for a year-to-date total return-including price change plus dividends-of about 5.9%). The yield of the 10-year U.S. Treasury note fell 4 basis points to 3.64% (for a year-to-date increase of 34 basis points)

 
(Source:Vanguard, CNBC.com, CNNMoney.com, ustreas.gov, bls.gov)