Thursday, February 24, 2011

Of Revolutions and Oil

As I was driving home today, I was listening to Hannity's radio show. Over and over, caller after caller kept insisting that this was the beginning of The End, all predicting that the revolutions now sweeping the Arab world will somehow end up in a one pan-Arab Caliphate, Islamist in nature, and that war was a certainty. As for me, I'm not so sure.

Shortly after the Bush Administration began to lay the publicity groundwork for the invasion of Iraq, I read a very prescient piece based on an interview with one Paul Wolfowitz, who at that time was the Deputy Defense Secretary. The piece wisely saw that a burgeoning youth population, high unemployment, corruption and disenfranchisement was certain to incite revolts-- and it went on to predict that most of the Arab world's dictators would fall in revolutions because of these factors. It was hoped by Wolfowitz that once the Arab world saw a functioning, stable, prosperous Arab democracy, they would begin to demand it in their own nations, sweeping away corrupt tyrants and ushering in an era of peace and democracy in the Arab world instead of worse alternatives. Iraq was to be the beacon, leading the way forward. It was certainly a grand throw of history's dice.. a bloody and expensive one at that.

Alas we have arrived, though Iraq certainly was not the beacon Wolfowitz has hoped for-- but neither do you see these revolutions taking place in Iraq. In my humble opinion, this is not about Islam. It's about unemployment and disenfranchisement. In all of the cases so far.. Tunisia, Egypt and now Libya, Yemen and Bahrain-- there were dictators in place, high unemployment and frustration. They were disenfranchised. Now they are (or will soon be) gone. There was today the beginnings of serious demonstrations in Saudi Arabia, a day after King Abdullah threw a ton of money at some of the Kingdom's social and economic problems. For the youth of these nations, it was their first taste of enfranchisement and power-- and they liked it, as well they should. 

Prediction Time !!  I don't see any pan-Arab Caliphate coming. Each of these nations has a differing set of variables and so likely have different outcomes. In Egypt and Tunisia, the Army will hold power for a time. I do believe that elections will be held in Egypt. I'm not so convinced about Tunisia. In Libya, Colonel Qaddafi will lose and will flee the nation, followed by another Army government and shortly thereafter elections. Bahrain is more of a religious thing.. most of the people are poor and Shiite, and the ruling family is rich and Sunni. I think the royal family will be forced to leave, and a Shiite government will take over-- and this will quite likely mean the eviction of the US 5th Fleet. As for Saudi Arabia, I believe that in time the King will be given the choice of a constitutional monarchy (like Britain) or being kicked out completely-- but I'm not convinced it's going to be anytime soon. Algeria is also on the bubble, and I see Boutaflika also being forced into exile. Will these people be able to produce some form of democracy ? I say yes.. Egypt almost certainly, the others not so certain, but it will take hold in a number of these nations. Unknown to most westerners, the vast majority of people in these nations want what we want.. peace, prosperity and democracy. There are huge numbers of educated, young, urbane college grads in the Arab world.. these are the people you see in the streets demanding change, not radical jihadis. But in all of these there is also a radical element.. perhaps a fifth of the population.. who want to turn back the hands of time to the 14th Century. But I say that history moves forward for the most part, Ayatollah Khomeini being one of the few exceptions. I also expect that the mullahs in Tehran will one day be forced to yield power. Forcing democracy is one thing.. providing reasonable employment is quite another. Many of these nations have very high birth rates and (except for crude) no natural resources. What would they produce ? The world only needs so many t-shirt plants. But even a dirt poor democracy is better than dirt poor kleptocracy. This is a situation which will be revisited with increasing frequency on the African continent. 

Now we come to the uglier part of this piece-- crude oil. Today Brent Crude (Europe's main source of crude) touched $120/bbl-- levels not seen since 2008. West Texas Intermediate Crude (the US oil) went north of $110/bbl. Most of this was on the news out of Libya, where today it was announced that the half the nation's crude exports had ceased. There were also rumors that Colonel Qaddafi, never one to espouse reason or sanity.. would blow up his nation's oil wells and turn the place into a gigantic Kuwaiti oil rig fire. Libya usually produces about 1.5 million barrels per day.. total world production is something like 83mm barrels per day. But the world is using much more oil than before; supplies were already tight before this. Algeria produces roughly the same amount as Libya does. Combined, this would be a tough loss, sending prices soaring. Depending on how bad things get-- and they might get very ugly-- we could see $4.00 gasoline again this summer, kneecapping any hopes Obama had of a recovery. If something serious were to happen in Saudi Arabia, look out-- $6.00/gal is quite possible-- and if this lasts for some time, it could be a  "Game Over" event. But talk of such things is still premature. I fully believe that more kleptocrats will be swept away this spring and that $3.50 gas is a reality we're going to have to learn to live with for the short term. Oddly enough, I'm happy for the peoples of these nations who will finally have a say in how they are governed. Let's just hope that it does'nt bring catastrophe upon our own economy in the process.

Sunday, February 20, 2011

The Paddy Ponzi

Ireland's situation is terrible. A country of only 4 million people, Ireland's banks have loaned out nearly $867 billion.. much of it to real estate developers.. and many of Europe's largest banks provided much of the money to the Irish banks in the form of loans and deposits. These banks and their hundreds of billions in bad loans are guaranteed by the Irish government, which asked for IMF/EU help to deal with the mess. Remember that the Irish government, which has guaranteed hundreds of billions, only takes in about $37 billion/yr in tax revenues (most of which goes to Social Security and their Medicare systems).. it's rather like watching a ground squirrel try and catch a falling hippo.

Apparently the IMF and Irish government are not keeping up with the losses. In yesterday's Irish Times, we catch a hint of how the Irish banks are keeping themselves afloat. Here's how it works: In Europe, a bank may borrow from Europe's Central Bank {ECB} if you have some investment grade (A or better) bond in which to give the ECB, who then waits for the bond to mature and cashes it in. So... Irish banks began issuing bonds to themselves and turning them over to the ECB as collateral. Thats rather like going to Kinko's, printing up a legitimate looking bond, and giving it to your bank as payment for a loan you are about to take out.

All the bonds mature in April and May when the details of the banks’ plans to sell off assets and shrink the size of their businesses must be agreed under the EU-IMF bailout deal.

Bank of Ireland issued the largest amount, €9 billion, on four bonds on January 26th. AIB issued €2.63 billion on January 25th, Irish Life and Permanent €3.1 billion the following day and EBS building society €1.7 billion on January 28th.

Bank of Ireland raised a further €980 million on another bond on February 10th.

The bank said that the issuing of the bonds represented “a technical adjustment” replacing sterling bonds backed by UK mortgages as the ECB stopped accepting sterling loans as collateral from the start of the year.

AIB said that “own-used” bank bonds could be used as collateral from the ECB if Government guaranteed. The banks have leaned more heavily on central bank funding from Frankfurt and Dublin due to the loss of deposits and the closure of the markets to Irish-issued debt.

Banks in Ireland had borrowed €126 billion from the ECB at January 28th, representing almost a quarter of all borrowings drawn from Frankfurt by euro zone banks.

The Central Bank in Dublin has provided a further €51.1 billion to the Irish banks through exceptional liquidity assistance (ELA) at this date on ineligible ECB collateral.

Guess who guarantees that additional €177 billion ? You guessed it.. the Irish people. This is a shell game, pure and simple, designed to buy time and possibly pawn off some of the previous losses onto the ECB's books. Bernie Madoff would give them an award from prison. The bill is coming due in May.. I'll leave it to my readers to guess how this will end. But before we get to April, there is an election in Ireland.. and the government of PM Brian Cowen will certainly collapse. It remains to be seen if the new Irish government will honor the IMF agreement.. an agreement that Ireland should probably reject. 

Onto another ponzi closer to home.. here's a video of my favorite economist, the outstanding Kyle Bass, on how we in America are doing:

Monday, February 14, 2011

Obama's Budget & Islamic Revolutions

President Obama today delivered his 2011 Budget proposal to Congress. Here are some of the "highlights".. the deficit this year will be (by far) the largest on record.. $1.6 trillion, just over 10% of our entire GDP. The US Government will in effect spend three dollars for every two they take in. There will be some haggling amongst politicians on "discretionary spending", which amounts to only 15% of the budget. You'll hear words like "painful" and "deep" from politicians. But the 85% of the budget.. and the fastest growing segment of it.. entitlements and defense, are completely off limits. Nobody will touch these programs with a ten foot pole. Social Security, Medicare and other entitlement programs consume 60% of all federal spending.. $2.1 trillion. In contrast, the federal government expects to take in $2.2 trillion in tax revenues. Obama's budget also expects federal revenues to grow by leaps and bounds.. it expects federal revenues to grow from $2.2 trillion this year to $3.0 trillion by 2013.. an increase of some 27% in only two years. Uh huh. By 2015, they'll grow to $3.6 trillion. Just who will be loaning us these vast sums to keep our government solvent ? The largest purchaser of government bonds is.. The Federal Reserve. Simply put, of the $1.6 trillion the US Gov't needs to borrow, approximately half will simply be printed funny money. QE3 and rising Bond interest rates are a mathematical certainty. Look for the US 10yr Bond to hit 4% by mid summer's eve. Here's the scary part.. the Office of Management and Budget expects interest payments on this national debt to rise from $180 billion this year to over $800 billion in 2020. Stephen Lewis from Monument Securities says "The US is pushing it's luck. Markets sense that Obama is unwilling to cut spending before the 2012 election. The Fed may have to stop QE because of rising commodities prices.. and if that happens, the market will react very negatively".

I watched an interview a year or so ago with Nouriel Roubini, an economist at NYU who predicted the economic collapse in 2008 and has become somewhat famous for that prediction. In this interview, he predicted that the Republicans would win at least one of the two Houses of Congress (which they did) and that when this happens, deficits would explode because the Democrats refuse to slow spending and the Republicans refuse to allow tax hikes.. and the path of least resistance is to just keep borrowing. Alas we have arrived. Instead of blaming politicians, I'd like for all of my readers to look in the mirror. If given a choice between electing a politician who says "Sorry guys.. the economy is screwed six ways from sunday and the best option we have is to slash social security and end the foreign wars. This is gonna hurt" and another one who says "I believe there are good options and we wont have to raise taxes or slash social security" nine out of ten Americans will vote for the second guy who's simply blowing sunshine up their rears. It's you and me that send these slicksters to govern us.

This money printing is already having an effect on us.. food and gasoline prices are spiking and will keep going upwards at a dangerous level. We'll see $3.50/gal gasoline this year, and I also believe we will not see them under $3.00 for some time. Brent Crude went over $103/bbl today, the highest since 2008. In 2012, should things keep apace, $4.00 will be the norm. Food prices will  continue to go upwards. But as I've said before, this inflation.. especially with food.. will hit other places on the globe especially hard. Tunisia and Egypt have recently found this out. Other governments are increasing their food subsidies to try and keep the price of food to reasonable levels so as to keep hungry masses from rising up against their governments. Many will begin defaulting on foreign debt rather than see their own people go hungry. It's not only the Islamic world that is feeling the pinch. China today released their inflation numbers.. and food inflation has risen by 4.6%.. in just ten days. Something's gotta give. I look for Venezuela to begin having problems pretty soon as well after a decade of mismanagement by Comrade Hugo.

Which brings me to point B in today's discussion.. the ongoing revolutions in the Islamic World. Today, there were violent upheavals in a number of Muslim nations.. Algeria, Yemen, Bahrain and Iran. Of these, two are of serious concern to the US.. Bahrain (home to the US 6th Fleet) and Iran. In Bahrain, a very rich country, the people were not upset so much by rising food prices as they were demanding a change in how they are governed. In Iran, where the demonstrators numbered in the tens of thousands, the police let loose volleys of tear gas and rubber bullets.. and the demonstators responded with rocks and bottles. That section of Tehran now resembles Beirut after a few Hizbullah rockets finished redecorating. My guess is that the Bahrain problems will pass without much more trouble.. fat, rich people make bad revolutionaries. But the ones in Algeria and Yemen are serious business and these governments might be in some trouble. As for Iran, we shall see.. there was a serious uprising about a year ago when the results of an "election" were announced. The Islamic regime was able to supress that one. Today's mayhem was the biggest demonstration since last year's. This friday will be a good test of wills in Teheran.. if the protesters number in the hundreds of thousands.. in combination with rising food prices.. Ahmed-need-a-jihad could be in some serious trouble. The Islamic regime itself might survive if they put a moderate guy like Rafsanjani in power and hold fair elections. But if this weekend is a dud, there's a good chance this uprising will fade much like the last one did.

In a greater context, much of what is going on in the Islamic world is about more than just food prices; it's about democracy, greater opportunity and justice. Many commentators here are worried about Islamic revolutions sweeping the Arab world, with visions of the entire region becoming rather like Iran. In truth, it's about something that we Americans take for granted.. liberty, justice and prosperity. The people at risk in all of this are the leaders of nations who do a bad job of providing these basic human desires. In Tunisia and Egypt, pro-US cleptocrats was swept from power. In Teheran, anti-US Islamist mullahs look to be in some trouble. On a grander scale, if many of these regimes are swept away, the end result might be an Islamic world that cares more about economic opportunity and justice than it does about wiping out a group of Jews hanging out in a small corner of the neighborhood. In my view, we do not need to fear these movements. In this context, Obama's early on ditching of Mubarak and his speech extolling democracy and human rights in the region looks like it was dead on.

Sunday, February 13, 2011

The 99'ers Caste Class

According to an estimate by the National Employment Law Project, approximately 3.9 million people exhausted their unemployment benefits in 2010, despite a much publicized "budget agreement" between Obama and the Republicans that extended the time frame of benefits, but not the 99 week limit. This 99 weeks is 26 weeks of state unemployment and another 73 from the federal government.

It's about to get worse. In December, the Obama Administration estimated that another 4.1 million people would be losing benefits in 2011. Congressional Democrats have introduced a bill extending the federal part of it by another 14 weeks, but the House Republicans seem set against this. I don't believe this will pass. It's just another temporary bandaid in any case if you really look at it in a monetary sense. Today, however, I'd like to take a little time to explore the human cost of this Depression-Lite.

There are many who get unemployment who are simply sitting on their rears, enjoying their paid holiday. Quite frankly, my niece is one of them.. but not for long. As a member of the work force, I can tell you unequivocally that a major consideration for hiring these days is the length of time you have been unemployed. If your answer is over six months, employers begin wondering why.. is there a medical issue the company might become liable for by offering them insurance ? Do they think it's perfectly fine to sit for months on unemployment.. what if the employee does'nt work out any better than the last time they were employed ? Substance abuse ? In the eyes of an employer, there is no acceptable answer.. and the company simply moves on and hires someone else with a better work history. Millions of people are falling thru the cracks like this. My niece faces a far more daunting task than she imagines in finding a decent job once her own 99 weeks is exhausted.

Unfortunately for millions upon millions of people who's jobs are not coming back, there are few options. One thing that I personally see is a huge rise in the number of people applying for and getting Social Security Disability and also food stamps. Rhonda Taylor, a 42 year old "99'er" who lost her IT job in 2008, is in just such a situation. Her unemployment has run out; the only cash income coming in is her minor son's disability check, just over $600/mo, and another 400 or so in food stamps. The number of people getting food stamps (again) hit a record 41 million people. One in seven Americans needs help feeding themselves. "Life is just awful since the cut off" says Taylor.

Slowly but surely, America is going to have to come to grips with what to do with the large and growing underclass of people who have no realistic hope of bettering themselves. The number of Americans who work is 138 million.. in a nation of 310 million people. The unemployment rate (the "U6" measurement, which is much more accurate and thus the government stopped reporting) has stayed above 16% for most of 2010, and this will not change for some time. I fully believe that America's problems are not simply cyclical (meaning this is just a temporary recession) but are now structural. This 16% unemployment number is the new norm folks, and it will be for years to come I fear. We are slowly but surely evolving into a nation where the middle class is being squeezed out of existence and a new, large and permanent underclass has come to be. While unemployment and recessions have always been painful, the sheer scale of this "Depression-Lite" as I call it boggles the mind. The eight million people who's UE benefits will be exhausted last year and this are tragic; these are real people. In addition, probably twice that many people have had their wages slashed in one form or another since Lehman Bros went under.. hours cut, job change for the worse, etc. Worse, we as a nation this year are going to borrow $1.5 billion between state and federal governments.. about 1/10th of our GDP. Imagine how much worse it might've been had we not borrowed this money. Ultimately, we as a nation cannot continue to live beyond our means.. not only that, but at what point do we begin to repay this debt instead of simply always borrowing more ? I fear that despite the pain we're experiencing, it's going to get worse as time marches on, especially for the new underclass caste.

Monday, February 7, 2011

Credit Default Swaps

Leveraged trading.. which in many ways is simply gambling.. has been around for quite some time here in the US. . Every day in America, people bet on sports teams without actually owning part of them. "Bucket Shops" as they were called, were essentially gaming establishments.. only instead of the Yankees or the Red Sox, they were betting on a stock.. GE, US Steel, etc.. without actually owning the stock. They were essentially side bets. During the early part of the 1900's, Edwin Lefevre ran one such shop on behalf of the legendary Jesse Livermore. Worse, in these bucket shops, people were buying on margin. For example, if you wanted to bet $1,000 that GE was going up to $65 a share, you would only have to lay down $100. Of course if you were wrong, you owed the bucket shop bookie the other $900. All of this without actually owning any stock.. it was, at it's heart, gambling. These bucket shops became so pervasive that they actually began, through inside information, to affect the actual stock prices.. and this was what in large part led to the "Panic of 1907", where the NYSE lost more than 50% of it's value from the high in 1906. The "Bucket Shop Laws" were enacted by Congress shortly after the Panic.

Fast forward three quarters of a century and we're in the partying 1980's.. the last days of Bill Clinton's presidency to be exact. Alan Greenspan, the Fed Chairman, has become very, very powerful as prosperity grips the nation, with many giving Easy Al the credit. Among those who believed Easy Al was Clinton himself. As his Presidency was coming to a close, Greenspan championed a bill in Congress, HR 5660, called the Commodity Futures Modernization Act, written by a Republican Congressman from Texas on behalf of Goldman Sachs.. He touted it as a necessary further step in the deregulation of Wall Street. It was on the last day of the last lame duck Congress that this bill came up for a vote. In their haste to pass it, the Democrats simply wrapped this bill into an Appropriations Bill, who's passage is a given. The appropriations bill was passed on a "unanimous consent".. ie.. everyone was so anxious to get home for the holidays they did'nt even bother with a formal vote. Clinton signed it into law on New Years Eve. The Commodity Futures Modernization Act allowed for Credit Default Swaps (the new term for bucket shop side bets) to become legal again. Worse, the CFMA expressly forbade any governmental agency, local or federal, to either regulate or halt it. Unknown to Greenspan, Clinton or the bill's authors, they has just unleashed the worst financial crisis in mankind's history, one which has yet to be fully played out.

Instead of betting on the Yankees or even Ford Motor Co, unemployed mathemeticians took this craft to new and unimagineable levels. They were initially sold as insurance policies. Here's an example: JeffBank has $10 million in the vault.. and of this $10 million, a million of it is yours, and it's in the form of a 5 year Certificate of Deposit (CD), therefore you cannot simply go into JeffBank tomorrow morning and get your money out.. you have to wait the five years. Now lets say you were getting nervous about JeffBank.. and thus your million dollars. Therefore you want some form of insurance on it, and so you then turn to "JaneBank" (which also has $10 million in the vault), who agrees to write you an insurance policy on this million dollars.. so long as you pay JaneBank a monthly premium. So far, this is legitimate business. But free from regulation, JaneBank then turns to you and says "If you really think JeffBank is going down, we'll write you a $20 million insurance policy, so long as you make the monthly premiums".. even though they only have $10 million in the bank. These are called "naked" Credit Default Swaps.. and are essentially a side bet. Despite not being able to cover their bets, profits at JaneBank are exploding thanks to the monthly premiums they're collecting.. as are CEO bonuses. Today CDS's are written on everything under the sun.. Greek Government Bonds, City of Detroit Bonds, stocks.. everything. The biggest banks in the US.. CitiBank, JP Morgan, Chase, Bank of America.. are so unimagineably head over heels with CDS's it literally blows the limits of imagination. It makes the problems of JaneBank look like kindergarten. Here's an example of just how bad things are: Bank of America, which has deposits of about $825 billion in deposits, has underwritten CDS's for $48 trillion. Yes Trillion. The entire US economy is only $15 trillion. JP Morgan is the worst.. they guarantee $75 trillion. The entire world economy is $50 trillion. As a whole, US financial institutions have underwritten about $225 Trillion in CDS, guaranteeing everything under the sun.. including each other. So if one big financial institution goes down, they are likely to take a number of others with them. This is exactly what happened on September 18th 2008, when Lehman Bros was allowed to go under.. and instantly made AIG insolvent. The US Government immediately stepped in to save AIG. The street rumor was that if AIG had gone down, it would've taken down Switzerland's largest bank (UBS) and Germany's largest bank (DeutcheBank). It would've been financial armageddon. The biggest CDS these days are written on interest rates. If the US Ten Year Bond goes from it's current 3.65% to 7%, the CDS's this will trigger could crash several very large banks.. which would then crash yet more banks. The Domino Effect on steroids.

So now that we know the problem, has the Obama Administration done anything meaningful to halt this insane cancer ? The Frank-Dodd Reform Act calls for CDS's to be regulated.. but not eliminated. It's yet to happen.. the lawyers are still working on the specifics. Why were'nt they simply eliminated ? This is a question best directed towards your Congressman.. and very likely they will have absolutely no idea what a CDS actually is. By reading this article, you now know more than 3/4's of the US House of Representatives. The banksters who are making bazillions on the profits from these highly dangerous devices.. and who are giving Congressmen millions in "consulting fees" and "campaign contributions".. are banking on Congressional ignorance and silence.. and they're getting it. Thus do civilizations collapse.

Thursday, February 3, 2011

Egypt & Rice

The events in Egypt have went from bad to very much worse. Mubarak's regime yesterday resorted to violence to quell the protesters. Thousands of "Mubarak supporters".. most of them, as it turned out, were secret policemen.. rode in on horses and camels dressed as Bedouins, swords gleaming in the sun, and attacked the protesters. The Army withdrew it's troops as this was happening, which was a clear change of tactics.. most of the protesters welcomed the Army as protectors of their right to protest. Last night, these same "supporters" opened fire on the protesters. The last figure I found was 300 dead and 2,000 wounded. Shortly after this, the Army arrived and separated the protesters from the "Mubarak supporters" by force of arms. These very bloody events are, in my view, the last desperate gasp of a dying regime. Foreigners.. especially journalists.. have been attacked, including CNN's Anderson Cooper.. twice. Make no mistake.. Egypt is descending into a very ugly end game. Here are a few facts.. apparently the police have been pulled from their everyday duties enforcing the law to deal with the protesters.. and the thugs have taken full advantage as crime, looting and all manner of lawlessness has taken place. Reports of thugs setting up "check points" and exacting taxes for passage is a very dangerous precedent; this is how civil societies begin to melt down.

Egypt's economy relies heavily on tourism, mostly from Europeans looking to leave winter behind and see the Pyramids. Tourism contributes $14 billion to Egypt's economy.. and this has completely dried up. The country's stock market closed yesterday after a few days of clifftop declines. Today the government limited withdrawls from Egyptian banks to $10,000/day as apparently there has been a run on the banks. Within a few days, this number will come down to less than a thousand. The nation's gold reserves are undoubtedly being plundered. The Egyptian Pound has also taken a severe beating.. and these, along with soaring grain prices that caused this misery in the first place, have put very poor Egyptians in a desperate situation. These economic calamities will be hard to reverse in the short term even if Mubarak leaves.

The US today finally came out in support of the protesters and asked Mubarak to step down. Last week I believed that Mubarak would'nt last past the weekend.. apparently the old bugger is pretty stubborn.. indeed he came out and said that he's going to die on Egyptian soil. He also said that neither he or his son will be running in the elections scheduled for September. This was not nearly enough for the protesters, nor should it be. I still believe that Mubarak is finished, and I think the military will in the end escort the old Pharaoh into exile beside his son in a posh London suburb.

During the 2009 financial crisis, the term contagion was bandied about with abandon, and it indeed proved to be true. This crisis.. which I still believe is a financial one at it's heart.. also has begun it's contagion. Protests in Algeria continue, as do relatively small ones in Jordan.. which caused King Abdallah to dismiss the PM and  appoint a new one. In Yemen, President Saleh.. another corrupt dictator.. awoke to 20,000 people in the streets marching and demand his ouster, which I think will probably happen. Of these disturbances, Jordan's appears to be the least dangerous.. there is a measure of democracy there, and the King has asked the new PM to draw up some constitutional changes which give elections more power and the King less. Yemen is a country that unnerves me.. desperately poor, having one of the world's highest birth rates, and with declining water and oil resources (and the aforementioned rise in grain prices), this nations' fortunes are going downhill fast, and the fallout will undoubtedly affect Saudi Arabia much like Mexico's problems affect the US. Yemen might become the third nation in recent history (Somalia & Haiti preceded them) to descend into a kind of chaos with no central government or national currency.

About two weeks ago, investor Jim Rogers announced that he was going heavily long rice.. and quite apparently he was not alone. Rice has gone from under $10 per hundredweight of rough rice at the beginning of 2010 to $16.60 today.. and nearly 11% in the last 4 days.It was about $13.40 at the beginning of this year. Wheat and especially cotton have also skyrocketed this year, with wheat hitting $8.63/bushel.. double what it was just last June. The panic buying and hoarding I described could be beginning on a national level: Algeria bought 800,000 tonnes of wheat this last week, bringing their purchases in January to 1.8mm tonnes.. quadruple their usual purchase tonnage. Part of rice's move in the last couple of days has to do with very heavy purchases by both Indonesia and Bangladesh; Indonesia's purchase was also quadruple their historic norm. Having been a commodities trader, I can tell you that these are pretty serious price moves. Some of it is indeed speculation, but most drastic moves in commodities have an underlying truth in them, and this one is no different. Many traders use "technicals", a mathematic program based on charts, to predict the direction of prices. These technicals are all pointing towards rice reaching $20 in the near future, possibly next week. This would be a very serious event in Africa and Asia, especially very poor Asian nations such as Bangladesh, Nigeria and Pakistan. Remember that in very poor nations, people use a very large portion of their incomes on food, and such price rises are very dangerous as more and more people go hungry. There are rumblings that this could be the beginning of a hyperinflationary storm or a new food crisis.. but for me, these dire predictions are a tad premature. Still, the poor nations of the world will indeed see hunger this year, with Africa and parts of Asia hit hard. Egypt's misery might indeed be the just the beginning.