Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
The Egyptian Unrest - Outside View by Chirag Mehta

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

The Egyptian Unrest
Feb 18, 2011

Would the great Pharaohs have ever thought that the Land of the Nile would one day see such despair? That the land of plenty would someday be plagued with such misery? Now while they lie stone cold and mummified in their monuments of sand and gold, their precious Mi?r erupts in disparity.

The unrest against dictatorial regimes of North Africa and the Arab world has demanded its share of exclusive attention. And while the outbursts of frustration and despair are echoed all through these provinces, Egypt seems to be the most precarious of the lot. The fall of Tunisia's dictatorship came as further inspiration for the Egyptians to bring President Hosni Mubarak's 30 year rule to an end.

The world economies care more about this unrest because the Red Sea's burning coast holds the possibility to threaten the commercial closure of the Suez Canal, along with the risk of this revolutionary trend spreading to the Arab world's oil-exporting nations.

Protestors flooding the streets of Egypt are not simply demanding the dismissal of the Mubarak regime; they are actually fighting for their right to make a political choice. As heroic as it may sound, this is quite an uphill battle driven by skyrocketing unemployment and rising food prices. An absolute economic disaster that has made even an obnoxious inflation rate of 10% look good, and needless to say has taken its toll on the youth of the country.

The Start...

Yes, the apparent reason for the revolt seems to be repressive governments; however, there exists a widespread view that the other major cause of the outburst is record food prices.

It's not a pleasant feeling when you simply don't seem to have enough money to afford sufficient food - it's a gnawing feeling more dense than the ever present hunger - a feeling that Egyptians wake each morning to. With rising global food prices creating an even darker situation, 40% of Egyptians have to survive on a mere $2 a day (sometimes even less). And that is just too little to even afford the daily "Eesch" (meaning both bread and life in Egyptian Arabic).

Over the last 6 months food prices have risen sharply in terms of most currencies. Tunisia gave the impending crisis a final push, when it proved that political change could be achieved if the nation demanded for it together. Ironically, the outcome was as tragic as it was glorious. Inflation ensured that families couldn't be provided for, and threw the hungry out on the streets.

So what really caused this "food inflation"?

Could Ben Bernanke's ultra-easy monetary stance and the money print game called Quantitative Easing have anything to do with this?

Because it is the world's reserve currency, any weakness in the dollar impacts financial and commodity markets across the globe. Commodities are priced in dollars, and the Fed has been over-producing dollars over the past few years, which would only imply that the US Treasury is actively undermining the dollar and promoting inflation. And this has caused emerging markets and the food sector in particular to suffering from rampant inflation.

Here are some numbers to help explain the situation better: Over the past year the UN Food and Agriculture World Price Index went up by 28% while the CRB Food Index went up by 45%, and Raw materials moved up 31% over the past year.

Chart: World Food Index
Source: Bloomberg

US - Not alone to blame

The Fed is not completely to blame for inflation problems that occur outside the US.

Yes, the Fed has complete authority to depreciate the US dollar, but how can it lead to a reduction in the purchasing power of any other currency? Only the fundamental attributes and the central bank policy making of a country can lead to a depreciation of its own currency.

Most of the global trade is denominated in dollars and most governments maintain atleast a partial peg to the dollar; hence any devaluation of the dollar has a global effect on countries and exchange rates. Central banks especially from the developing world attempt to restrict significant appreciation in its own currency vis--vis the dollar inorder to support its exports.

Therefore, rather than saying that the US exports inflation, it is more appropriate to say that other countries deliberately import US inflation. In doing so, the governments of these other countries hope to gain a short-term advantage for their exporting industries. The problem is that this short-term advantage for one sector of the economy comes at the cost of a long-term inflation problem for the entire economy.

The speculators are the major culprits

The Fed's Quantitative Easing policies combined with rampant credit growth in China and India has led to increased speculation in commodities. And it is this speculation that has forced food prices up.

In many developing countries (like Egypt) food makes up a much larger percentage of an individual's income and is felt much more severely than in the U.S.

Prices in Egypt are up 17% because of a worldwide surge in commodity prices that has many factors including the key reason - speculation. After being famed for chasing various assets from housing, stocks to tulips and creating asset bubbles; they seem to be eyeing commodities. The result is the same. At a time when there has been no significant change in the global food supply or in food demand, the average cost of buying food shot up 32% from June to December 2010, according to the UN Food and Agriculture Index. Nothing but price speculation can explain wheat prices jumping 70% from June to December last year when global wheat stocks were largely stable.

Gold - the true rescuer

It's indeed difficult to get rid of speculators and the biggest of them all, the Fed, until it possesses the control of the currency printing press that creates unlimited amounts of dollars out of thin air. The rising prices of food and raw materials will ensure that inflation continues to affect people all over the world. Gold is the only true hedge available today to hedge against policy makers misguided ideologies, actions and the resultant crisis / inflation created by monetary excesses. As the chart below shows, gold goes a long way to protect against the current rampant food inflation.

Chart: Cost of Food measured in Gold
Source: Bloomberg

Note: The above plot has been calculated using UN Food and Agriculture World Food Price Index / Gold (USD)

Chirag Mehta is Fund Manager, Commodities for Quantum Mutual Fund and manages the Quantum Gold Fund ETF and the Quantum Gold Savings Fund among others.


The views expressed in this Article are the personal views of the author Chirag Mehta and not views of Quantum Asset Management Company Private Limited(AMC), Quantum Trustee Company Private Limited (Trustee) and Quantum Mutual Fund (Fund). The AMC, Trustee and the Fund may or may not have the same view and DO not endorse this view.

Equitymaster requests your view! Post a comment on "The Egyptian Unrest". Click here!


More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

These Are the Kind of Blue Chips You Should Invest In(The 5 Minute Wrapup)

Nov 9, 2018

All blue chip companies are large caps but all large caps are not blue chips.

Get this Small Cap Logistics Company at a 16% Discount Right Now...(Profit Hunter)

Nov 6, 2018

If you turn the clock back, the current macroeconomic climate is nothing new. The markets have seen them all, and every downcycle has been succeeded by gravity defying gains...more so in the small cap space. This time will be no different.

This Was a Large Cap. But Was It Safe?(Chart Of The Day)

Nov 9, 2018

Investing in large caps is not always safe. Consider the right metrics to judge the safety and quality of large caps.

Why the Realty Sector's Recovery Has Been Delayed(Sector Info)

Nov 15, 2018

NBFC and IL&FS crisis have worsened the realty sector woes. Is there a light at the end of the tunnel for real estate sector?

Does it Make Sense to Invest in Offshore Funds?(Outside View)

Nov 6, 2018

Many investors prefer to invest in offshore funds because of the rupee depreciation and on-going downtrend in the markets, but it is to be invested only when there is no option available to invest in India.


Small Investments
BIG Returns

Zero To Millions Guide 2019
Get our special report, Zero To Millions
(2019 Edition) Now!
We will never sell or rent your email id.
Please read our Terms