Arab World's Berlin Moment?

Leo Kolivakis's picture

Back in May, I asked if Greek protests are going global?
With the recent events in Egypt, it looks like we are heading for
another round of geopolitical tension. Market participants are very
anxious because the global repercussions of this latest episode can be
significant.

While some in the media are proclaiming this the
"Arab world's Berlin moment", I'm very skeptical. Spero News had an
interesting interview with George Friedman, founder of STRATFOR, asking whether the end of Mubarak will lead to democracy or disaster (added emphasis is mine):

For
more than 30 years, the geopolitics of the Middle East has been built
on the American-Egyptian-Israeli relationship. STRATFOR founder Dr.
George Friedman contemplates current events in Egypt and the prospect
of the end of an era.

For more than 30 years, the geopolitics of
the Middle East has been built on the American-Egyptian-Israeli
relationship. Much of that time, the lynchpin has been Cairo and
Egyptian President Hosni Mubarak. Is this era about to end?

Welcome
to Agenda and joining me this week by telephone from New York is
George Friedman. George, it seems probable the Mubarak era is now
passing. What impact will it have on the Middle East?

George Friedman:
Well, certainly, Mubarak is coming to the end of his days. And it’s
not yet clear what, if anything, it is going to do to the Middle East.
It really depends on what the successor’s regime is going to look like.
He was hoping that his son Gamal was going to replace him; that’s increasingly unlikely.

There
are demonstrations going on in Egypt. How widespread is hard to tell,
and of course the Western media is immediately assuming that these are
democratic reformers out there because they talk to the ones who speak
English and they tend to be democratic reformers.

We don’t know
what the Muslim Brotherhood is doing, or capable of doing. So we don’t
know if we’re going to get a military coup to replace Mubarak, we don’t
know if we’re going to get a Islamic government, or if we’re simply
going to have a succession, fairly orderly, when he passes on or even
before then. But whatever happens can have enormous significance, depending on which way it goes.

What’s the significance of the return to Cairo by Mohamed ElBaradei?

George Friedman:
Well, ElBaradei is the Gorbachev of Egypt. Gorbachev is deeply loved
by Americans and profoundly loathed by the Russians. I wouldn’t go so
far as to say that Elbaradei is loathed, but he hardly has deep and
effective political roots in the country. Remember that the Army has
been the dominant force in Egypt since 1956; that Gamal Abdel Nasser,
Sadat, Mubarak all come from the military, and that the military is
among the more modern capable forces inside the country. So, the
default thinking is that, regardless of these demonstrators are doing,
it will be some military person coming on and succeeding Mubarak.

The
second possibility is that what’s going on in the streets now will
kick off an Islamic revolution in the same way that the Iranian
Revolution in 1979 started out as appearing to be opposed the Shah’s
oppressiveness and had the wide support Western human rights groups,
only to be taken over under control of a radical Islamist regime under
the title of Ayatollah Amini. That’s a possibility, although it’s not
visible right now. But the real question that comes out of all of this
is very simply: Egypt has been a pro-American country with a peace
treaty with Israel have been quite effective for 30 years.

 

Now
are we going to enter a period in which Egyptian policy will change in
which peace treaty with Israel breaks down and a situation in which
Israel goes from a country that it is enormously secure from foreign
threat to one that is again at risk from Egypt, particularly if Egypt
begins re-arming. Second, what is the effect of a Islamist Egypt on the
American position in the region?

 

Egypt
is the center of gravity of the Arab world — by far the largest
country — and more than a match for Saudi Arabia or Iran or anyone else
should should it choose to be. If this becomes an Islamist country,
then the United States is entering a new phase in its war against the
jihadists. Now, is it about to become a jihadist government in Cairo? I
don’t think so but that’s really what the question is: what’s going to
happen. And the least likely thing to happen is a long-term reformist
democratic government.

 

Much media comment is focused on
what they call the “Tunisia effect,” spelling the end of dynasties in
the East. Mubarak is under threat now, others may be tomorrow.

 

George Friedman:
In the case of Mubarak, he’s not, he’s dying by all accounts, I mean
he’s certainly going to disappear. And we’ve been talking for several
years about the succession. So it may be that what happened in Tunisia
influenced what’s happening a bit in Egypt but Tunisia is the tail to
Egypt’s dog. It’s also important to bear in mind the huge difference
between francophone North Africa and anglophone North Africa - that of
course is dominated by the English and the French.

 

Tunisia and Egypt
are widely separated. It certainly is possible to encourage some
people to demonstrate but in none of these countries outside of Tunisia
have we seen these demonstrations are particularly significant or
effective. The press is immediately speaking — I saw one headline about
the Egypt being on fire — uh, no, it’s not.
It may become, we can’t rule that out, but we have to remember the
example of the Green Revolution in Iran a couple of years ago (2009).
When the media was all over “what a transformation is taking place and
how the government is staggering” — the government was very effective
in putting it down and we haven’t heard much of it since.
So
much is uncertain of what’s happening but let’s be certain of this
much: what happens in Tunisia matters little to the world, what happens
in Egypt is a towering significance.

If this is a military coup or an army officer steps up to the plate, what then?

George Friedman:
Well, the military is in power in Egypt. Mubarak is a military man.
Sadat was a military man. Nasser was a military man. If the military
stays in power, in selecting one of its own to be president, I think
everything stays in place and that would mean that the regime survives.
It’s far more significant if the normal succession within the
framework of the military doesn’t happen. One
of the reasons that Gamal Mubarak was not going to be allowed by the
military to take power is that he wasn’t part of the military the same
way his father was. He wasn’t trusted by them. So, the issue here is a
succession within the framework of the military.

 

A sort of
military coup in which case the military takes much more direct and
open power, which it really doesn’t need to. So what we’re really
asking here is the geopolitics of the Middle East has been built on the
American-Egyptian-Israeli relationship certainly since 1977 — and
perhaps before that. Is that about to change? If that changes, it has
enormous consequences. But at this moment, I mean we know that the media
will get breathlessly excited over any demonstrations anywhere
especially that include twittering, that doesn’t mean anything yet.

The
crisis in Egypt is significant but what exactly does it mean for
markets? Over at Zero Hedge, RobotTrader posted a comment asking whether the market topped out on Friday, highlighting the following checklist:

1) QQQQ and IWM breakdown? Yep, they cracked big.

 

2) Financials breaking down? Not quite yet.

 

3) Retail stocks breaking down? Not quite yet.

 

4) Commodity "Midnight Massacre"? No.

 

5) Fleeing to USDX as carry trades unwind? Not yet.

 

 

6) Emerging market status? Blowtorched.

 

7) VIX going vertical? Yep.

 

8) Summation Index and McClellan Oscillator going down? Yep.

http://stockcharts.com/charts/indices/McSumNYSE.html

 

The
"all important 21-day" keenly eyeballed by the mo-mo crowd is about to
break. One more day, or a gap down on Monday will seal the deal.

Seal
the deal? In my opinion, it's way too early to speculate on where
markets are heading. Obviously, in the short-run, with all this
uncertainty the easy trade is RISK OFF,
close your risk trades and wait and see how all this plays out in the
weeks ahead. Some participants will be actively shorting the market but
that strategy is extremely risky and could easily backfire in these
volatile markets. Others will use this selloff as another opportunity to
scoop up more risk assets (my bias remains to buy every dip that comes
our way).

What we do know is what David Patten of Newsmax reported on, namely, that as Egypt explodes, oil is set to skyrocket:

The wave of unrest in the Middle East that began with the Jasmine Revolution is now having repercussions around the globe.

After
the recent fall of governments in Tunisia and Lebanon, angry marches
in Yemen, and the brutal crackdown in Egypt that has left seven dead
and hundreds wounded, analysts worry that the governments of Algeria
and Jordan could be next to see disturbances.

Radical
extremists see the turmoil as their opportunity to institute the
region-wide, anti-Western Muslim caliphate or union that they have
dreamt of for centuries.

Some
analysts believe Morocco also could be at risk, as well as the kingdom
of Saudi Arabia, a key U.S. ally in the war on terror that boasts the
world’s largest oil reserves.

The financial impact of the
uprising in Egypt has already begun to ripple around the globe. Middle
East currencies are under attack by speculators, the Egyptian equities
market and emerging-market stocks have nosedived. But the big question
for the West is what will happen to Saudi Arabia, which like Yemen and
Egypt has been under pressure from radical, anti-American extremists.

“If
this spreads, democracy in the Middle East spreads, the United States
could take a huge hit,” predicted CNBC’s Erin Burnett on MSNBC’s
Morning Joe program Friday morning. “Because democracy in a place like
Saudi Arabia, you've talked a lot about who might come into power, what
that means for oil prices — they're going to go stratospheric."

The
Obama administration is already taking heat from both sides of the
aisle for its policy of avoiding any public confrontation with Middle
East regimes over their abysmal record of repression, torture, and
corruption.

Unlike the Bush administration, which made a public
push for democratization, the president has preferred to express its
concerns in a more low-key manner.

The
reality is that US officials are walking a tightrope. On the one hand
they publicly support a widening of civil liberties in the region, but
on the other they know that democracy will open the door to even more
chaos.

Either way, everyone will be watching developments in Egypt this weekend and investors will be pricing in Egyptian risk on Monday.
What remains to be seen is whether the world is heading into a long
period of heightened political uncertainty and how this will impact the
global political landscape, economy and financial markets.

I leave you with a thought provoking interview with William Engdahl
on Russia Today discussing how this crisis was orchestrated by the US
and how it might shape the "new Middle East" and destabilize Europe.