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Egypt’s Social Unrest As A Pan-European Economic and Financial Contagion? Let’s Walk Through The Logic
We now know why I had my team specifically model in the fuzzy, yet
quite relevant social unrest factors into our Sovereign Contagion
Models. Egypt appears to have erupted, and I will illustrate the path in
real time using the roadmap that we created to predict such an event
igniting a powder keg much earlier last year. First let’s check out the
headlines:
- The Internet goes dark in Egypt – First, Egypt blocked the social networks, now Egypt has blocked the Internet itself
- Egypt Communications Cut As Protests Continue (WSJ) – Earlier this week, blogs and social networks were full of calls to take to the streets to bring down the regime of Egyptian President Hosni Mubarak. …
- Egyptians Extend Protests, Shun Ban (WSJ)-
- Report: Egypt Bans Facebook, BlackBerry Internet Service | News … Jan 27, 2011 … Report: Egypt Bans Facebook, BlackBerry Internet Service … Social networks have also played an important role in the uprising in Tunisia …pcmag.com
- Egypt bans protests after unrest, activity continues online … Egypt bans protests after unrest, activity continues online … After activists used social networking and blog sites to coordinate protests …
- Interactive Map Of Recent Food Riots And Price Hikes – … countries with high poverty and large population like Egypt the food riotes are expected
- Investors Flee to Dollar, Bonds On Growing Mideast Violence
– The dollar and U.S. Treasurys rose Friday as concerns that protests
in Egypt will intensify and spread across the Middle East drove
investors to seek safer assets. - Egypt Protestors Defy Curfew; Clinton Calls for Non-Violence
- As you can see, a common theme in many of these headlines is the
attempt by the Egyptian government to censor citizen communications via
the Internet. Despite this, up to 50,000+ protestors have taken to the
streets, complete with deaths and police/military violence. To attempt
to censor the Internet is an futile effort as you can see from the Al Jazeera live stream (over the Internet) as well as their live camera streams.
Now, what is it that has the Egyptians in such an uproar? Well, let’s
turn to that other source that has been the brunt of massive efforts to
censor their Internet presence. By the way, many of these cables have
been faxed in order to get around the Egyptian internet ban, including
one regarding Lebanese children being shipped to (or through) Egypt for
a organ harvesting operation. Heavy stuff!
So, what does all of this have to do with the Pan-European Sovereign Debt Crisis?
Well I have already demonstrated the high correlation exhibited in both
the equity and fixed income markets (yield), particularly since the
most recent crash.
Here’s the home page of CNBC as I type this…
You can guess what Europe and Asia did. Now, as excerpted from Japanese Downgrade Illustrates Potential Paths To Contagion:
Now, lets reference the subscription “BoomBustBlog Sovereign Contagion Model“,
wherein we spent many analyst man/months to create a realistic model
to capture the potential for social unrest, financial and economic
contagion as they could skip across sovereign borders, continents, asset
classes and hemispheres. Most analysts, investors and financial
pundits look at the cross correlations between countries this way…
What we have down was to adjust the pathways of apparent pure
financial contagion with several, real world factors. Let’s see how
close we came (this model was published in May of 2010. Professional
subscribers can find this on page 15 of this document: 
Sovereign Contagion Model – Pro & Institutional (retail subscribers must use this document – Sovereign Contagion Model – Retail (961.43 kB 2010-05-04 12:32:46))
Closest thing you can get to a crystal ball? No, just an objective,
empirical approach from a realistic perspective. None of that bull or
bear crap, not being pessimistic nor optimistic – just realistic. While
this model is far from exact, and has ambiguity as does any other model
(of real life) it goes a long way in illustrating “realistic”
paths to contagion – and as you can see there was a very material
chance of this breaking out in the middle east and also a material
probability that it can and will spread along financial markets. We are
working hard to release an updated to this model next week , along with a
proprietary currency model.
In order to derive more meaningful conclusions about the risk
emanating from the cross border exposures, it is essential to closely
scrutinize the socio-political, socio-economic, and the geographical
break down of the total exposure as well as the level of risk
surrounding each component. We have therefore developed a Sovereign
Contagion model which aims to quantify the amount of risk weighted
foreign claims and contingent exposure for major developed countries
including major European countries, the US, Japan and Asia major.
See the entire Pan-European Sovereign Debt Crisis series here.
Summary of the Contagion Model Methodology
- We have followed a bottom-up approach wherein we have first
identified the countries/regions with high financial risk either owing
to rising sovereign risk (ballooning government debt and fiscal
deficit) or structural issues including remnants from the asset bubble
collapse, declining GDP, rising unemployment, current account
deficits, etc. For the purpose of our analysis, we have selected
PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related
countries (Korea and Malaysia), the US and UK as the trigger points of
the financial risk dissemination across the analysed developed
countries. - In order to quantify the financial risk emanating in the selected
regions (trigger points), we looked into the probability of the risk
event happening due to three factors – a) government default b) private
sector default c) social unrest. The probabilities for each factor
were arrived on the basis of a number of variables determining the
relative weakness of the country. The aggregate risk event probability
for each country (trigger point) is the average of the risk event
probability due to the three factors. - Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure.
The exposures of each developed country were expressed as % of its
respective GDP in order to build a relative scale for inter-country
comparison. - The risk event probability of the trigger point countries was
multiplied by the respective exposure of the developed countries to
arrive at the total risk weighted exposure of each developed country.
- advertisements -
@Customersman....I know Israel is a real issue, but I'm I just naive is this about a whole lot more than just Israel? How about bad economics, repression, lack of opportunity, regime support of US in Iraq etc...not to diminish the Israel, not to say that once there is regime change in some Middle East countries things could really change in regard to Israel.
I do agree that Israel thinks they are world rulers because they do rule so much of US foreign poilicy. Hopefully they and the US will be humbled in regards to world power.
When US supports repressive and economic sellout dictators like the Shah, the reaction is ends up far worse for our selfish interests, its just stupid, and wrong. They took out Mossadeq to put Shah in, then got revolution. And then Iranian people lost out because the new Islamic govt was more repressive than Shar in the end.
I would be most happy if we stayed out of it, don't support repression and stay out it.
I thought when US occupied Iraq, Israel woudl become irrevalent to US but not so, as taking out Shah just gave Iran more power and Israel has used threat of Iran as rallying point. But maybe now rest of world will save us from bieng unduly influenced by reactionary zionist, and do things in our own interest, let alone the interests of people around the world.
It's not just them over there, it's them in all of the affairs of the world, through the FED, the IMF, the World Bank and numerous other much needed agencies throughout the globe.
They think they have a lock on all sources of funds, especially after the bailouts by the FED in the U.S.
We need to see the big picture and that their deliberate, incremental, gradualism over the centuries has led us to the current state of affairs, and that it's no accident that people throughout the world are more repressed than ever before.
Again, maybe I'm wrong.
no doubt there have been and are connected groups of powerful interests but I don't ascribe to see it as all one race, one set of people. Like I see the Koch brothers influence on US policy but just see this as rich energy guys that want to stay rich energy guys and are politically active. WASPy clicques have done all sorts of harm to interests of regular folks in US, the most obviously example being enslaving massive numbers of people in southern US for a few hundred years. There are some superrich, powerful Chinese guys that are having undo influence on US policy and are happy to parasite off their own kind as well as US and to empirialize around the world, while many Chinese Americans have lived generations as working class building this country. I refuse to see everything as a Chinese, or WASP or Jewish conspiracy. Nobody puts an Applachian white guy in WV losing his families land to pollution from mountain top removal coal "mining" in the same category white guy CEO of massive mining conglomerate living in DC area. There is a black president now and Fred Raines, a black guy totally screwed the tax payers when he made big money off Freddie Mac and left us something insolvent that US govt bailed out, with Obama at the lead. Of course Fred Raines has nothing to do with average black folks doing their working class and middle class thing. Similarly why would you lump all Jewish people together?
Always there will be a groups of politically active rich and powerful people/families/cultures etc that will try to further consolidate their riches and power thru greedy immoral anti-democratic behavior and always regular people of the world have to fight the tendency of power and wealth to collect in the hands of the few...who the few are is not and thus should not be defined by race, but by actions....whoever is trying to get over must be checked, exposed for their actions...getting racist about it muddies the message.
Egypt has long standing status in the Arab world and in the world in general.
In trying the peace deal suggested by Camp David the population took a chance on Israel and in their sincere willingness for peace. We've been through generations of deceptive rhetoric from the Zionist and when all's said and done,...we've all been bullshitted. We now know it for certain, are pissed for being taken advantage of, and no attempt to gloss this over with more western media propaganda will fix it now.
In accepting U.S. conditions seen as being dictated by Israel (and are), they have held the balance in place. But the populations in the region now know and had for a long time that Israel has no intentions toward peace. It fact they (Israeli's) see themselves as the new self-appointed world rulers.
They witness the savage handling of GAZA by Israel and see the governments hands tied by agreements that run counter to fair, honest and humanitarian behavior against themselves and their brothers in peril in GAZA and the rest of Palestine.
It is no coincidence that the recognition of Palestine according to pre-1967 borders has coincided with the action in Tunisia and brewing throughout the region.
Israel's lies, propaganda and influence buying is about to be constrained in a very serious way. There are limits to everything, and the latest power grabs of property and wealth, including settlements and the attempt to steal the oil & gas resources that belong to GAZA and the Palestinians has ignited an inferno, which no amount of Jewish BS, arm twisting, interference in the capital markets, the FED, World Bank or IMF will resolve.
The Jewish Global Power Grab with them leading a new world order/government is exploding. Actions against these hypocrites in the U.S. and elsewhere is soon to follow. The deceivers can deceive no more.
Just my view and I could be way off, but I don't think so.
by the way made this post end of last year:
2007 - subprime
pretty interesting historical arc in these words....so what's next for 2011?" ....now by inspiration from Reggie, and ZH, I predict word of year for 2011: CONTAGION2008 - bailout
2009 - admonish/unfriend
2010 - austerity
Reggie, time to dub 2011 the year of contagion
2011: Implosion
2012: Revoloution
2013: Military Rule
2014: Anarchy
2015: Anarchy
2016: Word Dictatorship
You may have it it right on the head again reggie. What we also aren't hearing is that there are demonstrations in Albania and Jordan and other countries that are being shadowed by the Egypt riots.
Reggie - No doubt you're doing a great job on financial predictions with your delibrate study of the data....but I find I crave just a bit more, which is your clear-headed, data-driven, wide-open-eyed analysis of general political-economic trends. This posts gets at it.
Its interesting to me that I have found much of Nate Silver's analysis of various progressive/liberal issues like HCR very objective and interesting, and often ends up fairly right on, even while more emotional progressives squeal...and both you guys seem to be great at looking at the objective things, numbers, and come to very accurate analysis.
You have a talent, would love to see it applied to more than just financial....
I actually plan to branch off to the political, the scientific and the social later on this year. All in due time.
good plan...
Great work Reggie. I rarely post yet I appreciate your point of view. I seldom agree completely with your conclusion, yet I almost always agree with your premise.
In any case, in my opinion you have pinpointed the primary problem: censorship. Be it Egypt, China, UK, or US. The media has become a crack whore to the pimp corporations/goverment partnership.The media serve one master: the fascist US/Chinese/UK/blah/blah goverment.What difference does it make whether the Right fist or the Left fist is used?
On the bright side, the Far Left and the Far Right can agree on one thing: the current power structure is non-discriminatory - they are out to fuck all of us.
Keep up the good work, I for one appreciate it, even though I don't always agree with you. Isn't that the sincerest form of appreciation?
agreed, every country's people are dealing with some sort of tyranny and parasites sucking off their labors, to varying degrees. We can all agree the parasites need to go and the MSM is their representatives. Iranians, Chinese, Americans, etc...
Egypt could be an endless source of al Qaeda fighters of it falls out of the western orbit. its bad enough now.
Thats what Large NUKES are for.
egypt -> opec -> petrodollar -> ________
Egypt is the intellectual heart of the middle east as well as a demographic powerhouse. It only makes sense that we would hedge our longstanding bet on Mubarak with a friendly opposition kept patient by calculated support. The time has arrived, and the question is will our network trump all others, be forced to ally with Iran's network or the Mubarak-loyal people, or get crushed by one or both?
Egypt could be an endless source of al Qaeda fighters of it falls out of the western orbit. its bad enough now.
IF Egypt is liberalized, economically and socially, terrorism will decline as a problem in that country. I'd say the chances of that happening are greater now that a US backed regime is about to be deposed.
Pastor Lindsey Williams intrigues me. He has some valuable info from the elite after he worked with them
on the Alaska pipeline. The elite are intentionally causing these events and recommend physical gold and silver.
This is a sample of his info. You can google him or check out more info on YouTube.
http://www.youtube.com/watch?v=dHPUjKcHepQ
Ignore him at your peril.
you lost me at "Pastor".
belief is the enemy of reason.
So you believe that anyone who is a Pastor, or have certain beliefs different than you must be incapable of reason?
Sorry that is a more than a bit circular and self-referential to be logical.
I've heard an interview with him before. 98% of what he says is about how he has this earthshattering information and secret access to "the elites". The other 2% is predictions that anyone with half a brain could make.
Reggie, What do you thing the likelihood is that there is a pan-Moslem contagion that leads to uprisings in Malaysia and Indonesia?
Bro, please: don't act like you somehow saw this coming.
You're a sharp dude. But humility is a valuable commodity.
as per lindsey williams, the cia had a hand in starting this and other uprisings!
As a non-financial/market guru, I truly enjoy reading your stuff! Kudo's!
It seems to me the numero uno immediate risk is the Suez Canal, and if it is somehow sabotaged, all bets are off. Of course, a huge percentage of the world's oil supply goes through there every day, but also a surprisinly large amount of total world trade...almost 10%.
Do your models contian info on how radical elements might use the unrest to cause trade problems?
Actually, that doesn't make any sense, sorry. If there is a shortage of oil, in this market the price of oil will sink. Never fight the basic economic laws (of Zimben)!
My understanding is that only ~2 million bbl/day traverses the Suez Canal. Another ~2 million bbl/day traverses the SUMED pipeling, which also traverses Egypt. Total world consumption is ~80 million bbl/day-is.
What am I missing here? I suppose the overall perventage does not matter so much as how much supply can be lost before massive price dislocations occur? What ever happened to all those tankers parked idle, supposedly full of oil? If true, these events are quite fortuitous for someone. Hmmm.
Could you scuttle a ship smack in the middle of it, and shut it down for several months?
Wow. Very cool. Saw you on Max Keiser. You da man.
Very interesting work, Reggie.
Makes one wonder how many others are doing the same, within the big companies, and how far along they are? Not that they are giving out their results, but I'll bet they'll buy yours to compare.
I think 2011 will be a very interesting year.
Hope so, because 2010 was boring.
So the news today to extend Greece and Ireland's payback period to 30 years was a pre-emptive effort at quelling similar riots?
Yep!
I'd say it was to quell the potential of financial contagion. Of course, the question still remains... How do those heavily indebted countries actually dig themselves out of the hole.
Is Iceland still a valid example? Nice article again RM - btw.
Answer: R E V O L U T I O N.
"off with their heads!"
I'd say it was to quell the potential of financial contagion. Of course, the question still remains... How do those heavily indebted countries actually dig themselves out of the hole.
"How do those heavily indebted countries actually dig themselves out of the hole?"
Apparently, very slowly. You can do a lot of digging in 30 years.
That only works when you are digging faster than the dirt is falling in. "very slowly" results in being buried alive. I think too many are too optimistic about the european situation. Default is either inevitable or a good portion of the Union will have to cooperate and conspite to engage in some pretty extravagant shenanigans.
Reggie, Thanks much.
Can you provide a link to the interactive map of the food riots?
I get Page Not Found.
reggie's link had one too many "article/". correct link is
http://www.zerohedge.com/article/interactive-map-recent-food-riots-and-p...
It's on the front page of ZH, it was their story.