Oil Prices Lead to Recession

At least that's been the model for each of the last 4 major recessions since the early 1970's, first oil prices leap and then recession follows.

The catalyst for higher oil prices should by now be clearly evident, unrest in the middle east. Looking at Egypt, I said this is the beginning, not the end with Mubarak stepping down. Was he a dictator, yes. Was Egypt a democracy? No. Is democracy a good thing? It depends on what country you are talking about. Do we have democracy here in the U.S.? We like to think so, but corporations shape everything as our representatives in Congress are much more willing to listen to the lobbyists then their constituents (money talks and we don't have patriots in government, we have power hungry leeches that would put their interests before the countries any and every day of the week), but each nation has its own dynamics.

For instance, in Egypt, have we seen regime change? The real answer is no. Mubarak was the face of the military regime having been put in place by the military and having come from the most esteemed branch-their air force, but without the military to safeguard him, he fell quickly-in fact he was removed by the military, but the regime remains and I'm willing to bet (as has already been shown) they will not keep the promises made. The military may allow, as Mubarak did, the facade of democratic elections, but as I predicted, the military in the end threw out Mubarak to keep their regime intact. Why the people of Egypt don't see this, I don't know, a few do as some protesters remain in the square-realizing that the majority of Mubarak's cabinet is still intact.  Eventually this may lead to clashes with the military as promise are broken.

And before Egypt was Tunisia, now we have Algeria. Countries can fall fast and in a black swan way. No one in the CIA understood the internal dynamics that led to the near overnight collapse of the Soviet Union and why the CIA didn't see it coming. Democracy there has been a mere facade as the main players are still the communist-despite who the president is, we all know who really runs the show there and if you dissent, you either die, disappear or are charged with any number of crimes and imprisoned or kicked out of the country.

Iraq may be a better model for us to consider as the middle east is fragmented in its ethnic make up due to thousands of years of shifting boarders and the UN's arbitrary establishment of countries boundaries.

The only way Iraq will ever form anything resembling democracy (and we see how hard it's been even with a hundred thousand plus US military presence) is if it is split into three different countries. Iraq is emblematic of the problem of the middle east, a huge number of different religious and cultural communities. In Iraq, you have the Shia, the Sunnis and the minority Kurds, each looking to establish a power structure of their own. So sometimes heavy handed dictators are all that can keep these countries functioning. After Sadam's fall, Iraq fell-the UN is largely to blame for having drawn up arbitrary boarders that put 3 different religious groups at odds with each other.

Rwanda is another horrible example where the ruling minority, the Tutsis were brutally slaughtered my the majority Hutus they ruled over under European colonialism. Once Belgium was removed from the country as a colonial power, the Tutsis were murdered in 1995 with over 800,000 dying in 100 days. A fine book on the subject is called "I Wish to Inform You That Tomorrow We Will Be Killed" Another example of ethnic tensions destroying countries.

The middle east and Africa are very fractured in terms of culture, ethnicity and religion. And now the real danger is set upon the middle east and Africa (I doubt it will be contained to Northern Africa alone) as a model for regime change has been set in place. The conditions are ripe for unrest as food inflation, unemployment, harsh living conditions and governments that have taken advantage of their people, all come to a head.

Regime change in the region is in motion and I'd venture to guess that at least a dozen more regimes will fall. The real trouble is what happens after. Setting up a government is no easy task, we will see how difficult it is in Tunisia first. And should the Egyptian military regime fail to quell the unrest, then we know that lesser states will have that much more difficulty. This all allows for unsavory characters to rise and Egypt was lucky that the protesters didn't coalesce behind a movement leader, although several tried to take up the challenge-the military understood this danger and moved quickly to end Mubarak's rule before that happened. We also know that until inflation and living standards improve, there are two options, more unrest or nationalism that seeks to blame, who else other then the west? If people's ire can't be resolved, it must be channeled and in that we find the danger of ultra-nationalism like we saw in the 1979 Islamic revolution in Iran. Are Iranians happy with the choice they made 3 decades ago? Most young people probably are not. Are the Russians happy with their standard of living? I'd guess the answer is no.

On one of my many visits to Hungary, formerly behind the Iron curtain, I visited with a family living a modest life, but couldn't help but notice pictures of their travels everywhere across the world. I inquired about their future travel plans, they had none. It was later explained to me that the man of the house was part of the communist party, overseeing a factory and in that life, they did all their traveling. Now they can barely make ends meet. Life is not better and they yearn for a return to their former lives-for me a huge surprise as I thought freedom was universally what the human soul yearned for.  This may be the west's greatest weakness in foreign policy (ex: Iraq/Afghanistan) , not understanding that what we consider to be the right of human existience-freedom is not shared by the rest of the world. Just as in America, the status quo is often a better life for those that are near the top of the ruling elite. Freedom, a mere slogan and thinly veiled facade. If you think about it, Obama rode the wave of "hope" right into office and the Republicans rode the wave of discontent right into office. Who will ride either wave into office in the middle east is a far more dangerous question for the world.

Thus we return to the precursor of modern recessions, high oil prices. I don't need to expound any further on the tensions in the middle east and what will happen to oil prices-even if it's just in the face of uncertainty and not violent revolution, but I believe we will see violent revolution. I believe we will see nationalism  with the west playing the role of villain and I do see higher oil prices. Therefore, I do see another great recession coming.

We haven't even talked about the fate of Europe yet, nor do we need to. Or the fate of the US, nor do we need to. There's enough on the plate and the signs are all there. Rising commodity prices fueled by cheap money as Central Banks across the world seek to debase their currency in a race to the bottom. Loose monetary policy in the US alone has led to unprecedented prices in the commodity complex thus driving up inflation through speculative activity in the markets. From cotton to make clothing, to food and throw in debased currencies that make all of that the more expensive, all of this leads me to believe this is the beginning, not the end.  To make matters worse, those who invest in these speculative assets at increasingly higher levels of margin debt are the ones rejoicing now and singing the praises of the Fed's QE policy. They'll be the first to fall in the market and the fall will be the hardest as our market's liquidity structure has been removed and the SEC which is underfunded and never seems to care much anyway, is way behind the ball on this one.

When this market falls, I believe it will be a fall we have never seen-not in our lifetimes. The house of cards is complete and it's a strong looking structure to many, yet it is a house of cards. Soon the winds of change will topple it and life as we have known it in America for a century will change radically. Perhaps then, Americans will care and will have some interest in just how dangerous the Federal Reserve has become in seeking to kick the can down the road just long enough that the major players on Wall Street can do as Mubarak did-delay the inevitable long enough to make off with the nations treasure.

Although this isn't all bad for us as traders. If we identify reality and instead of whining about it, look for the opportunities to make money, we'll find that we sit very close to an event in which those who have done their home work may find themselves becoming the next Soros. When one door closes, another opens. You just have to be brave enough to realize that the door has closed and walk through the next door-opportunity in hand-not always easy, but essential in trading the markets.