Nouriel Roubini has a very interesting analysis (video clip above) of the 2011 Egyptian protests. Roubini has so far acquired a reputation for prescient forecasts and accurate analysis, especially when the conventional wisdom has failed (Roubini has become known as Dr. Doom for his pessimistic but accurate 2005 forecast of the 2007-2011 Subprime Mortgage Crisis).
Roubini's implicit theoretical model is displayed in the graphic on the right. He explicitly links the protests in Indonesia and Egypt to rising commodity prices in world markets. Egypt and Indonesia are peripheral countries in the world system and, as such, are subject strong market shocks.
When commodity prices (oil and food, particularly) rise (as is currently happening) they generate cost-push inflation and a direct negative affect on disposable income. Cost-push inflation reduces economic growth which also reduces income, especially in countries with high inequality, such as Egypt and Indonesia. The result is protest.
All these events lead to political contagion, geopolitical risk, risk aversion and negative effects on equity markets. The effect on equity markets can be seen from Market Vectors Egypt Index ETF (EGPT) -- the only ETF devoted entirely to Egypt. It's been trending down steadily all year and has suspended trading (but not redemptions) until the Egyptian bourse reopens.
If that's not enough to scare you away from this ETF, EGPT is also the first pure random walk I've displayed. The fund is neither a business-as-usual investment nor linked in to growth in the world economy. Although I can present confidence intervals for the fund, it is difficult to say where the price will go in the future. Because EGPT is a random walk, there is no attractor. The fund price can go anywhere. Indeed, from the confidence intervals, it has already made some excursions into improbable territory. We can only expect more in the future.
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