As I enjoy the sun baked skiing conditions at Diamond Peak in Incline Village, we are watching history unfold at a mind-boggling pace. The spreading effects of the Egyptian crisis will dominate what happens in the world economy for many months, if not years. Even before the crisis erupted, many oil industry analysts were beginning to predict $4-a-gallon gasoline for this summer. Incline Village Gas is already at $4.  That looks even more likely now, though more for reasons of political tension than because the world economy is growing.
 
This update, unable to ignore the potentially powerful effects of this political problem, attempts to briefly discuss the economic sources of this uprising, the potential effect on the price of oil (though not because Egypt is a net exporter of oil any longer), and the fragile nature of Egyptians trying to put together a new government. This is a huge story with gigantic but currently unpredictable ramifications.

There may be opportunities hidden in this, though. It is heartening to note that the stock market climbed briskly as I was writing this based on the unexpectedly high earnings report delivered by UPS.

Still, interest rates seem to be quietly waiting to see which direction all of this will push them. We just don't know yet--any more than we can predict tomorrow's headlines about Egypt, Tunisia and Jordan.  Scroll to the bottom om my Real Estate blog for more commentary.

KEY INDICATORS [2/4/11]

 

Gold $1340.50/ounce [up]

Crude Oil(Brent) $101.97/brl [up]

U.S. Dollar to…

    Euro .7352 [down very slightly]

    Japanese Yen 81.37 [down]

6-mo Treasury Bill Yield 0.16%

10-yr Treasury Note Yield 3.43%

[6-month down 1 bp, 10-yr up 6 bps]

11th Dist Cost of Funds 1.508%[-]

30-yr Fixed-rate Mortgage 5.12%

15-yr Fixed-rate Mortgage 4.47%

1-yr ARM 3.71%

[HSH average includes jumbo rates: 30-yr up 1 bp; 15-yr up 1 bp; 1-yr ARM down 4 bps]

Freddie Mac weekly average rate

    4.80% [up 6 bps]

 

Mortgage Bankers Association Mortgage Applications Index

week ending 1/21

  Overall

    Down 12.9%; Up 5%

the week prior

  Purchase Money Loans

    Down 8.7%; Down 1.9%

            the week prior

  Refinancing Loans

    Down 15.3%; Up 7.7%

the week prior

 

Jobless Claims 1/22

    454,000 – prior week 404,000  (rev) – Continuing claims up 94,000 to 3.991 million

 

Pending Home Sales Report Dec

    Up 2%

 

Gross Domestic Product (GDP) 4th Quarter 2010

    Up 3.2% (vs. 2.6% prior quarter)

 

Weekly Commentary

 There is simply too much to discuss this week in this small space. The disappointment of weak mortgage applications figures and higher unemployment insurance claims, and the contrary optimism engendered by the relative strength of the first GDP numbers and December’s Pending Home Sales Index (measuring the advance or contraction in the number of new home purchase contracts) all give way to our preoccupation with the chaos that has overtaken Egypt.

 The simplest question: What effect, if any, will Egypt’s turmoil have on our own domestic economy? Based on the size of Egypt’s economy and the country’s importance as a trading partner, the impact should be small. However, based on the political importance and geographical position of the country, the impact could eventually be huge. And not just to America, of course.

 Egypt has the largest Arab population in the world, and it also still honors the peace treaty it signed with Israel. Further, it has remained a tentative ally for many countries with on-going problems from terrorism. Last, but not least, it essentially owns the Suez Canal, which is the channel through which oil is delivered from the Middle East to Europe and America, along with other items of trade—about 8% of all world trade in total.

 If that channel were closed or restricted, it would, for example, add an extra twelve days to the delivery of those goods by ship from Saudi Arabia to Houston, as the ships reroute themselves below Africa. This would likely result in rising prices for oil and other goods.

Economic problems are probably the prime underlying reason for the rebellion in Egypt. Geologist and newsletter writer Byron King (of “Outstanding Investments,” Agora Publications) notes that Egypt for the first time became a net importer of oil this year. That means the country is quickly running out of oil money to subsidize its food prices, so the population is finding it harder and harder to buy the same amount of food that it used to be able to afford. Also, Egypt is already the world’s biggest wheat importer, and it imports about 40% of its total overall food needs. It is extremely vulnerable to its own food problems.

Egypt’s crisis may already be spreading to other countries. The world’s economic markets wait tensely to see what happens, as do we all.