Arab World's Berlin Moment?

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.

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.