11 February 2011
Cairo and Dow Jones
1. If Egypt becomes an Islamic Republic, in the manner of Iran, that fact will be disastrous to world trade, especially disastrous to any industries that rely on getting crude oil from the eastern to the western side of the Suez canal, and this impending disaster would show up in devastated stock prices on, say, the DJIA and the S&P.
2. Highly liquid stock markets tend to discount reasonably foreseeable future events -- so that what is now likely to happen next year should show up in this year's stock prices.
Putting (1) and (2) together, it seems natural to draw the following conclusion:
3. If Egypt's likelihood of turning into an Islamic Republic has markedly increased in recent days, then one should have seen a sharp drop in the DJIA and the S&P.
So, let us add another fact to the mix:
4. The situation in Cairo has been getting, from all appearances at this distance, ever hairier and scarier since at least January 26:
So ... has there been a sharp drop in the indexes in NYC?
If you look at a chart of the DJIA covering the period from then until now, you'll see that there has been only one not-especially-sharp drop since the turmoil began. But that might have been a chartist's drop, caused by the approach of the psychologically important 12,000 number. The market subsequently recovered, broke through 12,000, and then went to 12,100. All as talk of whether Mubarak would leave was turning into talk of how quickly it could be arranged.
If this is a disaster in the making, why hasn't Wall Street reacted accordingly?
Oh, and what can we say of the chart of the S&P for the same period?
Again, there was a gentle swoop early-on in the period of the Cairo demonstrations. Again, this could be interpreted in chartist terms (the S&P fell just as it hit a round number, this time 1300.) Again, even if you don't interpret it in chartist terms, the fall didn't last long, and the rebound has since gotten us well above that 1300.
My only conclusion here is that one of my four propositions above must be incomplete or just wrong, because taken together they would lead to the conclusion that what is happening ... could not be happening.
The most likely conclusion, then, is that "Wall Street" as a collective entity knows something that I don't, and that to this collective entity there is no grave concern about Egypt going the way of 1970s Iran.
What about the market in crude oil? Surely if there were a good chance of a radical Islamicist takeover of Egypt, and speculators had figured this out, there would have been a sharp spike in the price of the stuff: right? Go to the light-crude price link I entered in this blog Thursday. Follow that, and then adjust the chart to show three months. You'll see that the recent high came before there was any trouble in Egypt. Thereafter, crude prices fell to as low as $85 a barrel. At that point, news from Cairo did cause a rise (but a modest one). After those first few days, crude oil prices have headed downward again.
All of which means ... what? Call me a mummy and wrap me in toilet paper if I know.
Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.