Change in the Middle EastVery little has changed in the Middle East since the Arab Revolt of 1916-1918 which was romanticized by my all time favorite movie, Lawrence of Arabia. This cinematically pleasing film relates ‘a’ story of peoples on the Arabian peninsula attempting to gain some measure of self determination. Of course the movie also relates part of famed WWI British Intelligence officer T.E. Lawrence’s legendary exploits and bluntly presents his descent into insanity. While the movie really is a must see, it’s plot line is somewhat disappointing. The real plot was more instructive for what is occurring today. Namely, the Arab Revolt was led by direct descendants of the Prophet Muhammad pursuing ideological independence from an Ottoman empire that had the misfortune of aligning at the onset of WWI with Germany and Austria-Hungary – both ‘infidel’ nations. All of this occurred across an area larger than Western Europe. These Facts are often lost on many in the West.

Recent visits in Southeast Asia and the Middle East have caused an adjustment in the framework from which I consider Islam. Now it is in terms of its treatment as a cause or, separately, social fabric rather than as factions such as Shia, Shi’ite, and Sunni frequently referenced in the general press. As a cause, we see terrorism groups willing to pursue Jihad, or war, against the infidel. Under normal circumstances this is contemplated by a small fraction of this population. As a social fabric it is something else all together. Here there are deep relationships that can only be developed when men, and even women, come together in shoulder to shoulder agreement for five times daily prayer, massive 5000 to 15,000 person celebration meals, devout reverence for the power of elders, and a Sharia based legal structure that while it did not only come from the Qur’an, is what is relied upon for governance. The fabric woven from these primary as well as other secondary observances lead to very strong relationships indeed. Relationships that when called upon can not be resisted.

Regardless of Islam’s expression as a cause or as social fabric, the ties that bind are deep – but generally separate in execution. For example, I have been told that the Islamic pledge “to die is the inevitable destiny of man” is only secondary in importance to the declaration that “God is one and that Muhammad is His Prophet.” There is no nuance in how the secondary pledge is carried out. Those that champion Islam as a cause do so by such things as suicide bombings and beheadings. Those that are in the social fabric camp generally wait for practical catalysts. One catalyst tends to be the establishment and maintenance of power. Once weakness is shown in this region of the world, it can be impossible to recover from it if the populous is sufficiently agitated. Witness the revolution begun in Tunisia that now is spreading in one form or another to a dozen neighboring countries. In most of these cases the first sign of problems was when the strongman governments removed various food and energy related subsidies that were no longer fiscally affordable – or the bureaucracy excluded the common man from an ability to earn money in which to meet basic needs. Then when the Tunisian, and quickly thereafter the Egyptian, governments did not forcefully and immediately put down the mounting rebellions, the social fabric based relationships became mobilized across the entire region. From this we see the resultant chaos that fills the news today. However, a few countries such as Saudi Arabia are wealthy and still have cash to throw at their people. The $36 Billion that the Saudi King Abdullah is distributing to his subjects implies that in order to keep budgets balanced the government will either have to produce 10% more oil and gas than planned in the coming year or maintain current production and allow oil prices to rise by a similar amount. With pressures for lower prices coming from the west it is no wonder we hear that they are prepared to increase production. They know the real, and eventually absolute, dangers of an unbalanced budget – a loss of power.

Muslim Distribution

The Indian Ocean region holds more than just the thirteen* creaky and destabilizing nations referenced above in North Africa and the Middle East. There are another eight** of somewhat similar history and influences stretching thousands of miles to the east. While some of the eight are not experiencing riots or revolution now, the ingredients are there. This can be explained by the idea that while most of these nations have been delineated, established, assisted, or prodded along by the West, they have done a terrible job of succession planning and budgeting – something that dictatorships and other forms of autocratic regimes are not known for anyway. The result is that they are all very likely to fail at some point. So, while there may not be an agreement on what the resulting governments might look like, the effort to achieve self determination is the same now as it was during the Arab Revolt. However due to global imbalances in food, energy and even money, the seemingly good opportunity to take up the mantel of change is something of a mirage. Until the basic issues behind the inflation are addressed, the chaos is likely to persist. For now it is inflation that is the primary spark for revolutions fueled with dreams of self determination.

While we have not specifically positioned portfolios for this unfolding scenario our generally defensive stance has led to large allocations to food, energy, and precious metals. As mentioned in our December 7th, 2010 article, Reading Tea Leaves, the short term may cause one to question just about any investment allocation. However, we remain steadfast and confident in our current allocations based on what has transpired many times over the past 3,000 years under somewhat similar transitions and circumstances.

*Morocco, Algeria, Tunisia, Libya, Egypt, Saudi Arabia, Yemen, Oman, Bahrain, Kuwait, Iraq, Jordan and Syria

** Iran, Afghanistan, Pakistan, Bangladesh, Burma, Thailand, Malaysia, and Indonesia