Turmoil in the Middle East

By: Sandy Stuart, Investment Advisor
There certainly is no shortage of news lately! Mideast turmoil, escalating energy prices and the huge debt run-up by our government are stories that seem to be receiving the most media attention. Just as globally critical, yet receiving much less coverage in the U.S., is the food shortage and an ensuing spike in food prices. We have been following these issues and thought we might shed some light on the current situation in the Middle East.

The Mideast revolutions are certainly unsettling. No one really knows how things are going to shake out. Certainly, Islamic extremists would love to come out on top and impose Sharia law wherever they can. I doubt they will be able to do so. Young folks are driving this train. They are demanding democracy and an end to corruption and government inefficiency. They want jobs. Good jobs. They want a chance at "the good life", defined more by economic opportunity than the Islamic faith. The aforementioned food shortage lends impetus to the peoples' economic concerns.

If you think about it, there is a lot of irony in this situation. One of the reasons we went to war in Iraq was that we wanted to establish a sectarian, democratic country that could serve as a model for other Mideast countries currently ruled by dictators or royal families. The jury is still out on whether Iraq will become just that, but who would have thought the driving force for democratic reform to sweep the Mideast would be a bunch of young men and women communicating by Facebook and other social media sites? Incredible. If someone had written a book with that plot, it would have been ridiculed as a fairy tale.

What has been happening is a demonstration of how the free flow of information is the mortal enemy of dictatorial regimes. The Soviet Union met its demise largely because of the communications revolution. The Soviet regime's propaganda looked more and more ridiculous in light of the window on the world that TV and other intercontinental communications provided. Well, the social media sites are providing even more access to the real world. They are the cause of a very nervous time for governments used to tightly controlling their citizens.

If and how the affected countries will transition to democratic forms of government is problematic. Leadership will have to emerge and organize the rabble; street demonstrations can only accomplish so much.

In the meantime, energy markets will suffer, mostly due to uncertainty and speculation. As I'm writing, there is plenty of oil in inventory. Libya is shutting down for a while, but Saudi Arabia purports to have additional capacity they can bring on line that can restore supply. President Obama is reported to be considering opening our petroleum reserve; I suspect he is just trying to settle the markets. We don't need additional oil at this time. If the revolutions spread to Saudi Arabia with their vast oil industry, supply could be severely constrained and then prices will really take off.

To what effect? There will be renewed pressure to "drill baby drill". Oil extraction from shale will fire up as it becomes more profitable. Investments in the energy industry will rise, and well-diversified portfolios that contain energy investments will benefit. If severe energy price rises are sustained, there is a risk that the economy will slow. That is the weird thing about energy as an investment. In "normal" times and conditions, when the economy slows, energy takes a dive due to slackening demand. As the economy improves, energy prices will rise due to increasing demand. However, if energy prices rise too much, it puts a damper on the economy. In this phase, energy investments pay handsomely but do so at the expense of other segments of the economy. Eventually though, the economy slows and energy investments cool off.

Our biggest, concentrated energy play is our natural resource sector funds in which we invest. As you pump $50 worth of gas into your car you can smile because you are sharing in the profits. Also recognize that any aggressive growth, growth or growth & income funds can also own an energy stake.

Suffice it to say that in uncertain times like this, a globally diversified portfolio of actively managed mutual funds is a comforting way to invest.