Revolution in Egypt and Where to Be When Black Swans Appear

02/14/11 Baltimore, Maryland – Not much action in the stock market on Friday. Gold didn’t do much either.

The big news was that Hosni Mubarak called it quits. After supporting him for 3 decades, the US threw him under a tank. Almost everywhere except the Mubarak household, people rejoiced. We were surprised they had an opinion, one way or the other.

We got emails from strangers telling us what a “hopeful” development this was…or how “free elections” might be coming next.

Typical was the report in The Washington Post:

“Mubarak became the second Arab leader in a month to succumb to his people’s powerful thirst for freedom.”

“Thirst for freedom?” If Egyptians were thirsty for freedom they must be like camels. They only need a drink of it once every 30 years. Mubarak ruled for three decades. Egyptians went without quenching their “powerful thirst for freedom” through the ’80s, the ’90s and the ’00s. Apparently, they only needed to bring the cup to their lips this year.

Many spoke of the “jubilant crowds” and the “idealistic youth” behind the peaceful revolution.

We were tempted to mention the jubilant crowds that attended the execution of Louis 16th…or the idealistic youth who gathered to jeer at Nicholas II when he and his family were shipped off to Yekaterinburg, where they would be murdered, along with their valet and even the cook.

Mubarak left office on Friday. The army took control on Saturday. On Sunday, the generals dissolved parliament.

Revolutions don’t always turn out well. The French Revolution was a good time to be in England. The Russian Revolution was a good time to be almost anywhere other than Russia. Even the American Revolution was a good time to be elsewhere too. And then, when Americans finally got their freedom from Britain they almost immediately began shackling one another. Tax rates had been only about 3% when the English ran the colonies. Now, the federal rate is 11 times as much. And for every injustice done to Americans by the English there must be 100 they have done to themselves.

But revolutions happen.

Where should you be now? We don’t know. But we suggest that you have a bolt hole somewhere. A refuge…a getaway…a family stronghold…

Many things could go wrong. Earthquakes. Plagues. Volcanic eruptions. Wars. Bankruptcies. Hyperinflations. And – we wouldn’t rule it out – invasions from space.

These events are hard to predict. Even something as obvious as the revolution in Egypt was unforeseen by almost everyone. We pay the CIA hundreds of billions to keep on top of things like this, but as one journal put it, sarcastically: “CIA Forecasts, like, Suck.”

Here at The Daily Reckoning, however, we take up for the CIA, just as we would stand up for any drunk or half-wit. The CIA’s work is at least on a par with the SEC or Amtrak. We have no doubt about it. It is at least as efficient as the Post Office. It is as necessary as the TSA. And it is as competent and effective as the Congressional Ethics Committee.

But we do not take up pen today to criticize America’s intelligence agencies. Instead, we merely point out that: bad stuff happens.

What kind of bad stuff? All kinds. Kinds you expect. And kinds you don’t.

The problem with bad stuff is that it often comes in drag…pretending to be something it is not. A “peaceful revolution,” for example, can turn bloody mighty fast. And no one gives you advance notice.

Real trouble comes unannounced. If you knew that the dollar would collapse on the 3rd of June, for example, you could switch your money into euros. If the Irish Prime Minister called you on the phone and tipped you off – “Hey, we’re going to default next Thursday,” – you’d know what to do. You’d short the euro and make a bundle. Or, if you intercepted a secret cable – “Nuclear Attack on Washington, DC, 4PM, October 13th…” you’d get out of town as soon as possible.

But black swans do not honk before they appear. They just appear.

We’ve spent a lot of time anticipating disaster. There will be a collapse of the international monetary system, for example. It is almost inevitable…but it is still unpredictable. We can’t say when or how it will come about.

Likewise, much higher inflation rates are coming…and a huge sell-off in government bond markets. Those things will provoke widespread financial disasters – possibly leading to riots, revolutions and other bad stuff.

It is possible that these financial calamities will cause a major economic disruption, like the collapse of the Roman Empire. In the chaos, trading networks could fall apart and take many decades to be rebuilt. GDP growth could turn negative and remain in the red for years. Developed regions could slide backward for generations. Emerging markets could explode. Who knows what would happen?

We see trouble coming…but we can’t tell you exactly what color wig it will be wearing…when it will get here…or what it will do when it arrives.

And then, there are the disasters that are impossible to see coming at all. For example, our old friend, Marc Faber, includes an essay on “cyber security” in his latest newsletter:

“Whether we acquiesce or not, our lives are determined by technology and computer systems. Our electric grids, nuclear systems, water supplies, financial institutions, fuel systems, communication systems, as well as our governments, are directed by technological systems, which are subject to attack or disruption.”

Apparently, the cyber attackers are well funded, very sophisticated groups engaged in serious warfare all the time. For the moment, they are outgunned by the forces of law and order – led by the USA. But imagine what happens when the USA runs out of money? How long will it take the attackers to get ahead technologically? With all the billions and billions of dollars worth of capital in the world…and the millions of people with high-tech computer skills…it seems like a matter of time before a serious Black Swan event occurs.

One thing about cyber war makes it especially attractive to low budget terrorists – it costs relatively little to maintain a serious threat. No battleships necessary. No billion-dollar fighter jets. No nuclear deterrent. In fact, with the right team of software geniuses, it may be possible to turn a nation’s own nuclear capability against itself.

“The US Department of Defense classified military computer networks were attacked in 2008. At a military base in the Middle East, an infected flash drive was inserted into a US military laptop, presumably by a foreign intelligence agency. The code uploaded itself to a network run by the US Central Command, spreading undetected in classified and unclassified systems, creating a digital source from which data could be transferred to computer systems under foreign control.”

In other words, when it comes to bad stuff…the sky’s the limit. It’s gonna happen, eventually…one way or another. And it could be real bad.

And when bad stuff happens, you’re better off being somewhere else.

Where?

Generally, bad stuff seems to happen most often in cities. Why is that? Cities are where most people live. It is where governments are. And it is where the labor force is most specialized.

There are no subsistence farmers living in cities. Nor do urban populations “live off the land.” Instead, they depend on complex networks of commerce. The typical city dweller produces neither food nor energy. He sits all day in an office – completely dependent on others to provide power and food. Then, he goes home – still completely dependent on the division of labor for his most important needs.

Progress can be described as the elaboration of the division of labor. In man’s most primitive state, specialization is extremely limited. From what we’ve been told, the early man was the hunter. Early woman gathered…that’s about the extent of it.

As the tribe grows larger, specialization increases. One person might tend the fire. Another might be in charge of making clothes or arrows.

The advent of sedentary agriculture and towns caused a big leap forward in human progress and, not coincidentally, the division of labor. Some townspeople went out to tend the fields. Others began to focus on woodworking…or iron mongering…or making weapons…or clothes. Some played cards and hung around at bars. There was soon a homebuilding industry…and, not long after, merchants, prostitutes and bankers…and even shyster lawyers and tax collectors.

As the division of labor expanded, the average person became richer…and more dependent on others. In order to eat, someone else had to plant…and till…and harvest…and hunt…and gather. And then, when agriculture became mechanized, he depended on faraway people who produced oil and gasoline…and people who built tractors and combines…and bankers who financed industries and factories. And, of course, he was more dependent on money too. In the days when he bartered, money was no threat. Then, when he traded only with gold and silver coins, there were no monetary breakdowns…no hyperinflations…and no financial crises.

As the 20th century progressed, more and more people gave up agriculture, moved to cities and took part in other industries. Today, cities may have millions of residents – like Bombay with 14 million…or Sao Paulo with 20 million…or Mexico City with even more. All of these people are dependent on vast, stretched lines of communication and commerce.

Even the farmers themselves are now dependent on these sophisticated networks of commerce. They depend on money…and what it will buy. Agriculture has become monocultural. That is, a farmer is likely to produce only wheat. Or only rapeseed. Or only barley. Or only cattle. Gone are the chickens around the farmhouse and the pig in the back pen. If the system of transport and trade breaks down – or the money itself goes bad – thousands of farmers could go hungry too.

There are black swans all over the place, waiting to be discovered. And when a black swan appears, people in the cities seem to suffer most.

In the hyperinflation in Germany in 1923, for example, farmers had so much food they ran out of storage space. But they wouldn’t sell it to city slickers. The mark was losing value so fast, farmers preferred to hold their crops off the market, knowing that the price was soaring…and that if they sold, the money they got would soon be worthless.

People in the cities, meanwhile, were starving. Soon, gangs roved the countryside, raiding rural barns and houses…and occasionally killing farmers who tried to resist.

Plagues hit city dwellers hard too. Proximity seems to be a curse when an infectious disease appears.

And, of course, in time of war and revolution, cities tend to be the battlegrounds.

Advancing armies are rarely polite. But even if they are advancing through the countryside, they are usually advancing towards cities, which they attack. In the old days, cities were besieged, starved out, and then, when they were taken, the attacking soldiers were given 3 days in which to sack the cities. In other words, they had three days to commit whatever mischief and mayhem their imaginations suggested.

When bad stuff happens, progress goes into reverse – so does the division of labor. When an economy goes backward, much of the specialization that developed during the boom years turns out to be uneconomic, or unaffordable, or unwanted. People may be willing to pay someone to park their car when they are flush. But when they are broke, they will park their own cars.

As the division of labor goes backward, people also find they need to tend to their own food and energy needs. Here is where it gets very tough for people who live in cities. They have no stores of mason jars with food from their own gardens that they have canned themselves. They have no hams hanging in the barn or stocked away in the larder. They have no animals on the hoof that they can slaughter. They get no eggs from the chickens they don’t have…and they can hardly go into the local park and shoot squirrels to make a pie.

Instead, they are out of luck.

Generally, when the black swans come out you are better off in the country – with country-boy skills and old-time farms supplies.

We once met a fellow who had a keen appreciation for apocalypse. He was sure it was coming. So, he moved to Arkansas where, he said, “I’m protected by 300 miles of armed hillbillies.”

That’s something else to think about. Not only do you have to worry about food and energy, you also have to worry about your neighbors. If you have a nice little vegetable garden next to a large apartment complex, for example, you might have a hard time protecting your crops. And don’t count on fattening a calf in Central Park during a famine.

You need to be somewhere else. Where?

Stay tuned.

Regards,