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Farrell: Who's Afraid of What

Tuesday, 8 Mar 2011 | 11:44 AM ET

The Bahrainian royal family is plenty worried about the unrest in their country.

The rulers are Sunni's but about 70 percent of the population is Shiite (Shia). The pressure for political reform and job opportunities might be the primary motivation behind the protests, but religion is not out of the picture. Last Sunday thousands gathered at their version of the town square to let their grievances be known.

Reverting to the old tried and true bribery method they think has worked so well for them in the past, the Saudis are pitching the Gulf Cooperation Council (GCC) on an aid package for Bahrain and Oman as well (also predominately Shiite). Bahrain, Kuwait, Oman, Qatar, the United Arab Emirates and Saudi Arabia are the members of the Council. The Saudi's would be glad to fork over the money but it looks good if they have some front men along with them.

A Saudi man wears a t-shirt with the image of King Abdullah bin Abdul Aziz in the Saudi capital Riyadh.
A Saudi man wears a t-shirt with the image of King Abdullah bin Abdul Aziz in the Saudi capital Riyadh.

The Saudis are concerned, close to scared, and maybe a bit terrified that Shiite unrest in Bahrain, on their border, will energize the Shiite minority in Saudi Arabia.

The minority, about 18 percent of the population, is clustered for the most part near Bahrain.

The House of Saud is at a critical point since all the rulers are well on in years. And there are enough Sunni members of the Kingdom that are itching for reform as well. The London Telegraph, occasionally sensational in its reporting, wrote that the Saudis have warned Bahrain to put down the uprisings or they would do it for them. The Saudis went on to allegedly say that demonstrations within their borders will not be tolerated. They have apparently shifted some troops around to be prepared for this Friday's "Day of Rage".

King Abdullah of Saudi Arabia (to distinguish him from a few other King Abdullahs) came back from medical leave and announced a $36 billion program to ease the pain of the suffering Saudis. And there are those who suffer. In a land of untold wealth, 30 percent of the young are unemployed and 70 percent don't own homes. Maybe throwing cash from your private 747 will work, but it ups the ante on the price of oil. It is now figured that the Saudi budgetary break even price of oil is $90. Murphy's Law translates into Arabic and I know the price of oil is supposed to go to the moon on all the unrest, but if the Saudi's need $90, something tells me they won't get it.

The world does work that way.

"There has been noise about opening the Strategic Petroleum Reserve due to the troubles in Libya. No way. That is for oil shortages, not fluctuating prices." -CIO, Soleil Securities Group, Vincent Farrell, Jr.

Everyone is afraid and wondering when Gaddafi of Libya will deploy his air force. He apparently has 150 fighter jets and some attack helicopters at his disposal. The rebels seem to have mysteriously come up with some arms (from the Saudis?) but have nothing to match the air power. Gaddafi might hesitate to use the air force due to retaliation by the West.

But he's nuts and something had better be done before he decides to act.

At the least, the newspapers on Monday suggested a jamming operation so air communication would be interrupted. The idea of enforcing a no-fly zone, presumably by American planes, seems to scare everyone. Turkey and Russia have come out against it. But since when does Turkey or Russia tell us what to do? Suppose Gaddafi slaughters his way back to power while we sit on the sidelines. The US Air Force against the Libya Air Force would probably convince the Libyans to defect. Where is the moral fiber?

The Chinese have to be worried about the anti government demonstrations in North Africa.

If there is any government that deserves to be anti'd against it is the Chinese. The powers that be are using their usual tough guy, strong arm tactics against dissent, but they are trying to rush forward with improvements in the standard of living. They know hungry people will take to the streets. Subsidies for food and such will undoubtedly lead to higher food costs until production can catch up with demand.

SOEs & China's 5 Year Plan
Discussing the role of state-owned enterprises in China's economy with William Kirby, Chair of Harvard China Fund.

China's 12th Five Year Plan will be introduced this week.

For the first time it will focus on internal consumption as opposed to export growth.

That implies they will allow the Yuan to appreciate as a way to provide a stimulus for internal growth (if the Yuan is worth more, it can buy more goods that are priced in dollars, say). Ed Yardeni, of Yardeni Research, notes the Chinese allowed import/export trades to settle in Yuan last week. It's a long way to heaven, but this could be the beginning of trying to introduce their currency on the world stage. And they have to be worried about starting to lose their low cost labor edge. The one child policy is starting to slow the growth of the labor force. See, even the rich ($2.7 trillion in reserves) have their issues.

There has been noise about opening the Strategic Petroleum Reserve due to the troubles in Libya. No way. That is for oil shortages, not fluctuating prices.

Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.

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