Reflation: A Dominant Theme for 2011

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage. The opinions expressed are those of the author and do not represent the views of TheStreet or its management.

NEW YORK (TheStreet) -- Egypt's longstanding president, Hosni Mubarak, stepped down Friday, Feb. 11, 2011 after 18 days of widespread protests. The turmoil and change in leadership in Egypt meant little for most stock and bond markets. Oil prices fell despite the potential disruption to oil transport and the risk of a spread of the unrest to oil producing neighbors. In 1971, Pete Townsend wrote one of The Who's biggest hits: Won't Get Fooled Again. Forty years later, his take on the lack of any real change resulting from revolution could be applied to the events that have transpired in Egypt.

Far from a revolution, for investors the events mark a minor evolutionary shift in Egypt and the region. Since a military coup in 1952, all of Egypt's presidents have been military leaders. The military is the most central institution in all of Egypt. Like his predecessors, Nasser and Sadat, Mubarak served as President at the will of the military. The military was in charge during Mubarak's 30 years as President, they were in charge during the 18 days of protests, and they remain in charge now. The demonstrators are cheering, cleaning up, and going home. The military maintained the support of the people. Any elections are likely to involve candidates that are de facto selected by the military.

The military stated over the weekend of Feb. 12-13, 2011 that it will abide by all the former treaties, including the 1979 peace agreement with Israel. This is a big part of restoring normal diplomatic relations with the United States and other benefactors. Internally, the army may declare martial law to get everyone off the streets and back to work in short order. They may also attempt to undermine the popular Muslim Brotherhood political opposition group by invoking fears of radical Islamists having entered the country during the chaos (former Egyptian president Sadat was assassinated by Islamists). The military is working as rapidly as possible to return things to normal both externally and internally.

Markets have shown little reaction as investors watched to see if real change was coming and if the seeds of revolution were spreading around the region. Egypt provided an example of the unrest that can be fueled by rising food prices. Major importers of food and energy, such as China and India, have already have seen a negative impact on their markets. Social stability could also begin to unravel if soaring food and energy prices are not addressed in emerging market countries where they make up a large portion of consumer spending. The theme of reflation is becoming a dominant one for 2011 and may in fact be the true revolution taking place for investors as it defines the performance of all markets so far this year.

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