The Daily Reckoning October 18th

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Your Vote Still Doesn’t Matter

I hit a nerve whenever I write about voting and democracy.

Point out the sheer lunacy of the civic religion and a certain group of readers will blow their stacks, sending back long emails stuffed with long words, calling me things like “intellectually vacuous” and insisting I’m full of “self-aggrandizement.”

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Such is the case with an email from Laissez Faire Today reader B.R., who says he doesn’t normally like to start his criticisms with name-calling but believes the idea of not voting is “so astounding” that it “requires an equally strong tactic to stop its momentum in its tracks.”

I hate to break it to B.R., but the nonvoting train left the station a long time ago. For the last 50 years, 40-50% of eligible voters have chosen to stay home on presidential Election Days. President Obama’s campaign in 2008 actually pumped life into the election process.

However, since the promised changes never occurred, Americans will likely stay home on Nov. 6. We can only hope. Meanwhile, globally, Wikipedia reports that voter turnout has decreased five percentage points over the past four decades.

BR then proceeds to school me on “the four basic types of government power acquisition.” So BR’s assumption is that government must acquire power. Individual sovereignty is out of the question. He says that government power is inherited, bestowed, seized, or chosen.

Therefore, since I’m not for choosing, I, according to BR, “must be in favor of despotism and tyranny. This is where logic must take us.”

B.R. is assuming that since we have elections in the U.S., we don’t have tyranny or despotism. I would contend that we have both. The tyranny of the majority has elected despots at every level of government from the local school board to the president of the United States.

Why is that? Democracy itself is the problem. It attracts the wrong people to leadership positions. As F.A. Hayek famously argued in The Road to Serfdom, in politics, the worst get on top, and he outlined three reasons this is so. First, Hayek makes the point that people of higher intelligence have different tastes and views. So, as Hayek writes, “We have to descend to the regions of lower moral and intellectual standards where the more primitive instincts prevail,” to have uniformity of opinion.

Second, those on top must “gain the support of the docile and gullible,” who are ready to accept whatever values and ideology are drummed into them. Totalitarians depend upon those who are guided by their passions and emotions, rather than critical thinking.

Finally, leaders don’t promote a positive agenda, but a negative one of hating an enemy and envy of the wealthy. To appeal to the masses, leaders preach an “us” against “them” program.

“Advancement within a totalitarian group or party depends largely on a willingness to do immoral things,” Hayek explains. “The principle that the end justifies the means, which in individualist ethics is regarded as the denial of all morals, in collectivist ethics becomes necessarily the supreme rule.”

Abraham Maslow’s “hierarchy of needs” has something to do with it. Maslow’s hierarchy is taught in most business management classes and is depicted as a pyramid.

Maslow’s view was that the basic human needs — thirst, hunger, breathing — must be satisfied before humans can accomplish or worry about anything else. The next level of the pyramid is the need for safety. After satisfying thirst and hunger, humans are concerned about their continued survival. If a man is constantly worried about being eaten by a tiger, he doesn’t concern himself with much else.

Once other needs are satisfied, according to Maslow, humans seek the belonging and esteem needs. These first four needs are considered deficit needs. If a person is lacking, there is a motivation to fill that need. Once the particular need is filled, the motivation abates.

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This makes these needs different from the need at the top of Maslow’s pyramid, the need for self-actualization. The need for self-actualization is never satisfied, and Maslow referred to it as a being need.

Maslow believed only 2% of humans become self-actualized. That means many are stuck a step or more below seeking actualization.

Maslow described lower and higher esteem needs. And while the higher form of esteem calls for healthy attributes such as freedom, independence, confidence, and achievement, the lower form “is the need for the respect of others, the need for status, fame, glory, recognition, attention, reputation, appreciation, dignity, even dominance.”

Most psychological problems manifest themselves in this lower esteem area. We see these qualities displayed by virtually all politicians in democracy: the constant need for status and recognition. The ends — compensating for an inferiority complex — justify whatever Machiavellian means.

So while B.R. thinks democracy is so hot, the fact that democracy is open to any and all who can get themselves elected either through connections, personality, or personal wealth means it is a social system where leadership positions become a hotbed for sociopaths.

B.R. doesn’t sound like he’s too wild about inherited power — monarchies — but as Hans Hoppe points out in The Great Fiction, governments that will stay in the family have much more incentive not to steal from their citizens, as opposed to short-term caretakers in a democracy that have every incentive to take as much as they can in the short time that they will be in power.

B.R. contends that it is axiomatic that “All you need to do is convince a majority of the voters to agree with you and your position or candidate.”

The problem is that democracy promotes the opposite of freedom. As Hoppe explains:

“One-man-one-vote combined with ‘free entry’ into government democracy implies that every person and his personal property comes within reach of and is up for grabs by everyone else. A ‘tragedy of the commons’ is created. It can be expected that majorities of ‘have-nots’ will relentlessly try to enrich themselves at the expense of minorities of ‘haves.’”

One assumes B.R. is a productive person who believes that he can influence other productive people into joining his cause and electing the right politicians who will enact the right (or get rid of the wrong) laws. History, I’m afraid has just flat proved B.R. wrong.

In a recent interview, Hoppe — the author of The Great Fiction: Property, Economy, Society, and the Politics of Decline, which can be yours free, along with so much more, if you become a member of the Laissez Faire Club — explained:

“It is democracy that is causally responsible for the fatal conditions afflicting us now. The number of productive people is constantly decreasing, and the number of people parasitically consuming the income and wealth of this dwindling number of productive people is increasing steadily. This can’t work in the long run.”

Finally, B.R. accuses me of triangulation. That I’m setting myself up to be “above it all.” My no vote message make me feel better, “but it’s, in fact, harmful,” he writes. “If the ‘good’ among us refrain from participating, then only the ‘corrupt’ will participate and, by default, own government.”

However, in the words of Sy Leon, “A choice between the politicians is not a choice — it is a surrender.” It is a surrender to the idea that these empty suits we elect actually run the government day to day. That a vote for this one or that one will prompt change in Washington or your nearest state capital or city hall.

No matter who wins, the government gets elected. The millions of government employees will wake up on Nov. 7 and trudge off to their assigned work areas. They will march to the beat of their bureaucratic drummer — just like any other day. They will do all they can to spend their budgets, keep their jobs, and convince elected officials they are important. They never go away. The elected politicians and their political appointees are transitory decorations; the real structures of the nation-state are permanent and constitute the core of what is called “the state.”

The idea that you can change all this by spending a few quality minutes making your enlightened choices in a voting booth is complete fantasy. There comes a time in a person’s life when they should face the facts and stop believing in Santa Claus, the Tooth Fairy, and change through politics.

H.L. Mencken wrote, “The average American legislator is not only an ass, but also an oblique, sinister, depraved, and knavish fellow.”

This is not company you want to keep or endorse. To do so makes you even worse.

Sincerely,
Douglas French

Original articled posted on Laissez-Faire Today

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Your Vote Still Doesn’t Matter appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Cheap Currencies Don’t Guarantee Strong Exports

The currencies continued to push the envelope versus the dollar yesterday. The Aussie dollar (AUD) was really kicking sand in the face of the US dollar yesterday, gaining over 1 full cent on the day! So all those traders who sold their Aussie dollar futures in the past two weeks, are piling back in, I bet! The euro (EUR) stalled out just above 1.31. But the rest of the “little dogs” were off the porch and chasing the dollar down the street.

But that was yesterday, and some of the currencies are still gaining versus the dollar, and some have stalled out, for they need the Big Dog, euro, to run with them, and like I said above, the euro stalled out just above 1.31.

The Aussie dollar blew right through its 200-day moving average, yesterday, and touched $1.04 this morning — the latest push coming from economic news coming out of China. I told you yesterday that China’s third quarter GDP was due to print, and print it did! The Chinese economy expanded 7.4% in the third quarter versus a year ago. The consensus was for a 7.4% increase, but I was hoping for a little more as I told you I thought it would be around 7.8%… (And it was +7.8% “Real GDP”, whatever that is!) But that wasn’t all for China.

Chinese industrial production and retail sales also printed strong numbers for September, thus indicating that China’s economy has turned the corner on its government-generated slowdown. If you’re keeping score at home, Chinese industrial production gained 10% in September, and retail sales grew at a 14.2% clip. Now that’s strong! And if you only want to believe half of what the Chinese report, then a 7.1% increase in retail sales is still cooking with gas!

So… The risk sentiment is strong, except with gold and silver. These two have been left behind at the station, and the Love Train carrying the currencies has departed. This improved risk sentiment is not playing well with the US Treasury yields. The 10-year Treasury’s yield has risen to 1.80%… (Just a couple of weeks ago it was 1.64%). And remember, when the yield rises in a bond, the bond’s price goes down. But we’ve seen these moves higher in yields before, and every time the Fed steps in and squelches any attempt to take yields even higher. The bond markets used to be able to direct yields. But with the Fed buying as much as they can these days, remember they participated in 61% of the Treasury auctions last year, there’s not much the bond markets can do. Although I would still love to see them try!

In Sweden overnight, an article in a Swedish newspaper really threw cold water on the markets’ thoughts that the next move in rates would be down. Sweden’s central bank, the Riksbank (and the Riksbank Governor Ingves) was in the news. In the article, Ingves warned that household and corporate indebtedness must be considered when setting rates. These words were like a dagger in the heart of the rate cut campers, and the Swedish krona (SEK) rallied!

The Riksbank meets next week, and I would bet a dollar to a Krispy Kreme that the Riksbank would leave rates unchanged at that meeting. That would be good for the krona. But remember, the krona, the Norwegian krone (NOK), and Danish krone, all need the euro to push against the dollar for these to move higher. For now, that is. I keep telling you time and time again that one day the markets will wake up and smell the coffee. The coffee that says these countries’ fundamentals are not Greece, Portugal, and so on. But until then, they get tarred with the same brush as the euro.

Remember yesterday when I was talking about the Canadian dollar/loonie (CAD) and saying that the fundamentals there continue to be strong, and that’s why the markets keep the loonie above parity, even though the Canadian government and central bank don’t like it one iota? Well… More strong data has printed in Canada. Take Canadian Manufacturing, which rose at a faster-than-expected clip of 1.5% in August. And then here’s something that the Canadian government and central bank are going to have to stop and think about… Exports are up in Canada — even with the stronger-than-parity loonie!

Look… Let me set this straight for Mr. Carney (Bank of Canada Governor)… If you have items/stuff that other countries demand, the price of your currency isn’t the “all-in” of everything that goes into the valuing of the export. You can ask the Germans about this. Yes, they would love to see the euro around 1.20. But, when you make things of value, and they are in demand throughout the world, you can live with a stronger currency. There’s no need to go jimmying the currency’s value lower so your exports can be more competitive. This goes out to all the other central bankers that are trying this “debase your currency so exports are more competitive” game. HEY! Make something of value, and you don’t have to jimmy the price of the currency lower!

The news out of the Eurozone continues to have a calming effect. But an article in the Financial Times (FT) just might begin to stir things up. The FT reported that “plans to create a single euro-area banking supervisor (the European Central Bank/ECB) are illegal. The FT claims that they obtained a secret legal opinion for the European Union Finance Ministers. I would say that this probably has a lot to do with the stalling out of the euro this morning.

I think, as we go along here, that there will many of these seeming setbacks. But, as long as the Eurozone Leaders keep their heads down, and keep working toward a resolution of their debt problems and bond yield problems, that things on the “other side of all this” will be better.

At least they are trying something! And maybe they’ll be wrong, and have to go back to square one, but at least they tried! Here in the US it’s just carry on and keep piling up debt. I know you all are tired of hearing me harp on about our ever-increasing debt. But, unless someone does something about it, we have to keep this in our sights, so we aren’t standing there holding the bag, when the “you know what” hits the fan!

And with that. My “Then There Was This” story today is from our former General Accounting Head, David Walker, who has taken his thoughts across the country, and put them in a book. But, just for you, dear reader, we’ll have David Walker talk to us today. So, let’s go to the Big Finish!

Then There Was This… From Moneynews.com…

“The overwhelming majority of Americans feel fiscal reform should take priority this election season, though few expect it to happen, said David Walker, former Comptroller General of the United States and current CEO of the Comeback America Initiative, which promotes fiscal reform and responsibility.

“Walker recently concluded a ‘$10 Million a Minute Tour’ bus tour, named after the speed at which unfunded promises are climbing, and reached out to Americans in 16 states and the District of Columbia to convey to largely undecided voters issues surrounding fiscal reform in the country.

“‘We found out 97 percent of the people we interacted believe our fiscal challenge is a major challenge and should be a top priority for the presidential candidates as well as other candidates for office, yet only 8 percent have confidence in their ability to work together to get something done in 2013.’

“‘Eighty-five percent believe that it’s going to take a combination of spending reductions and additional revenues to get the job done. We talked about reforms in eight different areas, including social insurance programs, taxes, defense, budget controls, political reforms — the minimum support we got for the reforms was 77 percent.’”

Chuck again. OK. So more people in the country are realizing that going from $15 trillion in debt to $16 trillion in just 10 months is getting out of hand. But, I have to think that those calling for spending reforms are not the ones receiving the payouts from the government. And then the biggest thing here is the question, “Will lawmakers listen to the voters?” I doubt it. But there’s always a chance, right?

To recap… The currency rally continued throughout the day Wednesday, and in the overnight markets, but left some currencies behind, as their respective rallies stalled out. The euro stalled out, probably on a story in the FT about how a plan to give the ECB more power is illegal. Canada continues to print strong economic data, in spite of a stronger-than-parity loonie, and the Aussie dollar rallied back to $1.04 overnight, before giving up some of that gain this morning, probably on profit taking.

Chuck Butler
for The Daily Reckoning

Cheap Currencies Don’t Guarantee Strong Exports appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

The Moroccan Pottery Distraction

And you laughed at the proverbial college course in “advanced basket weaving.” How about “impossible-to-replicate pottery techniques”… at your expense?

In 2009, the U.S. Agency for International Development undertook the task of improving Morocco’s economic competitiveness.

Key to the plan: a training program for Moroccans to create and design pottery, led by an American instructor. Never mind that Moroccans have successfully made pottery on their own for centuries.

“Unfortunately,” reads our copy of Wastebook 2012, “the translator hired for the sessions was not fluent in English and was unable to transmit large portions of the lectures to the participants.” Worse, the dyes and clay used by the instructor can’t be bought in Morocco.

Cost to U.S. taxpayers: $27 million.

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The Wastebook is an annual compendium of such outrages, compiled by the staff of Sen. Tom Coburn (R-Okla.). And helps kick off one of our favorite episodes of The 5 Min. Forecast every year.

On the government dime, the Wastebook continues, researchers at two California universities sought to learn how rattlesnakes would react to the presence of mechanical squirrels.

RoboSquirrel 1.0, complete with wagging tail…

Using part of a $325,000 National Science Foundation grant, the researchers created RoboSquirrel — “a taxidermied actual squirrel that is stored with live squirrels so it smells real. The body and tail are heated with copper wiring, so the snake can see the squirrel’s heat signature as if it were real. The tail is controlled by a linear servo motor that makes it wag back and forth.”

In the field, the researchers found rattlesnakes reacted to RoboSquirrel as if it were the genuine article — and thus did not attack when RoboSquirrel wagged its tail.

We’re not sure what useful insights were gleaned from this groundbreaking research. Nor are the scientists themselves, judging by their final report.

Still… the work must go on. They’re already building other robot mammals.

If you golf, you’ll be interested to know that researchers at Purdue University used part of a $350,000 National Science Foundation grant to come to a not-so-stunning conclusion: Visualization helps improve your game.

Take it to heart. If you “imagine” a bigger hole, you have a better chance at making a putt. Or as the scientists put it, “Perceived increase in target size will boost confidence in one’s abilities.”

And grant subsidies, apparently.

“Some of our favorites,” writes the DC Decoder, an insider blog, “include $10,000 for talking urinal cakes in Michigan (to fight drunken driving), $142,000 for a Department of Transportation grant offering free bus rides to Super Bowl attendees in Indianapolis, $25,000 for the Alabama Watermelon Queen to tour the state to promote her prized crop, just under $50,000 for Smokey Bear hot-air balloon rides…”

To that list we might include the:

* $1.6 million NASA spent to develop video games to enhance the space agency’s cool factor among nerds… after scuttling the Space Shuttle program.

* $300,000 spent by the USDA to promote consumption of caviar… likely among their own staff, we are left to presume. What better fish egg tasters could there be, after all?

* A half-million bucks used to help develop pet shampoos… $1 million to taste foods destined for the planet Mars… $2 million more in financial assistance provided to upscale cupcake bakers…

The Wastebook documents $18 billion in such grants, exemptions and programs.

Here’s the “unfortunate but true”-ism… as much as “waste, fraud and abuse” stoke the ire of voters… $18 billion is only one half of one percent of the $3.8 trillion federal budget.

Half a percent.

You could eliminate every one of these goofy programs and still be left with 98.2% of last year’s $1 trillion deficit.

Sigh.

The irony. The International Monetary Fund (IMF) also released its latest “World Economic Outlook” this week.

Relative to annual economic output, the U.S. national debt is on par with four out of five PIIGS countries.

Not even big enough to make Coburn’s book, the U.S. Department of Transportation is funneling $275,000 to police agencies in Connecticut and Massachusetts, the better to stop the “plague” of driving-while-texting.

“In order to more accurately identify and effectively stop the dangerous practice of texting behind the wheel,” wrote Transportation Secretary Ray LaHood on Tuesday, “the demonstration grants announced today call for Connecticut and Massachusetts to develop anti-texting enforcement protocols and techniques such as using stationary patrols, spotters on overpasses on elevated roadways and roving patrols.”

Never mind that traffic deaths fell between 1995-2009, despite an eightfold increase in the number of cellphone subscribers and an overall increase in miles driven.

“Guess what happens,” Addison writes in his latest forecast, “when all these little interventions start to pile up. Guess what happens when you roll over and accept what bureaucrats do.

“I’ll give you a hint — you create the ultimate form of job security. Not for us, obviously… but for them. The more decisions we cede to the authorities, the less we’re able to make decisions for ourselves..”

Cheers,
Dave Gonigam

The Moroccan Pottery Distraction appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Buy Walnuts!

Juglans nigra vs. debitis gubernationis. The former produces nuts; the latter is produced by nuts.

In today’s musing we compare black walnut trees to government bonds. This clever comparison springs from the mind of James Grant, editor of Grant’s Interest Rate Observer. But we will not simply paraphrase Grant’s thoughts on the topic, we’ll add a couple more of our own…for better or worse.

Juglans nigra is a tree, of course, but it is also an investment. In fact, from Grant’s perspective, it is a far better investment than debitis gubernationis.

Admittedly, growing Black Walnut trees is a very non-traditional investment. But we inhabit very non-traditional times. “Non-traditional” is, in fact, Fed Chairman, Ben Bernanke’s go-to adjective for describing the array of money-printing schemes that he pursues. And he is so proud of these schemes — and the wonders they may or may not bestow — that he promises to continue them indefinitely.

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But as it happens, open-ended money-printing is the sort of thing that promotes inflation. And inflation is the sort of thing that causes hard asset investments like timber to thrive, at least relative to soft assets like Treasury bonds.

That’s why Grant’s “Reason No. 1” to invest in black walnuts is that “a tree is a store of value, a tangible, or ‘real,’ asset…”

The second reason Grant takes up the cause of the Juglans nigra “is that the idea is so winningly contrary. It’s the kind of idea that not one professional investor in 500 will be able to implement. The value proposition takes this form: Lock up your capital — the cost of land as well as that of seedlings, taxes, labor, etc. — to reap an uncertain reward in the year 2040…Truly,” Grant concludes, “black-walnut farming ticks not on institutional box.”

Therefore, Grant advises shunning the perceived safety of Treasury bonds and embracing the “extreme leverage” of growing trees. But this “organic” version of leverage is not the kind that sends a Lehman Bros. careening into bankruptcy or sends an AIG running to the Treasury Department for a bailout. It is the kind that takes a $5 seedling and turns it into a thousand-dollar tree. “Dig a hole,” says Grant, “plant a seedling and wait 25 or 30 years. Minimum effort yields maximum results — leverage of a nonfinancial kind.”

Recently, a twenty-something California surfer who moved down to Nicaragua a few years ago shared a nearly identical idea with your editor. “I’m thinking of planting some hardwood trees on my land, then watch ’em grow for twenty-five years…and then harvest ’em for about 60 grand.”

This ex-pat surfer has never read an issue of Grant’s Interest Rate Observer. He doesn’t pay any attention to the Federal Reserve, listen to CNBC or read the Wall Street Journal. He has no “investment portfolio,” other than the livestock and papaya fruit he raises on his small farm.

And yet, he and Jim Grant have reached an identical conclusion… sort of. But Grant suggests planting hardwood seedlings in upstate New York; the surfer prefers planting seedlings in southern Nicaragua. Perhaps this geographical nuance is a distinction without a difference. But 25 years is a long time.

“Hardwoods demand a generation-length holding period,” Grant admits, “and pay no dividend until the man with the chainsaw shows up.” Given this generation-long holding period, these two would-be foresters — Grant and the surfer — are not merely betting on trees, they are also betting on the land beneath the trees.

Here in 2012, no one would mistake Nicaragua for New York. Only one of these two locales boasts a “First World” status. The other is struggling to shake off its “Third World” reputation. That said; one or both of these two nations could change dramatically over the next 25 years…and not necessarily for the better. Their respective economies, political climates and tax regimes, for example, might look nothing like they do today.

Twenty-five years ago, Nicaragua was embroiled in a catastrophic civil war. The US, meanwhile, was tasting the first fruits of a two-decade economic boom. But Nicaragua’s civil war is over…and so is America’s economic boom. In fact, their respective economies are trending in very different directions — Nicaragua, for the better; America, for the worse.

Obviously, these recent trends cannot tell us anything about the socioeconomic conditions of Nicaragua or the US in the year 2037. But they can, and do, tell us that change is constant and that no nation holds a permanent monopoly on opportunity — not even the United States.

So just for kicks, let’s examine a few socioeconomic contrasts between the US and Nicaragua. To preview: The US is very rich and powerful; Nicaragua isn’t.

The US spends 4.7% of its GDP on its military, while Nicaragua spends only 0.7% of its GDP. The US employs 13 times more cops per 100,000 citizens than Nicaragua — 233 vs. 18. And yet, very few US cities are 13 times safer than Managua — El Paso, Texas being one of the rare exceptions.

Number of Homicides per 100,000 People in Managua vs. Various US Cities

These sharp contrasts are exactly what one would expect when comparing the world’s wealthiest nation to the Western Hemisphere’s second poorest nation (top prize in that category falls to Haiti). Similarly, it should come as no surprise that the median income in Nicaragua is only 1/10th of what we Americans call the “poverty line.”

As a result, most of America’s poor enjoy much greater wealth than the average Nicaraguan. Only 65% of all Nicaraguan households have a TV, while here in the US a whopping 97.7% of all poor households have a TV, according to the Heritage Foundation. Similarly, less than 10% of all Nicaraguan households have a PC or an Internet connection, while nearly 40% of poor US households own a PC and more than 30% have an Internet connection.

Net-net, the US is still a very, very rich country and Nicaragua is still a very, very poor country. That said; several gauges of America’s economic condition have been deteriorating over recent years, at least relative to similar gauges of Nicaragua’s economic trajectory.

As the chart below illustrates, Nicaraguan GDP growth has staged a remarkable rebound from the war-torn decade of the 1980s. Meanwhile, US GDP growth has been downshifting from its robust pace of the ’80s and ’90s.

Cumulative GDP Growth of Nicaragua vs. the US During the Last Three Decades

More recently, the Nicaraguan economy has been producing rapid employment growth, while the US has been producing rapid unemployment growth.

Rolling 5-Year Change in Employment: Nicaragua vs. the US

Regrettably, as the US private sector struggles to grow, the US government’s debt burden is soaring. During the last six years, America’s federal indebtedness has increased from less than 70% of GDP to more than 100%. During that identical timeframe, Nicaragua’s government debt burden has decreased from more than 110% of GDP to nearly 70%.

Increasing US Government Debt vs. Declining Nicaraguan Government Debt

If you were to get out a ruler and extend these trend lines out 25 years, you’d find the US economy in a very lamentable condition, and the Nicaraguan economy in a very enviable one. But the world doesn’t robotically follow trend lines. The global economy has a way of foiling linear extrapolations.

That’s because linear extrapolations fail to account for unknowns and “unquantifiables.” They cannot anticipate a nation’s capacity to overcome adversity, nor predict a nation’s capacity to accelerate its own demise. Neither can extrapolations predict future natural disasters, manmade disasters, tax regimes or environmental laws.

The world is always changing, but not always for the better. So why not keep an eye on the long-term trends that can nourish prosperity…or starve it?

Regards,

Eric Fry
for The Daily Reckoning

Buy Walnuts! appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

Oil, Gas… And The Riches That Follow!

While in Yangon, I met with U Moe Myint, who started and runs two oil companies in Myanmar. One is an oil field services company. And the other is an oil and gas exploration and production company. He is going to be a very rich man soon.

Untapped natural resources are a big part of the Myanmar story. They also tie in to some interesting geopolitical considerations and tell us something about the future of the oil and gas markets. Let’s take a look…

I met U Moe Myint in his office along with his two sons, who work in the business. We began with the big picture. Myanmar, it may surprise you to know, is an old producer. It exported its first barrels before Lincoln was president, back in 1853. As late as 1941, Myanmar was the 14th largest oil-producing country in the world.

In 1963, the military junta nationalized the industry. Today, Myanmar doesn’t rank in top 50 of oil-producing countries. Much less endowed countries like Chad and Belarus produce more oil than Myanmar today.

The potential for a return to form, though, is great.

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It’s hard to know how much oil and gas Myanmar holds. “Myanmar is a proven oil province,” U Moe Myint told me, “but very much unexplored.” There are 17 sedimentary basins, 14 onshore. Estimates for how much oil and gas might be here vary all over the map. Let’s just say it’s a lot. And knowing how these things tend to work, whatever estimates come out now will surely prove too low.

This is yet another spear that pierces the oft-repeated idea that somehow we’re reaching a peak in oil production anytime soon. Here in Asia is another yet vast untapped oil province to add to the growing list of new potential supplies to come online in the next few years.

In any event, Myanmar has many of the oil majors salivating at getting a crack at Asia’s last big frontier. It also has attracted the attention, of course, of the oil-needy Chinese. U Moe Myint and I talked about how Myanmar can solve a long-standing strategic worry for China.

Currently, most of China’s oil comes to China through the Strait of Malacca. This is one of the most important shipping lanes in the world. It handles an estimated one-quarter of the world’s traded goods — including oil. The problem for the Chinese is that the U.S. Navy controls the strait. They have long sought an alternative route.

Myanmar (or Burma) is that route.

There is a major transportation hub under construction now at the southern city of Dawei in Myanmar. The centerpiece is a deep-water port. Once completed, the port will have a capacity to rival that of Singapore.

Transporting goods through Dawei instead of the strait will lead to dramatic cost savings and reduced shipping times. It will also provide, via pipelines, a land bridge to China that skirts the strait. The Dawei hub will not only connect with China, but also Thailand, Cambodia and Vietnam. Already, Myanmar supplies Thailand with about 25% its natural gas; Thailand relies on natural gas for 70% of its energy needs.

Beyond Dawei, there are other ports that will get or are getting face-lifts. The Chinese have two 500-mile pipelines under construction that will take oil and gas from the Kyaukphyu port on Myanmar’s west coast to Ruili in China’s Yunnan province. A direct oil drip into the veins of Chinese commerce.

So Myanmar’s importance in Asia as a new transportation hub and oil and gas supplier is another reason the country has gotten so much attention. Geography, in this case, is destiny.

U Moe Myint’s firms are both in great position. As the oil majors come in, they will need local, experienced partners. Investment laws, too, may well require some local labor and material content. So I would expect U Moe Myint will have more business than he knows what to do with. He will need capital, and he told me he is exploring a public listing to raise money for his efforts.

U Moe Myint has another important feather in his cap: his reputation. There is a WikiLeaks on him, written by the U.S. Embassy. Here is a relevant snippet:

“U Moe Myint is one of Burma’s most successful businessmen, and perhaps the most legitimate… U Moe Myint readily admits that the Burmese government places pressure on him to ‘become a crony,’ offering him vehicle import permits in exchange for donations to government causes. According to U Moe Myint, he continues to turn down the offers, noting that he does not need to curry favor with the regime to be a success… U Moe Myint is a legitimate and respected businessman, who earned his success through hard work and ingenuity, rather than ties to the regime.”

I asked him if he knew there was a WikiLeaks cable on him. He laughed and said he found out about it only when he read a story in The Wall Street Journal about him that referenced it. But this points to another challenge in doing business here. Most people won’t want to do business with the corrupt regime or its cronies. “Clean” business partners will go for a premium. And U Moe Myint is really in the catbird seat on that front.

I think the oil and gas story in Myanmar will be a game for the majors. And truthfully, I’m not interested in investing directly in the extraction of oil and gas. As always, such projects are in the spotlight, costly and full of risk. (Having said that, I would like to have a look at U Moe Myint’s companies — but they are privately owned, for now.)

I am more interested in thinking about the effects of all that money sloshing around. Oil and gas companies will bring billions of dollars of investment money into Myanmar. They will bring armies of workers. They will need housing. They will need food. They’ll want restaurants and medical care and wireless connections. The oil companies will hire thousands of locals. They’ll have more money in their pockets for groceries and clothes and nights out.

Myanmar has the potential for the kind of transformational change that you just don’t find in world markets today. Let me give you one chart that I thought was pretty stunning. It shows you the number of Internet users and cellphone subscribers per 100 people.

Now, traveling through the country, I can tell you that getting a decent connection was a challenge. But this table starkly shows you the potential of Myanmar. I mean, Myanmar has a fifth of the Internet users of Cambodia! Just to get where Laos is, Myanmar’s Internet users would have to grow 35-fold; and cellphone users would have to increase 54-fold.

I can show similar upside in a number of other categories: per capita incomes, fertilizer use, hotel rooms, office space and more.

I led off with a quote from Alisher Ali, who recently started Myanmar’s first investment bank, Mandalay Capital, with $1 million of his own money. (Ali started Eurasia Capital in Mongolia, which has won success in that country.) Mandalay too is staying away from extractive industries. Instead, it will focus on “fast-growing sectors more likely to be free of cronyism, corruption and political baggage,” as an AP story put it. These include technology and telecom, as well as real estate and financial services.

I think these are all potential big stories for investors to keep an eye on.

Sincerely,

Chris Mayer

Oil, Gas… And The Riches That Follow! appeared in the Daily Reckoning. Subscribe to The Daily Reckoning by visiting signup for an Agora Financial newsletter.

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avatarThe Daily Reckoning - The Daily Reckoning posted Thursday, October 18th, 2012.

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