The Land Of Plenty

MORAL FOUNDATION

Immortal words were penned 233 years ago by the luminary Thomas Jefferson:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed. That whenever any form of government becomes destructive to these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness.

Much has changed in the course of human events.  The once young nation endowed with incredible natural infrastructure, abundant natural resources and unbounded borders provided the opportunity for Atlas to carry the world.

NATURAL INFRASTRUCTURE

A few years ago I floated down the Yangtze river from China’s former capital Chongqing to Wuhan.  It is one experience to read about China’s rise and another to walk amongst, float by or fly over that growing dragon.  China is spending billions of dollars to tame this flooding beast and on other similar terraforming projects.  While Russia has plenty of land little is usable, they have only one convenient river and scant access to the oceans.

Likewise South America has some of the most fertile land in the world which imbues the lungs of the earth with its life sustaining power but those same jungles partition the continent and have prevented a unified trading zone.  While Brazil’s Iguazu Falls are majestic they do not help trade very much.

But the United States has a natural irrigation system and transportation waterways.  The terrain is easily suitable for farming, carving tracks for railroads and an interstate highway system was, relatively, almost effortlessly constructed.  Capital that other countries have to spend terraforming is instead allocated by the United States to investments, like research and development for millions of patents or wonder weapons.  Additionally, the United States financial markets have mushroomed.

BREADBASKET FOR THE WORLD

In 233 years the world population has swollen from less than a billion to almost seven billion.  The Japan Times reports that Canada produces 145% more calories of food than it consumes and the United States is close with 128% while the island nation of Japan has recently dipped to 39%.

People eat or people die.  During tough economic times food is usually the last expense to be cut.  General Mills (GIS), Kellogg (K), ConAgra(CAG), Tyson (TSN)  and Kraft (KFT) all appear to be doing fine despite the worsening economic environment.  Commodity prices have retreated but the price of sugary corn cereal appears to be fairly sticky.  This financial analysis will use data from financial statements prepared in accordance with fair-value lying standards.

Kraft needs to get their administrative expenses under control and the debt millstones on the balance sheet could make maneuvering difficult considering the constipated debt markets.  Despite yields of 4.6% with Kraft and 3.4% with Kellogg they are evaporating stockholder equity although Kraft is doing it fastest.

While ConAgra yields 4% and has declining revenue they have taken preemptive steps over the past couple years by cutting general expenses by 8.8% which has increased their net income by 74.3% respectively.  It is good to see management that understands that it is net income and not sales that matter.

Cashflow is king and the food companies have decent yields.  Both General Mills with 3.40% yield and Tyson with 1.30% yield have been generating stockholder equity.  But General Mills is encumbered with long-term liabilities that are 128% of stockholder equity while Tyson’s ratio is 74.4%.

With the Fed failing with quantitative easing and the specter of hyperinflation it is the basics that are important.  Food, clothing and shelter.  Should the FRN$ enter hyperinflation it will be food, gold, silver and guns that will likely perform best and the food companies will probably weather the storm just fine.  Hyperinflation is only the end of the world for some while others may notice only minor disruptions because they have already switched to alternative monetary structures like GoldMoney.

Therefore, as long-term buys these solid blue chips, in order of favoritism, are a good value:  ConAgra at 0.56gg,  Tyson at 0.37gg, General Mills at 1.66gg and Kellogg at 1.29gg.

PEAK OIL SPECTER

But these food calories are generally transmogrified from imported oil.  As a result of almost free energy Americans feast on food from thousands of miles away and wash it down with water from Fiji.

The American economy seems only dazed from its first impact with Peak Oil and oblivious to the unyielding wall it just hit.  Those unacquainted with the topic may want to read Twilight in the Desert by oil investment banker Matt Simmons, The Long Emergency by James Howard Kunstler or the novel World Made By Hand.

American oil production has been in terminal decline since 1971.  Worldwide production appears to have peaked in 2005.  The current crude oil stockpiles and recent demand destruction are immaterial to this foreboding storm.  In the geo-political scheme this issue is guiding many of the decisions from Washington to Moscow to Beijing and Tehran.  The gold to oil ratio does matter.  Many may take our complex oil powered systems, like food production and distribution, for granted.

AMERICA IN DECLINE

The American Empire rose from a land of plenty governed by the Constitution which Gladstone said is “the most wonderful work ever struck off at a given time by the brain and purpose of man” (pg. 323).  The entrepreneurial minded people governing themselves under a moral law and endowed with abudance of food, natural resources, rivers and tributaries generated more wealth and advancements than in all of recorded history.

But then their domestic oil production peaked, their rogue President declared their promises to pay gold would not be honored and the essential checks and balances in their political machinery, gold and silver, were banished from the monetary realm.

As a result the federal government is completely out of control while state governments from New York to California are absolutely insane.  For example, California is now issuing state-registered warrants with Bank of America accepting these California IOUs while the non-favored banks keep failing with over 50 in 2009.  This is just another pass-through bailout by the federal government and probably intended to keep one of the largest economies in the world from issuing a California Dollar with a Bear on it.  But what is a dollar anyway?

While the July 4th tea parties are getting ready to start the real political fireworks will most likely be in 2012 or 2016.  After 4-8 years of Washington intentionally exacerbating the greater depression the meager 78M baby boomers will square off against 95M Millennials with the former wanting to preserve a failed system while the later are entering their peak producing years and will want to press the reset button.  During all of this chaos hopefully the food companies will be able to keep food on the shelves.

CONCLUSION

America is a land of plenty unique in all the world.  With out of control government and a slow motion currency crisis the future does appear ominous.  As the derivative illusion of wealth evaporates there has been a return to basics with the growth of survivalism in the suburbs.  While many companies have been and will be eviscerated by America’s decline during The Great Credit Contraction; instead of buying gold the food companies, particularly General Mills, Kellogg, ConAgra and Tyson may fair better at generating wealth.

Humanity occasionally takes detours as it climbs from the swamps of tyranny to the celestial stars of freedom, peace and prosperity.  The out of control and insane governments are becoming destructive of the ends of safety and happiness of the heirs of the Founding Fathers.  It is the right of those heirs ‘to alter or to abolish it, and to institute new government’.  Despite the current threats and any potential political fireworks, the country America will be a major world power long into the future.

Today we watch hordes of Tehran’s youth march.  Tomorrow it will likely be America’s.  Why?  Because mankind will be what they were born to be:  free and independent.  Happy Independence Day!

Disclosure:  Long physical gold and silver, indirect long interest in GIS and no position the problematic GLD or SLV ETFs, K, CAG, TSN or KFT but may be picking up some CAG or TSN.

Parsing the Budget Announcements

The Great Recession has induced a unique setting for Indian economic policy. See India in the Great Recession (April 2009) and The setting for the budget speech (May 2009).

These articles emphasise that the dominant story of Indian business cycle fluctuations is the situation with private corporate investment. When this analysis was written (April and May 2009), the problem of a drop in private corporate investment was only a conjecture. Now some data is showing that there is indeed a problem. Here are the two most interesting measures of investment activity, using monthly data. In both cases, I show the average of the four most-recent values of the seasonally adjusted annualised rates (SAAR). This is similar to the familiar year-on-year growth rates of monthly data with one big difference: the yoy growth rate is the average of the latest 12 values while here we’re averaging the latest 4 months so as to pickup the recent action:

Month IIP capital goods Capital goods imports
May 2008 31 -13
Jun 2008 19 16
Jul 2008 -18 98
Aug 2008 8 -4
Sep 2008 50 25
Oct 2008 1 -16
Nov 2008 2 -36
Dec 2008 11 41
Jan 2009 -37 -37
Feb 2009 14 -32
Mar 2009 -10
Apr 2009 -21

This data shows that there is a significant threat of a substantial dropoff in private corporate investment.

Fiscal, financial and monetary institutional reform

FM says he will `return to the FRBM target for fiscal deficit at the earliest and as soon as the negative effects of the global crisis on the Indian economy have been overcome’. Apart from that, there was nothing on fiscal, financial and monetary institutional reform. Pranab Mukherjee said:

Never before has Indira Gandhi’s bold decision to nationalise our banking system exactly 40 years ago – on 14th of July, 1969 – appeared as wise and visionary as it has over the past few months. Her approach continues to be our inspiration even as we introduce competition and new technology in this sector.

Put together, I did not see progress on fiscal, financial and monetary institution building.

Financing of the government

There was no statement on using sale of government assets in order to pay down debt.

The GST is to be implemented from 1 April, 2010. I do get nervous given the immense complexity of that effort and the lack of accomplishment on the ground.

There are five major bad taxes in India: STT, cesses, customs, octroi and stamp duty. The budget speech tinkered with none of these. There was an `abolition’ of the commodities transaction tax (which had never been levied anyway). It is distortionary, having taxation of some kinds of financial transactions but not of others. The `fringe benefit tax’ was abolished.

There was no movement towards fiscal austerity that I could discern.

Put together, I did not see progress on financing of the State.

Core public goods

Core public goods are the genuine business of the State. There seem to be substantial increases of expenditure on defence and home. This might suggest that the fraction of public expenditure on core public goods might have gone up. I am, so far, not able to tell whether this change is significant.

Infrastructure

There seems to be more money being spent on infrastructure. There is little evidence of institutional reform. The Ministry of Finance seems to be keen on building IIFCL, which seems worrisome. It is not clear that IIFCL will not suffer the fate of IDBI / IFCI / etc.

Education

The spending on Sarva Shiksha Abhiyan (SSA) has not risen in nominal terms, which is good, but a new Madhya Shiksha Abhiyan has been created. If this ends up being run like SSA, then we’ll know that there is little interest amongst politicians in actually getting India’s children educated.

Subsidies

There are good noises about fertiliser and oil subsidies, but no action.

The role of the budget speech

Maybe we do wrong in asking for a significant workplan in the highlights of the budget speech. Maybe a lot of good things will get done even though they were not announced. I have an article in Financial Express titled Which type of budget speech is this?.

Fiscal numbers

Here is a spreadsheet (.ods file) where I have a few years of data, with some value added, from `budget at a glance’. This has no corrections for the off-balance sheet stuff.

Tax revenues were at 9.17% of GDP in 2007-08. These dropped to 8.59% of GDP in 2008-09 (RE). The budget projection for 09-10 wisely places this number at 8.07% of GDP.

Non-tax revenues are projected to go up a bit: from 1.77% of GDP in 08-09 to 2.39% of GDP in 09-10. This is primarily on the back of revenues from the 3G spectrum auction.

Put together, revenue receipts are budgeted at 10.45% of GDP compared with 10.36% last year and 11.3% the year before. These projections seem reasonable to me.

Fiscal stress + gloomy revenue projections should have led to belt-tightening on expenditure. This did not happen, partly owing to the 6th pay commission.

Non-plan expenditure rose by 21.8% last year and is projected to rise by 12.6% this year. It will go from 10.59% of GDP in 07-08 to 11.83% of GDP in 09-10.

Interest payments to GDP – a key marker of fiscal stress – continues to be in troublesome territory, from 3.57% in 07-08 to 3.84% in 09-10. This is despite the dramatic collapse in inflation which should have made government borrowing much cheaper.

Plan expenditure is growing exuberantly: from 4.28% of GDP in 07-08 to 5.53% in 09-10.

With sombre revenues and a good deal of spending, we have dire deficits. The revenue deficit jumped from 1.1% in 07-08 to 4.45% last year and is budgeted at 4.81% the coming year. In other words, there is not even an attempt at fiscal correction.

The fiscal deficit was at 2.65% of GDP in 07-08; this went up to 6.02% last year and is budgeted at 6.82% for 09-10.

And finally, we switched around from a primary surplus of 0.92% in 07-08 to a primary deficit of 2.47% last year and are budgeted to have another big primary deficit of 2.98% in 09-10.

There is a caveat on all these numbers when expressed as percent of GDP. Nominal GDP is projected to be up in 09-10 by 8.35% when compared with the previous year. It is possible to think of combinations of real growth and inflation which will get this, but I would have been happier with a somewhat lower projection.

Other interesting comments: See Jahangir Aziz in Financial Express; M. Govinda Rao in Business Standard; an editorial in Business Standard.

Good news

Don’t I have any good news? I do. At NSE, derivatives on Nifty did turnover of Rs.707 billion or $14.7 billion. And, currency futures at NSE did turnover of $1.2 billion. So we’re in good shape on having a strong equity market, and we’re learning how to do currency trading also.

Online Job Numbers Signal Hiring Bounce for Some

The Conference Board reported this week that there were 3,294,800 online job postings in June on more than 1,200 major Internet job boards.

The postings between January and May signal an improvement from the decline of 1.2 million postings between August 2008 and January 2009.

“Job demand has definitely stabilized since January,” said Gad Levanon, from The Conference Board. “Although there is some bounce in the monthly numbers, the number of online advertised vacancies has held steady in the last three months.”

Renee Fulton, from the staffing firm Talis Group, said employers these days are looking to hire — and to hire quickly.

She believes that companies needed the help long before now, but they had stopped job orders because of uncertainty in the economy.

As a result, business was slow from November to March.

But her outlook for the rest of 2009 is much more positive.

Recent activity, particularly the placement of engineers in the manufacturing sector, has picked up. Last month the number of job orders for her firm was level with the same time frame last year. She said June 2008 was a very strong month.

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