Bud Conrad: U.S. Collapse Predicted

By The Gold Report, on October 17th, 2011

Bud Conrad Casey Research Chief Economist Bud Conrad believes the United States is acting as a late-stage empire, acting aggressively on the world stage, lowering its moral standards and debasing its currency. In this exclusive interview with The Gold Report at the Casey Research/Sprott Inc. “When Money Dies” Summit, he explains the options for how the inevitable collapse will occur.

The Gold Report: At the Casey Research/Sprott Inc. Summit, you gave a presentation called, “A Crisis of Confidence.” After all the government stimulus from the U.S. and the rest of the world aimed at injecting liquidity and keeping interest rates low, why didn’t any of it work? Why is the economy still hurting?

Bud Conrad: First, printing money doesn’t create wealth. Putting bits in a computer doesn’t create wealth. When politicians hand out money, they are the ones who get powerful and the banks get wealthy. The middle class with savings gets hurt. What creates wealth is people working and creating things.

Internationally, the Chinese are papering over their slowing growth rate by providing liquidity, but paper money systems will collapse. That is the reality. The global financial system is supremely unstable. When people wake up to the fact that this is a “king ain’t got no clothes” economy, we will see a run to the exits.

TGR: It seems like we are saying that the currency is going to fail because of debt to gross domestic product (GDP), not because governments can print money. If governments were disciplined, then would printing money be a problem?

BC: When the U.S., and therefore every other country, went off the last vestige of the gold standard, we were placed in a fairyland. That is even more important than the debt. It is linked. Debt is the result of the ability to print money. If there were redeemability, the U.S would have stopped issuing debt when it ran out of money. Without fiat currency, the country wouldn’t have reached the current level of debt.

No government is disciplined. My question is: “Why are people letting them get away with it? Why aren’t people out protesting in the streets?” Thousands of bankers should be in jail right now. There is an attitude of resignation in young people today that dismays me. Maybe they know they can’t fight city hall.

TGR: If we are all resigned that whatever is going to happen will happen, how can people protect themselves?

BC: A lot of people probably believe that everything will be okay. When we have a financial collapse and people stop getting their payments and they see bankers and government contractors getting rich, maybe people will take matters into their own hands. It could be dangerous to be in the streets because people who are hungry will rob you.

TGR: If the bubble has already broken in the U.S. stock and real estate market and is getting ready to burst in China, are there any upside opportunities?

BC: In a paper money/fiat currency collapse, the things to hold are real assets—gold and oil will look like you are making money. Gold doesn’t change. It is just gold. When the price goes up, the metal isn’t any different. Only the dollar is going down.

There is also a moral component to the question. A lot of people are getting out of the country. This is where I was born and where my family lives and I am an American so I probably won’t go anywhere, but a lot of people are considering moving out of the U.S. to protect themselves and their assets.

TGR: What is your biggest fear for your children?

BC: That the government has turned it into a totalitarian state where the people don’t have personal freedoms to assemble, think and live their lives without surveillance, over-taxation and subservience to the state. I worry that my children and grandchildren could be impoverished by conflict, by a society that dissipates it resources in wars that only destroy wealth, rather than creating anything.

I also worry about how they will fuel their economic growth. Fossil fuels created the abundance of our generation like humanity has never experienced before. We have used half of the dinosaur remains out there. If we use it all up, then we will have to reduce the number of people on the planet. Now we need to start thinking about what is next. I don’t know how my grandchildren will live in an abundant society when energy becomes so expensive and scarce that we have big wars over it. It’s already happening. Energy explains the conflicts in the Middle East more than religion ever could.

TGR: You have said we are entering Cold War II. Can you explain that?

BC: Everyone is uncomfortable with the role we played in the Middle East. They fear we could enter a World War III. But a cold war is not a conflict between the main parties. We didn’t battle with the Russians directly. We fought in Vietnam. The same is going on with China in an economic war over resources. The U.S. bombs the place in hopes that a new government will come in and give us cheap oil while China is busy winning contracts for the access to resources in many far-flung regions from oil in Africa to soybeans in South America. China is building cultural centers and roads to mines in an attempt to gain the favor of the people while gaining access to resources. Our approach of bombing people just makes enemies and is very expensive. It is another example of the stupidity of a late-stage empire.

TGR: You have referred to the fight over access to oil, but I hear the U.S. is the Saudi Arabia of natural gas. Can that replace oil in the future?

BC: Like any extractive resources, we have to approach this new technology with care. Fracking can leave a messed up underground and contaminate water. But natural gas is abundant and affordable and it can make a difference.

TGR: What about uranium?

BC: The problem is not just the radiation and the bad design of the early plants revealed by Fukushima. The problem is that it isn’t price competitive. We can build nuclear plants safely, but it isn’t cost effective compared to oil or natural gas. There will still be a uranium mining business in replacing spent nuclear fuel, but not in building new plants for a while.

TGR: You mentioned we will soon have two retirees collecting benefits for every one worker. What is the solution for the imbalance between workers and beneficiaries short of older people wandering off into the desert so they won’t be a liability on their families?

BC: The government will continue to print money to meet its obligations to retirees, but the problem is that those dollars won’t buy as much in the future. That is why people are trying to find protection for their retirement assets. Those relying on Social Security will find it difficult.

TGR: We have heard about a possible economic slowdown or collapse in China, but it has one of the highest personal savings rates in the world. Wouldn’t that mitigate some of the economic turmoil of a real estate bubble bursting?

BC: China is strong because it has gone through so many revolutionary problems during the lifetime of people who can still remember. The Chinese know how bad it can be so they fight to avoid returning to economic subsistence levels. What China has done economically puts Japan’s economic miracle to shame. The country has overbuilt during the last few years, but it has a lot of people and the one-child policy is being dismantled. It will manage any bubble bursting well. We, in the U.S., have an arrogance of wealth and that blinds us to possible problems. That is why we are unwilling to take the strong necessary steps to right our economic disasters of too much debt, too much government and little concern for concentrating on economic development.

TGR: You said you are expecting a recession next year and a weaker economy or “stagflation.” Will that be limited to the U.S. or will it impact the entire world economy?

BC: The U.S. economy will suffer greatly because we are unprepared for how serious the situation will become, but this is a worldwide phenomenon. Inflationary central bank printing is going on in Europe and China so they will be impacted as well. The world is interconnected so what happens in the U.S. does spill over into other economies and the other way around. The European weak countries failing will cause several big European banks to fail, be nationalized and cause debt crisis for U.S. banks as well. International contagion is particularly true when the U.S. starts wars to divert people from thinking about the economy. Wars damage productivity of personal consumption and therefore the perceived wealth of individuals.

I think of the U.S. as a late-stage empire. There are lots of ways to collapse. The Third Reich collapsed cataclysmically. The British Empire wound down in a gentlemanly fashion. I think the U.S. is headed to Roman type of collapse where the internal dissipation was as big a problem as the external conflicts. We have a culture of corruption with no accountability. In this most recent crisis, no bankers have been indicted, never mind convicted, compared to the Savings and Loan crisis, when thousands went to jail.

TGR: How are you protecting your wealth?

BC: I have some precious metals and energy. I expect interest rates to rise.

TGR: You are predicting a weaker economy. When are interest rates going to move?

BC: How about now? I warn you, I have been wrong before. I predicted the debasement of currency would require higher interest rates to get people to invest. I didn’t give enough credit to the Federal Reserve’s ability to manipulate the market. We are now at record low rates and the government deficit is at such extremes that rates can only go up. I don’t know how it will all unravel. But at some point people will wake up to this sham and they won’t want to keep their money in banks. Then they will go buy physical assets, gold and food and, sometime later, real estate.

TGR: After all this bailing out, what will be the trigger point for a collapse?

BC: We all want to know that. We look at the numbers and I can’t see it going on for the rest of the decade. When it goes, it could go very rapidly. The markets feed on themselves more now than at any other point in time. What happened over a period of years in the Great Depression could take weeks this time around. Currency collapse could happen quickly. The collapse is already happening in Europe and more countries may follow Greece.

This is not war; it is merely the collapse of a currency. People aren’t wiped out by the thousands. But their savings are. Currency disintegration is not unusual. It happens all the time—about once a generation a collapse happens in every country. The fact that the U.S. dollar is the second oldest in existence today is an anomaly, an anomaly that may come to an end soon.

Bud Conrad holds a Bachelor of Engineering degree from Yale and an MBA from Harvard. He has held positions with IBM, CDC, Amdahl and Tandem. Conrad, a futures investor for 25 years and a full-time investor for a decade, is also sought after as keynote speaker in Dubai, New Zealand, Vancouver, New York and many other cities. He has appeared on TV on CNBC, FOX, and on many radio shows. As chief economist at Casey Research, he produces original analysis.



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The Harrisburg Miasma = Pennsylvania's Miasma

By Christopher Briem, on October 17th, 2011

The thing that gets me about the fiscal mess in Harrisburg these days.  The city is so broke it is seeking bankruptcy. Even if that does not go forward, why are they in this situation?  Is the city itself that mismanaged?  Even if you want to think so, the actual fiscal miasma they are dealing with is from a debt owed by something called the “Harrisburg Authority” for building of all things a garbage incinerator.  The full story was written up by the Patriot News earlier in the year.

The real story here, IMHO, is not really about anything specific to Harrisburg, but what this all says about public governance in Pennsylvania.  How many folks really paid attention to whatever public debate there was over the garbage incinerator that has created their current predicament?   All the public authorities and special districts in Pennsylvania create an impossible to decipher mosiac of governance that leads to these problems.   Pennsylvania is by far the most fragmented state in the nation when it comes to local governance.  Most focus on municipalities when they think about that, but it goes far beyond boroughs and townships and cities…  few people really think about the secondary costs of all the ‘other’ governments we have out there.   Why is there a generic “Harrisburg Authority” in existence if not to obscure the public governance.  There is even an Equipment Leasing Authority here in the City of Pittsburgh that is nominally an independent public authority according to the laws of Pennsylvania.

How bad is it? A version of a graphic I made in the past is below.. when you lay out all the official and distinct governments in Pennsylvania this is what you get. Each government is scaled by the number of employees it has. You never know what will jump up and bite you. Somewhere in there is the “Harrisburg Authority”.  From obscurity to what is becoming national news and beyond.

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Random Shots - Is it Over Yet?

By Claus Vistesen, on October 17th, 2011

It was telling that just as the ECRI and other notable research outfits decided to push recession button on the US economy the data flow became notably more positive. This could be a sign of the times that the cycle is just too volatile for even capable analysts to call or it could simply be a blip to the otherwise fundamental issue that economic weakness is here to stay for now.

Risk asset markets however made no mince of the recent stabilisation of the euro land crisis as well as the better news flow from the US economy. Just take the following headlines from Bloomberg and you know exactly what kind of sentiment I am talking about.

Quote Bloomberg

U.S. stocks advanced, giving the Standard & Poor’s 500 Index its biggest weekly gain since July 2009, as retail sales beat economists’ estimates and the Group of 20 nations began discussions on Europe’s debt crisis.

(…)

U.S. 30-year bonds capped the longest weekly losing streak since January as concern eased that Europe is unable to curb its debt crisis and U.S. retail sales climbed, damping bets the country will fall into a recession.

The question is then whether it signals a decisive and lasting breakout or whether it was simply a rally to the top of a choppy range before we start another descend to test the lows. Recent weeks’ market movement will suggest that you sell the current levels as top of a post crash range and I, for one do not think we are out of the woods yet. It is important to emphasize two issues on the US economy when it comes to the likelihood of a recession.

Firstly, the US housing market has never recovered and inventories remain low. This means that there is not much room for the economy to slump even if it does enter a recession. Any recession is then likely to be relatively short. Secondly, all liquidity gauges we are watching are pointing strongly upwards which is likely to provide strong tailwinds for risky assets 9-12 months out. Excess global liquidity, US broad and narrow measures of money are all shooting up.

In addition, we should consider the slow but sure movements by all four major central banks to increase either the short term liquidity or simply re-starting QE.

The BOE put itself at the front of the pack with the recent addition of another bn 75 GBP worth of QE, but likewise at the ECB it was interesting to see that long term liquidity operations was re-instated together with an expansion of the covered bond purchasing programme. Additionally, the ECB has been and will continue to be more or less forced to support bonds in the periphery, particularly in Spain and Italy, in order to ring fence the periphery from the coming Greek default. In comparison, the Fed’s latest much debated Operation Twist looks almost modest since it is, by the letter of the theory, not quantitative easing but rather qualitative easing [1]. Of course, the market is fully expecting the Fed to act aggressively should the economy falter further with a joint financing programme with the Treasury for long duration mortgage products as the most likely initiative alongside the more technical move in the form of reducing interest rates on excess bank reserves to negative.

I think it is important to realise that the Fed, with its latest actions, have its gaze firmly fixed on stimulating a recovery in the US housing market which is seen as the most important missing leg in an already faltering US recovery.

In Japan, the BOJ’s situation is different in the sense that economic has been distorted by first the devastation of the earthquake and then obviously the technical recovery as supply side disruptions have eased off. I take note of the fact that the BOJ has verbally put a lot of promises on the table in terms of stimulating the economy not least, one would imagine, in relation to the ongoing strength of the JPY. Finally, it is worth pointing out that the BOJ’s balance sheet has actually expanded briskly in the past two months.

The main conclusion to draw here I think is that while it is certainly not over yet, developed market policy makers are starting to open the floodgates. The euro zone crisis will remain a severe drag and like an almost chronic illness will continue to flare up. A disorderly Greek default can still not be ruled out and as the euro zone policy makers seem to take comfort on even a second of calm it seems to me that the market will have to push harder before we get a realistic proposal for a Greek default.

The recovery in the periphery (or obvious lack thereof) is still not working. The internal devaluation in the European periphery is alive and well when it comes to nominal wage increases which is getting a beating but in the context of lingering inflation in core and headline it leads to a squeeze in real wages and further depresses the recovery. The problem is that a sharp reduction in living standards through a decline in real wages to restore competitiveness is needed but if it occurs without any form of nominal currency depreciation not to mention in the context of very sticky core inflation, it just becomes counterproductive. Absent a fiscal union to socialise the risks it is difficult to see how the euro zone policy makers will be able to come with a fudge that will satisfy markets. In that regard I agree with Chris Wood here.

Ultimately, GREED & fear’s view on all of the above remain the same. This is that the only coherent end game for Euroland remains a formal move towards collective fiscal responsibility, which would ultimately address the fundamental cause of the present crisis. This is the financial fault line represented by monetary union without fiscal union. Euroland either has to go down this path or it has to confront all the problems associated with a break up since in GREED & fear’s view there is no “middle way”

One positive development on Greece is that the private sector involvement (PSI) proposal originally envisioned seems to have been abandoned for a much more realistic haircut.

But more challenging issues remain.

It was hardly surprising that the S&P downgraded Spain last week which only serves to underline the issue that while Greece may be the imminent worry the real problem lies in Spain and quite possibly Italy. There is a limit to the amount of Italian and Spanish bonds that the ECB can buy as long as it is evidently clear that growth prospects continue to remain difficult.

In emerging markets and touching on the theme I dealt with in my last installment the recent inflation data from India indicate why I continue to think that investors may hold too high expectations for easing in big emerging markets.

Quote Bloomberg

India’s inflation exceeded 9 percent for a 10th straight month in September, maintaining pressure on the central bank to extend its record interest-rate increases.The benchmark wholesale-price index rose 9.72 percent from a year earlier after a 9.78 percent jump in August, the commerce ministry said in New Delhi today. The median of 21 estimates in a Bloomberg News survey was for a 9.75 percent increase.

Elevated inflation in India and China are crimping room for policy makers to ease monetary policy and support global growth amid Europe’s debt crisis and a faltering U.S. recovery. India’s central bank Governor Duvvuri Subbarao said yesterday that a more than 9 percent inflation is above “comfort level.”

Of course, the picture is not uniform here with notable economies such as Brazil and Indonesia already lowering interest rates but all eyes are currently on China (and secondarily India) and here I think that we will have to see stronger signs of a hard landing or a relapse into a more severe global slowdown we can expect policy makers to actively stimulate.

In summary, I think that we are indeed nearing an inflection point at which money printing in the developed world will once again provide relief to risky asset markets but the problem is that the underlying economic backdrop has not improved much. In particular, the ongoing lack of resolution in the euro zone represents an issue but Eastern Europe as well as a housing bubble in Australia (and perhaps even in Denmark) are also potential sources of uncertainty not to mention the unravelling of credit excess in China. As such, “it” is far from over but a tradable bounce in risky assets which goes beyond the current choppy range may soon represent itself.

–

[1] – The distinction between quantitative and qualitative easing is simple. The former refers to an expansion of the balance sheet through the central bank increasing its liabilities and adding a corresponding amount of assets. The latter refers to changing the composition of the asset side of the central bank’s balance sheet and as I am reading the gist of OT the Fed has committed to keep its balance sheet unchanged by selling short term bonds and buying long term bonds. Try this one for a good recap of what QE is and isn’t.



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Economic Events on October 17, 2011

By B.P.T., on October 17th, 2011

At 8:30 AM EDT, the Empire State manufacturing index for October will be released. The consensus is that the index value will be -3.25, which would be 5.57 points higher than the value reported in the previous month.

At 9:15 AM EDT, the Industrial Production report for September will be released. The consensus is that there will be an increase 0f 0.2% in production and an increase 0f 0.1% in industrial capacity utilization.

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Fat Taxes

By Simon Grey, on October 14th, 2011

Things are never so simple, of course. The tax has already been received by many Danish firms as a ‘bureaucratic nightmare’, piling on additional costs to firms in an already tough period. Once more, any tax such as this is going to be inherently regressive; those least able to afford any price increases will be hit the hardest. But what does it matter? The French ‘fat tax’ is expected to raise an estimated €120,000,000 p.a.. A nice little earner.

Fat taxes are politically convenient in countries where obesity is a sizeable problem. There is presumably plenty of revenue to be had because fat people aren’t going to change their eating habits overnight, nor are they the type to be particularly cost-conscious, in terms of both direct and indirect costs.

Furthermore, defending fatties is political suicide for most, since fat people are generally reviled. Thus, a fat tax is politically brilliant because it will raise revenue easily and enjoy widespread support (or, at the least, it won’t face much political opposition).

Most are in agreement that obesity is a society-wide problem. The more rotund we become, the more our healthcare costs increase. So what’s the solution? Surely not pricing poor people out of the market for fatty foods. We must seek a solution other than ‘more taxes’ – the default position of any government. Perhaps our BMIs could be helped by making it easier for people to help out at sport clubs without undergoing a raft of CRB checks, or by reforming our health system which currently permits the cost of atrocious health habits to be picked up by someone else.

Sadly the precedent has already been set. When we already allow the government to dictate what we may and may not consume in the form of innumerable drugs, letting them control what we eat is a logical advancement. And it will all be done for our ‘own good’.

Actually, once you expect the government to provide free universal health care for every citizen (and all non-citizen residents), the natural consequence is for the government to enact some sort of cost-cutting measure, like rationing or queuing. Alternatively, the government can enact a tax on unhealthy things in order to make providing health more reasonable. If fat people ignore the increased prices, the government will at least have enough money to defray future health care costs that inevitably arise as a result of unhealthy diet. Alternatively, if fat people decide to respond to the tax rationally, then the government will have to pay less for health care later on, thus negating the effect of less-than-projected revenue.

In many ways, a fat tax mimics the natural workings of the free market. If there were no governmental guarantees of health care, people would more inclined to take care of themselves and eat properly. Thus, the fat tax serves as a replacement market mechanism.

Now, this is not to say that I support a fat tax. I simply view it as the rational response to the current conditions in Europe, with regards to how health care is provided over there. Personally, I think the best solution would be to have the government completely deregulate and desubsidize the entire health industry, and get out of providing and paying for health care in its entirety. But if the government is going to be involved in health care, it is going to have to find a way to manage costs. That much is certain.



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US manipulating the gold price up

By Bron Suchecki, on October 14th, 2011
Very funny to read this from Reuters where Iran claims that its enemies were deliberately causing the price of gold and foreign exchange to rise in a bid to undermine the Islamic Republic’s economy. “The enemies and ill-wishers want to make a fuss and present wrong information to provoke and deviate the market,” Ahmadinejad told a crowd in a town in the western province of Hamadan, where he was on one of his frequent provincial visits. “In order to disturb the market they buy a lot of gold coins with their huge amount of money …

Seriously, this should be read in context of Vietnam’s issues with its citizens buying gold as an inflation hedge/savings, which I’ve blogged about in the past. We are seeing how politicians respond to high inflation. In Vietnam’s case, try to ban/restrict gold or in Iran’s case, blame outsiders. In neither case take responsibility. Don’t expect it to be any different in Western countries.
I also note DGC Magazine’s pick up of expansion of reporting (in USA) of export/import of physical money to prepaid access/stored value card products. Of course all about preventing the “transfer of money obtained through illicit activity”.  I wonder how long before the movement of money between states within a country has to be reported. They may as well get it over and done with and tell us fuck your privacy and just ban all forms of physical money/value and tell us we have to have one government issued credit/debit card we have to use for any transaction.
Finally, I recommend reading Unqualified Reservations blog post on maturity transformation, on which he has written about before. His argument is that borrowing short and lending long is at the heart of our banking problems and cause of the business cycle.
Quote:
The genius of Professor Krugman is that he goes so near the truth that he makes it obvious even to his commenters – who typically are both idiots and fools, but several of whom spontaneously exhibit the same insight themselves: Why can’t we regulate or even ban the maturity mismatch? Savers would have to make the maturity choice themselves and it would be transparent. Currently, the savers don’t understand the huge run risks that the banks have by funding with demand deposits and lending long. It’s hiding the risk.


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Health Insurance

By Christopher Briem, on October 14th, 2011

Some new data out on Small Area Health Insurance Estimates from the census folks.

They have a tool there you can use to look this up yourself, but what I get is that for children (age 18 and under) in Pennsylania, Allegheny County is tied with Montgomery for the lowest percentage without health insurance at 3.9%.  The highest: 10% in Lancaster County.  Data is for 2009.

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Economic Events on October 14, 2011

By B.P.T., on October 14th, 2011

At 8:30 AM EDT, the Import and Export Prices index for September will be released, providing some data that can be used to monitor the threat of inflation.

Also at 8:30 AM EDT, the Retail Sales report for September will be released.  The consensus is that retail sales were 0.8% higher last month, after no change in the previous month.

At 9:55 AM EDT, Consumer Sentiment for the first half of October will be announced.  The consensus is that the index will be at 60.0, which would be an increase of 0.6 points from the level reported in the second half of last month.

At 10:00 AM EDT, the Business Inventories report for August will be released.  The consensus is that inventories increased 0.4% from the previous month.

At 2:00 PM EDT, the Treasury budget for September will be released, providing an account of the federal government’s budget surplus or deficit for that month.

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Ricardo Hausmann on Economic Complexity

By Ethan Zuckerman, on October 13th, 2011

The member meeting at the Media Lab features speakers from within the lab, like César Hidalgo and Joi Ito, and outside speakers – in that latter case, the invited speakers reflect César’s wonderfully idiosyncratic take on networks. One of his major collaborators is Ricardo Hausmann, director of Harvard’s Center for International Development and former Minister of Planning for Venezuela.

Hausmann argues that to succeed economically, humans have learned how to specialize. Someone who’s marvelous in one area is likely mediocre at others – consider Michael Jordan’s ill-fated attempts to play professional baseball. Some tasks require a full human’s worth of knowledge – a person-byte – to carry them out successfully. Others require much more knowledge – building a complex product like a computer might require a kilo-person byte or more – the highly specialized knowledge and skills of a thousand different people. “Modern man is useless as an individual. Making a computer is a team sport.”

By understanding how much knowledge and coordination different economies are capable of, we might understand their economic growth potential. In the US, the average employee works with 100 coworkers. In India, the average employee works with 4 coworkers. Hausmann explains that’s not coincidental – the difference in wealth and income between the nations is closely related to the ability of firms to take on complex tasks. This also helps explain recent disappointment with the limited impacts of microlending – those loans go to small firms that are limited in terms of personbytes. They’ve only got so much knowledge they can apply to producing complex and high value products.

We might characterize economies in terms of those where lots of people do very simple work – he illustrates this with a marvelous Edward Burtynsky photo of assembly line workers processing chicken in China – and those where individuals do complex things in consort, like the players within a symphony orchestra. Hausmann shows us a “map” of the world, a complex graph that represents nations and what products they produce. Most nations produce a few things, and a few produce many different things. Some products are made everywhere, while others are made in very few places.

There’s an underlying pattern to this. The nations that make only a few things all tend to make, more or less, the same things. Basically, we can divide the world into two sets of countries – those that have sufficient personbytes of knowledge to produce a wide range of goods, and those that can produce only a few simple things. The places that make everything make things that few others make. Hausmann explains that products require a specific set of personbytes to produce. When you gain additional personbytes of skill, it’s like getting new letters in Scrabble – you can produce a new set of words, but only within the constraints of the letters (skills, knowledge) you already have.

“Poor countries make few things, and things that everyone makes. Rich countries make unique things. And this is true for municipalities as well as for countries.” He shows a graph of manufacturing in Chile that looks curiously like his graph of the world – on the top is Santiago, where people manufacture all sorts of things… on the bottom “is where there’s nothing but penguins” and capacity for manufacturing is very low.

Global economics, Hausmann explains, is a little like the BCS scoring in college football. It’s not just about who you beat, it’s about who they beat as well. What do you make, and what does everyone else make? What do you make that no one else makes? What new products could you manufacture based on what you already make?

Why pay attention to this idea, the “economic complexity index”? It’s a very good tool for explaining the classic question of “Why are some countries rich and others poor?” Specifically, it explains 73% of the variances of incomes across nations. And where the predictions economic complexity theory offers differ from reality, it’s possible that reality is wrong. The index suggests that India should be richer and Greece should be poorer, which suggests that error in the index is predictive of future growth. If you want to bet on economies that are undervalued, Hausmann suggests you invest in China, India, Thailand, Belarus, Moldova and Zimbabwe. (On the last, he suggests that Zimbabwe’s main economic problem is a single persistent individual, but that there are many personbytes of knowledge ready to produce goods once the political situation changes.)

Is economic complexity actually measuring another phenomenon, like education? Probably not. We can look at investment in education and economic growth, and education appears to correlate more weakly than economic complexity. He suggests we look at Ghana, which has invested heavily in education since 1975, and Thailand, which hasn’t invested as heavily. Ghana hasn’t moved far from a largely agricultural economy, while Thaliand has moved from producing jute and sugar to becoming a major manufacturing center. They’ve accumulated many personbytes even if they didn’t invest heavily in education.

This raises a tricky question – how do you become a watchmaker in a country without watchmakers? The answer is that you move from what you currently produce to products that require only a fractional increase in personbytes, from one product space to a closely related one. The question for economic success may be how close you are to good products from what you already know how to make.

I find Professor Hausmann’s theory fascinating, in part because I’ve had the chance to play with the gorgeous visualizations César has built of economic progress in different parts of the world based on economic complexity. What I still don’t understand is how Thailand kicked Ghana’s butt economically. How do you get from jute to microcircuitry? And why couldn’t Ghana get from aluminum production to more complex manufacturing. Looking forward to reading his papers and understanding a bit more, as the core concept of complexity is a very compelling one.



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Ross Beaty: Gold, Silver, Copper, Nickel and Alternative Energy for Fun and Profit

By The Gold Report, on October 13th, 2011

Ross Beaty Legendary mining entrepreneur Ross Beaty is an optimist. He likes the opportunities present in both bear and bull markets. In this exclusive interview with The Gold Report at the Casey Research Summit in Phoenix, he explains his love of metals and alternative energy and what he is doing to position himself regardless of where the markets go.


The Gold Report: Your talk was titled “Gold, Silver, Copper, Nickel and Alternative Energy: the Commodities I Still Like.” Before we get into the specific commodities, I wanted to ask you about the distortions in supply and demand that you mentioned. As more investment is going into exploration, fewer discoveries are being made. Is that because the easy ones have already been mined? Are costs higher? Are there more regulatory burdens? And how does that impact share prices?

Ross Beaty: It is more expensive to discover resources because there are more barriers to development; there are more empowered people who don’t want a mine in their back yard. The U.S. is a perfect example where there are some great ore bodies that simply are not allowed to be developed. What used to take three years now takes 10 or 20. That means that supply just can’t respond quickly enough to rises in prices and prices stay higher longer.

Share prices are influenced by many factors—perceptions about long-term and short-term trends. The winds of change that affect profitability of a mine in a particular place present a very complicated picture. You have to look at operating and capital costs. If you work anywhere other than the U.S., in Chile for example where the currency has increased in value 30% against the dollar in the last three years, you have to consider the impact of the devalued dollar because suddenly all local costs have gone up 30%. All of this weighs on profitability. It is difficult to break out the impact of just the price of development alone on share price, but it does have an impact.

You also have to realize that exploration and mining companies are very different. Exploration companies won’t have cash flow for many years. It’s a much riskier business to evaluate compared to a mining company that suffers changes in revenue and costs minute by minute. For example, one of my companies, Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ), the second-largest primary silver producer in the world, produces 24 million ounces of silver each year. If we have a silver price change of year-on-year $10/ounce, that immediately translates into an extra $240 million (M) of cash flow. If I have a deposit in the ground that will take 10 years to dig out, short-term price fluctuations mean absolutely nothing to the profitability of the company. It’s a very different thing.

TGR: Do people have longer-term investing strategies toward exploration stocks if it takes so long to pay off?

RB: It always surprises me that people treat exploration stocks as if they were producing mining companies. Share prices go up and down based on the price of the metal. It makes no sense, but they do. They also judge the immediate value of an exploration company based on political changes when often the political situation will have changed completely by the time the mine is producing in five or ten years.

TGR: Does politics play an important role in the profitability of producing mining companies?

RB: Politics have greater impact on producing companies. We have an asset in Bolivia. In May, the president made a sweeping statement that he wanted to nationalize the mining industry. Pan American was hit by 15% share price drop overnight even though nothing happened, the rules didn’t change, the mine is still operating. And that mine is only about 6% of the net asset value of our company anyway. Investors sell on rumors. That is the world we live in.

TGR: Once a mining company finds a resource and gets through the long permitting process, is it difficult to find qualified people?

RB: The existence of a trained workforce—engineers and geologists—is a very serious problem today. Not enough are being educated. The same is true in the oil industry. Keep your bankers and lawyers, but send us your engineers and geologists. It’s the same in Peru, Argentina and Chile. That will impact how long it takes to get a mine built, how well it is built and how profitable it will be in the end. It is a very serious problem.

TGR: Is there a solution?

RB: There is a lag and often it ends up countercyclical. When the market is up, students go in, but it takes four years and by then the market could be down. I have seen this many times, but this particular construction boom is just sucking up everyone. We need more people going into these programs.

TGR: You said gold has great legs. How high can it go?

RB: I have no idea. I just know the forces driving metal prices are very strong right now. Gold is in a secular bull market with long-term upswing driven by governments printing money, lack of supply and increased demand from China. These are powerful forces. When they will stop, I don’t know, but I don’t see things changing anytime soon. That is especially good for gold and silver.

TGR: You sold Ventana Gold Corp. (VEN:TSX) last year for $1.5 billion. Now you are an investor in Keegan Resources Inc. (KGN:TSX; KGN:NYSE.A). Is that the same business model: explore, derisk and sell?

RB: I like the story. Keegan is basically the same business model as Ventana. The company is developing a gold deposit in Ghana. It hopes to sell it and that usually commands a premium. It could take a month or it could take three years. My money is on the shorter term.

TGR: You called silver the schizoid metal because it doesn’t know if it is a precious metal, an industrial metal or an investment insurance play and that can make it more volatile. Are ETFs bringing more investors and therefore making it even more volatile?

RB: The silver ETF has been the most important thing driving silver prices in history. It has created a whole new demand from people who want an easy way to buy physical silver.

TGR: Is it a new demand or does it cannibalize the equities?

RB: It definitely cannibalizes equities, so does the gold ETF. But I would rather have a higher silver price since that provides better cash generation and a more sustainable long-term business. They are both good ways to have exposure to silver. I was a big part of the establishment of the silver ETF and without a doubt that has profoundly contributed to the rise in silver prices.

TGR: Is that also true on the gold side?

RB: Not as much on the gold side. Silver is a much thinner market so a little bit of money on the silver side has a bigger impact than the same amount on the gold side. Gold is also held by central banks in significant amounts and that has its own impacts.

TGR: Pan American is selling for less today than it was a year ago when the price of silver was higher. What is causing the distortion?

RB: Forward-looking investors bought in the $10 range with the expectation that the price of silver would go up.

TGR: So today’s higher silver price was priced into the stock?

RB: Yes. Today a lot of people have taken money out of the equities because they fear perturbations in world economies that will drive down all metals.

The other factor is that Pan American had some unusual political exposure this year. For example, Peru. When Ollanta Humala was elected president, people thought he would be another Chavez and nationalize the mining industry, so they sold our stock. That didn’t happen, but the stock took a hit anyway. We also have an enormous asset in Argentina, but it needs some political changes before its value becomes apparent. These things weigh on our share price.

I am optimistic about the price going forward because these concerns haven’t been realized. We are taking advantage of the share price devaluation to buy back $150M of our stock. It is a great use of our capital. So, this market correction is a gift because it gives us a chance to increase the value-per-share for shareholders who want to keep their shares long term.

TGR: Are the same dynamics at play in copper?

RB: They call copper “Dr. Copper” because of its ability to reflect global economic conditions. In the last 50 years, it has had many cycles. The most recent bull trend is really driven by industrial demand from China. Copper is used in energy transmission, energy generation and, at the other end, all kinds of consumer goods. Cars use a huge amount of copper and electric cars use even more. Developing countries use an immense amount of copper to grow.

TGR: But if China experiences an economic slowdown, what does that do to copper demand?

RB: I have a different view of China. I don’t believe the enormous ship of China has turned course. It may have hit a few waves but it still has a long way to go to improve living conditions for its people. I don’t see growth stopping because there is a little bit more debt than it should have or it is acting a little bit more bellicose than it should. China will take its place as a world leader and remain an engine for economic growth.

TGR: Why aren’t stock prices reflecting Chinese demand?

RB: China has been the single most important factor in the metals bull market of the last nine years for fundamental reasons. The recent problems in the stock market haven’t been about China but because of the problems in the rest of the world. In early 2009, a lot of people were saying China’s run is over. That was the best investment opportunity in my lifetime. That was when you wanted to back up the truck because everything was so oversold. A lot of people said it was the end of the world, the end of the bull market. It turned out metal prices bounced right back and they have been like that for the last couple of years and are just slightly off that peak now. Copper is still at prices that most mining companies just love. I’m taking the view that this is a great opportunity to be a buyer. It’s the people who are contrarians and have the courage to buy when everyone else is selling who make the big money.

TGR: But this downturn is less about financial institutions collapsing than fears of a double recession. If “Dr. Copper” reflects economic growth, why are you still optimistic?

RB: I look at the whole world as a source of demand. Things are booming in Saudi Arabia, South America, India, parts of Asia. In all those places there is growth, which demands new infrastructure and that requires a lot of copper. Even though there is a slowdown in the U.S. and Europe, there is great growth elsewhere. Every day more people are born and more people want stuff. This is very supportive of long-term high prices. Nothing goes up forever in a straight line. Price corrections are absolutely normal and healthy.

TGR: Is this the same thing you are seeing in nickel?

RB: Nickel is less complicated. It has one use—stainless steel. You just have to look at demand for that and things look pretty good there. On the nickel supply side, it is changing radically. The cheap, easy-to-operate nickel mines are being mined out and being replaced by expensive-to-build and operate nickel mines. So you need high nickel prices to bring into production and sustain those mines. If nickel prices go down, those may be shut down, which will reduce supply and increase prices.

TGR: What is the magic number where nickel mining is no longer profitable?

RB: That might be $5–$6/pound on a global average, maybe more.

TGR: Lumina Copper Corp (LCC:TSX) and Anfield Nickel Corporation (ANF:TSX.V) are two metals companies you are involved in with an explore-and-sell business model. Mergers and acquisition activity has been off lately. Do you see that changing?

RB: I think there has been a lot of acquisition in the last year globally. A big deal was announced last week by a Chinese company for an African copper producer.

TGR: Is that the trend, that China will be the home of a lot of the acquirers?

RB: China has been the number one buyer for sure. It isn’t just limited to the Chinese companies, however. In the last cycle it was English, American and Canadian companies. Now it’s the developing countries: Indian and Korean companies are entering the space. They want to secure long-term metal supplies because they need them to secure supply for their manufacturing businesses. They are worried about buying on the open market and the prices going up, so they are taking action by buying assets in the ground. It also reduces their exposure to the U.S. dollar. I don’t see that changing anytime soon.

TGR: You said you are an optimist and the proof might be your dedication to renewable energy.

RB: I’m doing that as much for love as money. I think it is an important legacy for my children to wean ourselves from fossil fuels. Oil and gas are great for making a lot of things, but it is a terrible waste to burn them. Alterra Power Corp. (AXY:TSX) started up in 2008, went public in 2009 and already has $1.1 billion in assets, all generating clean power, profitably.

TGR: Your strategy has been to make it bigger. You started with geothermal and added wind and run of river. Will you keep growing it?

RB: Even though I am disappointed in the stock market reaction the last couple of years, I am proud of our execution of the business plan. We have a wonderful team of experts, adequate capital and we are building a large alternative energy company that is profitable and sustainable and will live way beyond my lifetime. This is based on development of energy sources that are free: wind, heat and water. You just have to hook them up to a turbine. This takes a lot of money, but once they get going, they run essentially forever at very low cost.

Alterra is already a medium-sized alternative power company that will survive and prosper for a long time. We are working on how much bigger we can get and with what technology: wind, water or geothermal. Do we want to grow organically or do we want to buy other businesses on an accretive basis? It has to be a winning proposition for everyone. This is the ultimate long-term business.

TGR: Long term and steady, but without big jumps in price.

RB: It’s the opposite extreme of mining where you have no control over your revenues. In this business, you fix the prices for the long term, 20–25 year contracts, so your revenues are steady and predictable. Banks love these long-term businesses. These are ultimately big dividend producers.

TGR: How long before it starts paying off?

RB: We are in a position to pay dividends today. But I think we can better reward our shareholders by growing. We might be there next year or sometime after that.

TGR: What are you most excited about?

RB: I am most excited about continuing to build Alterra Power into a bigger and better clean energy company. We can do this in any market, be it bear or bull. Bear markets aren’t all bad. It is often easier and cheaper to build things in tough markets when other companies are stressed. Slower markets usually also mean lower capital costs. But I also like bull markets; it’s always nice to see the share price go up.

I don’t know what is going to happen next week or next month, but if we keep our heads down and execute on our business plan, we will build value.

TGR: We are at the “When Money Dies” conference that says fiat currencies will die. Since you are so tied to U.S. dollars, do you believe that and how do you deal with that?

RB: I am involved in a natural hedge against dollar devaluation—metals mining. As currencies weaken, metals prices go up. It’s a good place to be today. And in alternative energy, once you have operating plants using wind, water or geothermal heat, you have long-term predictable revenues and no exposure to commodity prices. It’s another great place to be today.

TGR: But if the dollar weakens, don’t your operating costs go up as well?

RB: You have to hope that revenue increases faster than expenses and that is what has happened so far.

For the complete audio collection of the Casey Research/Sprott Inc. Summit “When the Money Dies,” click here.

Ross J. Beaty is a geologist and entrepreneur who currently serves as chairman and CEO of Alterra Power Corp. and Pan American Silver Corp. He also founded and divested a number of other public mineral resource companies. Born in Vancouver, Beaty has degrees from the Royal School of Mines, University of London, (M.Sc., Distinction in Mineral Exploration, 1975) and the University of British Columbia (LL.B. [Law] 1979 and B.Sc. [Honors Geology] 1974). Working in 50-plus different countries during the course of 37-plus years in the international minerals industry, he speaks English, French and Spanish, as well as some Russian, German and Italian.

Beaty is a past president of the Silver Institute in Washington, D.C., a fellow of the Geological Association of Canada and the Canadian Institute of Mining, recipient of the Institute’s Past President’s Memorial Medal, and a founder of the Pacific Mineral Museum in British Columbia. Beaty received the Association of Mineral Exploration of B.C.’s Colin Spence Award for excellence in global mineral exploration in 2007 and in 2008 the Mining Person of the Year award from the Mining Association of B.C. and the Ernst & Young, Natural Resources Entrepreneur of the Year award.



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