By Simon Grey, on February 17th, 2012
The American social fabric is now so depleted that even if manufacturing jobs miraculously came back we still would not be producing enough stable, skilled workers to fill them. It’s not enough just to have economic growth policies. The country also needs to rebuild orderly communities.
So now the theory is not that Americans won’t do these jobs, it’s that they can’t do these jobs because they’re so messed up. If only someone had thought to test this theory. Oh wait, someone did. Alabama decided to crack down on illegal immigrants and miraculously their unemployment rate went down. Funny how that works.
The larger issue with Brooks’ fallacy is that, in my opinion, he gets causality wrong. Communities don’t have unemployment because they’re disorderly; if anything, it’s high unemployment that begets disorderliness. If orderliness were the issue (and it presumably is, seeing as how Brooks is implying that foreign labor have more orderly communities), then you would expect productivity, not wages to be the deciding factor. But, for the most part, foreign labor competes primarily on price, not productivity. As such, the issue of community “orderliness” is quite irrelevant, and appears to be nothing more than a pretty lie that the pro-immigration crowd needs in order to feel good about making life more difficult for their fellow citizens.*
* On a tangentially related note, how come free traders and free laborers argue more fervently on behalf of foreign business and labor interests than domestic business and labor interests? Couldn’t they channel all the energy and righteous indignation into arguing for deregulation of domestic businesses and labor, which would benefit their fellow citizens?
By Claus Vistesen, on February 13th, 2012
I have been enjoying myself in the Austrian Alps last week and hence the lower output. Here is my look though, of a number of notable news stories and contributions.
Global Liquidity
Benoît Cœuré, Member of the Executive Board of the ECB has penned a speech (and argument) on global (excess) liquidity. Izabella likes it and I agree with her that it is a good piece. I am not sure though that it is that much different than the Savings Glut argument put forward by Bernanke, but I may be missing the fine print (i.e. need to read it more carefully). The biggest problem I have is that he assumes that the lack of safe government (i.e. AAA rated assets) is cyclical and due to market failure or other “temporary” factors. Izabella interprets it as follows,
What’s the solution to this vicious liquidity circle? Simple, says Cœuré. The euro area needs to regain its role as a global supplier of safe assets. Something which could be achieved by a) ensuring that Eurozone countries have become fiscally sound and b) diverting excess liquidity from other zones back into “programme countries” by way of the IMF.
I disagree. The failure of euro zone economies and indeed large parts of the OECD edifice in general to provide “safe haven” assets is deeply structural and tied to population ageing. Unfortunately, there is little prospect that the euro zone economies will be able to supply AAA rated securities for a long time and herin lies the rub. Of course, if we are talking euro bonds, but then again. I will believe it when I see it.
Japan and the currency wars
A recent Bloomberg article suggested that Japan has been “secretly” selling JPY to try to stem the tide and force through depreciation of the Yen.
Japan used so-called stealth intervention in November as the government sought to stem yen gains that hammered earnings at makers of exports ranging from cars to electronics.Finance Ministry data released today showed Japan conducted 1.02 trillion yen ($13.3 billion) worth of unannounced intervention during the first four days of November, after selling a record 8.07 trillion yen on Oct. 31, when the yen climbed to a post World War II high of 75.35 against the dollar. The currency’s strength has eroded profits at exporters such as Sharp Corp. and Honda Motor Co., just as faltering global growth undermines demand.
Open market operations to sell domestic currency are so old school. Didn’t they get the memo in Japan? In a world where all major central banks are either at or very close to the zero bound, it is central bank balance sheet expansion (quantitative easing) that matters. On this note, both Japan and the Fed are being left decisively behind by the ECB and BOE (at least in the past six months). Of course, even the usage of “standard” measures in Japan is being contested and as long as this is the case, the Yen will continue to strengthen.
Don’t bet on deflation with the current team of global central bankers
Elsewhere, I am wondering where all the deflation, let alone disinflation, is. I am a sworn deflationist and I believe in the main thesis of the deleveraging/depression/deflation crowd. However, I have the utmost respect for the inflationist bias of global central banks and with the current batch of policy makers at the helm, deflation is a very remote risk.
The latest data show that inflation in China recently quickened as well as producer prices in the UK increased in the week that the BOE announced another round of QE. Of course, this is not all clear cut. Chinese real M1 (YoY) recently moved into negative territory for the first time since 1996 and in the UK, it is noteworthy that core inflation (ex food, beverages, tobacco and petroleum) came in noticeably lower in January.
I will change my views on the basis of changing data, but I am beginning to think that the bout of global headline disinflation we are expecting as a result of the global slowdown will reverse itself much, much quicker than many (including me) have expected. Arguably, we still need decisive easing in emerging markets and QE3 from the Fed, but it is more a matter of when and not if this happens and as such, global central bankers remain fully committed to creating inflation.
The main problem so far for those arguing for strong central bank action (including me) is the absence of nominal growth in output in excess of consistently rising headline inflation. Could this be a result of doing too little, perhaps, but at the moment stagflation remains the best way to describe our current economic situation and thus inflation in all forms is a drag on growth. Should the genie finally come out of the bottle in the form of consistent wage increases central bankers may find that they got more than they bargained for even if the alternative is equally painful.
The Greek experiment is about to end
Greece remains the main talking point and also the only thing that appears to prevent equity markets ripping to new highs. Greece is bankrupt and while I understand that the patience of the rescue committee will run out at some point, I am astounded that anyone expects this hideous experiment to end well. Greece will see its fifth year of contraction this year and for what? A membership of a currency union that does not work anyway?
We are told by the Troika, the EU and the IMF that failure to reach a deal would be catastrophic and thus that Greece has no way out but to take the medicine. However, Greece has a real choice and the stronger she is pushed the more obvious the end result is. Internal devaluation and decades of austerity don’t work; not in Greece and not elsewhere. This remains the KEY issue that the euro area politicians and the ECB have not understood. The social fabrics of society won’t stand the pressure and strain. Textbooks tell us that the cure is simple when you can’t devalue, but practical experience have now shown otherwise.
I am neither on the Greeks’ nor the IMF/Troika’s side, but I simply point out the obvious destiny of current events; failure! Even if Greece manages to appease its creditors with austerity, the end result in terms of Greek macroeconomic balances is still unsustainable and thus the underlying problems will not have been solved.
The ECB and the IMF will likely face significant drawdowns on their Greek bondholdings regardless of whether they use such drawdowns as ”carrot” for Greece to push through austerity measures. This is what the establishment has not yet understood.
MF Global investigation fails to uncover illegal activity?
Megan McArdle has an amazing article suggesting that the investigation on the failure of MF Global is finding it difficult to uncover anything illegal.
Megan quotes a piece from Reuters (no link available)
Lawyers and people familiar with the MF Global investigation of the firm that was run by former Goldman Sachs head Jon Corzine say that even though the hunt is still on to find out whether or not officials at MF Global intended to pilfer customer money in a desperate bid to keep the brokerage from failing, the trail at this point is growing cold.
This seems very odd to me even if I have not followed the aftermath in detail. I completely agree with the sentiment expressed by Megan.
I don’t understand how this could be true. To be clear, I am not saying that it couldn’t be true-only that I don’t understand how such a thing could have happened. There is more than a billion dollars missing from supposedly segregated client accounts. I understand that it was chaotic, but what kind of chaos causes you to accidentally move money out of money that any moderately sophisticated compliance system should have automatically flagged for approval?
While my professional responsibilities are confined to the smooth running of a macro research product I sit in an office, and work, with asset managers and ever since the failure of MF global I would imagine that their general level of concern has increased. This is understandable. If your main counterparty as an asset manager (i.e. your prime broker) essentially decides to steal your deposits and/or allocate them to losing trades against the principle of segregated accounts, it really does not matter what you do. No matter the tightness of the shop run on the asset managers’ end, he will face significant and perhaps even fatal losses.
Obviously counterparty risk is as old as finance itself and any decent asset manager today will deal with more than one broker and even have a strategy on how to manage counterparty risk. Ultimately though, mutual trust between asset managers and their prime brokers is a commodity which has been severely impaired by the MF Global failure and this is an issue for all players in financial markets.
Dealing with vintage data in economic forecasts using instrument variables (wonkish!)
A recent note from the George Washington University points to an interesting study from Warwick University on the forecasting of data vintages in the context of US output and inflation forecasts. The problem is as follows;
Consider a simple benchmark autoregressive model that a forecaster might use to forecast an economic variable yt. In order to estimate the parameters to be used for the forecast, typically the forecaster will obtain the most recently updated data on yt (i.e. the vintage of yt available at that time) and estimate the model using those data. However, the data in this single time series may in fact be coming from different data generating processes. The data some time back in the series have gone through monthly revisions, annual revisions, and perhaps several benchmark revisions. The most recent data, however, have been only “lightly revised,” as Clements and Galvão term it. Therefore, Clements and Galvão argue that the data in a single vintage are of“different maturities.” Forecasters may want to forecast future revisions to data as well as exploit any forecast ability of data revisions to improve forecasts of future observations. In their article, Clements and Galvão suggest that a multiple-vintage vector autoregressive model (VAR) is a useful approach for forecasters working with data subject torevisions. This comment discusses the importance of taking revisions into consideration and compares the multiple-vintage VAR approach of Clements and Galvão to a state-space approach.
This is a significant issue but remember; if the following holds, we need not worry too much about it.
If the revisions are unpredictable and the early data are efficient estimates of future data, then we may not need to be concerned about the different vintages.
Most economists assume that the statement above is true and simply force through their model. Being a great believer in practical usability when it comes to empirical economics, I would argue that in most cases this will not cause too many problems in most cases. However, a growing body of evidence suggest two important issues to consider. Firstly, revisions are predictable and thus provide important ex-ante information which should be incorporated into the the forecast. Secondly, even if revisions are unpredictable, the manner in which data is revised may itself provide important information on future data readings.
I agree, but the problem is potentially much more severe. Another issue then concerns that situation where you try to forecast Y(t) as a function of X(t) where both variables may be subject to revisions. Normally, we would solve this issue by restricting X(t) to variables where revisions are minimal (or absent alltogether). One way to do this is to use market based data (market prices, closing values of securities etc) which are, by definition, not revised. However, in the context of the e.g the classical leading indicators framework pioneered by Geoffrey H Moore, this issue re-emerges X(t) is cast in the form of real economic variables (themselves potentially subject to revision).
We have replicated and refined many of the LEIs described by Moore et al and applied it to various economic data series with specific fitting of a time series regression in each case. However, such an approach may still suffer from vintage data issues (as described above. One solution that I been thinking about is to imagine two forms of right hand variables. X(t, economic) and X(t, market based); if the latter is unrevised it might be possible to find an instrument for X(t, economic) (final revision!) using a variation of X(t, market based). This would, in my opinion, constitute an elegant way to solve the issue of data revisions in your explanatory variables.
In practice, you could also try to replace Y(t, economic) with Y(t, market based), but this is probably too a-theoretical and ad-hoc.
By The Gold Report, on February 6th, 2012
 Economics and politics. Accretion and repletion. Mergers and acquisitions. Joe Mazumdar, senior mining analyst with Haywood Securities, sees all of these as catalysts for a rebound in the junior gold space in 2012. In this exclusive Gold Report interview, he reveals the names of companies he expects to take off.
The Gold Report: What is the consensus among Haywood analysts on what 2012 will bring for mine commodities, particularly precious metals?
Joe Mazumdar: Last year, risk aversion was a common market theme. In 2012, some of the same global economic concerns, such as the ongoing Eurozone crisis and the future of the euro, will continue to draw attention. But we also believe there is potential for positive economic indicators, primarily from the U.S., where there have been upticks in manufacturing and GDP growth. Also, unemployment in the U.S. is down to 8.5%, generating some consumer confidence. Recently, GDP growth for Q411 came in at 2.8%, which was slower than consensus forecasts—3%—but still the strongest in over a year.
Political factors will play a role in 2012. There could be a change in leadership among four of the five permanent members of the U.N. Security Council. The presidential election will be a key focus of the U.S. and global market. There are also presidential elections in Russia, France and Mexico. There also may be a changing of the guard in China in the latter part of 2012. The potential for changes in leadership in these key nations will generate a bid to market volatility in 2012.
Beyond gold and silver, our preferred commodity sectors include copper, iron ore and coal. Gold continues to be adversely affected by its own volatility, which continues to tarnish its reputation as a safe-haven asset. We note that during 2011, U.S. Treasury securities, the most liquid safe-haven asset, was a preferred recipient of capital investment, providing a ~10% return, its highest annual return since 2008 when it was 14%.
TGR: Will the strengthening American economy have an adverse effect on the gold price?
JM: Yes, the gold price quoted in U.S. dollars will be hindered by any U.S. dollar strength based on economic growth and increasing consumer confidence. In the current environment, gold, quoted in U.S. dollars, is still holding up well at price levels over $1,700/ounce (oz).
We note that the Federal Reserve said recently that it remains concerned about the “vigor” of U.S. economic growth and pledged to maintain low interest rates until at least 2014. The latter is a positive for gold prices.
In the medium to long term, increasing confidence levels in U.S. economic growth we believe will drive higher capital investments domestically and potentially raise inflation expectations, which would be a positive for gold.
TGR: What about silver and copper?
JM: We see copper on the brink of a rebound in 2012. The London Metals Exchange inventories are at low levels and Chinese imports of refined copper accelerated in the latter part of 2011. Copper is covered by Stefan Ioannou/Kerry Smith of Haywood Securities and they highlight a structural tightness in the copper market as supply growth remains constrained while a portion of future production growth resides in higher geopolitical risk jurisdictions. They note that the GFMS has estimated a deficit of 372 Kt copper in 2011 and forecast yet another deficit for 2012, 101 Kt.
Chris Thompson covers the silver sector for Haywood Securities and has commented that despite the growth in investment demand over the past five years, silver is still very much an industrial metal. Volatility, he believes, will be underpinned by potential contradictory moves by those who see silver as an industrial metal and others who seek it as an investment asset.
TGR: Did the junior mining sector hit bottom in 2011?
JM: Within the current cycle, I think it has hit bottom. For me, the question remains: What are the catalysts that will move individual stocks up within the sector?
For a number of the majors, growth has been increasingly difficult to achieve given the higher amounts of reserves they must replete on an annual basis. Companies such as Newmont Mining Corp. (NEM:NYSE) have been offering higher and more levered dividend payout structures to attract investors.
In 2012, we see the potential for more merger and acquisition (M&A) activity, specifically in the junior to intermediate sector, given the plethora of small-cap stories in the gold sector. Producers have performed better with respect to their paper in 2011, compared to development stocks, and boast healthier balance sheets. M&A activity will be driven not only by a desire for growth but also motivated by financing risk to capture any synergistic opportunities such as sharing infrastructure and the potential to merge critical skill sets. There is a paucity of people who can bring projects into production and operate them. Merging structures and management is very important right now in the junior and intermediate sector. Without it, a lot of these companies with development assets may continue to struggle.
TGR: Do you expect the Kinross Gold Corp. (K:TSX; KGC:NYSE, Not Rated) write-down to have an adverse effect on M&A?
JM: Large projects that are required to move the needle in the growth strategy of a large gold producer have a scale and scope that naturally expose them to significant execution risk. So, in a nutshell, escalating capital costs for projects of this magnitude are nothing new.
The M&A opportunities I refer to are at a scale that would be accretive to a junior to intermediate company from a growth perspective and offer opportunities to capture synergistic value. From a valuation perspective, many companies with development stage assets are trading well below their underlying asset valuations. M&A activity allows also for some consolidation in the junior sector given the plethora of small-cap gold plays.
TGR: Did you make any adjustments to your investment thesis following the dip in precious metals equities late in 2011?
JM: In our top picks, which we put out on Jan. 9, we focused on producers generating cash flow and developers with permitted or on a clear path-to-permitted projects in low geopolitical risk jurisdictions.
One pick was Midas Gold Corp. (MAX:TSX, Not Rated), whose flagship asset, the Golden Meadows project, hosts a global resource of 5.8 million ounce (Moz) in the Yellow Pine Stibnite area on a large land package (11,600 hectares) in west-central Idaho, a re-emerging gold district. The company is working toward an updated gold resource estimate before the end of Q112, leading to a preliminary economic assessment (PEA) by Q312.
TGR: Can you give us another name on your list?
JM: Yes, Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.A, Sector Outperform, CA$3.25 Target Price). It has the Spring Valley gold project, an intrusive-hosted gold deposit with a global resource, we estimate at over 5 Moz, in a district close to Lovelock, Nevada, where Barrick Gold Corp. (ABX:TSX; ABX:NYSE, Sector Outperform, CA$61 Target Price), is earning in up to 70% by 2013 by cumulatively spending US$38M.
From a metallurgic perspective, the gold is free, not occluded in pyrite and potentially amenable to be economically extracted via a heap-leach process. Barrick, the joint-venture operator, is currently drilling the edges of the deposit to find out how big it could be. This means the near-term news flow will be linked to drilling results and less about a resource update in 2012.
Midway has a portfolio of projects that it is capable of bringing on-line. Its Pan project, a low strip open-pit, heap-leach gold project in Nevada, has submitted a completed bankable feasibility study and a plan of operations. Its Gold Rock project, only 8 kilometers from Pan, is in an earlier stage where we anticipate a resource by Q112 with additional drilling in Q2–Q312, leading to another resource update by Q412 and a PEA by 2013. Additionally, Midway is working a low-sulphidation, high-grade gold project in the Tonopah District.
Midway has a portfolio of projects and is assembling a team to build and operate them. Its COO, Ken Brunk, formerly with Newmont and Romarco, is very familiar with the permitting process and developing/operating projects in Nevada. I believe the company can manage this project pipeline of financeable projects in the low geopolitical risk jurisdiction of Nevada.
TGR: Your target price for Midway is $3.25, up $0.25 from your last report. With that many projects in the development stage, it seems that Midway would be a prime takeover target, especially given its joint venture with Barrick.
JM: Barrick is looking at a number of projects in Nevada, some of which are billion-dollar-plus projects that would add significant ounces to its production profile including Spring Valley, Goldstrike and an expansion at Turquoise Ridge. I believe that Spring Valley may be a target for Barrick going forward as it has potential to contain a +5 Moz global resource and lies in Nevada where Barrick has a significant infrastructure and asset base.
However, the other components of the company’s portfolio, which include smaller open-pit, heap-leach projects, such as Pan and Gold Rock, that could potentially produce between 70–90 thousand ounces (Koz)/year, would not move the needle for most majors. These smaller projects do generate cash flow and are more readily financeable by a company the size of Midway. They could also be attractive to an intermediate operating group looking at accretive transactions with junior developers.
TGR: You cover Orvana Minerals Corp. (ORV:TSX, Sector Outperform, CA$2.25 Target Price), which is in production at its Don Mario mine in Bolivia and its El Valle-Boinás/Carlés (EVBC) mine in Spain. From June to October 2011, gold grades there increased incrementally from 1.4 to 2.17 grams per tonne (g/t). Nevertheless, Orvana’s throughput at EVBC is below your forecast. Results at Don Mario in Bolivia also were below estimates. Is this a make-or-break year for Orvana?
JM: It is a critical year for the company. Bill Williams, formerly Orvana’s vice president of corporate development, is now the CEO. He is an ex-Phelps Dodge vice president and has been instrumental in generating the revised technical reports on both operations, EVBC and Don Mario Upper Mineralized Zone (UMZ), while advancing the Copperwood project. We believe his appointment reflects the company’s focus on getting the operations back on track.
Orvana is currently in the process of re-benchmarking both EVBC and Don Mario UMZ. For Don Mario—an open-pit mine with an upper mineralized zone containing a lot of copper, as well as gold and silver—Orvana has delivered a new life-of-mine forecast that addresses the difficulty of getting copper out using a leach precipitation flotation circuit on a much bigger scale than has been used before. The Don Mario operation also has been troubled by high costs of reagents for the circuit, which has raised the processing costs.
We had originally forecast an annual production profile of 10–15 Koz per year of gold and 10–15 million pounds (Mlb) of copper. We are now looking at a production profile of 9–10 Mlb copper and 8–9 Koz of gold, whereas Orvana is still signaling 13 Mlb of copper and 12 Koz of gold. In Q411, the Don Mario UMZ operation produced 2.5 Mlb of copper and 2.3 Koz of gold, which is a positive. Now, it has to consistently achieve its new benchmarks over the next few quarters so the market can gain confidence in its operational abilities.
At Orvana’s flagship, the EVBC gold-copper project in northwest Spain, the operational issues have been related to head grades. Underground bottlenecks have hindered the company’s ability to blend higher grade feed to the processing plant. We anticipate that a shaft will be in place by April/May 2012, which should alleviate some of the bottlenecks. We had originally forecast that the feed grade, at steady state levels, would be in the area of 5 g/t. However, revised guidance indicated that it would be lower, 3–3.5 g/t gold, which also conspired to lower our target. We anticipate a revised technical report for EVBC prior to March 2012 with updated life-of-mine forecasts.
Orvana’s Copperwood project in upper Michigan is a 50 Mlb/year copper project, now in bankable feasibility study, and Orvana is seeking to permit this year. Even with up to 800 Mlb of copper reserves, we believe that the Copperwood asset is not being valued at its current price levels as Orvana has been heavily discounted in the market due to poor operational performance.
TGR: Given the lower recoveries and production estimates at Don Mario UMZ released in late January, you lowered your target price by $0.15 to $2.25. Yet you still give it a sector outperform rating. Why?
JM: Due to the heavy market discounting related to disappointing results from both operations over the past few quarters, Orvana still provides about a 100% return to our target from where it is trading right now. I continue to believe that management can redeem themselves by achieving the revised benchmarks consistently over the next few quarters. As Orvana meets its goals, I believe the market will appreciate the cash flow being generated, worry less about its working capital position and give the company credit for its advancement of the Copperwood project.
TGR: Prodigy Gold Inc. (PDG:TSX.V, Sector Outperform, CA$1.20 Target Price) recently published an updated PEA on its flagship Magino gold project in northern Ontario. Your model for Prodigy, using the updated PEA, projects a 20,000-ton/day operation, producing 222 Koz of gold per year over 13 years at total cash cost of roughly $775/oz. That would generate annual earnings before interest, taxes, depreciation and amortization margin of more than 50%. Yet, your target price of $1.20 is only about 40% above where Prodigy is trading. Why so conservative?
JM: Given that gold indices provided a negative return in 2011 ranging from 13% to 20%, I think that a positive 40% return to target is probably not conservative in the current market environment. With respect to the valuation, I have adjusted for the technical and execution risk of the study level (PEA) and the fact that I have modeled a larger mineable resource base than that used in the December 2011 PEA. As a company derisks the project from PEA to a feasibility study, I revise the multiples applied to the asset valuation.
Prodigy is planning a significant drill program of 60,000m in 2012 to infill/upgrade and expand the resource base while condemning areas for locating site facilities. We also anticipate an updated resource by Q312 leading to a feasibility study by Q412.
TGR: Do you expect a takeover offer for Prodigy?
JM: I try not to work off the takeover model because it is highly uncertain but focus on the underlying valuation. While I do believe that the Magino asset would be a good takeover candidate for an intermediate, I think that there are opportunities for consolidation and capturing some synergies with Richmont Mines Inc. (RIC:TSX; RIC:NYSE.A), which has an underground operation that abuts Prodigy’s land package. Consolidation would probably be a good idea, given that Prodigy could have underground targets within the same host rocks as Richmont, which has a fully permitted and functional process plant.
TGR: In your last interview with The Gold Report, you talked about Revolution Resources Corp. (RV:TSX; RVRCF:OTCQX, Not Rated). You said it was looking for analogs of Romarco Minerals Inc.’s (R:TSX, Not Rated) Haile Deposit in the Carolina Slate Belt. What’s happening with Revolution now?
JM: Revolution still occupies a significant land package of 7,500 acres along a 25-kilometer corridor within the Carolina Slate Belt at its Champion Hills Gold project in North Carolina. It drilled 19,150m in 2011 and is working on a resource estimate in 2012. Currently, gold equity plays exploring in the Carolina Slate Belt are strongly tied to news flow from Romarco’s multimillion-ounce Haile gold development project in South Carolina and its ability to permit it. In an effort to diversify its portfolio, Revolution acquired a significant land package (~400,000 hectares) in two prospective regions in Mexico from Lake Shore Gold (LSG:TSX, Sector Outperform, CA$3.50 Target Price) in 2011. These assets host high-level low-sulphidation epithermal, gold and silver mineralization and we anticipate news flow from drilling results by Q1–Q212. The company wanted to present the market with multiple catalysts from a diversified asset base and this project has allowed it to achieve that goal.
TGR: In late December 2011, Eldorado Gold Corp. (ELD:TSX; EGO:NYSE, Sector Outperform, CA$19.00 Target Price), made a takeover bid for European Goldfields Ltd. (EGU:TSX; EGU:AIM), which has gold exploration and development properties in Greece, Turkey and Romania. Last year, you discussed Carpathian Gold Inc. (CPN:TSX, Sector Outperform, CA$0.90 Target Price) and its Rovina Valley copper-gold-porphyry project, which contains about 10.7 Moz gold equivalent in Romania’s Golden Quadrilateral. Does the proposed European Goldfields takeover make Carpathian Gold more attractive to larger suitors?
JM: Barrick’s private placement in August 2011 into Carpathian to fund additional drilling at Rovina Valley already speaks to the attractiveness of these gold rich porphyry systems to larger suitors. Mining activity in Romania is heavily linked to news flow on the permitting activities at Rosia Montana operated by Gabriel Resources Ltd. (GBU:TSX, Not Rated).
Eldorado Gold’s proposed takeover bid for European Goldfields does put in a bid for assets in Europe, however, the majority of European Goldfields’ assets are located in Greece (Olympias/Skouries) and less so in Romania (Certej). For me, the takeover trigger was related to the receipt of permits to develop its Greek projects in July 2011. Permitting of those projects took an extended period of time. A positive permitting environment in Europe bodes well for Carpathian at Rovina Valley and it will benefit from any positive news flow from Gabriel. The risks include royalty increases and potential free carried interest that the government wants to negotiate.
TGR: Royalties are going from 4% to 8%. That certainly is not positive, but to get those revenues the government has to permit the mines.
JM: Herein lies the rub. On Jan. 3, we lowered our target by $0.10 on Carpathian to $0.90 to accommodate an increase in the gold and copper royalties to 8% at Rovina Valley. However, on the positive side, by defining the mining royalty rates and the tax structure and negotiating a free carried interest, the Romanian government has shown its desire to have these companies invest in these projects and generate the revenue streams within a restructured rent-sharing framework. We note that the local government is also looking to privatize some state-owned mining assets to raise revenue.
TGR: What do analysts, investors and companies need to look out for in terms of geopolitical risk?
JM: I would highlight countries—emerging or developed—that are in economic dire straits with prospective geology whose mining sector is underdeveloped and has untested mining laws and poor infrastructure. Geopolitical risk carries a few facets including outright expropriation to creeping nationalism, which is linked inextricably to a company’s ability to develop/permit the project. These countries will continue to seek foreign direct investment to explore/develop these assets. Outright expropriation is difficult in countries where there is no mining history and a paucity of critical skill sets locally, unless of course it is looking to sell the asset to another bidder. Alternatively, the country may alter its mining laws to increase its share of resource rents derived from the exploitation of these assets. We have observed higher rent sharing globally via increased royalty payments, higher taxes and/or the introduction of windfall tax structures in countries such as Peru, Argentina and Romania, to name a few.
Assets in higher geopolitical risk jurisdictions must provide the investor a high return and quick payback commensurate with the elevated risk profile. Note that assets within higher geopolitical risk jurisdictions may be more difficult to finance and there may be a limit on potential takeover suitors, depending on their risk appetite. To properly risk adjust and quantify these uncertainties remains a challenge.
TGR: Is that because it is not going away?
JM: Let’s not forget that mining is a great way to get an injection of direct investment into an economy and generate employment. For example, high rates of unemployment in developed countries such as the U.S. and European countries are driving mining activity in places where permits have historically been difficult to attain.
TGR: Joe, thank you for your time and your insights.
Joe Mazumdar is a senior mining analyst with Haywood Securities in Vancouver. Previously, he served as director of strategic planning at Newmont Mining and was the senior market analyst for Phelps Dodge. He has held a variety of geologist positions with other mining companies including RTZ, MIM, North and IAMGold working in South America, Australia and Canada, rounding out ~20 years industry experience. He holds a Bachelor of Science in geology from the University of Alberta, Canada, a Master of Science in exploration and mining from James Cook University, Australia, and a Master of Science in mineral economics from the Colorado School of Mines, U.S.
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By Simon Grey, on February 1st, 2012
To be honest, this sounds like a lot of pious baloney. As Michael Beckley points out in a new article in International Security, “The United States is not in decline; in fact, it is now wealthier, more innovative, and more militarily powerful compared to China than it was in 1991.”
Yep, and the Roman Empire saw continuous growth right up until it declined. A trend line is not a guarantee of future performance, as anyone with half a brain knows. Yet this clown somehow thinks that this particular trend line will continue on its path. The best way to predict the economic future is to look at fundamentals of the economy (e.g. legal system, regulatory system, tax policy, etc.) and see what effect the current policies and practices will have on the future. Of course, this is significantly more difficult than identifying a trend line and extrapolating (probably because fundamental analysis requires thinking whereas trend analysis requires Excel and rudimentary data entry skills, which many trained monkeys are capable of performing), which is why most mainstream economists never bother with it.
The rest can be found here.
By Eldon Mast, on January 31st, 2012
I happened across this article today and wish I could claim that I wrote it. Here is the opening…
Sen. Marco Rubio (R) of Florida delivered his party’s weekly address on Saturday morning, and made a provocative claim about President Obama.
“The bottom line is this president inherited a country with serious problems,” Rubio said. “He asked the Congress to give him the stimulus and Obamacare to fix it. The Democrats in Congress gave it to him. And not only did it not work, it made everything worse.”
What a crock!
So have a look at the full article here and see the Rubio claim debunked soundly.
Not only has the U.S. economy grown for the last 10 quarters, but the workforce has ADDED jobs for the last 22 months straight.
Can we do better? Sure. Did Obama policies make things worse?
I don’t think so!
By Simon Grey, on January 17th, 2012
Time and again, Americans are told to look to Japan as a warning of what the country might become if the right path is not followed, although there is intense disagreement about what that path might be. Here, for instance, is how the CNN analyst David Gergen has described Japan: “It’s now a very demoralized country and it has really been set back.”
But that presentation of Japan is a myth. By many measures, the Japanese economy has done very well during the so-called lost decades, which started with a stock market crash in January 1990. By some of the most important measures, it has done a lot better than the United States.
Japan has succeeded in delivering an increasingly affluent lifestyle to its people despite the financial crash. In the fullness of time, it is likely that this era will be viewed as an outstanding success story.
How can the reality and the image be so different? And can the United States learn from Japan’s experience?
It is true that Japanese housing prices have never returned to the ludicrous highs they briefly touched in the wild final stage of the boom. Neither has the Tokyo stock market.
When the talking heads speak of a decline, what they really mean is a loss of stock portfolio value. Or, more accurately, a decline in the prices of stocks, bonds, real estate, and other forms of capital. The wealthy abhor this potentiality because it would effectively destroy their wealth. While this concern isn’t altogether problematic (why shouldn’t they be self-interested, just like everyone else in the world?), the proposed solutions are.
Preventing “decline” is largely contingent on keeping capital prices afloat, which is itself contingent on leverage (which, it should be noticed, will be subsidized by taxpayers in some way), debt, and/or inflation. This is the only way. Capital asset prices are already significantly overvalued; the only way to keep it this way is to continue the policies that enabled this in the first place.
The only alternative is to let capital asset prices crash and then recover. This is the optimal strategy, in the sense of doing what’s best for the most people, for this strategy only requires non-intervention in the economy, which is unsurprisingly cheaper than intervention and bailouts. The reason why the talking heads never propose this is because the timeline for recovery is fuzzy at best.
Quite simply, once the market crashes and capital prices return to their pre-malinvestment valuations, it will be some time before those prices go back up again. This poses a problem to the wealthy employers of the talking heads, for said employers have spent their lifetime accumulating this imaginary wealth and, now that they are beginning to look at retiring, they do not want to see it simply vanish.
Therefore, the mainstream argument against decline—which is prevented only by bailouts and leverage—is entirely founded on the assumption that maintaining capital asset prices is desirable. Given the costs of doing so, and given that the result only benefit wealthy crooks, it seems clear that the best course of action is to welcome decline with open arms. This way, as is seen in Japan, living well will not simply be the privilege of the wealthy.
By The Energy Report, on January 6th, 2012
 Clean balance sheets, cash flow visibility and trading liquidity in oily stocks are the cornerstones of investment success in junior E&Ps, according to Oil and Gas Analyst Tim Murray of Desjardins Securities. In this exclusive interview with The Energy Report, Murray lays out his risk/reward proposition for his very favorite names.
The Energy Report: Tim, what is your investment thesis right now?
Tim Murray: It hasn’t changed since the last time we talked. We are biased towards oil plays. But we will look at selective natural gas players and we prefer the lowest-cost producers as well as the companies with a larger production base.
TER: Are you currently telling investors that they need to be patient?
TM: Yes. Most of the small/micro cap stories have seen a dramatic drop in share price over the last year; however, WTI (West Texas Intermediate) is hovering around $100/barrel (/bbl), and oil companies should be able to generate strong cash flow at these levels. The market has gone quieter on the smaller-cap companies as investors traditionally flock to larger, more liquid names in times of uncertainty. Once we see more general stability in the global market place we expect money to once again flow back into small/micro cap names.
TER: So, how does a micro-cap company get out of a hole like this? If its market cap has been knocked down so dramatically that the stock becomes hard for mutual funds to own, what must happen to get out of that situation?
TM: It usually comes down to market sentiment changing. Money managers will eventually start looking at the small caps again because those companies offer significant potential gains in a portfolio. You don’t buy small caps or micro caps for 20% returns; you buy them for 80% or 90% returns. Small cap names may currently be light in many portfolios, however we believe market participants will return to these names once general global market stability is demonstrated. The other option is to become an active acquirer in order to grow in size, however this can be a challenging goal for many small caps that have depressed valuations, unless you can purchase another small cap in the same situation.
TER: Do institutional E&P investors tend to think in terms of value, or are they looking for growth names?
TM: I think most institutional E&P investors are still looking for growth prospects. However, many of the small cap names are trading cheaply on a cash flow basis, so these growth stories can also be viewed as value plays. Most institutions are choosing companies with better balance sheets that don’t have to go to the market to raise money to move their drill programs forward. Companies that can show good visible organic growth from cash flow for the next two to three years seem to attract more attention. Institutions also seem to be most interested in liquid stocks.
TER: Gasoline prices in some regions have declined to the sub-$3/gal range, and this is right in front of a big holiday. Are we looking at continued weakness now in commodity oil?
TM: I don’t think so. We do like the commodity and prefer it to natural gas right now. As for natural gas, we are bearish in the short/medium term, and I don’t see any meaningful near-term catalyst to change that. We don’t see $50/bbl oil in the near term and we are thinking that anywhere between the $80–100/bbl bandwidth is a realistic range for WTI to trade over the next 12 months.
TER: What catalysts are needed to turn energy stocks around?
TM: Well, some equities have done well this year, and so it’s hard to paint a broad stroke across the board. We believe once general market stability has returned that market participants will return to the small/micro cap space. Looking more to a company-specific level, management teams that continue to deliver results will see stock prices that outperform their peers.
TER: When could we see some upward movement?
TM: There is lots of news flow operationally for the names I cover in January and February, so positive drilling results should help push individual stocks higher. On the commodity front it’s really hard to project what’s going to unfold in the next month and we prefer to look out over the next 12 months and believe a realistic trading level is between $80–100.
TER: What names are you talking to investors about today?
TM: The ones I’m talking about the most have strong management teams, good balance sheets, liquidity and visible cash-flow growth. My favorite name is Whitecap Resources Inc. (WCP:TSX.V), which has all those characteristics. Whitecap is run by Grant Fagerheim, who has led several other successful junior oil and gas companies. We believe Whitecap has a top-tier management team. This is the biggest company that I follow in terms of production and reserves, and it also has the best liquidity. It has a visible light oil growth profile for the next several years, offers a top-tier cash netback and a low relative corporate decline, which we believe positions them very well. We also like that Grant has traditionally been an active M&A player, which we think leads itself well to the current environment as we have mentioned previously many small/micro caps trade fairly cheap.
TER: What’s the story here? Is it about the Pembina Cardium and Valhalla Montney?
TM: Yes, and it is acquiring Compass Petroleum (CPO:TSX.V), which will give the company another core area targeting the Viking in the Dodsland region of Saskatchewan. So, it now has a fourth core oil area.
TER: Your target price was $11. Have you upped that?
TM: Yes, it’s $12.25 now.
TER: That represents 40% upside potential from here.
TM: Yes, and the upside may seem light for a small cap, however it carries considerably less risk than some of the other companies I cover. For instance, I have a target of $1.25 on Torquay Oil Corp. (TOC.A:TSX.V; TOC.B:TSX.V), which would be a much greater return, but there’s a lot more inherent risk in a Torquay then there is with Whitecap. So, on a risk/return basis, Whitecap is currently my top pick.
TER: You took Torquay down from a $2- to a $1.25-target, which is still better than a 200% implied return from current levels. What’s your investment thesis on the company?
TM: A larger portion of my $1.25 target hinges on the company’s key core property at Lake Alma. The company is basically trading at my base net asset value (NAV), which is essentially all the company’s other properties. Torquay has discovered oil at Lake Alma; however, it has not been extracted economically to date. Torquay’s management team believes they do have a viable play and that they can extract the oil economically. However, Torquay is not big enough in size to fund a meaningful drilling program from cash flow, and the company is going to have to go to the market to raise money if they would like to get aggressive again with Lake Alma. The large drop in share price and its marginal success at Lake Alma over the last 18 months could make raising money challenging. That’s why on paper it looks like a no-brainer to invest in because of the huge potential return, but there’s a lot of risk associated with the company from a market perspective (raising capital) and exploration risk at Lake Alma. If Torquay can’t succeed at Lake Alma, then I would have to remove the Lake Alma upside of approximately $0.75/share.
TER: Who is currently buying the stock? Is it the hedge fund community?
TM: Since November and December, Torquay has had relatively huge trading volume. Some investors picked it up in the $0.25–0.30 range because they thought it was so cheap that they couldn’t go wrong as it was trading below its base NAV. So they basically got exposure to Lake Alma for free. It’s hard to say who’s playing in this story right now. Some hedge funds may be looking to add this classic high-risk/high-reward play to their portfolios.
TER: What other companies do you like?
TM: It is not my top pick, but one of my other favorite names is Spartan Oil Corp. (STO:TSX). I think of it as a mini lookalike of Whitecap, however smaller in size. Spartan’s core property is located at East Pembina targeting the Cardium formation. Management is very familiar with the Cardium as its predecessor company showed terrific growth drilling the Cardium horizontally. The key asset for Spartan is the Keystone unit #2, which is a legacy oil pool that has been drilled vertically. Spartan believes it can substantially increase the recovery factors through the application of horizontal drilling. The #2 unit has never had a horizontal well drilled into the pool and Spartan has drilled three to date, and we’re waiting on results from these wells. Spartan also has a couple of exploratory plays in Saskatchewan, which is the torque in this story. Further positive drilling results could lead to another core area. We also would like to point out that the balance sheet is very strong and Spartan could announce a very aggressive 2012 capital program.
TER: This is the best-behaved stock in your universe. It’s had its head above water for an entire year.
TM: Right.
TER: Is your target still $4.75?
TM: My target is higher than that. It’s $5.25 now. Whitecap and Spartan are my two favorite names right now. I like both their balance sheets. I believe Whitecap can show organic growth in the 20% neighborhood from cash flow over the next several years, and Spartan should be able to demonstrate similar numbers over the next 12–18 months because its balance sheet is very strong.
TER: Tim, you follow Strategic Oil & Gas Ltd. (SOG:TSX). I saw that it had recently negotiated a $40M bought-equity deal. When a company can avoid the risk of going to the market by selling its equity directly to the investment banks, it sounds like a very positive development.
TM: I definitely agree with that as Strategic will have a very strong balance sheet entering 2012, which will allow it to have an aggressive 2012 drilling program. Strategic has two oil plays that are both very early stage and quite high risk. We can see growth prospects for the next 12–18 months if either one of the oil plays is deemed commercial. On a comparable basis, Strategic’s assets are much higher risk than Whitecap’s or Spartan’s. This stock could perform very well with good drilling results or very poorly with bad drilling results.
TER: I enjoyed speaking with you very much. Thank you.
TM: Cheers. Thank you.
Tim Murray joined Desjardins Securities in July 2011. Prior to this, he was an oil and gas analyst for almost six years at several investment boutiques covering junior and mid-cap companies. He also spent over a year at AltaGas Income Trust performing risk and credit analysis on natural gas and power assets for the company’s midstream business and served as an investment advisor for three years. Tim was awarded the CFA designation in 2003.
By Ajay Shah, on January 5th, 2012
The PISA 2009+ results are the end of the beginning. For the last decade there has been a debate. Some argued the levels of learning inside Indian elementary schools (primary and upper primary) are a national scandal and a threat to the future of India’s society, polity, and economy. Others appeared to believe that the main, if not only, problem with Indian schools was that not enough children attend them and that with more money and more of the same, all would be well. The last five years saw a relentless accumulation of evidence about the crisis of learning. The establishment has tried to deny, deflect, and dismiss the evidence on learning. Eventually the Government of India agreed to participate in the PISA (Programme for International Student Assessment) – but only for two states, Tamil Nadu and Himachal Pradesh – and both sides agreed PISA was the litmus test. The PISA 2009+ results, which are both official and are beyond gain-saying are unspeakably bad. They confirm the worst of what anyone has been saying about the levels of learning in India elementary education.
- In reading of the 74 regions participating in PISA 2009 or 2009+ these two states beat out only Kyrgyzstan.
- In mathematics of the 74 regions participating the two states finished again, second and third to last, again beating only Kyrgyzstan.
- In science the results were even worse, Himachal Pradesh came in dead last, behind Kyrgyzstan, while Tamil Nadu inched ahead to finish 72nd of 74.
But just coming in last (if we can dismiss as a relevant comparator for India a tiny Central Asian state) does not convey the enormity of how bad these results were, as not only was India last, it was far, far, behind its aspirations, both at the bottom and at the top levels of performance.
PISA expresses the levels of performance in two ways, an overall index number and the fraction of students achieving various “levels” of achievement. The PISA index numbers for each subject are scaled so that the typical OECD student is at 500 and the standard deviation across OECD students is 100. The testing of thousands of students allows the results to present not only the average but also the worst (5th percentile) and best (95th percentile) students do in each country/region. PISA also classifies student performance into “levels” that represent different degrees of mastery of the material.
Table 1 compares India’s performance to three groups of countries. The economic superstars have successfully completed the transition from poor to rich economies in just two generations – Singapore, Hong Kong, Korea (China’s only results are just for the city of Shanghai, which are the highest scores of any region tested, but this is too a typical to really be comparable) and India aspires to their sustained success economically. The current super powers are represented by the USA and the OECD average reflects India’s aspirations as a superpower. The rising powers are represented by the BRIC countries of Russia and Brazil which reflect the rise of the emerging markets.
Compared to the economic superstars India is almost unfathomably far behind. The TN/HP average 15 year old is over 200 points behind. If a typical grade gain is 40 points a year Indian eighth graders are at the level of Korea third graders in their mathematics mastery. In fact the average TN/HP child is 40 to 50 points behind the worst students in the economic superstars. Equally worrisome is that the best performers in TN/HP – the top 5 percent who India will need in science and technology to complete globally – were almost 100 points behind the average child in Singapore and 83 points behind the average Korean – and a staggering 250 points behind the best in the best.
As the current superpowers are behind the East Asian economic superstars in learning performance the distance to India is not quite as far, but still the average TN/HP child is right at the level of the worst OECD or American students (only 1.5 or 7.5 points ahead). Indians often deride America’s schools but the average child placed in an American school would be among the weakest students. Indians might have believed, with President Obama, that American schools were under threat from India but the best TN/HP students are 24 points behind the average American 15 year old.
Even among other “developing” nations that make up the BRICs India lags – from Russia by almost as much as the USA and only for Brazil, which like the rest of Latin America is infamous for lagging education performance does India even come close – and then not even that close.
To put these results in perspective, in the USA there has been huge and continuous concern that has caused seismic shifts in the discourse about education driven, in part, by the fact that the USA is lagging the economic superstars like Korea. But the average US 15 year old is 59 points behind Koreans. TN/HP students are 41.5 points behind Brazil, and twice as far behind Russia (123.5 points) as the US is Korea, and almost four times further behind Singapore (217.5 vs 59) that the US is behind Korea. Yet so far this disastrous performance has yet to occasion a ripple in the education establishment.
| Table 1: Comparing Indian (Tamil Nadu and Himachal Pradesh) students mastery of mathematics to economic superstars, current superpowers, and rising superpowers |
| Country/Region |
5th |
mean |
95th |
HP+TN average to comparator average |
HP+TN average to comparator 5th percentile |
HP+TN best (95th) to comparator’s average |
HP+TN best (95th) to comparator’s 95th |
| Points TN/HP is behind (-)/ahead(+) |
| Economic Superstars |
| Singapore |
383 |
562 |
725 |
-217.5 |
-38.5 |
-99 |
-262 |
| Hong Kong |
390 |
555 |
703 |
-210.5 |
-45.5 |
-92 |
-240 |
| Korea |
397 |
546 |
689 |
-201.5 |
-52.5 |
-83 |
-226 |
| Current Superpower |
| OECD avg. |
343 |
496 |
643 |
-151.5 |
1.5 |
-33 |
-180 |
| USA |
337 |
487 |
637 |
-142.5 |
7.5 |
-24 |
-174 |
| Rising Superpowers |
| Russia |
329 |
468 |
609 |
-123.5 |
15.5 |
-5 |
-146 |
| Brazil |
261 |
386 |
531 |
-41.5 |
83.5 |
77 |
-68 |
| Indian States |
| Tamil Nadu |
241 |
351 |
468 |
| Himachal Pradesh |
223 |
338 |
458 |
| Average of TN and HP |
232 |
344.5 |
463 |
| Source: PISA 2009 Plus Results, Table B.3.1 for first three columns and author’s calculations. |
I have emphasised Mathematics because many believed math was an Indian strong suit. The results for reading and science are similarly bad. Table 2 shows science results in a different format, which shows the proportion of children in various categories of performance. There are three points:
- “Below level 1″ doesn’t even have a description as it implies that so little proficiency is demonstrated it is impossible to
distinguish from not knowing anything at all. In the USA, even with its socio-economic and racial inequalities and language inequalities and its failing inner city schools, only 4.2 percent are in this category. In HP 57.9 percent of 15 year olds in school cannot be distinguished from not having learned any science at all and in TN 43.6 percent all in this category – ten times as many as the USA.
- PISA considers “level 2″ as the minimum level that provides the science competencies that will enable them to participate actively in life situations related to science and technology. Since more than 80 percent of students in both HP and TN
are level 1 or below this most students in these states have reached age 15 ill-equipped for the century they will face.
- While a thin elite that competes for the few highly selective technical institutes are globally competitive, this is a tiny fraction of the population. The estimate of the fraction of TN or HP students at level 6 in science proficiency was zero. Their estimate of the fraction at level 5: also zero. Of course this does not mean there are not such students in these states, of course there are, just that from the samples available in the study the best estimate was so small as to be indistinguishable from zero.
Table 2: Comparison of science proficiency in Tamil Nadu
and Himachal Pradesh to India’s aspirations |
| Country/Region |
Below level 1 |
Level 1 1 |
Level 5 5 |
Level 6 6 |
| Singapore |
2.8 |
8.7 |
15.3 |
4.6 |
| Hong Kong |
1.4 |
5.2 |
14.2 |
2 |
| Korea |
1.1 |
5.2 |
10.5 |
1.1 |
| OECD avg. |
5 |
13 |
7.4 |
1.2 |
| USA |
4.2 |
13.9 |
7.9 |
1.3 |
| Russia |
5.5 |
16.5 |
3.9 |
0.4 |
| Brazil |
19.7 |
34.5 |
0.6 |
0 |
| Tamil Nadu |
43.6 |
40.9 |
0a |
0a |
| Himachal Pradesh |
57.9 |
30.9 |
0a |
0a |
| Source: PISA 2009 Plus Results. Description of levels Table 3.2, percentages Table B.3.4.
1) At Level 1, students have such a limited scientific knowledge that it can only be applied to a few, familiar situations. They can present scientific explanations that are obvious and follow explicitly from given evidence.
5) At Level 5, students can identify the scientific components of many complex life situations, apply both scientific concepts and knowledge about science to these situations, and can compare, select and evaluate appropriate scientific evidence for responding to life situations. Students at this level can use well-developed inquiry abilities, link knowledge appropriately and bring critical insights to situations. They can construct explanations based on evidence and arguments based on their critical analysis.
6) At Level 6, students can consistently identify, explain and apply scientific knowledge and knowledge about science in a variety of complex life situations. They can link different information sources and explanations and use evidence from those sources to justify decisions. They clearly and consistently demonstrate advanced scientific thinking and reasoning, and they demonstrate willingness to use their scientific understanding in support of solutions to unfamiliar scientific and technological situations. Students at this level can use scientific knowledge and develop arguments in support of recommendations and decisions that centre on personal, social or global situations.
a) In Table B.3.4 these are reported as blank but the estimated percentages in below 1 to level 4 sum to exactly 100 percent. Obviously this not imply that there are exactly zero students in all of these two states meeting these levels but that with the sample sizes assess students of 1616 in HP and 3210 in TN there was insufficient information to create a non-zero estimate. |
These results on PISA 2009+, while tragic for what they imply for Indian youth and perhaps shocking to newcomers to this subject, come as no surprise to those who have been working on basic education in India:
- Das and Zajonc (2008) used results from Orissa and Rajasthan to create indices on mathematics performance similar to those of TIMSS (Trends in Mathematics and Science Study) and found these states near the bottom of the global rankings.
- Educational Initiatives carried out an 18 state study using sophisticated testing instruments and found levels of performance on TIMSS comparable items that were stunningly lower. For instance on the open ended question “Write a fraction larger than 2/7″ less than 30 percent of Indian students in standard 8 could answer correctly compared to more than 70 percent internationally.
- The APRest study led by Karthik Muralidharan and Venkatesh Sundararaman in rural AP asked the same questions of students in grades 2 to 5 and found very slow rates of learning progress.
- The results year after year from the ASER [2010 2009] study supported by Pratham find that significant fractions of students in Standard 8 cannot master even Standard 2 curricular basics. In rural areas nationwide a third of children in grade 8 could not do a simple division problem and almost 20 percent could not read a level 2 text. The 2011 results, due out in a few weeks will show continued stagnation or even retrogress in learning.
- Numerous studies by MIT’s JPAL, World Bank, NCAER/University of Maryland and other researchers found levels of performance that were shockingly low compared to curricular expectations.
These PISA 2009+ results are the end of the beginning. The debate is over. No one can still deny there is a deep crisis in the ability of the existing education system to produce child learning. India’s education system is undermining India’s legitimate aspirations to be at the global forefront as a prosperous economy, as a global great power, as an emulated polity, and as a fair and just society. As the beginning ends, the question now is: what is to be done?
 
By The Gold Report, on January 2nd, 2012
  China has become the $5.88 trillion question in the world financial equation for 2012. In an attempt to gauge the direction of this economic elephant, Cambridge House International is asking two China experts to debate the health of the second-largest economy at the Vancouver Resource Investment Conference January 22. We called the two speakers for a preview of the tactics they will take in this epic debate.
Frank Holmes, chief executive and chief investment officer at U.S. Global Investors, will focus on the upside of massive Chinese modernization and growth. He is the recipient of both Mining Fund Manager of the Year Award from Mining Journal and International Citizen of the Year Award from the World Affairs Council of America and has a long-term investor’s view of international geopolitics.
Author and Commentator Gordon Chang literally wrote the book on why investors should be wary of China’s growth. His book The Coming Collapse of China has attracted attention from the likes of the LA Times and Asia Times and many other publications in between. He has made appearances on Fox News and regularly contributes to Business Insider, Barron’s, National Review and Forbes magazines. When he lived and worked in China and Hong Kong for almost two decades, most recently in Shanghai as counsel to the American law firm Paul Weiss, he saw the ghost cities and environmental challenges up close.
“The debate is a direct response to attendees who need to know if China is on a course to grow, slow or blow,” said Nicole Evans, president of the Cambridge House International Conference Division. The Gold Report called these two experts to find out the numbers behind why they have such different predictions about how this enigmatic country will fare in the coming years.
Frank Holmes: This veteran investment advisor based his positive prognosis for China and its Eastern neighbors on a combination of tacit knowledge learned firsthand through travel and observation of geopolitical conditions along with explicit knowledge of history and the markets.
He studies S-curve patterns, modeled on economist Simon Kuznets’ 20-year long cycles. For example, the world’s population has grown from 1 billion in the 1800s to 7 billion today, which has drastically affected commodity consumption and infrastructure buildout. “Nowhere is this more evident than in the emerging markets, such as China,” Holmes said.
“When governments have invested in infrastructure, there has been a powerful impact on gross domestic product (GDP) numbers.” For example, he pointed to the 1950s, when Eisenhower signed the Federal Aid Highway Act, allowing commerce to expand across the nation, with restaurants including Dairy Queen and McDonald’s experiencing tremendous growth over the next several decades. “Paved roads from coast to coast helped sustain a more than tenfold increase in U.S. GDP,” Holmes said.
“Whereas the U.S. connected 160 million people with nearly 47,000 miles of freeways, by 2020 China will connect 700 million people across 250 cities, spanning more than 47,000 miles of interstate and 18,000 miles of rail,” Holmes explained.
Holmes estimated that over the next 25 years, about $41 trillion will be spent on global infrastructure—$6 trillion has been approved for the 2011 through 2013 timeframe with China projected to spend half of that $6 trillion. He believes these investments will result in rising GDP per capita and trigger a consumption economy.
“Once China connects its super cities, it will enable more Chinese to travel around the country, resulting in a completely different consumption pattern. You will see train stations with 50-story condominiums along with U.S. restaurants that have already been expanding in China, including McDonald’s, Dairy Queen and Starbucks. Major hotel chains, such as Wyndham, Starwood and Hilton, along with luxury goods businesses including Cartier, Hermes and Gucci will compete for market share. Infrastructure will change the face of the economy in China just the way it did in the U.S.,” said Holmes.
“We are big believers that government policies are precursors to change, so our investment team continuously tracks the fiscal and monetary policies of the world’s largest countries in terms of economic stature and population. The G-7 (industrialized) countries are 15% of the world’s population but 50% of the world’s GDP and growing only about 1%. Western countries seem to be focused on cutting back infrastructure spending and raising taxes to pay for entitlements. At the same time, E-7 (emerging) countries comprise 50% of the world’s population with 20% of the world’s GDP. However, these countries are growing at 7% to 8% and include a rising middle class of some 60 million people out of a total 2.2 billion people. But, 60 million people making $30,000 a year is very significant. Think about the movie “Slumdog Millionaire”—this is what is happening throughout Asia. That is why companies such as Gap and GM and KFC are focusing on expanding in China where its residents love American products and pack the stores in Beijing.”
Holmes also saw important policy changes in the works that could improve China’s economic outlook. “Over the past 10 years, we have seen a slow migration of more property rights being given to people in China. The largest transfer of real estate in the history of mankind took place in China seven years ago when more than $500 billion of real estate value was basically transferred to farmers. That was followed by condo building. Additionally, to attract public companies, Shanghai adopted the Hong Kong Stock Exchange listing and bankruptcy systems, which are based on common law. This is significant because if you look at all the countries that have had financial problems over time, no common law system has ever gone bankrupt. Civil law has. China is slowly adopting a rule of law system.”
Not all of the changes have been smooth. “One of the biggest things that China has been wrestling with is the fear of inflation,” Holmes said. “The government raised the minimum wage and that resulted in a big spike in food inflation. Then it had to deal with real estate inflation in Shanghai and the cities along the ocean. It required banks to keep more reserves, up to 20% in some cases, to avoid the problems now occurring in European banks. A tax on speculative real estate slowed the economy and it showed up in the psychology of the stock market.
“The spike is slowly reversing and rates are falling. Because there is so much less borrowing generally in China than in the rest of the world, prices rebound much faster,” Holmes said. “Only 25% of homes have mortgages so the impact of bankruptcies is much smaller. Also, I don’t think they’re going to print money the way they did in 2008. The Chinese government will move slowly to make sure the country doesn’t get hurt by Europe’s slowdown.”
Based on money supply, debt levels and the weakness of the dollar, Holmes predicted economic activity in the emerging countries should double over the next five years. “It is going to be between 8% and 9% this year and it has another 10 years of growth ahead of it,” Holmes said. “Investors need to understand volatility and not be fearful of it. If you are trading futures where your leverage is 10 to 1 and you have a big correction, you can get wiped out. But, if you are a cash business, you understand when these markets go through these corrections. Solid companies paying dividends can be an attractive investment over the long term.”
Gordon Chang: This China-watcher recently wrote an article for Forbes that said what others considered positive November trade numbers—exports up 13.8%, imports up 22.1% year-over-year—was actually an indication of flat consumer demand once the commodities were factored out. His conclusion was that the government was taking advantage of low prices to stockpile things like soybeans, copper and iron ore while domestic demand remained stagnant. “Since September, we have seen essentially flatlining growth,” he said.
“The growth over the last three decades has been absolutely stunning, but that was then, and this is now,” Chang cautioned. “After 35 years of virtually uninterrupted growth, the Chinese economy hit an inflection point, probably in September of this year. I think we are going to see a long-term cycle down. There are a number of reasons for it, some of them short term, some of them long term. The reasons that created this growth either no longer exist or are disappearing fast. Deng Xiaoping’s policy of reform paired with the end of the Cold War and expansion of globalization triggered growth in the 1980s. However, under current leader Hu Jintao, China has seen the reversal of reform, with the government partially renationalizing the economy. Today, we are in the second part of a global downturn, which will be much worse than what started in 2008. A trade-dependent economy like China’s is going to have real problems. Additionally, China was aided by the demographic dividend, an extraordinary bulge in the Chinese workforce, which by most estimates will level off between 2013 and 2016, leaving a demographic tax where one worker supports two parents and four grandparents.”
Chang pointed to stagnant electricity consumption, flat car sales, plunging industrial orders and collapsing property prices. “For example, in October, we saw property prices collapse 30% in places like Shanghai and Beijing, and actually across the country. That has to eventually trigger a negative wealth effect.
“Domestic growth is vital for a sustainable economy,” Chang said. “Last year, domestic consumption comprised less than 34% of Chinese GDP and it has been dropping in recent years. That means China is not restructuring its economy because the problems go to the core of the political model. The government would have to let the Renminbi float, allow banks to offer market rates of interest to depositors and state enterprises, allow workers to bargain collectively to get higher wages and provide a better social safety net, especially in the health care area. These are things that Beijing didn’t do a half-decade ago when it was growing at 9.9% and they’re certainly not going to do so now in a very difficult environment.”
On the manufacturing side, Chang referred to the December HSBC/Purchasing Managers’ Index (PMI). “It showed an absolute, outright falloff in industrial orders domestically. I think that is a really important indication of the problems,” Chang explained. Technically, the Chinese economy went from expansion in October to contraction in November when it crossed the critical 50 line. Any number above 50 shows expansion; any number below 50 shows contraction.
The fact that China is reporting negative numbers is telling in itself, according to Chang, who said often government-issued statistics conflict with reports from other sources. Beijing reported 13.8% export growth in November. However, during that same period factories went bankrupt, factory owners fled because they couldn’t pay their debts and some of them took their own lives. Even more damning are container and freight statistics, including reports from mega-container shipper Cathay Pacific that showed November cargo shipments down 13.8%. “Exports to Europe have fallen off the cliff and the EU was China’s largest trading partner so something doesn’t add up,” he said.
For the final blow, Chang pointed to the actions of the Chinese government. “If China really does have robust, 8–9% growth as everybody says, why is the central government starting to stimulate the economy again? That just doesn’t make any sense. If we look at things like imports and exports, I think the economy is really in trouble.”
Chang warned of political consequences if the country is not growing at least close to a double-digit rate. “I don’t know if China can stand 3% growth—or the other very real possibility, contraction. The American government bases its legitimacy on the nature of its political system. The legitimacy of the Communist Party is primarily based on the continual delivery of prosperity. Already, the number of protests in China has increased dramatically from maybe 70,000 mass incidents a year in 2005, to as many as 280,000 last year. In addition to strikes, riots, insurrections and bombings, the standoff between villagers and the authorities in Guangdong province are threatening the future of the Communist Party.”
One solution is for the Chinese government to continue to spend millions on infrastructure to create growth as it did when it spent $1.1 trillion after the 2008 downturn. “This tactic is of limited usefulness the second time around,” Chang warned. “It may be able to play out the game for 18 months, maybe two years at the outside, but it’s pretty much done. Plus, the artificial stimulus also created a stock market bubble, inflation, ghost cities, banking weakness and property bubbles. Massive spending didn’t avoid problems, it just postponed them and made them bigger and more difficult to solve.”
Chang said that people in China are starting to see the reality of the problem. “There is a sense of pessimism. Starting in October, we saw large, unexplained transfers of money out of the country.”
The bright spot, according to Chang, is that while China will not be able to fuel a global recovery with a consumer-driven middle class, a Chinese meltdown won’t be a major blow to the U.S. either. “We have the world’s largest internal market; 70% of our GDP relates to consumption. Exports don’t really play that much of a role in the U.S. as it does in other major economies. So China can fall off the cliff in a sense, and it would have some negative effect but not very much. In fact, we might benefit from it.”
Chang’s conclusion? “People say the Chinese economy is the global engine of growth, but that’s not true. The engine has been the American consumer because we are taking every other country’s exports, and the Chinese, through predatory and mercantilist policies, have been grabbing growth from other countries. For the last 200 years, China has been a potential source of customers for other countries. Still, domestic demand isn’t that significant. China’s imports lately have been commodities and that is going to fall off because China’s exports of manufactured goods, to Europe and the U.S., are going to be stagnant or lower than they have been in the past. So China really reacts to the rest of the world. If the changes over the next couple of months are as dramatic as they’ve been for the past two, then we’re going to be looking at a very different China. The Chinese economy could fall into a big black hole with 1–2% growth or even contraction. Can the government turn it around as it has in the past? That’s the money question.”
Frank Holmes is CEO and chief investment officer at U.S. Global Investors Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. In 2006 Mining Journal, a leading publication for the global resources industry, chose Holmes as mining fund manager of the year. Holmes co-authored The Goldwatcher: Demystifying Gold Investing (2008). A regular contributor to investor-education websites and speaker at investment conferences, he writes articles for investment-focused publications and appears on television as a business commentator.
Gordon G. Chang is the author of Nuclear Showdown: North Korea Takes On the World. His first book is The Coming Collapse of China. He is a columnist at Forbes.com and The Daily and blogs at World Affairs Journal. He lived and worked in China and Hong Kong for almost two decades, most recently in Shanghai, as counsel to the American law firm Paul Weiss and earlier in Hong Kong as partner in the international law firm Baker & McKenzie. His writings on China and North Korea have appeared in The New York Times, The Wall Street Journal, the Far Eastern Economic Review, the International Herald Tribune, Commentary, The Weekly Standard, National Review, and Barron’s. He has given briefings at the National Intelligence Council, the Central Intelligence Agency, the State Department and the Pentagon. Chang has appeared before the House Committee on Foreign Affairs and the U.S.-China Economic and Security Review Commission. He has appeared on CNN, Fox News Channel, Fox Business Network, CNBC, MSNBC, PBS, the BBC, and Bloomberg Television. He has appeared on The Daily Show with Jon Stewart.
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By Doug Gentry, on December 30th, 2011
Was it Popeye’s friend, Wimpy, who kept asking for a hamburger on credit? Today’s credit markets are anything but robust, with reduced demand and supply for borrowed funds. Always eager to find obscure terms for modern dilemmas, economists refer to this condition as a liquidity trap. With a little prodding from Facebook friend and neighbor, Patrick, we’ll give the concept a once over.
Jumping to the conclusion (and resisting the academic approach of a slow, careful warm-up) there is bad news and good news about liquidity traps. The bad news is that they make it difficult for the Federal Reserve to execute monetary policy. Creating 100s of billions of dollars has a muted impact on our economic recovery. The good news is that the liquidity trap dampens the significant inflation we might expect with the creation of all that money.
OK, back to the beginning. During times of slow or no growth and high unemployment the Federal Reserve can create/inject money, largely by increasing reserves that banks have in their accounts with the Fed. They can do this by buying U.S. treasury bonds on the open market, or even by buying troubled/toxic assets from banks. This increase in the supply of money allows interest rates to fall, which in term spurs demand for more consumption and investment. This is classic monetary policy. With mild downturns this is often enough to increase growth and kick start the economy. For the most recent 2007-2009 recession the Fed took these actions, a number of times in a number of ways, and those actions were not sufficient. Now the target short term interest rate – the Fed Funds rate – is essentially at zero. The Fed can’t lower the interest rates any further. Here’s a graph of the Fed Funds rate since 1980. The big peak at the beginning of the graph was the result of aggressive Fed action to contain inflation. Now, though, the rate has sunk to the very floor.
 Fed Funds Rate – St. Louis FRED database One thing that is happening is that while reserves are building up in our financial system, the banks are holding on to them rather than increasing their lending. Some argue that the banks are using the added funds to improve their balance sheets, which were hurt by the dramatic loss in value of securitized mortgages and other derivative assets, and to build up enough cash to pay executive bonuses. The banks argue that demand for credit by qualified borrowers is low. I don’t put much credence in the latter explanation. One apt analogy for this situation is that the Fed is trying to push on the end of a string, in order to get the economy going.
There is another layer to the liquidity trap concept, and that has to do with the buying public’s (people and business) expectation for inflation. The theory goes that if buyers expect inflation in the future, they will increase buying now. They expect the value of their cash or savings to go down during inflationary times, so they seek to use it now, while its value is still high. This works with traditional monetary policy where an injection of money would be expected to increase inflationary pressures.
On the other hand if purchasers believe that inflation will be controlled, then there is less pressure to buy now. That’s what is happening now. Despite what some politicians suggest, inflation is not right around the corner, and buyers are in no hurry to convert their cash into goods. We see evidence of this with the continuing low interest rates on U.S. bonds. Expectations of high inflation would push those interest rates up. Low inflation expectations, even in the face of increasing money supply is another symptom of a liquidity trap.
This scenario played out, to grim effect, in Japan in the 1990s, as their central bank poured money into the banking system and no one responded. Their “lost decade” was one of almost zero growth.
This paper by a New York Federal Reserve staff economist explains things in more detail, complete with impenetrable equations.
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