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Any opinions expressed here at Seeking Alpha by me are strictly my own personal views and ideas and should not be considered advice of any kind nor considered to be professional opinions. You should always seek advice from a qualified professional before embarking on any market trading or investing.
  • Gold, Euro And Political Risk

    Jim Sinclair has recently asserted that Gold is not at risk ofconfiscation. I disagree and will explain why in the following post.

    Sinclair is overlooking the fact that the purpose of Gold is to give essential meaning to a currency. Central Banks have taken a keen interest in the metal in the past few years for its virtues as a settlement mechanism and its use in assuring the legitimacy of their respective sovereign currencies.

    This is precisely what makes it a target for confiscation.

    With no gold-backing whatsoever the exercise of printing money for trade is near to pointless with so much risk currently in play and this is particularly so for nations without alternative reserves of wealth to support the money it offers abroad. Lets keep in mind that most Western countries have continued to carry gold on their books despite the fact the gold standard was eliminated.

    Now why would they have bothered to do that?

    This is not the case for every Western nation of course. Canada for example has virtually no Gold holdings whatsoever however this problem is overcome as that country is well endowed with both oil and agricultural production for export. These indirectly serve the purpose of Central Banks needs for holding collateral against any potential default risk to other nations.

    Lets also recall that the purpose of Gold in the past was to facilitate trade between nations. In the absence of any other mechanism or product to exchange gold has served the purpose of payment to satisfy creditors. The alternative of course is the direct exchange of food, industrial commodities, energy or specialized services.

    In more modern times however fiat currencies have substituted for gold as the fluid to make the system work but as we are seeing cracks appear in exchange mechanisms a new interest in Gold has arisen. A country that can meet the capital needs of the market where trade is concerned by supplying alternative resources that are in demand does not need Gold as backing nor its collateral for external purchases and imports. In this case fiat suffices and it is accepted on face based on a nations resource strengths.

    Gold (or Gold backing) merely makes the exchanges simpler and more transparent.

    Fiat in this case is more than adequate where a nation is not questioned regarding its solvency. The US itself is well endowed in the worlds most essential and demanded resources which include energy, food and minerals. All these it has available for export. In the case of Corn and Soy it may be the global leader. Its currency is thus not in doubt despite heavy indebtedness in the same way we question European solvency.

    The point though is that balancing trade between nations is of much greater significance than how a country exchanges goods and services within its borders. The currency issue is one of international relationships and as gold is borderless it is where Central Banks will turn to insure those trade relationships carry on without regard to risk while proving it can collateralize its currency for trade.

    As a medium of settlement there are few simpler alternatives than Gold but it is not the only choice as I have already noted above.

    So when we also consider that other Central Banks around the world are now bolstering gold stocks against a backdrop of widespread currency devaluations then it should be clear to even the children in the room that moves are afoot to stabilize trading relationships and reduce currency risk while also insuring transaction liquidity is sufficient in a worst case scenario.

    A worst case situation would be the collapse of the European Union and the possible dissolution of the Euro with the concomitant risk of multiple sovereign defaults and bond failures. This is not just a possibility in the minds of some economists but an inevitability although I seriously doubt the Euro is truly at risk.

    So how do you protect yourself against such a scenario at a time when social discord may overrule current political dictates? Let us not forget the ballot box and how it may bring less cooperative elements to the forefront as a disenfranchised electorate chooses those with more radical solutions to our collective problems.

    The world is clearly becoming more discordant as job losses mount and living standards decline during this period of deleveraging (particularly in Europe) and this presents stability risks on both a Sovereign and global level. Witness the rise of Neo-Nazi parties in Greece, separatist movements in Spain and anti-Euro groups in the Northern countries as just a few examples of more divergent political movements in Europe that present hazards to the current group of policy makers and leaders.

    Any prudent Central Bank would naturally look to Gold under these circumstances as a backstop against potentially serious fiat losses (in a default scenario) and as a means of providing insurance in preserving the viability of its banking system while protecting the real gains their country may have achieved through past trade activities. Indeed, we are seeing exactly this scenario unfold much to the delight of many in the Gold investing community who perceive CB buying as a primary impetus behind future price rises in the yellow metal.

    Let me assure you though that what lies at the heart of this exercise is not greater price volatility but rather price stability in metals versus currencies. Investors should bear in mind that we will likely never see the more extreme valuations that some people have proposed as discipline is gradually brought back to our money production processes. We are now discovering again what value is where a currency is concerned and as regards resource strength I have few doubts about the sanctity of the Dollar as a global reserve currency.

    How deeply it may yet fall is another question but there is now a widespread acknowledgement that we may be reaching the end of the thin branch that permits nearly unlimited printing to resolve the shortfall in genuine economic activity. The resolution to the dilemma will likely come about as inflation pressure mounts and velocity bounces off its historical lows. It is then that some of the excess liquidity must be withdrawn. No doubt Gold prices in US Dollar terms will benefit in the meantime but a price point of 5 or 10 thousand dollars per ounce is just preposterous and probably spells the end of the currency in our lifetime were it to occur.

    As Basel III seeks to make Gold tier one we cannot help but note this suggests moves are afoot to reduce unpredictability and volatility in Gold's price movements which is actually contrary to the thinking in the Gold community that seeks speculative gains.

    And so it is this money, (that which is earned abroad that I discussed above) that has come through exports and the honest efforts of its citizens which needs protecting as opposed to the internally generated transactions and cash accounts. Internal transactions in a country are much less relevant than external trade where the issue of Gold-backing is concerned.

    Do we not measure our success versus other counties in terms of our relative trade in goods and services? If the cash reserves we hold in our balance of trade accounts in another nations currencies are being devalued sharply are we not at risk of loss?

    Lets keep in mind we need to pay our bills to others as well. Will they continue to accept our word that we are good for the invoice or should we not be showing evidence of solvency via a backing mechanism whether it be oil, corn or metals? Gold as a first order is proof to others that we can collateralize and meet our obligations when necessary.

    From this perspective it becomes easier to understand why China, Russia, Brazil, Mexico and many others are in the process of bolstering gold holdings. This is no casual event. Billions upon billions are being spent by the various nations on an object with no intrinsic use. Now why would they be doing that? Furthermore, why would they be doing so in such numbers and volumes? Part of the answer of course is that gold makes up for deficiencies in other areas of their respective economies although that is really a topic for another day.

    It should be clear though that Gold has been the object of serious interest to some Central Banks for a number of years now and that this interest is growing as global currency uncertainties evolve. At some point though there will not be adequate sources of supply for all Central Banks with a desire to accumulate and this is where the rubber hits the road.

    Confiscation is all but assured on this basis although where it happens first is unclear. It is worth considering that the price of Gold will subsequently become mutually managed by the collective will of our banking community for the good of preserving and stabilizing trade exchange and value between nations.

    The unfortunate use of the word "confiscation" is a misnomer in my opinion and it has been over used by those who fear government with an eye to accumulating reserves. Simple trading bans and offers to purchase from private holders are sufficient to achieve the goal of acquisition without causing alarm. This is not a forced move but an offer to exchange where no other reasonable offers exist. I also believe we are evolving towards a hybrid system of currency valuation and that all the major players including China will play a role in the development of this new regime. Gold has a keystone position in the new hierarchy and so it will not be overlooked.

    Take note though that these activities we are witnessing where Central Bank acquisitions are concerned are quite outside the needs of the individual who pursues Gold for personal or speculative purposes and therefore the collective needs of the global community of nations will take precedence over the private desire of individuals. Put more simply, Gold is heading back to the vaults of nations and its use in private transactions will therefore be diminished.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: Euro
    Jan 17 6:35 AM | Link | 7 Comments
  • Roberts Rules...Not Robber Barons.

    Every once in awhile we need to stand back from the smoke and the action of the day and attempt to really see the forest from the trees. Recent events in Africa and the Middle East now demand closer scrutiny and it is important that we do not lose sight of the real game that is unfolding.


    In blunt terms, one thing I do see is that we are now witnessing the e
    arly stages of the break-up of monopoly interests in the autocratic and dictator led nations of this region.


    For too long now, too few have controlled too much. This is affront to the citizens of those countries in turmoil. It has also resulted in a political environment that has engendered exclusivity amongst the few elites which has prevented business competition which normally flourish in open markets. This has in turn suppressed what might otherwise be more natural development and social growth in those nations. 


    Citizens there are finally demanding a greater role in participation of the growth in their economies and becoming partners in the success of their nations. Outside investors too, are naturally seeing the probability of business expansion improve as old regimes are swept aside. Local entrepreneurs
    which have always existed in large numbers will be emboldened to seek to carve out profitable niches for themselves without contending with corrupt off the books demands for money from bureaucrats and police. Times are changing quickly and there are vast opportunities that now present themselves as the people and their economies will soon be on the rise.


    There are strong hints of the blooming growth potential and first amongst these is the incredible demand we have witnessed for open access to shared media, cell phones and the internet. Millions of the poor in this region of the world are now connected. In many cases, the only real asset they own is a mobile phone. They are, as a result, all too aware of how life is being experienced everywhere else in the world too.


    In a time when millions of people in Africa and the Middle East are subsisting on the most meagre of incomes ranging from as little as a dollar or two daily is it any wonder they are angry at their leaders? Would you not be resentful too in this media enriched world to see others basking in easy wealth while your own pocket held only pennies or be angered while a tiny cadre of your own people jet-set around the world?


    Collectively, the Arab countries have become sick of watching as the rest of the world live in relative luxury while they starve at the sidelines. They want in on the action, to be full participants in the global economy and to take a greater share of the resources. Quite simply, they want the monopoly interests of the dictators, Kings and Sheiks to be divided more equally.


    What we are witnessing is nothing less that the unionization of the classes from all walks of life who are demanding that their basic interests be fairly represented, as they stand in unison against the tyranny of the few while shouting “enough is enough“. 


    But what does it really mean to the West when millions across the region all simultaneously demand a better deal? Should we feel threatened? Is this really an Islamic horde on the march as some media suggest? Is a new terror on the horizon? OK everyone,
    lets get a grip. None of your worst fears are going to materialize here. We should in fact be embracing the dramatic changes now underway in this hot region of the world.  We do not see balaclava draped lunatics with machetes and AK47’s attempting to storm their capitals while shouting anti-capitalist slogans. Instead there were scenes in Tahrir Square of mothers with their children in tow demanding better wages, an end to bread shortages and an opportunity to speak out freely against the governments that have held them in suppression for decades.


    As many others have already noted, do the current unfolding events in the Mid East not also remind you of the events that surrounded the fall of the Berlin Wall and the
    break up of the Soviet Union? They should.


    History does indeed repeat. It is now the turn of this crop of despots to step aside as more egalitarian demands emerge. This you see is really about money and the right to earn a fair living. And it is huge. In fact, I see this all shaping up to be one of the biggest opportunities for business expansion since the fall of the wall. Millions of willing customers may be in the formative stage of finally joining the global community more fully. I see Africa itself booming over the coming years.  While the folks there are not yet wealthy relative to us we should reflect on how desperately poor many in the old Soviet Union were prior to the break up there. Does this not feel more familiar now?


    That is why we need not fear these revolts. These popular uprisings are not made of the desires to bring on even more severe autocrats or worse yet, sectarianism. The protesters do not shout slogans at President Obama, burn American flags or threaten Western interests. Nor is there
    an interest in fundamentalist religious dictates as now exist in Tehran. Ironically enough, the West has barely registered in the ongoing revolutions except as an added source of complaint. Never were we so marginalized and irrelevant as these states are instead looking inward on themselves.


    This is not our battle. The outcomes there will be determined by residents of the nations who are standing on their own legs to oppose the interminable legacies of their corrupted leadership and their own people.


    This new group seeks greater inclusion, democratization and personal freedoms. This battle for equity was born in the bare cupboards of the kitchen itself. Whether you know it or not it is led in large part by women. They have simply had enough and are prepared to go into battle with their men to show the disgust they feel with regimes that are built around state control and endemic theft from their families at almost every level including the dinner table. 
     


    But it is more than this. Women’s rights have steadily eroded in most of these states in tandem with the loss of individual rights and personal freedoms. There is just no room for the variability of cultural life and personal social expression that we enjoy in the West with these one-man single faceted governments at the helm.


    Of course, for the autocrats, there is no real constituency to contend with anyway. No special interests. No need to curry favour with marginalized groups, to sponsor individualism and achievement (which is threatening) or to promote sexual rights and therefore no interest whatsoever in dealing with the alienation developing within families themselves.


    This is marginalization in one of its more cruel forms and so both sexual and social repression have grown over time and have left women with no real voice in the affairs of their own societies. Hell, most of us know how hard it is to concentrate on our own daily personal affairs, never mind the variables of running a country of millions with just a handful of cohorts. That is why force is the answer to most insoluble problems in these states and why police spring up as the alternative to social development and idealism. Islamic beliefs have not therefore shaped these societies deficiencies so much as the poverty found in political exclusion.


    Until now.
    Now change has arrived. And as you should already  know intuitively, that when women finally get involved at this level of the game, the outcome is pretty much already decided. The days of the Autocrats are numbered.


    There has not therefore been a better opportunity in years for corporatism and industry to begin to mobilize for the future. Growth led by more dollars in the pockets of individuals, by business investment and jobs, by greater access to the internet, to information, to education and therefore by its virtue, to the oyster of the world of possibilities that do not currently exist there is an inevitability.


    We can already see that the real investment action and some of the biggest future opportunities are found primarily in the rapidly developing African nations. No less than six of the
    worlds ten fastest growing economies are in Africa and while Egypt is not amongst the top ten it is certainly no slouch after having posted GDP gains exceeding 5% this past year. How much more could it achieve with a more open economy and true business transparency?


    And so, the major countries of the region is where the focus of capital will now be turning in seeking better returns and more growth as the more mature markets have been largely saturated already. Demographics are the key of course. Youth is the cornerstone. The majority of these nations and the many surrounding them possess very young populations and are a tremendous source of potential for future consumer demands if their economies can be freed to explore their full potential.


    These opportunities cannot be accessed while the old style monopolies overseen by one-man national rule remain in place. It is convenient that the strangle hold these rulers have had over the resources and business monopolies of their respective nations is now being broken up. These autocrats stand in the way of free markets and growth.


    And so what we are seeing may be nothing short of a kind of corporate takeover of the region that is being driven by the citizens themselves. It is unstoppable too. We have seen that one of the key demands of the enraged public are for a more equal share of their nation
    s wealth and entitlements. Is that too much to ask?


    The dictators have quickly caught on that the winds of change are not at their backs. Many are now taking aggressive steps to stem the revolutionary fervour by offering substantial incentives to their populations in order to maintain the status quo, keep the peace and quell the riots. Incentives that were unheard of only a few weeks ago are now offered in profusion. Cash, expanded freedoms, an end to emergency laws, public sector wage increases and political reform are all on the table. Too late though.


    While smaller in scope, what is taking place in North Africa today is no less dramatic than the events that led up to the end of the Berlin Wall and the collapse of the Soviet Union. This is people power at one of its finest moments where unarmed restive protesters are willing to stand up against 50
    caliber machine gun fire in fearlessness as we have just seen in Libya.


    We witnessed the same bravery in the protests across the countries of the old Soviet Union many years ago. Who might have seen then that the rise of Russia on the world stage from the ashes of near bankruptcy would bring on such tremendous resurgent growth that within a mere decade it would form part of the fastest growing bloc of countries on earth that we now affectionately call the BRIC? (Well, some people did see it actually). Catching that wave made fortunes for those willing to risk their money and invest despite what looked like a big gamble on the unknown at that time. 
     


    Once the dominoes began to fall the process was unstoppable, much like we are seeing today. The entire region awoke and began to open up to greater trade. All of the worries investors had then are similarly reflected in the concerns we also have today with the probability of discord arising less from pure politics than from the fears of religious fundamentalism taking hold. We should not worry though. Opportunity knocks and it is clear to me that this region of the globe will be amongst the biggest drivers of the world economy over the next decades.


    Who thought that the events that brought about the break-up of the Soviet Union would lead to a renaissance of business opportunity, the creation of thousands of new avenues of investment followed by a multitude of good quality jobs? Who could have conceived that the opening up of that waterlogged economy might also eventually yield millions upon millions of new consumers and provide so many new venues for both new and existing business’s as political freedoms were unleashed on their world.
     


    True democracy may not have been achieved in Russia or her old satellites over the past years but there can be no doubts about how globalization has impacted that part of the world. There are few who can doubt the positive
    impacts that was enabled as those nations were freed from the grips of totalitarian and indoctrinated regimes.


    Today of course, many of the flagship corporate interests of both the West and East are present in that region. You can enjoy a Starbucks coffee in Moscow within view of some of the famous Onion domes. Or perhaps chow down a Big Mac in Leningrad. For fun, get some KFC take-out in St Petersburg while shopping for all the most popular brands of Japanese electronics and Asian cell phones at malls across the country or maybe pick up a crisp copy of the Wall Street Journal & Financial Times in Red Square of all places. 
     


    Unthinkable just 20 years ago.


    But I am not suggesting that a profusion of American or European franchises are the answers to breaking up the closely held business cartels and exclusive interests in the Islamic world.
    Far from it. Nor am I suggesting that many of the familiar brands have not already begun to engage this region already. They are there of course and many of our iconic brands are well represented.


    What I am suggesting is more basic in nature. It is the view that greater access
    and  consumption is something that is desired in these countries. Anyone who thinks these people enjoy poverty or a lack of material necessity is totally mad.  


    There is a demand for more goods and greater variety too. Importantly though, what I believe is about to change is how the boardroom itself operates in these countries in the future, how control over companies is determined versus dictated and how a more transparent business environment will ultimately yield beneficial results for the people where it engages them directly in the downstream contracts to supply goods and services without the state micromanaging each aspect of the chain and drawing off the cream for itself.


    The products, the services, the emblems and trappings of wealth that will feed the fires of latent consumer demand as nascent freedom blooms in these countries are sourced and delivered from the four corners of the earth already. There will just be much more of it in the future. Egyptians naturally seek to participate in a more open economy.
    One that will reward their labour and ingenuity instead of depressing their entrepreneurialism.


    Freeing the predominantly Muslim nations to join the consumption societies of the West assures continued economic growth worldwide and in fact, this is the last of the major untapped regions available to the big players who are eager to engage the hungry populations there and offer the wares that are now very much in demand.


    We can easily see why the days of Mubarak needed to come to an end. His regime had co-opted the output of the populations and therefore acted as a drag on the economy while remaining shielded against the broad trend of globalization that might have brought more opportunity to his country. This you
    see, is really about business. And it is personal now.


    The uprisings are clearly a result of profound inequity in levels of income and opportunity that have been festering for many years now and that have been triggered by the recent and rapid escalation in food prices and inflationary pressures.


    In light of the break-up of the strangle-hold that Mr Mubarak and his government have long held on the economy is a signal to investors that positive changes are on the horizon. So put your fears on the back-burner and get ready for a whole new world. I have no doubts whatsoever that the economy of the storied nation of Egypt will rebound strongly in the months to come as peace returns to the streets and a new sense of optimism replaces the fear that has long held the country back.


    In the bigger picture, (the one with more forest and less trees), the entire Middle East region and
    North Africa now sit primed to both bloom and boom economically in the unfolding future. The profit opportunities may well be near spectacular as millions of freshly minted global consumers see wages rise and begin demanding more of what everyone else around the world already takes for granted.

    Roberts Rules will thrive where Robber Barons once ruled.

    Mar 06 10:11 PM | Link | Comment!
  • Ethiopia on Track to Become Africa’s Energy Superpower

     


    This is a growth story. Within it are the flickers of hope and prosperity for what is ostensibly the poorest country on Earth. And so it is also a Christmas card to those investors who follow emerging markets and to those who keep their minds open to developing opportunities.

    In the bustling streets, coffee shops and clubs of Addis Ababa, Ethiopia, a palpable change in sentiment is in the air. The country is experiencing a growth renaissance, employment is on the rise and there is an evolving sense of optimism. And it all centers on water, Ethiopian dam construction projects and future food security. The good news in Ethiopia can be summed up in just the following few words. Clean energy, industrial development, irrigation and plenty of cold hard cash. In other words, the Chinese have arrived.

    And they want what Ethiopia can offer them. Power, and lots of it.

    Now I will bet that the very last word that popped into your head when you first read the word Ethiopia at the start of this article was “power”. You would not be alone. This is the land of famine after all. The devastated country of 85 million people where failed crops have cost several million lives over the past decades, where an absence of irrigation, fertilizer and modern farm practices have been a curse that have stunted that countries development for as long as any of us have ever known.

    But in an ironic twist, Ethiopia sits atop huge deposits of potash, has made discoveries of natural gas and is now in the early stages of building its own fertilizer facilities. Not only that, Ethiopia is amongst the wettest of countries in Africa.  Now, everyone knows that the Nile River is the longest in the world but did you know almost 85% of its flow originates in the Ethiopian highlands? One of the key steps in preventing future failed crops will be to start getting some of that surplus water to where it is needed most badly. But that will require pipe, steelmaking, cement production and plenty of money.

    Oh, did I mention the Chinese, the dam projects and all that cash yet?

    And so, this is what is electrifying Ethiopia and is a harbinger of the end to its dependence on charcoal and kerosene as cooking fuels, an end to its dependence on foreign food aid supports and the beginnings of a very surprising growth story. There is hope now that the deep red soils will not continue to be washed away each rainy season as agricultural practices are improved, electrification supplants deforestation for fuel and tree planting has a real hope of taking hold on lands where only the most meagre of crops were being planted in the past.

    And with the advent of power comes fresh investment out of Asia leading to the development of new industries and thousands of new jobs. A better marriage could not have been made by the angels in heaven themselves. Voracious needs, particularly in China, have come face to face with Ethiopia’s tremendous hydroelectric potential, low wages and resource wealth.

    These developments have also lead to some of the world’s highest inflation rates too though. This story is not all sunshine and roses people. Like many other poor countries the cost of living is incredibly low. Wages may be rising but there has been a concurrent rise in costs keeping many in the rural areas impoverished. For some, life has only become more of a struggle. The Ethiopian Central Bank, in a surprise announcement last month, devalued the currency by 16.7% in a single day. That was the fourth devaluation in less than two years.

    That revaluation was brought in as a means for the country to retain a competitive export advantage and as a means to manage its currency which floats against the US dollar. The falling dollar in effect precipitated the action by the Ethiopian Central Bank. There is no stealth devaluation there at all. The authorities have acted decisively as the country has never been in a good position to compete with heavily subsidized agricultural products of Western nations.

    Compounding worries there is the recent commodity boom and the sharp price increases in cotton, coffee, cocoa, wheat, canola and of course cooking fuel (kerosene) amongst others. The problem Ethiopians face is that commodities, while locally sourced, are not locally priced as they are subject to global competition and speculative forces and those prices as we know are set in the futures markets.

    So despite being an agricultural country and net food exporter, Ethiopians are facing the same market dynamics and price hikes that we are about to experience in the West (this story is indirectly about us too, so pay attention). And because their country is primarily an agricultural exporter, the new prices hit the streets almost as fast as they change on the boards in New York and London. Ethiopia with its economy heavily biased to agricultural goods is perhaps being hit the hardest as much of the resource boom to date has impacted the so-called soft commodities, primarily food. It is no joke that Ethiopians are now unable to afford buying some of the produce of their own country. Following this last price spike, coffee is almost out of the question for many.

    Since the summer, the cost of a kilo of Coffee has climbed from about 2.20 US to over four dollars, almost a 100% price spike.  Affording coffee on an income averaging a dollar daily is not just prohibitive; it is a sacrifice and a luxury. This irony is not lost on the people living right in the midst of the country where coffee was originally discovered and where it is still one of the primary exports abroad.

    So Ethiopians have been pretty worried lately. They are stoic though and rarely complain despite the fact that the price of flour is also up over 70%, cooking oil by 50% and onions of all things have increased by an incredible 250% on the heels of a crop failure. And you thought we had inflation worries coming down the pike over here! Ethiopia’s Central Statistical Agency (NYSE:CSA) meanwhile reports for 2010 that tobacco has risen 34%, clothing 25% and rent, fuel and power have collectively risen by over 16%. Yikes!

    All of this of course is on outgrowth of shifting investment dynamics taking place worldwide at this time, where paper investments are seen as risky, bonds pay nothing and holding cash is a sure way to go broke over the long run as currency devaluations have become endemic. There has been a shift, particularly amongst hedge funds, away from certain equities and debt instruments and into hard assets, gold and resources.

    Further compounding this growing trend is the widespread belief that Quantitative Easing is leading to dollar devaluation and therefore resource investments are very appealing as a long term hedge against potential losses. Stimulus leakage itself and the outcomes of investment changes that flow from this policy are now the impetus behind both a developing African growth story and some tremendous inflation pressures. These are the sources behind some of the stresses the people there are now facing.

    An unfortunate outcome of this major trend change is therefore expressing itself in the form of some very serious price increases and negatively impacting those not just in Ethiopia but in all the poorest countries in the world. It must be kept in mind that in many countries across Africa and parts of Asia food and transportation are the largest components of their monthly expenses. The inflationary impacts of price increases in the double digits are therefore a serious hardship in a way that very few in North America can fully comprehend.   

    Today, Ethiopia is one of the largest coffee exporters in the world and not so surprisingly government revenues have surged on the back of the commodity price increases there and also from a host of other export products. Increased incomes from both private and corporate sources including the VAT tax have shot up a staggering 150% in only the last three months according to Nazret.com sources, and the Government is now on track to fully exceed its wildest revenue estimates.

    In the simplest terms possible you might imagine that the price increases for food are therefore coming out of the pockets of the average person on the street and then miraculously reappearing on Government ledgers. Of course it is not that simple though and the differences between export revenues and increased consumption costs could hardly balance equitably. But this is not a bad news story and while Ethiopians are paying the price at the till on the one hand the country is experiencing tremendous growth on the other.

    Why? Resource’s of course, with water and hydroelectric potential as the cornerstone of the country’s growing regional influence. Ethiopia has them in spades and China, amongst others wants in on that action. So they have shown up with what the country badly needs. Cold hard cash, engineering expertise and generous assistance with infrastructure improvements. Heck, they even send in their own people and equipment to get the jobs done. No hurry of course. Pay the bill later.

    In the midst of this boom though, trouble is brewing and it is naturally political. A recently published article by The Economist quotes Prime Minister Meles Zenawi saying the Chinese were “generous and dependable” while backhanding the West and calling them neoliberals. This is not likely leaving a very good taste in Washington’s mouth where the efforts of many, many years of support and contributions to Ethiopian development aid are suddenly not yielding the expected returns. Nor are there smiling faces as it becomes apparent that China is recycling its US dollar balance of trade bounty into efforts that are appearing to be undermining US influence in the Horn of Africa.

    It is no secret that Ethiopia has long been considered a key strategic ally in the region. That relationship may be at risk. With China now stepping in with investment money versus aid dollars they are winning the hearts and minds of the population who want jobs, not handouts.

    In any event, Mr Zenawi has his own concerns and they are a real worry for his government. Many millions of young people in his country are heading into the workforce over the next decade. He needs to get them busy and fast. A quick look at Ethiopia’s population pyramid and you will know in an instant why the government is shoulder-checking for signs of future trouble and looking for new regional friends with deeper pockets and plenty of needs of their own. So what has developed with Asia is a marriage more than a friendship but it is certain to test Washington’s patience and resolve in the coming years as regional influence is now at stake.

    Now one of the surprise upsides to this current commodities boom is that it has actually been beneficial to Ethiopia in many ways despite the extra financial burden it has place on the people.

    The country has a suspected treasure trove of resources that are only now being explored but existing discoveries of Gold, Potash, Natural gas and many others are already well know. Exploration for diamonds is now underway in Welega Province by a junior miner out of Australia, holes are being drilled for the first time in the broad search for mineral deposits elsewhere and BHP Billiton is on the scene assessing the local Potash reserves. “China Mining United Fund” is said to be taking a serious look at the Allana potash deposits in the Rift Valley and there is a strong likelihood a partnership will be inked there in due course.

    There has been a significant infusion of foreign capital inflows across the country over the last few years and it is now accelerating as new partnerships with Asian investor’s ramp up and jobs are being created. Capital is flowing in from India, Malaysia, Singapore, China, Australia, Canada and many other sources. As I have mentioned already, it is not so surprising that there has also been inflation to match the rapid growth and this has made life difficult for anyone trying to earn a living there (which is pretty much everyone).

    The most recent inflation numbers released show that the annual rate is running ahead of 11% even before the commodities craze is priced into the equation. This is on top of last year’s 9% and a 2008 inflation rate that clocked in at a blistering 45%. And in a crazy upside down world, people there hold US dollars as an inflation hedge! This actually makes perfect sense really. Everything is relative isn’t it? And when both Gold and Silver are well beyond the financial means of virtually everyone then a store of Greenbacks is as good as gold itself.

    Especially if your own currency is shrinking by the day.

    According to the CIA fact-book, Ethiopian GDP growth was ringing in at 8.7% for 2009 while industrial growth exceeded 10% placing Ethiopia 5th amongst nations on the growth scale. Exports were a paltry 1.6 billion dollars versus 7 billion in imports which is small potatoes by any standard but don’t let that dissuade you from the growth potential that now exists. Much progress obviously still needs to be made. US contributions to programs and aid when added to remittances from the Ethiopian Diaspora overseas, IMF forgiveness of some indebtedness and Chinese direct investment have helped make up some of the difference on the national ledger.   

    As mentioned, the Chinese amongst others are taking a very serious interest in the region. You may be surprised to hear that there is a construction boom going on there now. According to the Economist’s “The World in 2011” publication they have noted that Ethiopia and Eritrea of all places will be amongst the top three fastest growing economies of any country on earth this coming year. Growth there is anticipated to exceed 10% annually. Surprise! And you thought it would be China didn’t you?

    Nazret.com, the Ethiopian news portal has reported this past week that Chinese investments in excess of 780 million dollars have been made in a wide variety of projects and activities including cement factories that have directly created 76,000 new jobs in the country. This is money in excess of development funds of nearly two billion already allocated by the Chinese Government for an ongoing infrastructure build-out. In the big picture, those millions might sound like spare-change to you but this is clearly very significant relative to Ethiopian export incomes and cannot be understated.

    Just imagine for a moment that one single country invested in the US in an amount equal to half of all its export trade and you will then have some perspective on what is taking place over there. Now you get it.

    In the background, there are 13 new universities being constructed or contemplated with the assistance of the German Government (GTZ) and related agencies that are designed to accommodate up to 148,000 new students. It’s a big initiative. According to Wiki, almost half the Ethiopian population is below the age of 14 while the median age is 16.8 and those over 65 account for just 2% of the population. That is one hell of a demographic picture. The US median age by comparison is 37 years while those over 65 account for closer to 12%.

    Furthermore, health initiatives from a multitude of sources including the US Government, the Gates foundation, Canadian International Development Agency (CIDA) and a host of European NGO’s along with the efforts of hundreds of charitable agencies means the country is stronger and healthier than ever. Aids rates incidentally are amongst the lowest in Africa at 2% and dropping due to education and health initiatives.  

    The very low wages have also provided an opportunity and an outlet for some of Asia’s over-heating economies and as a result those countries are now actively outsourcing production themselves. And that is a big surprise to most people who only think of Asia itself as one monstrous insular factory for the world that does not share.

    Rarely is it considered that production costs, particularly in China, have spiked due to the current high costs of real estate and growing incomes there and that they themselves are now seeking lower cost jurisdictions from which to maintain low-cost production. Much of Africa beyond Ethiopia is also now benefitting from these recent developments.

    So Ethiopia is going into textiles in a very big way and factories have been springing up across the country. The Government of Meles Zenawi has openly welcomed the new investments and resource rights are being sold to interested parties as exploration for minerals ramps up. The government is stable and has been for many years now and the country is for the most part at peace. It is hard to find a friendlier, warmer place to visit actually.

    But there is so much more to this developing story. China’s growing demand for construction materials has seen them investing in no less than eight cement facilities recently, both to supply voracious demand in Asia’s booming cities but also to provide the inputs needed for Ethiopia’s new dams construction projects.

    Oh yes, the dams again. And here we have a very contentious issue developing that could boil over in the future. There are significant concerns being expressed by Egypt, a country that sees virtually no rain of its own and whose entire civilization depends on the flow of the Nile for its very survival as a nation. Worries that Ethiopia may hold back too much of the Nile flow have brought old threats of war back into the light as Egyptians come to grips with the consequences of the dam projects and concerns that countries life blood may be on the verge of drying up. A flashpoint exists over the issue of equitable water sharing and past agreements will need to be revisited.

    For the moment, the details following the release of the new water data have amounted to no more than a war of words but that is no comfort in some quarters. Compounding problems, the US currently supports both Egypt and Ethiopia politically and financially. Brokering a new water deal is seen as a high priority for the region. Momentum is on Ethiopia’s side for now, particularly in light of China’s new interest and it is likely the disputes will need to be settled with the direct cooperation of both Washington and Beijing.

    To date, five large Dams have been built across Ethiopia and many more are proposed including a new one on the Blue Nile financed by Sino-Hydro, the same folks who built the Three Gorges project. The new Gibe III project on the Omo river meanwhile will be the highest dam in Africa at 245 meters and is projected to generate 1870 MW of new power. According to The Guardian, Ethiopia now has the potential to generate more than 45,000 Megawatts of power in aggregate. And that is a very big story in North Africa.  All the more so because there are 9 other countries downstream that all share in the water wealth that flows from Ethiopia’s highlands and upon which millions in the Nile Basin depend for irrigation, drinking water and transportation.

    So the Chinese have brilliantly seized on the obvious hydroelectric potential of the region and it is true that barring conflicts it is well within Ethiopia’s destiny to become an African energy superpower within the next decade. Clean energy too. Plans are already being drawn up to export power to Sudan, Kenya and other neighbours on the basis of multi mega-watt capacity coming on-stream over the next few years.

    But the real power is destined for domestic industrial needs and to meet Chinese demands for inputs to its own economy. Ethiopia as it turns out is strategically positioned for energy intensive factories and related facilities including cement production, bricks and steel. It should come as no surprise then that Chinese based steel-making enterprises have become one of the big partners recently in this evolving investment scene. And it certainly does not hurt that incomes in Ethiopia are the lowest in the world. Getting all the new facilities up and running is a cakewalk when it comes to cash.

    Ethiopia is certainly not all a parched dry wasteland as many might have imagined. Although almost totally devoid of trees from end to end, much of it is wet and green, particularly in the highlands, and this is why hydroelectric is such an obvious solution to the growing power needs there and the industrialization that is currently underway.

    The rains unfortunately are not always predictable and this has been at the root of some past disasters and famines as irrigation has not been sufficiently developed to date to ensure steady agricultural productivity. That is all about to change though.

    You seriously cannot believe how fast this poor country is developing and much of it can be attributed nearly exclusively to growth dynamics out of Asia. The Chinese in particular as already mentioned have moved into the country in a very big way and are busy building roads, dams, irrigation systems and bridges across the country. Things are changing for the better. And fast.

    So in a surprise twist, what is arguably the poorest country on earth is actually one of the world’s biggest investment and growth stories of the year. Don’t believe me? Go and see it for yourself. Ethiopian Airlines is well known as the best carrier on the continent sporting the newest fleet of Boeing 737’s and 777-200’s and one of the safest flight records anywhere.

    This past two years alone Ethiopian Airlines have acquired or placed on order 35 new Aircraft including 10 state-of-the-art Dreamliner 787’s to add to their growing fleet.  An expansion of Addis Ababa’s Bole International airport which is considered Africa’s primary air hub and hosts almost 4 million passengers annually is ongoing to accommodate the growing traffic and congestion. (And you thought all those people were starving over there, right? So what’s up with all the Dreamliners then?)

    The on-board food is terrific incidentally.

    Back in Addis meanwhile folks are both optimistic and stressed. Their wages are on the rise but are not keeping up with the loss of buying power caused by the recent Birr devaluations nor keeping pace with the fast rising costs of virtually all their daily needs.

    It  can only be hoped that the recent developments eventually lead to a higher standard of living for the country and that it can build its way out of the grips of poverty that have been its hallmark for most of the past century. Industrialization, resources and key partnerships are the ticket to a better future for Ethiopia and are the fuel behind its recent growth story.

    And it is not too late to get involved for those with speculative capital and minds open to a wide variety of surprising opportunities. The country is open to investment and a small amount of money can go a very along way indeed and yield potentially explosive results. And that sounds like advertising doesn’t it? Well it is not. One fact alone is that fewer than 1.5 in 100 people in Ethiopia have a cell phone today according to a recent (ITU), International Telecommunications Union report. That is the lowest concentration in all Africa and amongst the lowest anywhere on earth. There is naturally a huge pent up demand for technology of all kinds, a youthful population and a growing belief that change has arrived. The advent of optimism combined with that youth, new consumer demands and rising incomes is of interest to every serious investor.

    There are obvious difficulties for anyone trying to invest in this market of course. The country does not yet have its own stock exchange, credit and debit transactions are virtually unknown across the country, few individuals have bank accounts and the banking sector itself is still working through its developmental stage. Some might see opportunity in that though. The real potential is open for the most intrepid investors who simply go in person to get something started. And you could not be closer to the ground floor in any other country. Nobody said investing there would be easy. For most, for the foreseeable future, it just makes more sense to invest in Asian companies that are already active there or more directly in the juniors and small caps that are currently searching for minerals.

    Like much of Africa, Ethiopia has energy to burn and a desire to break from the bonds of the past. Demographics tell us there is tremendous potential there and a lot of future customers. Asian direct investment tells us that development is being fast-tracked and this is a country you will want to follow if emerging markets are your cup of tea. And last, Ethiopians themselves are telling us they want to be an integral part of the global community. This is truly a growth story.

    If you remain doubtful that Ethiopia has potential I just want you to watch this short video of a concert in Addis Ababa. It is a little rough and almost certainly made with a cell phone but if this does not convince you the country has energy, then nothing ever will. Beyonce is there up front and she leads a show backed by Teddy Afro, one of Ethiopia’s most famous musicians. Have a listen and look at Ethiopia 2010.

    http://www.youtube.com/watch?v=BFheOwMW28Q&feature=related

    This 5 minute clip should tell you everything I cannot say in words alone. Hopefully this will open your eyes to one of the very biggest developing stories in the world today. It is about the new Africa, the world’s last big frontier and a Wild West of investment opportunities. The potential is tremendous and those people sure look hungry all right. But in a way you probably never expected.

    So forget the sad imagery of the past. These people are hungry for their piece of the action.

    Merry Christmas!



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 22 8:55 PM | Link | 6 Comments
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