In the unlikely event that you missed the video, you can witness his fury in all its glory in the clip below.

Now, in the video, Ratigan recommends the president give a speech to “abandon the bought Congress,” and then begin the process of investing in solving the problem. How? He suggests that the US “begin an infrastructure bank with 2 percent lending.”

It sounds like an interesting kernel of an idea, so we dug around a bit to for a deeper explanation of what Ratigan may have been specifically proposing.

Here’s the concept, in more detail from Bloomberg:

“Creating a national infrastructure bank presents a harmonized solution to these two problems [US unemployment and failing infrastructure] that should be feasible even in austere times. Airports and transportation networks, levees and dams, water and energy systems are deteriorating. The American Society of Civil Engineers estimates that 25 percent of our bridges are deficient, 7 billion gallons of clean water are wasted each day because of leaking pipes, and a third of our major roads are in poor or mediocre condition. The costs of all this to U.S. businesses — in delays, accidents, lost productivity, red tape — are enormous.

“Yet improving such facilities adequately, the ASCE estimates, would require a five-year investment of $2.2 trillion. If you’ve been within shouting distance of Washington lately, you know that finding anything near such a sum is an impossibility. So a revitalization program that doesn’t rely entirely on federal munificence is crucial.

“Enter the infrastructure bank, which would provide loans or loan guarantees for big projects deemed to be in the public interest — and attract private investment by offering cheap access to capital and a path to profit from tolls, fares and other charges.

The bank could leverage the government’s outlay to lend more. An initial $5 billion a year for five years could result in $50 billion or more in loans. And because these loans would be paid back with interest, the institution could become self-sustaining [...] Every dollar spent on public infrastructure yields a $1.59 boost to gross domestic product, estimates Mark Zandi of Moody’s Analytics.”

According to Bloomberg editors, a number of suggestions for how the bank could be set up are already circulating through the halls of Congress. With current US infrastructure failings costing an estimated $2 trillion over a recent two-year period, you can understand the plan’s appeal. For more details see Bloomberg’s article on how a bank can get more Americans bank on the job and on the road.

Best,

Rocky Vega,
The Daily Reckoning

The (Infrastructure) Bank That “Abandons the Bought Congress” originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Since the end of June, copper has been slowly inching its way up, with the past three weeks having produced positive results. Part of this rise is due to reduced supply issues. Chile, the world’s largest copper producer, has been plagued by power outages, strikes, accidents and heavy rains. Reuters recently reported that a “once in a half century winter storm” caused more than 12 mines to slow or stop operations after the open pit roads became too slippery in the South American country that mines about one-fifth of the world’s copper.

The election of Ollanta Humala in Peru–the second-largest producer of copper–has also been a drag on copper prices as investors debate the probability of Humala electing a mining friendly cabinet. As I discussed in “Is Peru’s Humala Jekyll or Hyde for Mining?,” investors have worried the president-elect could retract policies that encourage mining investment and help grow their economy.

The announcement came this week that Humala will appoint Luis Miguel Castilla, Peru’s former deputy finance minister, as the new finance minister. Carlos Herrera will lead the mines and energy ministry. However, according to the Financial Times, it is still not clear whether Humala will increase the corporate tax rate paid by miners and enforce tighter state controls. The actions of this leader will have an influence on the direction of copper prices for the remainder of the year.

In terms of demand, copper is a necessary ingredient for numerous building projects. Electrical power cables, electrical equipment, automobile radiators, cooling and refrigeration tubing, heat exchangers and water pipes all require copper. With all the construction and infrastructure building in China over the past several years, it’s not surprising that this country is the No. 1 world consumer of copper. It’s estimated that China accounted for nearly 40 percent of global copper consumption last year.

Because of this large demand, similar to our outlook for oil, copper prices hinge on China’s ongoing development. While some have begun to wonder about the health of the country’s continuing growth and development, Macquarie Research believes that “real demand in the country remains robust.”

Take developer activity, for example, which Macquarie says has been a huge driver of construction growth in 2011. The media has focused its attention on ghost cities and lagging sales of property in China. Yet Macquarie thinks it’s important to consider the property sales across all different sizes of cities. In its Commodities Comment, subtitled “Chinese social house – another reason to buy copper and iron ore,” Macquarie acknowledges a weakness in property transactions in China’s larger cities. This was due to the government restricting investment demand to slow growth. However, these larger cities only account for 20 percent of the total market, says Macquarie.

Conversely, many smaller cities, such as Anquing, Guizhou, Luzhou, Mudanjiang, and Shijiazhuang, have had double-digit year-over-year growth in unit sales so far this year. In the case of Hohhot, the capital city of Inner Mongolia, sales growth has tripled. Government investment has led to urban space increasing from 80 square kilometers in 2000 to 150 square kilometers last year, according to the city’s government website. Hohhot, which means “green city” in Mongolian, has grown to more than 2 million people and has become a hub for agriculture and manufacturing.

Most importantly, Macquarie says the tremendous sales activity in these smaller cities indicates “there has been enough cash to keep construction activity going.”

In addition, China’s social housing project should drive incremental demand for copper. Macquarie indicated that China is “aiming for 10 million social housing units, up from 5.8 million in 2010.” The country has built only 3.4 million units so far this year, but based on China’s habit of exceeding its objectives, Macquarie thinks the target will be met.

Even if the naysayers think China’s growth will slow because of the government’s monetary policy restrictions, there’s consensus among research experts that the country’s inventory of copper is getting low. Goldman Sachs’ discussion of the copper market indicated that in the second half of 2011, the “winding down of destocking will lead to a stronger Chinese pull on global supply.” China seems to have no choice but to go back to the market for copper, if only to replenish its supply.

Tom Kendall, Credit Suisse’s vice president for commodities research, agrees. In a Mineweb interview on copper’s fundamentals and expectations of further growth, Kendall stated he has seen a “very sizeable drawdown” in Chinese copper inventories this year. He goes on to say, “some point in time, they will get to a point at which they have run down inventory levels to an uncomfortably low level and then there is no alternative to coming back to the international market.”

Portfolio Manager Evan Smith agrees that copper’s pricing looks promising. China is nearing the end of its tightening policies and has shown that its debt is under control based on released results of the country’s comprehensive debt audit. For the Global Resources Fund (PSPFX), he has been incorporating these macro thoughts into the team’s models to identify stocks with superior growth and value metrics that he believes could benefit the most.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

2011 Halftime Report: The Cues for Copper originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

China spent 17 years planning and designing the engineering marvel to be able to withstand the bay’s high salt content and icy winters. Yet, it only took four years to build, with at least 10,000 workers on the construction team. The Xinhua news agency says about $2.3 billion was spent, and 450,000 tons of steel and 81 million cubic feet of concrete were consumed in its construction.

An estimated 30,000 cars are expected to make the trek across the bay each day. Residents already traveling between Huangdao and Qingdao will have their trip cut in half, from 40 minutes to 20 minutes.

According to The Telegraph, Qingdao is one of China’s fastest-growing cities. It is among the top ten largest container ports in the world, and is the main port of the Chinese navy. Home to around 8 million people, half live in the metro area of the city. Many people might recognize the city as host of the sailing events during the 2008 Beijing Olympics.

While the bridge made headlines for breaking a world record, it is only one of many major infrastructure projects planned by China. In only a few short years, the country has been redefining urbanization at a phenomenal scale:

• From 2005 through 2025, Chinese cities will add more than 350 million people, which is the entire population of the United States.

• More than 200 Chinese cities will have more than one million inhabitants. Europe today has 35 cities of that size.

• There will be 50,000 new skyscrapers, the equivalent of ten New York Cities.

Many of these urban residents have rising incomes and discretionary income to purchase cars and upgrade their homes in pursuit of a better life—just like the American dream. To accommodate this rapid economic development, rising middle class and growing car ownership, China has been ramping up its transportation system. Similar to our story of China’s high speed rails, the magnitude of opportunity is expected to span across many industries, including tourism, restaurants, hotels, construction, property, rail, roads and airlines.

To grasp the immense size of China’s newest bridge, watch this short video from The Telegraph below.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

China Opens World’s Longest Cross-Sea Bridge originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Since opening the first high speed line between Beijing and Tianjin in 2008, the country has laid down more than 4,600 miles of new tracks. This is three times more than Japan, where the bullet train was invented, and this is just the start. Once completed near the end of this decade, the high speed rail system will connect more than 250 Chinese cities, span 18,641 miles and reach roughly 700 million people.

Currently, the high speed rail network connects about one-third of China’s cities. That figure is set to nearly double over the next two years. If current forecasts hold true, 100 percent of the China’s cities will be connected through high speed rails by 2019.

While linking megacities such as Beijing and Shanghai carries significance, connecting the urban East with rural areas of West and Central China is equally as important. This data from Morgan Stanley shows that the West and Central regions of China lag considerably in terms of GDP per capita, urbanization rate and property prices.

Many, including our investment team, believe that connecting these areas of the country could have a similar effect to what took place in the United States when Eisenhower’s interstate highway system linked cities such as Chicago and Philadelphia with their counterparts on the West Coast including Seattle and San Francisco.

The effect this massive buildout can have on commodities is evident: thousands of miles of new track, hundreds of new stations and dozens of new trains will certainly boost demand for steel. But there’s also a corollary effect that can expedite the transformation of China’s economy. More people traveling across the country means there will need to be more places for them to eat, sleep and shop.

Take hotel rooms for example. Currently, the U.S. has just fewer than 5 million hotel rooms spread across the country; China has about half that amount. However, Morgan Stanley forecasts that the two are set to switch places near 2025 as China pushes to offer more than 9 million hotel rooms by 2039. Familiar names such as Wyndham, Starwood and Hilton are planning major additions to their pipelines in China.

Morgan Stanley also says that the high speed rail expansion presents opportunities in areas such as consumer staples, car rentals and tourism. The latter is especially important because the average Chinese citizen is going to be able to explore culturally rich areas of the country that were previously too difficult or expensive to visit. A poll from CLSA’s China Reality Research last year showed that travel remained a top aspiration.

Rail passenger traffic has a strong correlation with instant noodle consumption (79 percent positive correlation) and soft drink volume (86 positive correlation), according to Morgan Stanley. This means that chains such as McDonald’s (1,300 stores in China) and KFC (4,000 stores in China), both of which are largely concentrated in the eastern third of the country, will likely follow the high speed tracks into Central and Western China.

These are all examples of how the dynamics of the Chinese consumer are forever changing. As investors, it’s important to understand these intermarket relationships and how a development in one area of an economy can dramatically affect another seemingly unrelated area of the economy. Being able to spot these trends and developments before they bubble up to the surface is how active money managers can create alpha for their shareholders.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

Railway Revolution Builds China’s Consumer Culture originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

In fact, US infrastructure is worn out and underfunded enough that planned investment for necessary improvements is lower than in several emerging economies including China, India, and Brazil.

According to The Washington Post:

“The report lends global perspective to an issue addressed last fall by a panel of 80 experts led by former transportation secretaries Norman Y. Mineta and Samuel K. Skinner. That group concluded that as much as $262 billion a year must be spent on U.S. highways, rail networks and air transportation systems.

“Congress has failed to approve the two major bills that allow for long-term funding and planning for aviation and transportation. The Federal Aviation Administration has been operating under a funding bill that expired in 2007 and has been extended 18 times. The surface transportation act, which provides the balance of federal transportation funding, expired in 2009 and has been extended seven times.

“As Congress debates how much should be spent and where to find the money, China has a plan to spend $1 trillion on high-speed rail, highways and other infrastructure in five years. India is nearing the end of a $500 billion investment phase that has seen major highway improvements, and plans to double that amount by 2017. Brazil plans to spend $900 billion on energy and transportation projects by 2014.

“The United States, the institute report concludes, needs to invest $2 trillion to rebuild roads, bridges, water lines, sewage systems and dams that are reaching the end of their planned life cycles.”

The US Congress is already embattled in an effort to reduce the national deficit through spending curbs, which suggests that state and local governments will be forced to bear the burden of expensive repairs. As they are also broke, they’d likely have to free up the needed funds by cutting standard services — much like Detroit has already slashed its basics such as garbage pickups and police patrols — and by increasing sales and property taxes.

In the coming years, the US is looking to become not only broke… but also broken.

You can read more of the details in The Washington Post’s coverage of the $2 trillion the US needs for infrastructure.

Best,

Rocky Vega,
The Daily Reckoning

US Desperately Needs $2 Trillion in Infrastructure Repairs originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

So what might such a ‘dollar crisis’ look like, how would the US government likely respond, and what impact should we expect this to have on financial markets? While we do not purport to have the specific answers to these questions, there are some general considerations we can discuss with some reasonable confidence.

First, let’s define ‘dollar crisis’. While dollar weakness certainly plays a role, what really matters is the impact that this has on US government financing costs. When these rise to levels that cannot be serviced without resort to direct debt monetization by the Fed, you have a crisis.

Now imagine if you will that as the dollar slides, major global buyers of US Treasuries and other dollar securities gradually withdraw from the market in favor of alternative currencies or, perhaps, gold reserves. They needn’t sell their existing holdings, mind you, rather merely reduce or cease ongoing purchases. As US borrowing costs rise, all the current assumptions about US debt serviceability must necessarily be re-evaluated for a higher rate environment.

While there is no magic number, in the event that Treasury yields rise back above 5% or so, chances are that financial markets begin to price in a materially higher risk premium for holding US debt. In a self-reinforcing spiral, unless the US government takes swift and credible action to restore confidence in debt sustainability–that is, a convincing program to reduce the deficit–what might have been a gentle and orderly if concerning rise abruptly becomes sharp and disorderly. At this point, desperate measures will be on the table.

First of all, most likely the Fed implements some sort of ‘emergency’ program of Treasury bond buying, perhaps a cap on yields at 5% or so, in order to buy some time. The problem with capping yields, however, is that if the market clearing yield is higher than the cap, then the Fed becomes the ‘buyer of last resort’ and, in short order, finds itself holding the bulk of US Treasury market debt outstanding.

While this would no doubt lead to (increasingly appropriate) comparisons with banana republics, the US Fed and government would nevertheless continue to try to exude an aura of being in control of the situation as investors dump Treasuries and the Fed’s balance sheet explodes.

Second, as foreign investors flee US Treasuries and most probably other US assets, domestic investors are highly likely to attempt to do the same. This is when the US government probably imposes some form of capital controls, making it essentially impossible and perhaps outright illegal for US investors to purchase foreign assets. Not only the US but also most countries facing such dire economic circumstances have resorted to comparably desperate measures in response to past economic crises, so extreme actions of this sort should not be ruled out but rather anticipated.

Third, the government may try to make life more difficult for so-called ‘speculators’, that is, people trying to protect themselves by reducing their exposure to devaluing dollars and risky Treasury securities. For example, they might restrict investors’ access to precious metals in various ways.

In doing so, US government officials will most probably draw some sort of arbitrary line between those institutions still allowed to transact in precious metals–the big banks–and those not so allowed, such as private investors and households. While such double-standards are no doubt arbitrary, unconstitutional and simply unfair, such actions have ‘legal’ precedent and, as such, may well come into force at this stage.

While capital controls and curbs on ‘speculators’ might also buy some time for the US government to try and restore some degree of stability in financial markets, in fact they will just bring the day of reckoning closer. Indeed, the very idea of the world’s pre-eminent reserve currency being subject to capital controls is downright farcical. Unless rescinded in short order, capital controls will lead to the US not only losing reserve currency status but probably becoming something of a global economic pariah.

As such, expect any discussion of capital controls to be couched in ‘temporary’, ‘emergency’ language, although we doubt that such rhetoric will prevent the Chinese, Russians, Indians, Brazilians, Europeans and probably also OPEC nations from forming new associations and alliances to offset the loss of investment and trade with a United States rushing headlong into masochistic, counterproductive economic nationalism.

As for the broader impact of curbs on ‘speculation’ in precious metals and possibly also other commodities, such policies will quickly drive global commodity trading offshore, most probably to locations historically keen to acquire such business from the US, including London, Switzerland, Singapore, Shanghai, Hong Kong, Moscow and Dubai.

Yes, the US government will no doubt be able to mandate, by executive fiat, who, what, and at what price various commodities will be traded on US exchanges, but to the extent that the rest of the world thinks the price of something should be higher (or the dollar lower), the associated transactions will take place elsewhere until, inevitably, the bulk of exchange activity emigrates to friendlier jurisdictions abroad.

As one desperate time-buying measure after another approaches its effective expiry date, the next step could be for the US to open negotiations with foreign creditors to restructure its debt, something which might well prove politically impossible, even with the best of intentions. Alternatively, and more in keeping with US and global economic history, the US might simply impose a settlement forcing foreign and possibly also domestic creditors take a huge ‘haircut’ on their holdings of Treasury debt.

Although obviously a default by any other name, no doubt the US will call it something else. (We suggest TOUGH, or ‘Treasury Obligations Under General Haircut’, given the historical proclivity of US authorities to employ euphemistic acronyms when implementing unprecedented and counterproductive economic policies.)

At any stage of the above process, and highly likely to occur in our opinion, the US may simply do away with such shenanigans and devalue the dollar unilaterally in some fashion and to a level which, in theory at least, would be sustainable and allow for the US to service, with reasonable confidence, its accumulated debts in sharply devalued dollars.

Indeed, the US has done exactly this before. In 1934, FDR unilaterally devalued the dollar by some 60%. In the early 1970s, President Nixon removed the anchor to gold entirely, claiming that this would not be inflationary.

More recently, any objective analysis would conclude that the US has had an unstated policy of dollar devaluation since at least 2004 if not earlier, as that was around the time that the US started to attack China’s exchange rate policy and, by implication, that of any other country which chose to maintain stable rather than appreciating exchange rates vis-a-vis the weakening dollar.

Continued in part three.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

It’s the End of the Dollar as we Know It (Do we Feel Fine?) Part 2 of 3 originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

As in 2007 and early 2008, the dollar is weakening sharply

As with many financial market developments, at first glance this might seem rather curious. After all, much headline economic data shows that the US economic recovery has been gaining momentum. The Fed has acknowledged as much and has indicated that its current policy of steady balance sheet expansion, known as ‘QE2’, will end as planned next month, to be followed, presumably, by higher short-term interest rates at some point. Other factors equal, a healthier US economy and higher US interest rates should be dollar supportive.

The problem with the sort of analysis above is twofold: First of all, it looks at only one side of an exchange rate, which naturally must have two sides. Second, it implies that headline economic growth and the current level of interest rates are the decisive factors that determine exchange rates in the first place. In the current instance, notwithstanding somewhat stronger headline US economic data of late, for those who care to look behind the numbers, the US economy, by contrast, is showing disturbing signs of major structural weaknesses pointing to dramatically weaker growth in future. And while US interest rates may nevertheless begin to rise at some point, rates are already rising in nearly all the rest of the world and show no signs of peaking given strong growth and soaring inflation throughout much of the global economy. These developments undermine the dollar’s pre-eminent reserve currency status. Concern that the dollar might lose this position at some point is a far more important factor in determining exchange rates than incremental changes in relative growth, inflation or interest-rate expectations.

So what are these signs of major US structural weaknesses to which we refer? Well, consider that, for an economy to grow in sustainable fashion, there must be business investment. At a minimum, rates of business investment must at least keep up with depreciation; any lower and the capital stock will erode over time, reducing an economy’s potential growth rate. There are various ways of measuring US business investment. It is important, however, to distinguish between fixed investment (in plant, property and equipment) and inventory building. The latter is highly volatile and does not contribute materially to an economy’s sustainable growth rate, whereas the former is a better indicator of how sustainable a given economic expansion is likely to be over longer periods.

Now while the current level of fixed, nonresidential business investment, up about 10% y/y, looks reasonably healthy in a longer-term comparison, note that, when compared to the depth of the recent trough–the last recession–in fact the rate of investment is unusually weak. Indeed, it is so weak that, if it does not increase substantially further from here, it is unlikely that the economy is going to replace that portion of the capital stock which was wiped out during the downturn, placing the US on a weaker potential future growth path.

Business investment is weak considering the depth of the recent recession…

Sadly, it appears that, for the current cycle at least, the rate of business investment has already peaked. How can we tell? Well, the core rate of capital goods equipment orders, which excludes highly volatile orders for defense and aircraft, has turned down quite substantially in recent months. Now this is not necessarily indicative of a recession ahead, merely of a more subdued rate in business investment. But as discussed above, this implies that the US potential growth rate is going to be unusually weak during the current business cycle and, unless the situation begins to change, for an even longer period.

This is bad news on a number of fronts. Weaker potential growth implies weaker wage and jobs growth, lower tax receipts and, by implication, higher government deficits. If these are accommodated by easier monetary policy, this situation also implies a growing ‘stagflation’ risk. Given the massive public debt overhang already plaguing US federal, state and local government finances, it should be no surprise to informed observers that, not only is the USA now highly likely to lose its symbolic (if somewhat outdated) AAA sovereign debt ratings, but also that state and local government finances, already approaching junk status in many cases, just keep on deteriorating, with ominous implications for borrowing costs in future. Who, in their right mind, is going to buy debt which is growing rapidly in supply at precisely the same time that weak rates of business investment imply lower tax receipts with which to service such debt in future? In this context, it is understandable that US municipal borrowing costs remain near their recent, record highs vs. Treasuries.

It should thus also be no surprise that the dollar has suffered to the extent that is has of late. While there are debt problems aplenty elsewhere in the world, including in the euro-area periphery of course, recall that the US dollar, by virtue of its pre-eminent reserve status, is not a normal currency. But if the US should lose that status it will, by implication, lose a substantial portion of its investor base–central banks and other major global financial institutions–and US government funding costs would most probably soar to levels that could well be catastrophic.

…and appears already to have peaked for the current cycle

Given the potential gravity of the situation, the US government is going to resist the loss of reserve currency status with everything it has got in the arsenal: economic, political and possibly even military. Do not for one moment think that the government has not already got to thinking very, very seriously about what could happen in the event that the dollar’s status comes under threat. In much the same way that the Pentagon is constantly ‘wargaming’ various scenarios in order to continuously improve planning for all manner of potential contingencies around the world, there are most probably some quite senior and even quite smart people in the current administration who are currently tasked with ‘wargaming’ a dollar crisis and the possible responses thereto. Sadly, we’re not terribly confident that such contingency planning is going to be particularly helpful in the current instance. It might even be counterproductive, as we discuss later.

Continued in part two.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

It’s the End of the Dollar as we Know It (Do we Feel Fine?) Part 1 of 3 originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

“Of course, that would’ve been a home run,” I said.

“Welcome to Colombia.”

We were sitting in a comfortable restaurant in Medellin’s downtown area. Medellin is a pretty city that spills out across a river valley and creeps up the walls of the surrounding mountains. Medellin’s nickname is the City of Eternal Spring, thanks to its temperate weather. If you have an image of Medellin (and Colombia) as a violent place, a visit here would change your opinion. We could have been in any number of cities around the world. I never felt unsafe. (As with any city, there are good and bad areas.) The bars and restaurants were full at night. The skyline was lit with tall buildings. The sidewalks busy with people. It was not always so, as Medellin was once a notoriously dangerous city.

Security issues have been a huge problem in Colombia’s past, but it is much improved, and most of the remaining issues are deep in the jungles, near the porous borders with Venezuela or Ecuador. (In fact, while we were here, rebels snatched 23 Talisman workers doing seismic work near the Venezuelan border. Even these occurrences, however, are now rare.)

Today, Colombia is a young and growing emerging market that has a lot of catching up to do – and that is the core of the investment opportunity here.

For example, one day, we visited Cementos Argos, the largest cement company in Colombia, with a 51% market share. It is an asset-rich company. In addition to its cement operations, Argos owns a huge land bank of 5,000 hectares and a portfolio with stakes in three other listed Colombian companies worth $3.3 billion and 600 million tons of coal reserves.

We met with Ricardo Andres Sierra, the CFO, who told us in the bad old days, plants could work only from 6 a.m. to 6 p.m. And there were parts of the country where the company simply did not go. But today, the plants run 24/7. “We can go wherever we want,” he said.

Argos has a huge opportunity in Colombia. As is often the case when a boom arrives, the building of the infrastructure to support the boom comes later. Colombia is way behind in infrastructure. It needs miles and miles of roads. It needs bigger ports, expanded airports and railroads. This has been a recurring theme on our trip, something we heard everyone mention.

Sierra gave us an arresting statistic. He said Colombia consumes about 220 kilograms of cement per capita annually, compared to 500 kilograms for Vietnam. The point being that Colombia is well below the consumption rates of comparable developing economies. There is lots of room to grow.

We talked about new road projects, such as Ruta del Sol, which will connect Bogota, the capital in the Andes, with Santa Marta, a port city on the Caribbean Sea. We talked about the Cartagena Refinery expansion. Both are huge projects, “as big as the Panama Canal expansion,” Sierra said. There is also a tunnel project that will connect Bogota to the Pacific port at Buenaventura. There are projects for hydropower plants, bus systems, pipelines and much more.

“Infrastructure is the key to growth in Colombia, that’s for sure,” Sierra ventured.

This has also been one of the surprises of the trip. We had heard and read, of course, about the relative lack of good infrastructure in Colombia. But it is another thing to be down here and see it firsthand.

Traffic in Bogota, for example, is impossible – or nearly so. The roads are choked with small cars that go nowhere fast. It seems to take forever to go even short distances. One of our contacts here told us that Colombia has only 300 kilometers of two-lane two-way roads.

The government knows this, and there is a lot of money slotted for infrastructure development in the coming years. Argos is in a great position to profit from the build-out of Colombia’s infrastructure.

So infrastructure is one of the big investment themes we’ve found here.

Another is oil, which is not surprising, as oil makes up 40% of Colombia’s exports and is one of the headline-grabbing investment stories in Colombia. The years of violence in the country hampered exploration and development of Colombia’s oil assets. The easing of security issues has brought back the oil companies in a big way. Also, Hugo Chavez has chased out a lot of the talented oilmen from Venezuela. Many came to Colombia and used their expertise in heavy oil to tap Colombia’s rich Llanos Basin, in the east, which shares a similar geology with Venezuela’s prolific fields.

What may surprise you is just how quickly it’s all happened. Much of the acreage is already locked up. When new blocks come up for bid, they are heavily contested. We met with Charles Gamba, president and CEO of Canacol Energy. He told us there were 67 bidders on their latest block. This industry is developing very, very quickly.

In 2003, Colombia licensed only 4% of its available acreage. Today, that’s 60%. So there are several companies here that have stocked up an enviable portfolio of prospects to explore. And oil and gas will be an important driver of Colombia’s economy for years to come as it develops further.

In any case, there are, as in any market at any time, opportunities. And there are certainly opportunities here.

Stay tuned!

Regards,

Chris Mayer
for The Daily Reckoning

Welcome to Colombia! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Both Chinese sociology professor Zhou Xiao Sheng and Hong Kong-based analyst Gillem Tulloch interviewed in the piece fear growing polarization between rich and poor. Should the China real estate bubble burst, they report, significant numbers of people will be impoverished, and the chance of social unrest or revolution, often considered the Chinese government’s biggest concern, will increase.

You can watch the video below, which came to our attention via a post on revisiting China’s ghost cities from The Mess That Greenspan Made.

Peering at China’s Ghostly GDP Quality originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

To hear the press tell it, when a mob upsets a dictator, it is because they “yearn for freedom.” They can hardly wait to get into the voting booth so they can pull the lever for truth and justice.

Martin Wolf, writing in The Financial Times, and recently listed by Foreign Policy magazine as one of the world’s 100 best thinkers, says the move in Egypt was a step in the right direction. How does he know it is the right direction? Because that’s the way the rest of the world is going!

He provides figures showing that there are many more democracies today than there were in 1945. The reasons he gives for this shift? Economics. Education. Richer, better educated people are less inclined to leave all the power in the hands of an autocrat, he thinks.

But there’s another reason.

“The most powerful reason for believing in democracy’s future, however, is that it responds to something deep with in us.”

Yes, dear reader…it is in our genes. Our inner democrat just needed about 2,000 years after the birth of Christ to express himself. And now he’s mouthing off everywhere.

Or… Is it possible that democracy is just the flavor of the month…an evolutionary development, like all the forms of government that came before it? Is it possible that it succeeded in the 20th century because it was much better adapted to leeching out the wealth and complicity of the average man? It gave him a stake in the system – like getting some prisoners to guard each other, or bribing taxpayers to rat out their neighbors to the IRS? Isn’t it possible that by giving the masses a “voice,” the elites who really control government are better able to take his money…and, if necessary, his life?

Soldiers will do their duty to a dictator, if the price is right. They will do their duty to the government they helped elect for less. And they will more willingly submit to government’s taxes, too, if they feel they are its masters, rather than the slaves. The real difference may only be an illusion, but it is an effective one. In practice, the individual may have less ability to influence the large pool of voting numbskulls than he does to influence a single knuckleheaded autocrat. But heck, we’re all democrats now.

Regards,

Bill Bonner
for The Daily Reckoning

On Humanity’s Instinctual Need for Democracy originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".