How Reliable is CNBC’s Rankings of the Best Countries with Long Term Growth?

CNBC recently came out with a slide show depicting that troubles in the Eurozone and in the US has been prompting investors to search for new or alternative markets to invest in. And based on their selections mainly derived from demographics, natural resources or geography they came up with the following list:

10 Algeria

9. China

8. Egypt

7. Vietnam

6. Malaysia

5. Bangladesh

4 India

3 Peru

2 Ukraine

And the winner of CNBC’s best countries for long term growth…

…is the Philippines.

Given the endowment effect or home bias I should be screaming “yehey, buy buy buy the Philippines!”

Here is what CNBC has to say on the Philippines

1. Philippines

Projected annual growth: 7%

2010: $112 billion*

2050 projected GDP: $1.688 trillion

The Philippines has one of the fastest-growing populations in Asia. The population is set to jump by almost 70 percent over the next 40 years, and HSBC believes the combination of its powerful demographics and strong fundamentals will drive the economy to become the world’s 16th largest by 2050. That would mark a jump of 27 places from its current ranking of 43.

The country is one of the world’s largest exporters of labor, with over 9 million Filipinos working abroad, according to the latest data from the Commission of Filipinos Overseas. In 2010, almost $19 billion was sent back to the Philippines as remittances from Filipinos working abroad.

More recently, the country’s fast-developing business process outsourcing (BPO) industry has helped keep some of the workforce from leaving the country. Already 350,000 Filipinos are estimated to work in call centers, compared with 330,000 Indians, according to the Contact Center Association of the Philippines. The industry is projected to provide more than 1 million jobs within two years.

The economy’s focus on the services sector and domestic consumption, as well as a lower exposure to global financial markets, helped it to escape a recession following the 2008 global financial crisis.

It would seem as reductio ad absurdum to predict on long term growth based simply on variables of natural resources, demographics and or geography.

If these variables have been instrumental in generating prosperity, then the linkages should have been evident today.

Yet in looking at the world’s top 20 wealthiest nations based on per capita income from Wikipedia.org we see limited influences of abundant natural resources, young populations (demographics) or geography.

Why?

Countries with natural resources are usually afflicted by what is known as resource curse, which according to Wikipedia.org

refers to the paradox that countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources. This is hypothesized to happen for many different reasons, including a decline in the competitiveness of other economic sectors (caused by appreciation of the real exchange rate as resource revenues enter an economy), volatility of revenues from the natural resource sector due to exposure to global commodity market swings, government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions (possibly due to the easily diverted actual or anticipated revenue stream from extractive activities).

In reality, the biggest reason why the resource curse occurs has been due to the cartelization of resource based industries by politicians and their oligarchic cronies. These have mostly led to a political economic regime that have been anchored on anti-competition regulations which inhibits external and domestic trade.

Also it would be pretty naïve to focus on geography when vastly improving modes of transportation have been reducing the attendant costs.

Transport, Insurance and freight costs as share of import cost have been on a secular decline

Mark Dean of the Bank’s International Economic Analysis Division and Maria Sebastia-Barriel of the Bank’s Structural Economic Analysis Division notes in the following study,

One of the most obvious costs to international trade is the cost of transporting goods from one country to another. Transport technologies are continually improving and transport services are also becoming cheaper through increased competition. The goods transported are also changing; some goods are now transported electronically, such as newspapers and magazines, due to improvements in communication technology and others are becoming lighter, for example mobile phones. All this should be reflected in lower transport costs.

In short, falling transaction costs diminishes the impact of geographic vantages.

Finally while I agree that “go forth and multiply” should generally be positive for the global economy; that link may not be obvious.

Most of the nations with the fastest population growth (table from Wikipedia) have hardly been the best economic growth performers. To the contrary most have been economic bottom dwellers.

The fundamental reason is that commercial activities have been severely restrained due to lack of property rights, deficiency in the rule of law, failure to protect contractual rights and limitations to voluntary productive exchanges. Also the political economic environment by many of these economies can be characterized as having been plagued by despotism and socialism. So the positive effects of population growth have been stunted, instead large populations morphs into a social burden.

Next, based on population growth, Indonesia has far outsprinted CNBC’s top 10 (chart from Google Public Data).

Indonesia has likewise been a resource rich country, and as our neighbor has been endowed with geographic advantages. So it would be a curiosity for me that Indonesia has been glossed over by CNBC.

And in terms of debt management, (chart from tradingeconomics.com) Indonesia has thus far bested the Philippines.

While this is both good news for the Philippines and Indonesia, the bottom line is that CNBC’s coverage hardly seems objective. There must be some undeclared biases in their methodology, such that even considering the few specious variables they can be amiss of other major potential contenders for investors, as Indonesia or Thailand.

And finally too much reliance on domestic consumption is unsustainable. This has been the Keynesian mantra embraced by mainstream media.

When excess consumption (government and private) in the Philippines will get manifested in the current account balance, which has still been positive today due to remittance and portfolio flows, the country’s declining debt to gdp trend will reverse and deteriorate.

Current negative real rates policies have already been adding to consumption activities via an artificially stimulated boom from domestic monetary policies by the BSP.

Yet the obverse side of a boom is a bust. And that’s hardly a long term positive growth proposition.

[As a caveat I don’t trust government statistics considering that almost two fifth of the Philippine economy is considered informal or underground or shadow. There are yet many factors not captured by statistical aggregates.]

Finally it should be a reminder that the key to prosperity is through attaining trade competitiveness (chart from the WEForum) via economic freedom or a deepening of the market economy or capitalism. The most competitive nations have almost reflected on the same standings as with the most prosperous nations.

To quote the great Ludwig von Mises

Capitalism is essentially a system of mass production for the satisfaction of the needs of the masses. It pours a horn of plenty upon the common man. It has raised the average standard of living to a height never dreamed of in earlier ages. It has made accessible to millions of people enjoyments which a few generations ago were only within the reach of a small elite.

Apparently, that’s not in the equation of CNBC. When reality is dealt with a blackout occurs.

OPEC’s Welfare State: Buying Off the Populace to Maintain Political Power

From Bloomberg, (bold highlights mine)

Saudi Arabia will spend $43 billion on its poorer citizens and religious institutions. Kuwaitis are getting free food for a year. Civil servants in Algeria received a 34 percent pay rise. Desert cities in the United Arab Emirates may soon enjoy uninterrupted electricity.

Organization of Petroleum Exporting Countries members are poised to earn an unprecedented $1 trillion this year, according to the U.S. Energy Department, as the group’s benchmark oil measure exceeded $100 a barrel for the longest period ever. They are promising to plow record amounts into public and social programs after pro-democracy movements overthrew rulers in Tunisia, Egypt and Libya and spread to Yemen and Syria.

Unlike past booms, when Abu Dhabi bought English soccer club Manchester City and Qatar acquired a stake in luxury carmaker Porsche SE, Gulf nations pledged $150 billion in additional spending this year on their citizens. They will need to keep U.S. benchmark West Texas Intermediate crude oil at more than $80 a barrel to afford their promises, according to Bank of America Corp…

OPEC will need WTI at above $80 a barrel to maintain the increased social spending because the costs of Persian Gulf budget obligations have more than doubled since 2006 to $77, with Saudi Arabia needing an average $82, according to Deutsche Bank AG. OPEC’s basket price at more than $100 puts it on course to earn $1.01 trillion this year, the U.S. government said…

This time, rulers are shoring up domestic support. Demonstrations in Saudi Arabia, the Arab world’s biggest economy, failed to take off in March as citizens were offered extra money for housing. Government employees had their salaries increased 15 percent and got two months extra pay. Kuwaitis received 1,000 dinars ($3,664) and free food for 13 months, state news agency KUNA said in January. Earlier this month, Qatar’s crown prince Sheikh Tamim bin Hamad al-Thani ordered 30 billion riyals ($8.2 billion) in civil servant salary increases and pension-fund allowances.

“As soon as the government announced handouts, people went out and bought cars,” said John Stadwick, managing director of General Motors Co. (GM)’s Middle East operations. Sales in Saudi Arabia climbed as much as 48 percent a month since April, compared with a decline in February and March, he said.

Gulf nations are also aiding neighboring Sunni monarchies to prop up dynasties that have ruled parts of the Middle East for centuries. They pledged $20 billion for Oman and Bahrain to fend off protests and invited Morocco and Jordan to join the six-member Gulf Cooperation Council which will include economic assistance. In addition, newly democratic Egypt received $20 billion from Qatar and $4 billion from Saudi Arabia as the Gulf seeks to retain influence in the most populous Arab nation.

Of OPEC’s 12 members, nine increased 2011 budgets and of the remaining three, only Nigeria amended its budget lower, while the U.A.E. doesn’t disclose its public spending. Nigeria, Africa’s biggest oil producer, set up a $1 billion wealth fund in May split into an infrastructure fund, a future generations fund and a stabilization fund. Algeria’s cabinet approved a 25 percent budget increase to pay for the salary raise and food subsidies amid protests that have ended 19 years of emergency rule and led to a review of the election law.

For many of the incumbent political leaders of OPEC nations, buying off the population with expanded welfare spending extracted from oil revenues will only buy them sometime to preserve their grip on power.

With the growth of welfare spending increasing the cost of oil, OPEC’s welfare state has increasingly been dependent or sensitive to ascendant levels of the prices of oil.

Anytime oil prices don’t keep up with the cost of maintaining the system heightens the risks of political upheaval (Arab Springs).

So we can expect welfare states even among resource rich (resource curse) nations to continue to yearn for inflationism. As this should keep commodity prices elevated, as well as, depreciate the purchasing power of money used to finance the current welfare spending.

Again inflation is a policy that won’t last.

Prediction Fulfilled: Philippine Mining Index Tops 9,000 (Now 11,300!)

``A cynic is a man who knows the price of everything but the value of nothing.”-Oscar Wilde

WAY back in 2003, I turned bullish on gold and wrote a series called the “Rip Van Winkle in Gold”. (No blogging yet for me)

Not content with newsletters to our clients, I submitted my article entitled, “The Philippine Mining Index Lags the World” to two international websites (see link: safehaven.com and goldseek.com) who promptly published my outlook. Of course, I would like to thank safehaven’s Mr. Bruce Stratton and Goldseek’s Mr. Peter Spina for this.

My underlying message: Philippine mining industry, which should benefit from a secular global bullmarket in gold prices, will eventually become a dominant theme for the PSE. In addition, not only in terms of stock prices, but likewise from an increasing share of contributions to the domestic economy.

The last time I followed up my prediction for the Philippine Mining Industry to test the 9,000 level was in May 6, 2007 [see Philippine Mining Index: Reliving The March to 9,000!]

How time flies!

Anyway, the red arrow in 2003 shows that the Philippine Mining Index was at around 1,500 when I made the audaciously unorthodox call. The light orange arrow, where the Philippine Mining Index reached its high in 1987, served as my benchmark. The blue arrow marks today’s milestone breakout.

It’s isn’t easy to be a contrarian. Aside from being ostracized for espousing unpopular unconventional views, we occasionally get ridiculed or scoffed or mocked at. I never realized that publication can also be a humbling experience, aside from the self-effacing trait one has learned and gleaned from dealing with markets.

Speculative Stigma, Resource Curse

Anyway, the sharp downside volatility of 2008 meltdown likewise placed into a stern ordeal my beliefs. The mining index got bludgeoned the hardest. This goes to show local investors have yet to assimilate on the risk reward prospects of the industry aside from the realization of the diminishing risk premium relative to the reckless policies engaged by policymakers that enhances the value of mining products.

Moreover, the speculative stigma has yet to be eschewed by public. This has been quite evident even in the political context where populist politics have equated mining as anti-environment. This is where reason has been blinded by unthinking populism predicated on ipse dixitism and of the farcical nobility from the socialist mindset.

By prohibiting trade, supply is taken off the markets from which, in the face of limitless fiat currency issuance by global governments, would only provoke a supply shock that would send prices spiraling higher.

And a spillover of high prices to a wider basket of goods would only result to increased economic hardship in the name of environmental preservation. Moreover there are other opportunity costs from preventing commercial operations (such as increased employment and livelihood, technology transfers and other business opportunities).

Yet if mining has been generalized as totally environmentally destructive then it follows that we should expect economies as Australia, Canada, Chile, New Zealand and others to be vast wastelands. Conversely, considering that the domestic mining industry has largely been in the doldrums due to two decades of falling commodity prices, then the Philippines must have been an environmental model. Unfortunately, none of the two arguments are valid, demagoguery has been unsupported by facts. To add, environmentalism has been converted to religion-where reasoning is proscribed.

At the end of the day, high commodity prices would only compel for a “resource curse”. This means that eventually the political elite and their supporters or the economic rent seeking interests tied to them will use state power to engage in resource extraction. And by preventing trade and competition and by monopolizing commercial activities by the greasing of the public officials, these actions will effectively undermine social and political institutions which should impede growth-the recipe for the resource curse.

Examining The Mining Index

Going back to the mining index, compared to the previous boom, which had been premised on foreign investors buying into the local industry, today’s mining index breakout seems to have been based on several Godfathers’ (to borrow Joe Studwell moniker of domestic economic elite) interests on the publicly listed mines. Perhaps the dynamics mentioned above could be in play.

Principally the mining index boom has mainly been prompted for by the recent explosion of Philex Mining [PX] prices.

PX, a gold mining company, which price per share almost doubled from last month constitutes more than 60% of the Philippine Mining index weighting. In addition Philex’s market cap as a Phisix composite member has stormed to 4.19% as of Friday’s close.

Philex, which has surprisingly surpassed Metrobank [MBT], Globe Telecoms [GLO], Banco De Oro [BDO] and etc., is now among the top 10 or among the Phisix big leaguers.

Although as a caveat, the recent price action of Philex appears to have reached bubble like proportions. PX’s turnover this week constituted about 25% of the Philippine Stock Exchange’s total. The hefty turnover somehow replicates the Meralco saga [see Bubble Thoughts Over Meralco’s Bubble] which makes us leery of the attention PX has been getting.

But don’t get me wrong. Whether it is Meralco or PX they are all headed higher over the longer term. In a bullmarket-generally- all stocks go up to paraphrase Edwin Lefevre.

It is just that the unwarranted short term attention that could pose as a barrier for sustained new interim highs following a record breathtaking run.

It is true that size and heft matters, and this has been the reason for what we might call “survivorship bias” or the tendency to focus on winners at the expense of the mediocre.

The fact of the matter is Nihao Minerals Resources [NI], another mining outfit which could be classified as exploratory since the company has yet to make a buck from actual mine operations, has been a far stellar performer than PX.

NI’s chart has been parabolic or vertical (black candle), has returned almost 5x or 500% since the first quarter of this year and has breached to a new record high prices along with PX.

Moreover given the chart above of the other mining components as part of the local mining index, we can note that all the mines-Apex Mining (light orange) [APX], Lepanto Consolidated (dark green) [LC], Manila Mining (light green) [MA], Atlas Consolidated (blue) [AT] and Geograce Resources (gray) [GEO] have all made substantial moves, but unlike PX and NI are still far from the 2007 highs.

The chart excludes other mining index members particularly Omico Mining [OM] and oil companies Philodrill [OV] and Oriental Petroleum [OPM]

My Two Cents On The Domestic Mining Industry

So here are my thoughts on mining industry:

1. Given the recent explosion of NI and PX, corporate or mine product price fundamentals does not appear to be the key drivers but from alleged interests from new class of investors [including Godfathers] to partake of key stakes in the firm. Of course, loose monetary policies have been the unseen or unrecognized factor behind the reanimation of local equities in general.

2. Since the domestic mining industry remains broadly underinvested and where current crops of mining firms lack the capital to expand or operate, the major catalysts for prospective runs would be speculations on joint ventures and or prospective M&A developments from new investors (they could be foreign or local godfathers)

3. Actions among the mining components appear to be rotational- a classic symptom of bullmarket driven by inflation. This implies that the next major moves could likely come from those that have been in a reprieve.

4. A sustained bullmarket in commodities- arising from monetary “pass through” or from BRIC and emerging markets demand- is likely to underpin the secular case for investing in local mines.

5. Compared to other sectors mines are likely to generate ALPHA. As in the case of PX which traded at about .50 cents (dividend adjusted) per share in 2005, and closed 16.75 per share last Friday or a 3,300% for 4 years (285% p.a,) in spite of the volatility, should be very rewarding for long term investors.

That’s because using the “follow the money trail” analysis underinvestment in a world where money is given for free should translate to a gush into the industry which equally becomes rife for M&A rumors.

6. Market trends are social trends. As mentioned above, the speculative label on the mining industry is a symptom of the lack of social acceptance or persistent aversion emanating from over two decades of depression. Essentially such resistance is psychologically bullish. That’s because despite present levels, only a handful have been invested. In social terms, bandwagon effect occurs when trends are reinforced by confirmation of expectations. In other words, long term trends draws in more converts.

It’s when commodities or the mining industry is seen as “risk free” or deemed as blue chips or becomes the public’s favorite object of discussion- is where the red flag should be raised. As far as we are concerned, such social dynamic seems distant.

From this juncture, we believe that the mining index next goal would conservatively be at least 20,000.

Important disclosure: I am not fortunate to own any of today’s star performers. So it would seem like a pyrrhic victory-right in essence but less lucky in selection.