Saudi Sows Budget Busts


Oil prices fell below $80 this week and are down ~25% since June, driven in large part by a rapid increase in supply while demand growth slows.   Reasons for slowing demand are well-understood: Europe’s economic malaise and China’s slowdown are two logical explanations. Rising vehicle fuel-efficiency and the increasing use of alternative energy sources are two additional drivers.

The supply side of the story, however, is more intriguing. While the US energy boom is certainly a factor, it’s not the only one. Consider the fact that Libya – a country acknowledged by many as effectively in the midst of a massive civil war – increased oil production from about 200,000 barrels in May to more than 1 million barrels a day in October. Or that swing producer* Saudi Arabia upon noticing excess supplies, decided to increase production in September, further exacerbating price pressures.

So What? The most commonly cited reason for this seemingly-irrational decision is that Saudi Arabia is seeking to maintain its market share versus Russia and other rivals. Less common, but perhaps more compelling, is that the Saudis (in cooperation with the United States) are actively squeezing Iranian and Russian budgets for political purposes.

Half of Russian government revenues come from oil and gas, and the Kremlin assumes $100 oil to balance its budget. $80 oil creates a gaping hole in Russian finances, one that has already prompted the Russian finance minister to suggest budget cuts. Last week, Iranian leaders noted “some so-called Islamic countries in the region are serving the interests of America and (other) arrogant powers in trying to squeeze the Islamic Republic." The 2014 Iranian budget, according to the WSJ, assumes $140 oil. Who else loses with low oil prices? Venezuela, Algeria, Iraq, Nigeria, and Ecuador do. They all have budgets that assume oil remains above $100.

In the midst of these budget busts, are there any winners? Meaningful oil importers include China, Japan, Europe, India, Korea, and Thailand, to name a few.  The US consumer is another key beneficiary, where lower energy prices increase discretionary budgets.  In this light, Saudi Arabia’s actions may be very rational: help out current and future customers and friends and simultaneously hurt enemies. Makes sense to me.


* Because American energy production is decentralized and spread among hundreds of companies making individual decisions, Saudi Arabia remains the world’s “swing producer.”

One Child Creates Global Economic Ripples

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Chinese GDP numbers released yesterday indicate the world’s second largest economy has slowed yet again. I believe this trend is likely to continue…here’s why.

There are three primary sources of growth in any economy: (1) labor, (2) capital, and (3) productivity. Labor-driven growth originates from adding more workers to an economy. Capital-driven growth comes from deploying more equipment. And lastly, productivity-driven growth is the result of squeezing more output from existing labor and capital.

Labor in China is unlikely to be a meaningful source of growth for the economy because the one-child policy has created a demographic ripple. Sometime in the next few years, those leaving the labor pool will exceed those entering it. Labor may in fact emerge as a potential economic drag!  It's not surprising to me that Beijing began last November to relax the one-child policy.

Population pyramid of China

What about capital? China has been on debt-fueled capital expenditure binge that has mis-allocated capital and created significant excess capacities in support of a housing boom that appears to be busting.  Might the dearth of home buyers be partially attributable to the one-child policy? China will need to spend at least the same amount this year as last simply not to shrink.  But there are plenty of signs of excess in past allocations; investing in the face of overcapacity can lead to an even harder landing in the future.

As for productivity, surely a factory worker is more productive than a farmer and the ongoing urbanization can drive growth for many years to come, right? Not really. Urbanization is not as simple an 'answer' as it may seem either.  While China's data indicates that there is a great deal of potential remaining for migration-fueled growth, much of this urbanization has already happened.  First, China defines a region as “urban” if it has a population density of 1500 people per square kilometer…but by that definition, Houston (America’s fourth largest city) is rural!  Second, the most likely age band to migrate is 16-24 year olds, and that age band is shrinking by 25% between 2010 and 2015.  Another impact of the one-child policy?  Third, China's hukou residency permit system (being reformed) classifies individuals according to where they live, not where they actually are (and we've already had lots of migration).   Thus, there are those working in actual cities that are deemed rural, or working in factories but are listed as farmers, and there are fewer potential migrants!

So what? My interpretation of these facts implies that China will continue to slow for the foreseeable future. The world is underestimating Chinese urbanization, and there is a structural headwind that makes a low single-digit growth rate not just possible, but likely, and this has massive implications for asset prices, interest rates, commodity markets, and inflation rates.   It may take a village to raise a child, but one child can create global economic ripples.

King Morocco


The protein consumption boom currently underway in the emerging markets is offsetting plateauing protein demand in several developed nations. The result, seen below, is a remarkably stable trajectory of animal protein consumption.


Source: Tysons 2013 Factbook, USDA, FAO, and OECD


So what? Food writer Michael Pollan noted that “you are what you eat eats” in his NY Times bestseller The Omnivore’s Dilemma, highlighting the fact that rarely is the food we consume the beginning of a food chain. So let’s investigate what our protein sources are consuming.

According to the Tyson’s 2013 Factbook (available HERE), each pound of chicken required 1.96 pounds of feed. This compares to almost 4 pounds for pork and approximately 8 pounds for beef. These metrics (~2x, ~4x, and ~8x), referred to by industry participants as the feed conversion ratios, provide some insight into the potential boom forthcoming in the demand for grains that go into the feed. If you are what you eat eats, then you are de facto consuming as much as what you consume consumes. Imagine thinking of your steak as 8 times as much grain!

Continuing the logic further leads to an investigation of what grains eat…and this takes us to a very problematic component that underpins much of the grain complex today – fertilizers. The three key ingredients needed to support plant growth are nitrogen, potassium, and phosphorous. Nitrogen in plentiful, but requires significant energy to “fix” into a usable form for plants. Water soluble potassium, know as potash, is geographically dispersed, but ~80% of reserves found in Canada, Russia, and Belarus. Water soluble phosphorous is mined as phosphate rock and is shockingly concentrated in a very few countries. According to the US Geological Survey (data HERE), more than 70% of proven phosphate rock reserves are currently in Morocco, a share that implies market power in fertilizers, food, and protein that is greater than that of Saudi Arabia or OPEC in the oil market.

Most economists, strategists, policymakers, and investors dismiss the seeming irrelevance of Morocco with a "Frankly, my dear, I don't give a damn..." but with respect to today's Casablanca, the phrase has outlived its useful life.

Hong Kong Sounds the Gong

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A mere 5 weeks ago, the Chinese Communist Party declared that the Chief Executive of Hong Kong would be elected from a slate nominated by Beijing. In so doing, it ignited a student uprising now known as the "umbrella revolution" in which up to 200,000 protesters took to the streets of Hong Kong in non-violent civil disobedience.  According to a declaration from the Hong Kong Students Federation (available HERE), the protesters are seeking (1) a confirmation of civil nominating procedures, (2) political reform in HK, (3) an apology from Beijing to the people of Hong Kong, or (4) the resignation of Hong Kong's top three executives. The protesters are drawing attention to what students are calling "imperialism with Chinese characteristics."

So what?  While the ultimate resolution of this standoff is impossible to know, I do believe that Hong Kong is sounding the gong on the global love affair with China.  While much of the world rushes towards building closer ties with China, those closest are running the other way "in search of things money can't buy in China: Cleaner air, safer food, better education for their children" noted Jeremy Page in a piece entitled "Plan B for China's Wealthy."  Consider the fact that ~85% of all "investor visas" issued by the US government so far this year have been awarded to Chinese nationals.  Or that Chinese investors are buying homes, art, and other assets outside of the Middle Kingdom as rapidly as possible.  Capitalism with Chinese characteristics is driving the financial flight of Chinese characters.

The WSJ's Bret Stephens recently wrote "Hong Kong is what China could be if it weren't, well, China -- if state intervention were minimal; if government weren't a vehicle for self-enrichment; if people could worship, write, exercise and associate just as they please."  He continues, noting the fundamental problem of politics with Chinese characteristics: "dreaming is the essential freedom: there can be no true dreaming when the state regulates the sorts of dreams its people may have."

Hong Kong has sounded the gong: the world must awake to the realities of life with Chinese characteristics.

Gloomy Outlook for Ghana: Where Gold Does Not Shine Anymore

Scrapping the Cedi could lift Ghana’s confidence and GDP, but only citizens can stop corruption
Vikram Mansharamani
YaleGlobal, 2 October 2014


NEW HAVEN: As famed US investor Warren Buffett has aptly stated, “it’s only when the tide goes out that you can see who is swimming naked.” Ghana is swimming naked, to put it bluntly, and this is increasingly obvious to the world. With its currency, the cedi, fast becoming not worth the paper it is printed on, Ghana’s salvation may have to come from embracing the US dollar.

A mere two years ago, Ghana had been hailed as the world’s fastest growing economy. Today, the country is seeking help from the International Monetary Fund to navigate a nasty economic slowdown, and 70 percent of the government budget is spent on supporting an inflated bureaucracy. Ordinary citizens lack basic infrastructure, and as a result of poor sewage and sanitation, the country is experiencing a cholera outbreak approaching epidemic levels.

Not surprisingly, confidence has plunged. Capital has fled, and the near 30 percent drop in the value of the cedi relative to the dollar this year has shaken the faith of even the most dedicated Ghanaian business leaders. Recent surveys suggest business confidence in Ghana has fallen from over 90 percent to 20 percent over the past few years. Unfortunately, the confidence problem is compounding, as seen in the recent game of domestic brinkmanship embarrassingly played out for a global audience during this year’s World Cup.

In June, the Ghana World Cup team, having lost faith in their own government’s ability and willingness to pay, demanded that the Republic of Ghana fund their appearance fees in cash immediately – or they would refuse to play in their next scheduled match. Fearing global public embarrassment, President John Mahama acquiesced and delivered about $3 million in cash on a chartered flight from Accra to Brasilia to meet the players’ demands. With the drama of reality television show, reporters from global news agencies literally followed the money from the airport to the players. The events inspired a Hollywood screenwriter to begin developing a fictional account of the relay, though classifying the film as suspense, comedy, thriller or tragedy may prove a difficult task!

Missed economic opportunities are a common discussion topic these days, with commentators regularly highlighting Japan’s lost decades, Europe’s deflationary dynamics and America’s lackluster labor markets. But when it comes to genuinely lost decades and foregone economic opportunity, Ghana is a serious contender for first prize.

Figure 1: GDP for South Korea and Ghana, in US$ Billions
A Comparison: Two developing countries were neck to neck in 1970, but today, South Korea’s GDP is near 30 times that of Ghana’s (Source:, World Bank)

Fifty years ago, Ghana boasted a per capita GDP roughly comparable to that of South Korea (Figure 1). Both countries had about 60 percent of the labor pool in agriculture. Today, South Korea has a GDP almost 30 times that of Ghana. Unlike South Korea, Ghana has been blessed with natural resources, ranging from gold to fertile land. The commodity boom of the 2000s supported strong growth and when offshore oil was discovered, it seemed Ghana’s fate had finally turned. Optimism reigned and by 2011 the country became a poster child for Africa’s resurgence. Confidence was running high, possibly too high, and by 2013 in a classic sign of entrepreneurial hubris and overconfidence, a developer proposed building the skyscraper complex Hope City, a US$10 billion development. At that time, the cost of the proposed development represented more than 20 percent of the country’s GDP.

Political stability had been elusive for several decades, but appears to have tentatively taken hold, and ballot-box battles appear more likely than the once frequent barrack-mobilized coup d’états. Nevertheless, several leaders have privately expressed concern that the country’s woes may in fact inspire a non-democratic leadership transition. Ghana’s coups took place for many reasons, but chief among them was the military’s desire to clean up a corrupt and ineffective government, ridding the country of an administration failing to meet the needs of Ghanaian citizens or address social injustices. In this regard, Ghana’s leaders should take notice.

Ghana's leaders privately express concern that economic woes could inspire a non-democratic transition.

The economy and government budget remain heavily dependent upon gold production, and 2013’s rapidly retreating gold price exposed economic weakness. The lack of accountability is on full display. Consider admissions from the auditor-general that the government has lost more than US$1 billion to payroll fraud and non-existent civil servants – an amount roughly equivalent to the donor aid received by the country. A recent program intended to support development in the northern portion of the country involved significant capital invested in a guinea fowl farm. Government auditors arrived to confirm the farm’s progress and found no fowl. “They’ve flown to Burkina Faso,” noted a farmer.

The government admits that it does not have adequate systems to track payments and recently retained KPMG to assist in auditing personnel. Surely ordinary Ghanaian citizens are not blind to such waste.

It is useful to summarize recent comments given by Mensa Otabil, one of the country’s most influential and respected thinkers, at the Festival of Ideas conference that took place in Accra in August. Otabil drew comparisons between the Titantic and Ghana’s prospects and between the ship’s overconfident captain and Ghana’s leadership. He urged leaders to acknowledge the gravity of the situation and accept losses while saving whatever possible.

The roots of Ghana’s woes are too numerous to address in any one policy, but it does appear that the currency may have outlived its useful life.  Originally intended to provide a sovereign means of exchange, today it is a source of uncertainty and highlights the country’s inability to constrain spending and maintain fiscal and monetary discipline. Ghana should scrap the cedi.

Figure 2: Bank of Ghana Runs Printing Press at Full Speed
Annual Growth Money Supply: Ghana’s cedi has depreciated since its 1967 debut; US$10,000 worth of cedi then would be worth US 30 US cents today (Source:, World Bank)

The cedi has depreciated by more than 99.99 percent since its formal adoption in 1967 (Figure 2). US$10,000 converted into cedi at that time would today be worth approximately US 30 cents. Few, if any, have faith in this currency. Classic business strategy suggests that a company outsource whatever is not core to its competence. Why not outsource the currency and attendant monetary policy? While the US dollar provides one option, almost any stable alternative to the cedi will do.

In fact, some of the economy has de facto dollarized already. Many individuals and companies think in dollar-terms and simply use the conversion rate to price in local terms. This should make a transition away from the cedi easier to adopt and less disruptive than Ghanaian leaders may fear.  While the success of Ghana’s recent Eurobond offering, oversubscribed three times, is compelling evidence of the global search for yield, it also provides strong support for the argument that cedi risks remain high on investor minds. Although Ghana’s medium-to-long run economic outlook is promising, it’s unlikely a cedi-denominated bond would have attracted such demand.

The benefits of outsourcing monetary policy have been visible from Hong Kong to Zimbabwe to Ecuador. Adopting the US dollar has squashed inflation, encouraged growth, enhanced monetary credibility, and helped attract foreign capital back into the country. The greenback is not, however, able to eliminate corruption and inefficiency – something citizens must work on themselves. Ghanaians must pay taxes – might the world cup event have been an elaborate tax-avoidance scheme? – and demand government accountability. Simply dollarizing won’t do that. Such changes can only come from within.

Using Otabil’s analogy, the Ghanaian ship is sinking, and bold leadership is required. Outsourcing the currency may bring much-needed fiscal and monetary sobriety – and a lifeline that just may buy enough time for Ghana to save itself.


Vikram Mansharamani, PhD, is a lecturer in the Program on Ethics, Politics, & Economics at Yale University, a senior fellow at the Mossavar-Rahmani Center for Business & Government at the Harvard Kennedy School, and the author of Boombustology: Spotting Financial Bubbles Before They Burst (Wiley, 2011). He recently returned from a trip to Ghana.



Reprinted with permission from YaleGlobal Online (
Copyright ©2014  The Whitney and Betty MacMillan Center for International and Area Studies at Yale

Geopolitical Chaos!


The world is in the midst of a boom in geopolitical uncertainty... Just consider the following regions: West Africa, Scotland, Pakistan, Isreal/Gaza, Syria, Iraq, Russia/Ukraine, Thailand, and now Hong Kong.  Amidst these rapidly rising risks, I find the relative calm of asset markets quite confusing.  Is this an unintended consequence of global central banks printing money (in some cases uncontrollably) over the past several years?  Have capital markets grown numb to risk?

NY Fed president William Dudley recently noted that these events "are horrible for the people involved, but there is not a lot of connectivity in terms of economic mass back to the rest of the world, and so long as things are contained in those areas and financial markets are aware of them, it doesn’t actually lead to a whole lot of volatility." 

Since he uttered those words, the Ebola virus has arrived in the United States, China is facing a rapidly escalating dilemma in Hong Kong, and Russia is contemplating the use of capital controls...  Have we entered a new world of rapidly rising volatility?


Edible Insects

My latest comment was about edible insects and how they offer the potential to meaningfully change the demand dynamics affecting livestock, feed, grain, water, and fertilizer.  Is it conceivable that backyard pests can feed the world?  Read more HERE.


Ebola & Cocoa

60% of global cocoa production is produced in the Ivory Coast and Ghana.  How might an Ebola-related disruption to the cocoa supply chain affect global markets?  Read my comment HERE.


Pakistan & Hunger

Pakistan is one of the most food-vulnerable countries in the world, making it a tinderbox in which any catalyst might ignite unrest.  Can hunger explain recent protests?  Read my comment HERE.


Butter Boom!

Butter consumption recently hit a 40-year high, and not surprisingly, butter prices surged to a 16-year high.  What are the implications of these developments?  Are bakers doomed? Read my comment HERE.



The world is expected to have more than 1 billion children (humans under the age of 18) on the African continent by the year 2050.  What does this mean for our population guestimates?  Read my comment HERE.

Boombustology My book was recently translated into Korean...a very obvious indicator of rising interest in the study of bubbles .  Any insight in this development?  The preface to my book is titled "Is there a Bubble in Boom-Bust Books?" Hmmm...

A Protein Production Powerhouse – in Your Backyard?

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Very few people realize that the most productive producers of protein in the animal world are insects.  Many of the six-legged friends in your backyard are more efficient in converting carbohydrates to protein than chicken, pigs, or cattle.  Consider the fact that ten pounds of feed can generate five pounds of chicken, approximately three pounds of pork, or about one pound of beef.  Ten pounds of feed given to crickets, however, will yield almost 9 pounds of cricket-meat.  Insects also produce less waste, generate fewer greenhouse gases, need significantly less freshwater, and leave a smaller environmental footprint than virtually all other source of protein.

So what? Widespread adoption of entomophagy (the practice of eating insects) has the potential to alter the demand profile for livestock, feed, grains, water and fertilizers going forward. This can happen in two ways. First, it’s possible that insects can be ground-up and included in current livestock feed, thereby reducing the need for other protein inputs.  Second, there is the possibility of direct human consumption that reduces the need for other animal proteins. Although this latter practice is met with cultural barriers in many parts of the world, more than 2 billion people currently consume insects as a direct source of food.

And for those in America who frown at the thought of consuming insects, you probably already consume some insects. Current FDA standards allow up to 30 insect fragments in 100 grams of peanut butter, up to 30 drosophila fly eggs in 100 grams of tomato sauce, up to 10 whole insects in 8 ounces of golden raisins, or up to 20 maggots in 100 grams of drained mushrooms. In fact, by some estimates, Americans are already consuming almost 500 grams of insects per year!

How might insect protein help the ~1 billion chronically undernourished people on this planet, or how could mass adoption of cricket consumption alter demand for grains?  Many, including me, believe that a booming middle class in the developing world is going to drive animal protein demand for some time to come, generating an exponential demand ripple through the grain markets, fertilizer industry, and the entire agriculture complex.  Our backyard protein powerhouses however, have the potential to derail this thesis by drastically reducing the need for livestock, feed, grains, water, and fertilizers; for that reason alone, edible insect developments merit close attention from investors, regulators, and policymakers alike.


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