- March 14, 2012
- Chart of the Week: The World’s Infrastructure Plans
Demand for access to basic needs, an emerging middle class and a never-ending use of global resources—these are the primary drivers of major infrastructure projects over the next several years, says GE.
In its Investor Meeting last week, the firm highlighted a few macro slides on world growth. One slide pins major global infrastructure plans totaling $4 trillion over the next 2 to 20 years.
Emerging markets across Africa, Asia, the Middle East and South America are overwhelmingly the ones pulling out their checkbooks. A number of projects are expected in Brazil, including the PAC 2 investment program totaling $872 billion, Petrobras Oil & Gas project of $225 billion, and the infrastructure spending for the World Cup and Olympics expected to cost $668 billion. Brazil’s PAC 2 will mostly be spent on energy and the remainder on subsidized housing, urbanization, sanitation and electricity distribution, says Financial Times.
India and Russia also have tremendous infrastructure plans, as each country is expected to be a half of a trillion dollars. China’s 12th Five-Year Plan is expected to spend $840 billion on the power industry and another $180 billion on health care.
In GE’s presentation, the president & CEO of Global Growth & Operations, John Rice, says many of these countries’ governments face extraordinary pressure “to increase standards of living and reduce the wealth disparity.” Of the world’s population of 7 billion, GE says 1.5 billion have no access to basic needs, such as health care, electricity and water. In addition, in the next 20 years, another 3 billion people will be added to the middle class, according to GE. That equates to 150 million people each year who will have the means and “the same kind of demands in terms of basic living conditions and infrastructure” available in the U.S., says Rice.
This trend is what I refer to as the American Dream Trade. When the boomers were babies, President Dwight D. Eisenhower signed the 1956 Federal-Aid Highway Act. The “great road program” was said to be the most intense road construction period in U.S. history, altering where Americans chose to live, vacation and work. A 62-day trip in 1919 from Washington D.C. to San Francisco was reduced to two days due to the U.S. interstate system. This helped sustain a more than tenfold increase in the U.S. GDP, according to the U.S. Department of Transportation.
A pursuit of the American Dream from the U.S.’s emerging middle class led to the success of many well-known U.S. companies. Restaurants including McDonald’s and Dairy Queen and automobile manufacturers Ford and GM prospered following this infrastructure spend.
The infrastructure plans taking place across emerging markets emulate a 1950s America. As these governments help their residents pursue the American Dream of better homes, health care and quality of life, I believe the companies with a strong footprint in these growing markets stand to benefit.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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The following security mentioned was held by one or more of U.S. Global Investors Fund as of 12/31/11: General Electric.
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- December 21, 2011
- Calculating the Impact of the Keystone Pipeline
Global markets have been tough in 2011 but I look forward to a strong 2012. To kick the year off, we’ve scheduled a special webcast with John Mauldin and our investment team to discuss our outlook for the coming year.
Mauldin is a wizard when it comes to markets and his annual outlook pieces are a perennial “must read” for global investors. His Thoughts from the Frontline e-newsletter is also distributed weekly to more than 1 million readers.
In this week’s edition, Mauldin shared his thoughts regarding the Keystone Pipeline that I thought you might find interesting. He begins with a short discussion from his book, Endgame, on the budget balance struggle that countries face when the private sector is deleveraging, and continues with a candid commentary on America’s dependence on energy and the impact of the proposed pipeline:
The desire of every country is to somehow grow its way out of the current mess. And indeed that is the time-honored way for a country to heal itself. But let’s look at yet another equation to show why that might not be possible this time. It is yet another case of people wanting to believe six impossible things before breakfast.
Let’s divide a country’s economy into three sections: private, government, and exports. If you play with the variables a little bit you find that you get the following equation. Keep in mind that this is an accounting identity, not a theory. If it is wrong, then five centuries of double-entry bookkeeping must also be wrong.
Domestic Private Sector Financial Balance + Governmental Fiscal Balance - the Current Account Balance (or Trade Deficit/Surplus) = 0
(By Domestic Private Sector Financial Balance we mean the net balance of businesses and consumers. Are they borrowing money or paying down debt? Government Fiscal Balance is the same: is the government borrowing or paying down debt? And the Current Account Balance is the trade deficit or surplus.)
The implications are simple. The three items have to add up to zero. That means you cannot have surpluses in both the private and government sectors and run a trade deficit. You have to have a trade surplus.
Thus the problem of Greece, with its massive trade deficit and huge fiscal deficit. They have no choices but default or depression.
The U.S. has two main sources of its trade deficit: energy and China, in roughly equal proportions. If we reduce our energy dependence, we can get the trade deficit below 2% of GDP.
The China problem is not simply one of reducing our trade deficit with China, as much of what China makes and sells to the U.S. is sourced in countries outside of China. While the final manufacture is perhaps in China, the bits and pieces come from other parts of Asia. The true cost of a product from China is less than 20% actual Chinese value added. An example is the Apple iPhone, which is assembled in China but whose most costly components come from elsewhere in Asia. Direct Chinese costs are less than 4%, but the entire amount is “attributed” to China in calculating the trade deficit.
The real problem is the demand in the U.S. for cheaper goods. If the U.S. were to pass a tariff on Chinese-manufactured goods, then production and buying would shift to other countries without the tariffs. Markets look for the lowest-price source. For a tariff to be truly effective, it would have to be on the product and not the source country. And the only way to do that is to start a trade war. That is typically not a good way to promote free markets and general prosperity. Think Smoot-Hawley in the 1930s.
On the other hand, the U.S. can do something about its energy dependence. We are blessed with abundant energy, if we simply exploit it in a responsible manner. And doing so would directly create hundreds of thousands of jobs, many of them quite high-paying, and many more hundreds of thousands of jobs servicing those employed and their companies.
Which brings us to the rather strange case of the Keystone XL Pipeline project. For non-U.S. readers, this is to be a 1,700-mile pipeline designed to connect Canada’s oil production in the province of Alberta with the U.S. Gulf Coast. The various government agencies of the current U.S. administration approved the project, after exhaustive environmental impact analyses. President Obama overruled his subordinates, postponing a decision until 2013, after the next election. Even though labor unions (normally thought of as Democratic and Obama allies) actively supported the project (as it means lots of jobs), various environmental lobbies were against it, and Obama apparently gave into them. (That is not just my opinion, but widely assumed, even by Democratic supporters.)
This issue has raised a few questions from international readers, wanting to know why so many people (the large majority of US voters, if polls are right) are seemingly willing to hurt the environment simply for the purpose of transporting oil. Wouldn’t a new pipeline create a whole new host of environmental dangers? What were we thinking?
As it turns out, a new pipeline is not all that radical. If you drive in the U.S., you cannot go ANYWHERE for any length to time without crossing dozens of pipelines that already exist, especially in the corridor where they want to build the Keystone XL pipeline.
Let’s look at two maps. The first is a map of natural gas pipelines in the U.S. To say it looks worse than your grandmother’s varicose veins is no exaggeration. It is hard to find a state that does not have a natural gas pipeline. Without them the U.S. would simply come to a grinding halt. (The source for this map is a governmental agency, the U.S. Energy Information Administration.)
The next map is just the major oil pipelines. If you were to add in all the small (8-inch or less) lines connecting minor oil fields, you could not distinguish between the lines in certain areas, as we will see in the third chart.
This next chart I throw in because it also shows the rather extensive pipeline system in Canada. This chart combines commodity pipelines of all kinds. The point is that we have the technology to build pipelines safely and in an environmentally reasonable way. When was the last time you heard of a serious pipeline disaster, or even a small one? Yes, the BP oil rig certainly comes to mind, but that was human error and not the fault of technology. Just as the large majority of airplane accidents are pilot error, you do everything you can to minimize the impact, and require safety procedures. But people screw up every now and then.
This is not to dismiss the problems and environmental concerns of drilling for petroleum products, or mining for various minerals. There needs to be strict controls on all such activities, with real penalties. You can see from the maps that my home state of Texas has a lot of pipelines and wells. The problems with pollution in the early development phase here in Texas were well-known. Now there is a very aggressive and popular regimen of control of drilling and transportation of oil and gas. We have to live next to the wells and pipelines. No one wants their water or land destroyed.
Now, let’s circle back to the Keystone Pipeline. We started this section with a reference to trade deficits. And this is Canadian oil, not U.S. oil. So it does not help our trade deficit directly, although a large portion of U.S. dollars that go to Canada come back to the U.S. Canada is far and away our largest trading partner and major energy supplier.
The problem is that the opposition is mainly of the “I don’t like any carbon-based energy” variety. Whether it is coal or oil or natural gas, it is not as “clean” as solar or wind.
The problem is that solar and wind simply cannot produce enough energy without huge government subsidies, at least with current technology (although that will change over time). In the meantime, if we want to balance our budget in the U.S. (and we must!), we are going to have to become energy independent as one part of the solution. In the short term (10-15-20 years), that means carbon-based energy. If we can produce our energy in the U.S., and we can, then why not create the jobs here rather than elsewhere, if jobs are our #1 political concern, as they seem to be, according to the polls? Further, in the short term, as Mexican production is falling rather fast, we are going to need that Canadian oil if prices are not going to rise.
(Note: in my book, I actually call for a slowly rising energy tax on gasoline usage, to be solely used for rebuilding our decaying infrastructure, so I am not against higher prices per se. I just want the reason for higher energy costs not to be shortages. But that’s another story for another day.)
In the “payroll tax cut” bill that will be passed in a few days here in the U.S., Congress will require the President to make a decision by the end of February on whether to allow the Keystone project. I hope they do pass it, and I hope he does decide to allow it.
But let’s not think that this one more pipeline is going to destroy the environment of the U.S. It might create competition for some U.S. producers, but if you can’t live with competition then you’re in the wrong country.
The U.S. is in a very deep hole. We need to stop digging and start figuring out a way to climb out. The world is sadly going to see what happens when Europe has to resolve its current crisis, one way or another, and what that will mean for world GDP growth. Then, I am afraid, Japan will be the next crisis in waiting.
The world can ill afford for the U.S. to be the third major economy to implode. The world is far too connected to shrug off such problems.
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All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of September 30, 2011: Apple.
By clicking the links above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.
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- November 28, 2011
- With Rising Wages, Will China Remain a Manufacturing Hub?
Earlier this month, I spent a few days at the CLSA AsiaUSA Forum in San Francisco, which offered a geopolitical and economic intellectual feast for global investors. The research firm gathered a well-rounded cast of engaging speakers that included Republican Presidential candidate Herman Cain, Hall of Fame quarterback Steve Young, Pollster extraordinaire Frank Luntz and renowned physicist Dr. Michio Kaku. Here’s a photo I snapped during a Q&A session with former U.S. Vice President Dick Cheney.
Year-after-year I make it a point to attend this conference because of the comprehensive examination CLSA puts together on the factors affecting global markets. To gather its exclusive knowledge of Asia, the research firm posts its analysts in the U.S. and many Asian countries, including China, Indonesia and the Philippines.
CLSA often discusses the numerous opportunities for U.S. businesses in China because of the rise of the Asian middle class, an increasing urbanization rate, and additional disposable income. The latter has been partially spurred by recent increases in wages. In fact, many people in China saw their wages rise 20 to 30 percent last year.
However, while these wage increases have been positive to the Chinese consumer and the companies which sell the goods, they have prompted many people to ask me how rising wages affect China’s status as a low-cost manufacturing hub for the world. Does this reduce the profitability of companies that expect to continue to benefit from the country?
This is where CLSA’s more balanced view of China’s business landscape is not only helpful, but essential. It is not enough to look at rising wages to appreciate how attractive China is for businesses. To get a better understanding, let’s compare three factors—the World Bank’s Ease of Doing Business score, minimum wage and workforce size—across several Asian markets. The World Bank annually analyzes regulations that either enhance or constrain business activity among 183 economies. For a business that wants to expand into different markets, this report is helpful in determining the ease or difficulty in obtaining construction permits, electricity and credit, as well as hiring workers and trading across borders.
On the World Bank’s scale, the business environment is easier in Thailand and Malaysia than in China and Vietnam, and companies would find it even more difficult to expand their businesses into Indonesia, India and Cambodia. However, Indonesia, India and Cambodia have cheaper labor markets than China or Thailand. But of all of these countries, China offers the largest labor market. CLSA says China makes for an “appealing hub for manufacturing” when you evaluate its unique combination of strengths together.
In addition, China’s workforce is better educated and more highly skilled compared to other Southeast Asian countries, says CLSA. China was also named the “world’s most connected economy” by the United Nations Conference on Trade and Development’s Liner Shipping Connectivity Index, when it comes to how integrated global shipping networks are to enable worldwide trade. The country also has superior infrastructure and trade connectivity compared to many emerging markets, “even occasionally besting developed economies,” says CLSA.
In 2010, countries such as Hong Kong, Japan, South Korea and Germany depended on China for data processing, apparel, and iron and steel exports. China also happens to be America’s third-largest destination for exports behind Canada and Mexico. China’s largest import partners in 2010 were Japan, South Korea, the U.S., Germany and Australia, according to the CIA World Factbook.
For those companies not already doing business in China, there’s one dominant factor that shows they should start: the vast domestic market. Companies may be able to find a cheaper workforce in Bangladesh, India or Sri Lanka, but being located in China allows convenient access to what is rapidly becoming the world’s largest consumer market.
I’ve discussed how many U.S.-based consumer discretionary businesses have been riding the wave of China’s growth all the way to the bank. Starbucks, Coca-Cola and Kraft have expanded their operations in recent years, as they have been converting the traditional tea drinkers to consuming other beverages including coffee, juice and carbonated drinks. (Read it now: China’s Rising Imports of American Goods.)
In American Classic Finds New Life in China, I talked about how American car company General Motors (GM), is also experiencing growth in Asia as Chinese consumers look to purchase their first automobile. According to the China Passenger Car Association, Shanghai-GM topped October’s list of the top ten largest automakers in China. In 2010, GM sold nearly 550,000 cars in China, and expects its global sales to expand by as much as 10 percent in 2012, says Bloomberg.
These are only a few examples of American companies benefiting from the rise of China. Have you positioned your portfolio to do the same?
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of September 30, 2011: Starbucks, Coca-Cola
The United Nations Conference on Trade and Development (UNCTAD) liner shipping connectivity index is generated from five components: (a) number of ships; (b) total container-carrying capacity of those ships; (c) maximum vessel size; (d) number of services; and (e) number of companies that deploy container ships on services from and to a country’s ports.
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- October 21, 2011
- Emerging Wonders…Abroad and in the U.S.
Last year, the Marina Bay Sands and SkyPark opened in Singapore. The new luxury casino and five-star hotel adds a very distinctive look to the Singapore skyline. Its boat-shaped “park in the sky” is one of the most unique designs I’ve seen in my East Asian travels and a reported 70,000 jaws drop in wonder each day as visitors view the structure for the first time. I encourage you to check out any one of the amateur videos on youtube.com of one spectacular feature—its infinity pool at the very top of the building from which one can view the city.
The Marina Bay Sands and SkyPark is featured on the cover of our latest Shareholder Report, and is a visual reminder of the growing role emerging markets play in economic growth. Our team discusses various factors from Brazil to China to Eastern Europe that are contributing to growth, including steadily rising oil demand and increasing numbers of middle and affluent classes. This is where I see numerous opportunities for today’s international investor.
There are also compelling values at home in the U.S. In my Shareholder Report letter, I showcase how the companies in the S&P 500 Index are currently paying a higher yield than the 10-year Treasury. This means a shareholder can get paid dividend income along with receiving potential appreciation.
Don’t miss our latest edition. Read it here.
If you would like to request your own copy, send your name and address to email@example.com.
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- October 28, 2011
- The Impact of Seven Billion People
On October 31, the world symbolically welcomes its 7 billionth. The real date the world hits that number is up for debate, but it has been symbolically chosen by the United Nations as a way to emphasize the effects a growing population will have on the globe.
Over the past half of a century, the world has rapidly accelerated in population growth. In 1800, the Earth had about 1 billion people, 2 billion by 1927 and 3 billion in 1959. A little more than 40 years later, our population doubled.
Babatunde Osotimehin, the executive director of the UNFPA noted some great statistics in the United Nations Population Fund report, “State of World Population 2011.” He says,
Today, there are 893 million people over the age of 60 worldwide. By the middle of this century that number will rise to 2.4 billion. About one in two people lives in a city, and in only about 35 years, two out of three will. People under the age of 25 already make up 43 percent of the world’s population, reaching as much as 60 percent in some countries.
In nearly every presentation I give, regardless if I’m discussing gold, emerging markets, energy or the U.S. Global Investors’ funds, I show this population S-curve. To me, this dramatically rising line illustrates the significance of the world’s population on commodity consumption, rising gold demand and infrastructure buildout taking place in every continent.
Watch the countdown to 7 billion here: worldometers.info.
By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.
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