Opportunities Along the Path to Democratic Prosperity

by Addison Wiggin – March 10, 2011

  • "Heisenberg effect" dogs us through Colombia… yet we still find opportunities along "the path to democratic prosperity"
  • Data suggest housing market continues to sink… our forecast for a lowering tide

  • Should your bank smell like fruit, sound like Enya and taste like candy? The answer below
  • Readers encourage, warn about Colombia… say we’re "schizoid" about Michael Moore

One of the dangers of writing a blog on the road: We gather our impressions, write about then on the fly… then, often, the people with whom we're meeting… er, read them.

Exhibit A: “Forbes Destaca Opciones de Inversion en la Bolsa Local”

We discovered this headline in La Republica, the nation's largest financial newspaper, this morning. Apparently, our comments, which you read here first in The 5, were picked up by a Colombian reporter who grabbed them from our Forbes blog.

(We had a similar occurrence in Bombay last year. You may recall when soon after our arrival, we were introduced to a national TV audience as a "young Marc Faber". All due respect and apologies to Dr. Faber, of course.)

Unfortunately, the exposure causes the "Heisenberg effect" on our emerging market experiments. Heisenberg, a German scientist who flourished in the middle of the 20th century, believed it was difficult for scientists to get accurate results from any given experiment, because they themselves impacted results… not to mention were very conscious of reporting those results. Ahem. Read between the lines, if you're so inclined.

Our first meeting this morning kicked off with a discussion inspired by the debate we've been having here in The 5 regarding security and corruption in Colombia. The largest transporter by tonnage in the domestic economy in Colombia is a private company that dominates the ready-mix cement market.

"Eight years ago," the CFO explained to us, shipping cement around the country was a "task of titans." They shipped to every region and city in the country, but could only do so between the hours of 6 a.m. and 6 p.m. The private security forces they employed to ensure the trucks arrived safely would not contract for the nighttime hours."

Today, "it's a completely different business environment." They can now run their trucks 24 hours a day. And they employ only limited security forces. They attribute the improvement to better government institutions, better security by the military and police and better intelligence on "guerilla" movements with the assistance of the CIA and the Israeli agency Mossad.

At dinner last night, we were told that 10 years ago, there were in excess of 40,000 guerillas in the hinterlands holding citizens hostage in the cities. Today, there are fewer than 6,000 operating in the most remote regions of the country. The 23 oil workers who were kidnapped earlier in the week were doing seismic studies in the jungle near the Venezuelan border.

As for corruption, it's "in the newspapers now." It used to be behind closed doors. Young people are more conscious of the need for honesty in business, we're told.

Demographics plays an important role in the growth story, not just for a new attitude toward prosperity. But 40% of the country is under 20 years of age. They are far more "aware" of the benefits of an open economy & — new houses, new cars, fashionable clothes, nightclubs and cosmopolitan restaurants.

Our meeting with the Ministry of Finance echoed this new demographic influence. Four earnest ministers, the oldest of which could not have been older than 28, walked us through the current government's economic plan, dubbed "the path to democratic prosperity."

It's a simple plan: More employment + less poverty + more security = PROSPERITY.

Hear, hear.

A couple of notable reforms that they hope will help usher in the first part of the plan & — a redistribution of oil and mining royalties from the eight states that currently retain all of them to include all 32 states. The 24 states who currently do not participate in the royalty program support the reform.

The ministry is also supporting the first formal jobs law in which they will offer tax incentives to employ young folks who have know formal education… and tax incentives for others to get an education.

Across the economy, the ministry projects 6.5% growth by the end of 2012. And they, like central bankers in other parts of the world, say they have inflation "under control" at 3.2%.

“Coffee has long been an important Colombian export” writes our travel companion Chris Mayer, taking a broader historical view in Special Situations, “and it remains so today. Colombia is the world’s second-largest coffee producer, after Brazil.

"Disappointing harvests helped drive the price of coffee to recent 34-year highs. Inventories fell to their lowest level in at least 40 years. The rains have been heavy this year, and Colombia’s harvests have suffered. Unusual weather has hit other coffee-growing regions as well, including Mexico and Brazil. The price of coffee is up over 145% in the last year.

"Expect to pay more for coffee. The chief roasters — J.M. Smucker, Kraft and Nestle — have all had to raise prices several times already. But there are few investing ideas that play off coffee.”

On the other hand, "Colombia’s history as an oil producer goes back to 1918 with the discovery of 'La Cira & — Infantas,' a giant oil field." They're now the world’s 25th largest producer of oil.

"The Colombian oil story peaked in the late 1990s," Mayer continues. "Production declined and has been flat in recent years. The reasons for the decline are complicated. The turmoil in the country certainly took its toll. Some of it had to do with the shifting nature of contracts and concessions. Some of it had to do with just neglect and poor management. And some of it was just that the easy oil was found and pumped out.

"But things have turned in the last couple of years. In 2009, production increased for the first time since the 1990s. Colombia’s oil industry is thriving amid better security, a better investment climate and the use of the new technologies."

As you know, we’ve met with leaders at a couple of small explorers and producers this week, and we’ll meet with more today. Stay tuned as we separate the wheat from the chaff and identify who has the most potential.

In a part of town our host dubbed, for better or worse, "little Dubai," we met with several small firms with oil and exploration concessions in various parts of the oil patch east of Bogota. Once we've had a chance to digest the hours of presentations we've been privy to, we'll give you our best recommendations for moving forward.

Later, in the headquarters of Ecopetrol, the state-owned oil giant. It’s about to list on the NYSE, and the fresh-faced investor relations chap we met with was eager to put a good foot forward. In the end, we're sure the job experience will be good for his career… as he had a tough row to hoe.

Ecopetrol has a market cap equal to 30% of Colombian GDP. As recently as 2002, any company that wanted to drill for oil in Colombia had to fork over 50% of its revenue to Ecopetrol. Only in 2007 were independent concessions allowed to be developed.

At the time, Ecopetrol offered an IPO and began competing with its new competitors in the market. But today, it’s still 90% state owned. Three of the nine directors are cabinet officials. The headquarters had the vibe of a government agency, replete with all the perks thereof.

We'd been told that of 19 new wells they drilled last year, a majority were dry. After we asked, the investor relations gentleman admitted, yes, there is room for improvement. Precious little else about how the company was going to grow its reserves was discussed. Given our effort to find small, quick growing opportunities in a booming economy, the experience was… well, whelming.

Back in the U.S., we see Bank of America has just moved about half of its mortgage assets into a "bad bank" made up of its riskiest and poorest-performing loans, much of it inherited from its takeover of Countrywide.

According to Bloomberg, this is an effort to get investors to focus more on the "good" mortgages still on BoA’s books. But this has all the hallmarks of something BoA can unload onto the U.S. taxpayer when the markets get rough again.

Likewise, there's no respite for the rest of the weary mortgage market this morning.

The number of Americans underwater on their mortgage rose again during the fourth quarter of last year. 23.1% of all homes with mortgages are now worth less than the outstanding loan balance, according to CoreLogic &— up from 22.5% in the previous quarter.

And home prices in 25 major cities are now back to May 2003 levels, according to the RPX composite index.

Across all 25 markets, home prices are down 34% from the peak. We maintain our forecast… until the mortgage market stabilizes, the economy in the U.S. is shot.

This morning, we heard some corroborating evidence from our new friends in the cement business down here in Colombia.

They bought into the ready-mix market in Texas, North and South Carolina and Virginia in 2005. At the time, they thought they were "management geniuses." Now they can barely discuss the acquisitions without grimacing.

On the upside, however, they expect the U.S. market to begin exhibiting the attributes of an "emerging market" in 2012, suggesting the demographics in the southeast support a very strong market, "once prices have cleared." And there's the rub.

Gold appears to be holding steady this week above $1,400.

"I think that my gold forecast was too conservative," our friend James Turk of GoldMoney.com commented yesterday, recalling his 2003 Barron’s interview in which he called for $8,000 gold. "I thought the Dow/gold ratio would be 1-to-1 again sometime between 2013-15. My thinking had been that gold would be $8,000 and the Dow would be 8,000.

"Now, given the way central banks are printing money when they are buying government debt, I think the 1-to-1 ratio is going to be reached at a much higher price," although he hesitates to say how much higher."

Watch the dollar index, James recommends. Once it breaks below the all-time low of 71.33, all bets are off. This week, it’s holding steady between 76-77.

While you're waiting, check out these nine easy ways to buy gold here.

For its part, silver is holding steady at $35.

"I watch where the money goes, and the money's going into silver," says Canadian hedge fund legend Eric Sprott, attending the PDAC mining conference in Toronto this week. “There's as much money going into silver as into gold in dollar terms."

Thus, silver will likely continue to outperform gold, Sprott concludes. "Gold's right in there, but not as good as silver." Heh. Here are six ways to buy silver.

Sprott will be one of our more notable speakers this year in Vancouver. If you're planning to join us, please be sure to register now. Seats are already filling up, and we haven't even sent invitations out yet. Best way: call Barb Perriello at (800) 926-6575 or (561) 243-2460 right now. She can help you with your registration and travel arrangements.

Question: How does your bank smell?

One of the truly peculiar experiences we’ve had this week was with a mid-size bank called Helm. They're a conservative and otherwise healthy purveyor of mortgages and retail banking services. But they were most proud of the makeover all 32 of their branches have recently undergone.

For inspiration, Helm commissioned “brand guru” Martin Lindstrom to concoct a scheme of "sensory marketing."

The Helm experience now engages all five senses: Bright colors, touch-screens, mood music, hard candies tastefully displayed and a faint scent of fruit wafting through the lobby, courtesy of small white boxes mounted eight feet high above your head.

That's right. It smells like Helm.

We asked why we couldn’t hear the music. We were told that was the whole idea. It operates on a very subtle level to create a more positive banking experience. Hmnn. Subtle indeed. Just what you want in a bank.

"I have been reading your analysis of Colombia with some interest," a reader writes, having spent some time in the Putumayo district and having friends living there far from Bogota.

"You have mentioned only the FARC, which is certainly one group of the 'bad guys,' but made no mention of the paramilitaries and the thugs (private and public) that do the dirty work of the oil companies, mining companies, palm oil folks and many of the other resource groups who are doing their best to successfully displace the little guys, farmers, miners, etc., in land disputes, not to mention controlling their own drug fiefdoms."

"I would be very, very careful about investments there. Colombia has had over 200 years of violent conflict with very few times of peace. I’ve invested in many places in the world, including third-world countries where there are questions about local politics and exploitation."

"However, I know too much about Colombia to invest in good conscience there."

The 5: Your prerogative, of course.

"I have been preaching for years that Colombia is the place to be," writes another enterprising reader with the opposite view. "I have been coming for the past 13 years, and have seen the opportunities at every corner.

"I have been a police officer here in Michigan for many years, as well as a ceramic consultant to the heat-processing industry for over 30 years. I just completed a project for Ecopetrol, the state-owned oil company, in Cartagena, and just received another for August."

"Along with the opportunities here, readers need to compare crime statistics with the U.S. They will find that the U.S. is the more dangerous place to reside. Trust me, I see the numbers. People that criticize the country probably live in Costa Rica, (way, way overrated) or have never been to the country."

"My wife is Colombian. Our two children have invested in a 200-plus-meter beachfront condo in Cartagena that would easily yield $2 million where our Naples, Fla., home is. We are renting the home in Florida, as we are planning our move & — or escape & — to Colombia."

"I am pushing to promote more of Colombian goods and services abroad. To those who will listen: There really are other good place in the world to live and invest in besides the good ol' USA. There are still plenty of good real estate opportunities in Colombia."

"Take care, keep up the great work you do!"

"Your quotes from Michael Moore are stinging, aren't they?" asks a reader. "It's tough when someone so supposedly despised says something completely in line with your own beliefs. Nowhere in Moore's comments will you find '…deciding how much wealth one "deserves" and what constitutes a "fair share."’ You construed those & — unfairly."

The 5: Funny, we quoted him directly.

"Look, I know you'd rather Moore had been more blatantly leftist," the reader goes on, completely missing our point, "and perhaps had advocated more of the same old 'distribute the wealth' rhetoric, but he didn't. At least not as contained (or alluded to) in the quotes you used. Rest assured that you selected the most inflammatory words from his speech."

"At least be fair and give him due when the time is right. Your comment about fairness and then calling the bankers 'jackasses' shows a rather schizoid approach. He's just pissed about who the recipients were? So am I!"

The 5: We could care less if Moore is left, right or just fat. We quoted him because we do agree with some of the things he said. Duh. On thing you can count on with Mr. Moore is he's polarizing. Here are two more intelligent responses from readers:

"If Michael Moore is so concerned about the rich getting away with wealth that they 'stole' from the middle class, then I suggest that he start with himself and the millions that he has made exploiting the middle class to see his crappy movies. He can then move onto the Hollywood crowd and then to someone who has made an estimated $800 million over the last 20 years or so scaring the gullible public to death over a nonexistent threat, Al Gore."


"Your blasting of Michael Moore was horses**t. He has more brains and guts than you'll ever have. And he did not say how much or what was fair for the wealthy to be taxed. I bet I pay more income tax than you do, and I don't doubt your annual income is at least 20 times mine."

The 5: Congratulations?


Addison Wiggin

The 5 Min. Forecast

P.S.: "I read your 5 Min. Forecast every single day," says another reader. "Wouldn't miss it for anything. And this emboldens me to request a favor: I'm seriously thinking of subscribing to the option trading service that Abe Cofnas is offering and that you are promoting.

"But I don't seem to be able to obtain an answer whether (as a nonresident alien of the United States) in order to trade these vehicles I will need to go through the time-consuming business of opening an account with yet another broker or I can trade them through my existing broker or bank. Any advice?"

The 5: The bad news… yes, you do need to open a separate account. The good news is it only takes five minutes.

Give it a look.


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