Investment Case in One Graph

The Cellphone Indicator

Here are vodafone’s revenue growth numbers from their latest quarterly presentation:

Hard to make a better case to invest in emerging markets and Africa. If people can afford to spend more on communications it should be a pretty positive sign for the economy as a whole. Vodafone isn’t present in the Ivory Coast, but well in neighbouring booming Ghana.  Vodacom is present in several countries in southern Africa, but the bulk of it is in South Africa.


A Comparison with Australia

Reality Check

Looking at the Ivorian government budget, I thought it would interesting to compare it to a developed country.  To avoid adjusting for population size, I checked if there were any developed countries with about the same population as the Ivory Coast:

Turns out Australia at 22.9 million comes very close.  The latest available budget for Australia is for 2010-2011 (the one for 2012-2013 is published tomorrow) and the total budget size is 356 billion aussie dollar which, using the current AUD/EUR exchange rate, is equivalent to 276.8 billion euro.

The 2012 budget for the Ivory Coast on the other hand comes in at 3.16 trillion CFA Franc which is 4.8 billion euro. That makes the Australian budget 57 times greater than Ivory Coast’s.

So there we have it, while the gap between the developed and developing world is narrowing, especially for indicators such as life expectancy or child mortality, there is still a pretty big gap in economic terms, at least for Sub-Saharan Africa.

I kind of like budget figures, because they are much more precise than GDP.  I looked at GDP as well, and I would have expected a smaller gap there as tax collection in the Ivory Coast captures a smaller part of the economy than in Australia leading to a smaller budget.  However, the Australia – Ivory Coast GDP gap using IMF figures turned out to be about the same as the  budget gap.  Explanations could be that I’m only looking at the federal level in Australia – not including regions, that Ivory Coast’s budget is augmented by support from international bodies and/or that Ivory Coast’s GDP is underestimated.

Receipts and Expenses

Looking at tax receipts, Australia took in 302 B AUD (234.8B EUR) in 2011, whereas the Ivory Coast budgets to bring in 1949 B CFA Franc (2.97 B EUR) in 2012. That makes Australia’s receipts 79 times greater.

Here’s where the receipts (largest categories) came from:

The thing is income tax, company tax and VAT only touch the formal economy in the Ivory Coast, whereas everybody have to pay import and export duties. With time I would expect Ivorian receipts starting to look more like the Australian.

Now for expenses (largest categories):

Australia’s profile is pretty typical for a modern western liberal democracy, with the welfare sector dominating expenses.  First I didn’t find anything at all resembling social security in the Ivorian budget, but at the end there was a small “Affaires sociales” post with contributions to orphans, social centers, war victims, but most of it to administration.

Going back 100-200 years the budgets of western countries looked more like present day Ivory Coast than Australia. (See US historical budgets in the Customs post.)  What’s remarkable about the Ivory Coast budget, and sets it apart from 19th century US budgets, are the investments – in among other things the third bridge over the Abidjan lagoon.   Despite the Australian budget being 57 times greater, Ivory Coast’s investments are actually comparable to the Australian ones in absolute numbers. And that should be a good sign for the future!

Rubber Trees

Waiting for trees to grow

The last few times I’ve been in the Ivory Coast I’ve heard a lot of talk of hevea or rubber tree plantations.  Since early 2000s, among well-off Ivorians there seems to be a trend to invest in rubber trees. I considered joining in, but never did for the following reasons:

  • It takes up to 7 years from planting a tree until one can start getting rubber from it.  While I like long term thinking and investing, I figured I would be in a better position after seven years investing, and re-investing profits from something else like taxis or real estate.
  • I thought synthetic rubber would squeeze out the use of natural rubber over time.
  • I like to invest in something linked to the growth of the Ivorian economy – on which I’m quite bullish. Selling stuff to the growing African middle class seems to be the right place to be.  Global demand for rubber has nothing to do with the Ivory Coast, and all to do with the developed world’s and China’s industrial demand for it.
  • Ivory Coast’s and Africa’s exports are already dominated by raw materials. It would feel better to do something with a little more value added.

“I sure as hell wouldn’t want to be in a 747 about to land on synthetic tires”

However, I’ve read a bit about natural rubber and started to re-think some of the above.

Apparently there are plenty of uses where natural rubber is better suited than synthetic rubber – and it’s not looking like it will change.  In fact, according to, the share of natural rubber of total world rubber production has gone up from 41.6% 1998 to 46% 2008, and is projected to increase further.

Despite the brilliance of industrial chemists, there is still no synthetic able to match natural rubber’s resistance to fatigue and vibration. Natural rubber still claims more than 40% of the market, a figure that has been slowly rising. Only medical rubber can be steam cleaned in a medical sterilizer, then thrust into a freezer – and still adhere flexibility to glass and steel. Big airplane and truck tires are almost entirely natural rubber; radial tires use natural rubber in their sidewalls, whereas the earlier bias-ply tires were entirely synthetic. High-tech manufacturers and utilities use high-performance natural rubber hoses, gaskets and O-rings. So do condom manufacturers.
“I sure as hell wouldn’t want to be in a 747 about to land on synthetic tires” the director of the U.S. National Defense Stockpile Center has said.

From the excellent book “1493” by Charles Mann, part of my post-Christmas reading

As to having to wait 7 years to get any returns, my problem with that was that the initial investment could be better put elsewhere.  Now, I have learned that a typical small scale rubber tree plantation deal in the Ivory Coast doesn’t have much of an upfront cost. It works like this; a village that owns land but doesn’t have the funds to cultivate it, allows an investor to plant and maintain rubber trees, and then the profits are typically split 25% to the village and 75% to the investor.  Planting the trees doesn’t cost much, and the invested funds mainly go to pay the  upkeep during the 7 years, paid monthly.

Rubber trees in the Ivory Coast

A plantation that has grown for a couple of years can of course be bought or sold, so nobody really has to wait 7 years. However, there are a lot of things that can go wrong in these type of deals, and if I ever invest in a rubber tree plantation, I’ll probably start from scratch.

My remaining concerns about rubber tree investments still stand though. Natural rubber is a curious product, being agriculturally produced but used industrially.   Demand for it is much more correlated to stuff like iron ore or copper than other agricultural products like wheat, soy-beans or apples.  And here lies a problem, since I have a gloomy outlook on the industrialised world’s economic prospects and believe China will see a real estate crash. Demand from China has been a big factor in driving up industrial commodity prices over the last decade and I don’t think this demand is sustainable.

Also, the 7 year lag of rubber, makes long term forecasting and planning important – and that’s not always something humans excel in.   I have a feeling a lot of rubber trees are planted when prices are high, thus contributing to reducing prices 7 years later.

It seems like major new plantations were started in Asia in 2006-2007:

On the supply front, natural rubber trees were planted in large scale in both 2006 and 2007. Once planted, it takes approximately 6 to 7 years for rubber trees to begin producing sap. Supply is therefore inelastic in the short–term and will be limited until 2013. It is estimated that newly planted acreage of natural rubber trees totals in excess of 1 million hectares. According to the International Rubber Study Group (IRSG), global natural rubber output is expected to total 10.83 mm tons, (up approximately 5% year-over-year). Although helpful in the short-term, long-term supply will not increase markedly until 2013.


So it looks like increased supply could coincide with decreased demand in 2013-2014 – and it’s not difficult to see what that would do to natural rubber prices.

The coolness factor

On the other hand 2013-2014 could be a good time to start a plantation, and one never know what will happen. And I got to admit that I would enjoy being able to say that I own a rubber tree plantation.

Rubber trees originally come from the Amazon in Brazil but due to leaf blight plantations in the whole of Latin America don’t work out too well. Instead, 90% of the world production of natural rubber comes from Asia (and 2% from the Ivory Coast), and if leaf blight were to hit Asia things would change dramatically.

Natural rubber price since 1981

Brace for Impact!

Crunch Time

It’s looking like the debt situation in Western Europe is approaching crunch time. Regardless what governments do I just don’t see how they can meet the expectations of their peoples in terms of stuff like goods and services, public sector jobs, various benefits and allowances, or pensions.

The direct cause is debt spiraling out of control, and I’d say the fundamental causes for that are:

1) Demographics – an aging population

2) A welfare state that has been allowed to expand more than what could be afforded

3) Governments taking on bank debt instead of letting banks fail

Not all countries in Western Europe have messed up though, but all will be affected, and especially export-dependent ones like Sweden. In Sub-Saharan Africa I don’t think any country have the problems above, but the effects of the coming crisis will be felt there as well, but, I think, less severely than in Europe. I wrote about potential effects for the Ivory Coast in the Well, Western World that was a nice 500 year streak post.

As to what’s going to happen in Europe,  it’s a lot harder to predict than the Ivorian crisis, where it was quite entertaining and not always difficult to guess Gbagbo’s next moves.

The options for debt ridden European governments are:

(1) Austerity – to cut spending significantly which is politically difficult as it’s never popular. For Greece it’s probably too late, but the other countries could still do it.

(2) Raise taxes, but due to tax levels already being high it’s possible that money flight and reduced economic activity actually make tax revenue fall as taxes increase

(3) Redirect (or confiscate) available assets, like forcing publicly controlled pension funds to buy government bonds or influencing commercial banks to buy government bonds

(4) Getting Central Banks to print money to cover deficits – possible for non-eurozone countries, and pressure seems to be mounting on the ECB to do the same in one indirect way or another. But there are problems with printing to put it mildly.  Quoting a zerohedge article:

However, it [printing] leaves the current status quo and financial system intact, does not provide the much needed lesson on productive capital allocation, provides no incentive for governments to put in real structural reforms because of tighter credit conditions and it will only benefit debtors and not savers. Savers will be punished greatly, especially since there is no limit to printing currency and the central bank could carry on undisturbed for a long period of time. This will continue to ease the burden on debtors due to inflation, but looming hyperinflation will be devastating for everyone.

(5) Default on a big chunk of government debt. This risks causing a chain reaction default in the European (and global) financial system as many big banks would be bankrupt in case of a large sovereign default.

One conclusion seems to be that pensioners will get the short end of the stick as the value of pensions will be reduced in all scenarios (except (2) but raising taxes doesnt really solve the problem anyway). My guess is that we’ll get all of the above, and real questions are whether it will be an orderly retracement or not, and whether it will go down the default-deflation route or the printing-inflation route.

Brace for Impact

Either way, it seems to be time to brace for impact.  My main brace-for-impact strategy are the investments in the Ivory Coast – especially the chicken farm seems to be quite well suited for tougher times. Even if things were fine in Europe, I’d still have made the investments in the Ivory Coast though – but this situation increases the urgency a bit.

Other ideas to protect one’s assets could be to buy:

-Currencies of fiscally responsible countries that seem to be able to weather a storm better than others, like Norway, Singapore or Switzerland (betting they will not keep the peg, or that the euro will split up)

-Gold, silver or stocks in gold/silver mining companies. Not too great in a deflation-default scenario though.

-Stocks in solid companies producing stuff people need even in a severe downturn.

-Real assets, preferably incoming producing ones, and preferably in parts of the world less hit by a coming crisis – and well, here we are back with the investing in Africa theme.

-Or for the real doomsdayers guns and food, but I doubt it will be that bad.

Or get a job (or start a business) outside the developed world. There are still billions of people joining the middle class, and for the world as a whole I think there is reason for optimism and plenty of opportunities.


Economic Complexity

Atlas of Economic Complexity

I came across something called the Atlas of Economic Complexity. It’s an attempt to measure the  “productive knowledge” of each country using network analysis techniques on the flows of trade – a bit like Google analyses internet links to rank websites. From the Atlas:

Ultimately, what countries make reveals what they know.  Take medical imaging devices. These machines are made infew places, but the countries that are able to make them, such  as the United States or Germany, also export a large number of other products. We can infer that medical imaging devices are complex because few countries make them, and those  that do tend to be diverse. By contrast, wood logs are exported  by most countries, indicating that many countries have the  knowledge required to export them.

Now consider the case  of raw diamonds. These products are extracted in very few  places, making their ubiquity quite low. But is this a reflection  of the high knowledge-intensity of raw diamonds? Of course  not. If raw diamonds were complex, the countries that would  extract diamonds should also be able to make many other things. Since Sierra Leone and Botswana are not very diversified, this indicates that something other than large volumes of knowledge is what makes diamonds rare.


Think of a particular country and consider a random product. Now, ask yourself the following question: if this country cannot make this product, in how many other countries can this product be made? if the answer is many countries, then this country probably does not have a complex economy. On the other hand, if few other countries are able to make a product that this country cannot make, this would suggest that this is a complex economy.

Let us illustrate this with a few examples. According to our measures, Japan and  Germany are the two countries with the highest levels of economic  complexity. Ask yourself the question: if a good cannot be produced in Japan or Germany, where else can it be made? That list of countries is likely to be a very short one, indicating that Japan and Germany are complex economies.

Now take an opposite example: if a product cannot be made in Mauritania or Sudan, where else can it be made? For most products this is likely to be a long list of countries, indicating that Sudan and Mauritania are among the world’s least complex economies.


In fact, as we show in this atlas, the gap between a country’s complexity and its level of per capita income is an important determinant of future growth: countries tend to converge to the level of income that can be supported by the knowhow that is embedded in their economy.

Makes a lot of sense, and especially the part about predicting economic growth is interesting.  The authors of the Atlas claim their method does wonders in this area: (more on that in an Economist article entitled Complexity Matters)

In fact, it beats measures of competitiveness such as the World Economic Forum’s Global Competitiveness Index by a factor of 10 in predicting growth for the following decade. It also beats by similar margins measures of human capital and governance.

So what are the predictions for economic growth?   The Atlas includes countries with a population above 1.2 million, trade above USD 1 billion and reliable data. Altogether 128 countries meet those criteria. In the map below they are all ranked according to their expected GDP growth to 2020:

Expected GDP growth to 2020

So it looks like East Africa is the place to be (and India), but West Africa isn’t looking too bad either.

What about the Ivory Coast?

Unsurprisingly the Ivory Coast doesn’t rank very high on economic complexity on a global scale. It’s 99th out of the 128 countries surveyed, and 11th out of 26 Sub-Saharan countries.

Since the Ivory Coast is slightly poorer than it’s economy is “un-complex”, plus having a fast growing population, prospects for economic growth are relatively good. The Ivory Coast ranks 28th of 128 in expected total GDP growth up to the year 2020.
The top of this list is made up of:

1. Uganda
2. Kenya
3. Tanzania
4. Zimbabwe
5. Madagascar
6. Senegal
7. Malawi
8. India

However, if one removes the population growth and looks at expected GDP growth per capita, the African countries fall back a bit.  Ivory Coast ranks  76th/128  in expected  per capita growth to 2020 – and that’s based on figures from 2008. And well, the question is if the Ivory Coast can move away from practically only exporting pretty simple stuff. Here are Ivory Coast’s exports in 2008:

Ivory Coast exports (click to enlarge)

UPDATE: Found two interesting articles about economic complexity:

The Art of Economic Complexity – New York Times

Complexity and the Wealth of Nations – Harvard Magazine



Does the IMF have a clue?

The latest projected real GDP growth figures for the Ivory Coast I have been able to find are from the IMF (via Economywatch) and are as follows:

2011: -7.5%

2012: 6.0%

2013: 6.0%

2014: 6.0%

2015: 6.0%

Before the scale of post-electoral crisis was known, IMF projected the following real GDP growth:

2011: 2.8%

2012: 4.0%

2013: 4.9%

2014: 5.5%

2015: 6.0%

The thing with these projections, beyond 2011, is that they are very uncertain.  The only thing I’d say with some confidence is that the growth isn’t going to be exactly 6.0%.  It’s uncertain not because the IMF has done a bad job, but because an economy is an inherently complex system full of non-linearity and inter-dependencies. In Nassim Taleb speak we live more in “extremistan” than in “mediocristan“.

Looking at past projections  there seems to be a tendency for actual gdp numbers to quarter after quarter come in systematically above or below projections. Right now in Western Europe actual gdp figures seem to disappoint at every quarter.  It’s a bit like projections play catch up to a reality that’s always more extreme than projections – in one way or the other.

For the Ivory Coast, starting in 2012 the projections are pretty optimistic, and if it wasn’t for the upcoming developed world downturn/crisis, my guess would have been that we’d see see constant surprises to the upside.  Now, my guess is that the Ivory Coast growth will outperform developing world and sub-saharan Africa averages, but that these averages at least for the next few years could be lower than expectations due to being dragged down by the developed world crisis.

“Ignore the experts and trust your vision”

Here are a few quotes from venture capitalist and Sun Microsystems co-founder Vinod Khosla on experts’ difficulties in making projections and the implications for entrepreneurs:

[…]Yet his attitude is pretty anti-establishment when it comes to independent thinking, which he believes is essential for entrepreneurship.

“Trust in your instincts and trust in a lot of experimentation,” Khosla said in an interview.

Quoting George Bernard Shaw, Khosla said, “The reasonable man adapts himself to the world. The unreasonable man persists in trying to adapt the world to himself. All progress, therefore, depends upon the unreasonable man.” And quoting Martin Luther King Jr., he said, “Human salvation lies in the hands of the creatively maladjusted.”

In his speech, Khosla spent a lot of time showing how expert predictions have gone awry, like Lord Baron Kelvin, the head of the Royal Society who said that “heavier than air flight” was impossible just a few years before the Wright Brothers flew at Kitty Hawk. And he said that, even today, oil experts can’t accurately predict the price of oil.

McKinsey failed to predict the popularity of cell phones, estimated in 1986 that the number of cell phones in 2000 would be 1 million units. It was off by 108 million units. The forecast was wrong by 10,000 percent. On that basis, AT&T decided to divest itself of its cell phone business.

“It was an expensive study,” Khosla joked.

Philip Tetlock, a professor at the Haas Business School at the University of California at Berkeley, did a study on the accuracy of forecasts going back 25 years. When he finished the study, he had collected 82,000 forecasts against real-world outcomes from nearly 300 academics, economists, policymakers and journalists.

Nobody predicted that Twitter would be used by more than 100 million users. Nobody predicted that India would have more cell phones than toilets. Nobody predicted the Arab Spring. Nobody predicted that China would become a huge consumer of the world’s oil.


Vinod Khosla

A safe store of value?

Land in Abidjan

I’m thinking that in 5-10 years time I’m probably going to regret that I didn’t buy more land in Abidjan.  A strong case can be made for it as an investment (but that’s for a future post), but it’s not bad as a store of value as well.   It actually feels safer to have money placed in land in Abidjan (given that the title is secured)  than in a lot of other places. That’s linked to me having pretty pessimistic macroeconomic views.

Very briefly, I think:

  • China is going to have a real estate crash – impossible to say when, but I think it will happen. This will reduce the demand (and prices) for various natural resources and cause stock markets to go down world wide.
  • Most of the countries in western world (plus Japan) have structural budget deficits, that seem difficult to close for political reasons.  Instead they are borrowing and/or printing money to cover budget shortfalls which isn’t sustainable and will end in disaster if it goes on for too long.
  • The banking sector (especially in Europe) is still over-leveraged and a second financial crisis might well happen.

With all this, it’s hard to find a safe store of value.  Even having US Dollars or Euros on a bank account doesn’t feel entirely safe – not because the bank will default, but because both the EUR and the USD could lose value dramatically.

Where am I gonna put my money?

Here’s Jim Rogers on BBC Hardtalk voicing the problem of where to put one’s money:  [He is more positive on China than I am though]

There’s going to be huge downsides, there’s serious problems. Where am I gonna put my money? US? the UK? They’re bankrupt. Why would I take my money out of a place that is having a dip [China] and put it into a bankrupt country?

With land in Abidjan the price is to a great degree determined by local conditions and local demands. With asset values in the developed world and the most developed emerging markets becoming more and more correlated, Africa is still an exception where things can go up while the rest of the world goes down.  Nile Capital has just released a report entitled “Africa investing: The benefits of a diverse continent” that elaborates on this point.

Also land prices in Abidjan are clearly not in a bubble – rather still in a political crisis dip, which provides a margin of safety. And land is a pretty good inflation hedge (except in the most dramatic stages of hyperinflation). 
The problems are that it’s not very liquid and that you don’t have a very strong rule of law to back up your ownership rights.

Safer places to put your money, compared to land in Abidjan, that I can think of include:

  • Currencies backed by countries that have low debt, a strong fiscal position and strong rule of law:  Norwegian crown, Swiss franc, and maybe Singapore dollar, Chilean Peso and Canadian dollar.
  • Gold mining stocks of companies with strong balance sheets and maybe gold itself although it has gone up a lot.
  • Stocks of well managed companies with strong balance sheets producing stuff that are close to the base of the Maslow’s hierarchy (eg agriculture). These should be well positioned in a crisis scenario.

More macroeconomics

British economic historian Niall Ferguson recently made a speech on Fiscal Crises and Imperial Collapse which has absolutely no connection to the Ivory Coast or lifestyle design, but was great, so I’m going to comment on it anyway.

Ferguson says that today governments have world war size debts, without having had a world war,  and lists what governments with world war size debts historically have NOT done:

  • Slash expenditures and entitlements
  • Reduce marginal tax rate on income and corporate profits to stimulate growth
  • Raise taxes on consumption to reduce deficits
  • Grow their way out without defaulting or depreciating their currencies

If politicians in general are analysed the same way as Ivory Coast’s president Laurent Gbagbo, ie they’ll do what it takes to stay in power, the above makes perfect sense as all the points are likely vote-losers.

Ferguson goes on to list what governments with huge debts USUALLY do:

  • Oblige central banks and commerical banks to hold government debt
  • Restrict overseas investments by firms and citizens (capital controls)
  • Default on commitments to politically weak groups and foreign creditors
  • Condemn bond investors to negative real interest rates

Of these only the third is really contributing to solve the problem, and the fourth is a consequence of inflation. Ferguson says that many assume that that governments will inflate away debt, but says it is harder than we think, because there are fewer naive investors now than in 1945, mentioning his grandmother losing money on British war bonds. Seeing the risk of deflation or default, Ferguson says, markets will ahead of time drive up borrowing costs, which can and has historically, lead to a nasty scenario with high real interest rates and deflation, forcing massive spending cuts and the fall of empires.

So, if Ferguson is right, it would mean deflation is more likely than inflation.

So far I have not taken any loans to invest in the Ivory Coast, but I am considering it, and having a loan when there is inflation is great – having one when there is deflation is clearly less great.

Destruction - Thomas Cole's 3rd painting in his 5-part series "The Course of Empire" from 1836

In other news a team of scientist have created the first artificial cell. Well, human kind, that was a nice 100,000 year streak!


Well, Western World, that was a nice 500 year streak

Global macroeconomics

I have been looking at a recent working paper from the Bank for International Settlements, and well, it’s pretty alarming stuff.  They are essentially saying that even with  significant budget cuts practically all large Western countries plus Japan have debts that will spiral out of control.

Continue reading “Well, Western World, that was a nice 500 year streak”