Recession is the environment's worst enemy

First of all, I appreciate the feedback and the comments that you've provided. As I have mentioned, I am no expert and I welcome different opinions. Therefore, in the future I will try and revisit some of my older posts and discuss some of the issues that you've brought to my attention. On that note, please feel free to continue to email me comments, feedback and any posts that you believe will have an interest to the readers of my blog. I will post them without censoring given that they are in the context of this blog.

I realize that I have not talked much about politics so far in my blog: The US has recently had an historic election of their new president, there was a terrorist attack in Mumbai and the leader of the Russian orthodox church passed away yesterday. In other words, there should be plenty of material to discuss politics and economics. Firstly, as with most of the things I discuss, brighter people than myself have already discussed the consequences of these political events. Secondly, I believe we all get bored from hearing about the same thing over and over again.

In any event, I'll now make an exception and discuss something that's been on the agenda on a government level for quite some time now: the environment. We all know it will collapse eventually and ensure new breeds of illnesses and diseases, that may lead to our extinction (this is a fact in my mind, the discussion is around whether we're causing it or not). I guess our passive response is a result of one of the two hypotheses: by the time it collapses (1) we'll be living on Mars or (2) our offspring will have found the solution. In fact a third reason may be that we're tired of hearing about the problem. If that's the case, then you should probably stop reading.

Just like street lighting, a good environment is a positive externality. A positive externality is something that we all benefit from incrementally, but are unwilling to pay for individually. For instance, you are satisfied with the street being lit on a late afternoon when you walk home from work. You benefit from it. But you wouldn't pay for it out of your own pocket. That's why the government must take the bill. The same goes for cleaning up the environment. True, companies pay donations to organizations that try to remedy these problems. But just like AIDS, this is done either out of a marketing perspective, having a bad conscience or like a few cases, a genuine belief that the donation will make a difference. So what happens to these "marketing gimmicks" when the companies' budgets are being tightened? What happends to personal donations when you lose your job, as is the case for many people today? That's right. You cut down on luxury expenditure and aid donations.

The LVMH group (Louis Vuitton Moët-Hennesy, a group that sells luxury goods) is probably making organizational changes as we speak: firing (staff) and hiring (consultants). The same goes for auction houses. My guess is that there won't be any new records for an orginal Monet in the next few years. And what about donations and environment-focus from governments, companies and households? Just like the Road runner does to the Coyote - bip bip - and it's gone.

This is a good time to stop. Why? Because as with everything else in the world, solutions have to be capitalized before they can become successes. As of today, most environmentally-friendly solutions don't have the legs to carry it in the fierce, free-market. For instance, if a company could sell plenty of houses profitably that used its own emsissions and turned it into clean energy or lit the lights in the rooms, that company would become a success. So when contributions from rich philanthropers, governments and agencies become marginalized, those companies at the receiving end, vanish like the dot.com firms.

I'll propose one solution though. And please if you're an environmentalist and don't want nuclear energy, I'll welcome any valid arguments on why my next suggestion is a poor one. I've mentioned it once in a previous blog and I'll mention it again: Thorium.

I recommend you read up on Thorium (Thorium's name in The Periodic Table is Th), speak to teachers, scientists and politicians to get the full picture. Thorium is the energy for the future. Let me give you an example to portray the importance of Thorium. If Africa is the next India or China, where will it's energy come from? As all countries almost without exception, experience a perfect correlation between growth in energy consumption and growth in GDP (in percentage terms) how will that be possible without leaving a giant, gaping hole in the ozone layer? Thorium. You may or may not now this, but China has, on average, built five new coal power plants a week since 2007! It's not because they don't care about the environment, but because they have no where else to get their energy from cheaply. After all, China is the largest producer of coal in the world.

So what's the highlight: most clean energy solutions, don't solve the real problem of the world. They're expensive and can't really replace heating oil or natural gas. Wind and solar energy? They might help you and me reduce our energy expenses. But save the world? No chance. Thorium at least has a great chance: It's found in abundance in stable economies, its energy output is huge, the initial research costs are far outweighted by the savings in energy costs and finally, believe it or not, it's a friend of the environment with zero emissions.

Why did I say that I wanted to discuss politics when I discuss energy? You may have guessed it already. Thorium is as good as I claim. Unfortunately, Thorium is all about politics. Take my simple association test to prove my point. Imagine you're the head of an energy-hungry country and one of your top researchers presents a new case that will solve most of your energy issues. Nuclear energy using Thorium. What pops into your mind?

Exactly.

The Tchernobyl-disaster (God knows how that's spelt), Sellafield wasteland, terrorism, melt-downs, people turning fluorescent etc.

Those same associations are leading to irrational behaviour as disucssed in a previous post ("Murderous, money management"). Forgetting the facts and adding too much weight on emotions can be equally wrong in politics as in money management. There are of course other important issues. Such as why would Norway (which benefits so immensely from being an oil exporting country) want to invest in Thorium plants that may compete against oil? And the US, which has a debt 4-5 times the size of the GDP, worry about the environment when there are far more pressing issues at hand that need to be addressed?

That's why it's up to us to set the agenda in the political world and press for changes. One great pitch about the need for Thorium to a local politician is worth far more than the contribution of USD 1 mill or that voluntary work one's entire life. Still, those contributions do have their value. That's why a recession is the environment's worst enemy.

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This blog is intended for the interest of the readers only and the blogger bears no liability as a result of investments undertaken from advice given in this blog. I have used citations that are accurate to the best of my knowledge, information that is correct and I apologize in advance for any spelling errors.

Farmers harvesting inflation?

In the blog "The Great Norwegian Depression?", I said that the markets no longer worry about inflation. And how can they? Aggregate demand is down in all countries, energy prices are falling, people are losing jobs and the level of savings is reaching new highs. In fact, senior portfolio manager at Storebrand Kapitalforvaltning, Olav Chen, says that "nobody fears inflation now" and follows up by saying "most of us worry about deflation" today on e24. So, everyone should be concerned with deflation. Well, I'll explain now why calling off inflation may be a dangerous move.

The fall in the prices from September to October in consumer prices hit a record 1% in the US. Energy prices fell an even more astonishing 8.6%. This is still an increase of 3.7% from the same period last year.

First off, some comments about inflation. Inflation is the general increase in prices over time (usually a basket of common goods is used to measure the CPI. The changes in the CPI is the inflation. Other measures are used such as The Economist's Big Mac Index). There are four main factors that lead to inflation: (1) the supply of money goes up, (2) the supply of goods goes down, (3) demand for money goes down and (4) demand for goods goes up. I'll refrain from taking the lecturer's hat on and leave it up to the readers to go into detail about Keynesian Economics (cost-push and demand-pull inflation). But let's delve more into the inflation factors.

In recent years (2003-2008) most countries have had relatively normal inflation levels. This is odd, since all of the 4 above mentioned factors were in place, right? Yes and no. Due to the immense capacity for growth in the BRIC countries (Brazil, Russia, India and China), countries have been "importing" low inflation for years. So although wages were rising in booming economies, production costs' reductions compensated for that increase (by moving production/support services/maintenance to BRIC) thus leaving prices for the final product relatively stable (the exceptions were of course oil, gold, platinum and quite a few other commodities).

Today, the situation seems to be the complete opposite with the fall in demand having to take most of the responsibility (why investors are more worried about deflation than with inflation). We are in a recession there is no doubt about that (at least in my head). In order to understand more what will happen to inflation let's first take the worst case scenario i.e. that we are in a recession (ideal for deflation). If households and companies stop consuming and investing, and instead hold cash, then we would expect deflation. However, history tells us that in a boom we have inflation, but in a recession we don't have deflation. During one of the worst recessions in the US since WWII, real GDP fell by 4.9% (between November 1973 and March 1975), but the inflation in that same period was 14.68%!

Why is that the case? If deflation is the opposite of inflation, then one would expect deflation in a recession and an inflation when the economy is booming? There are two reasons why deflation is not as frequent as inflation. First of all, wages are sticky downwards. That means that as soon as GDP rises, wages rise. But, when the economy slows down companies usually lay off workers (which takes time) instead of cutting wages ("Protectionism in Action" signed by trade unions). However, eventually this effect is not enough to avoid deflation. It is the second effect that ensures that the economy seldomly experiences deflation: namely the increase in money supply.

During that recession in 1973 to 1975, the seasonally adjusted M3 (money supply) rose by 24.4%. Historically, regardless of the financial climate, central banks have been busy feeding the markets with capital. And since most central banks don't seem to have forgotten the old trade of chipping in a dime every now and again (take the joint US/Euro-zone rescue package just a few weeks ago for instance) we won't have a problem with deflation. In fact, as shown by the previous historical example, inflation is what we should be concerned with especially in these times of high injections of capital to the markets. Now, what if central banks "run out" of money and are unable or unwilling to keep supplying the markets with cash? That is a question we'll have an answer to in a few years (then inflation will probably be the least of our worries).

Inflation is looming due to the high supply of capital. Now what about other effects? Hint: I mentioned farmers in the heading of this blog, but I still haven't said anything about farmers yet. A case of just being forgetful?

History can only tell us so much. Most economists, investors, governments, business leaders, housewives, carpenters (I'll stop now), etc will agree that the current situation is a rare one and thus needs to be scrutinized further than just being compared with similar, past events.

Here's the situation that is spinning around in my head and will make the case of deflation seem even more distant. Please, bear with me on this. What does every human being need? Food. Who makes food? Farmers. But what is happening to the farmers around the globe? Firstly, they're experiencing droughts and hurricanes of larger magnitude and a higher frequency than ever before. Australia is battling its problems with drought (desert is expanding), the US faces problems with hurricanes and ruined soil for its cattle, hog and corn production. BRIC are turning their best areas for farmers into highways and new office buildings in order to attract foreign capital. This leaves production at a plateau despite increased demand as the population is growing and thus leads to higher prices. Secondly, in order to increase production, farmers need to produce more on the same area of soil. The solution? Buy fertilizer! This is where I believe the problem will initiate.

Farmers are not as financially strong as large corporations to tackle increases in costs and new investments. Therefore they'll have to borrow money in order to buy fertilizer (think of the fertilizer being an investment since the increased harvest comes in the future). Due to the financial crisis and the tightened grip around lending practises, many farmers will struggle to get their loans and thus be unable to afford even the minimum investment in fertilizers needed to increase production. As a result, the prices for commodities will increase. Mainly for commodities from countries which have an unstable climate and many small farmers (the US has huge farmers compared to Argentinian farmers who are plentier, but smaller).

In addition, the actual inflation is obviously important, but so is the expected inflation. The reason being that households and companies will alter their consumption and investments decisions based on the expected future inflation rate as found by the Federal Reserve Bank of Cleveland. Thus, I believe we may even have a case of stockpiling. The production can't be maintained so buyers of rice, cocoa, beans, corn, etc will expect prices to rise in the future. They will fill their inventories with commodities (since they expect rising prices). As a result, prices rise even more and farmers will have to pay more for fertilizer as the demand for it goes up, leaving them no better off than initially. Thus, central bankers should be concerned with expected inflation and moderate interest rates accordingly. This is obviously not the case as interest levels are going down across all continents to stimulate growth.

If this ends up being "the perfect inflation-storm" is yet to be seen, but if that occurs then we may even have hyper-inflation in some parts of the world. In Zimbabwe, hyper-inflation is ruining the economy. Steve H. Hanke, a professor at The John Hopkins University and a Senior Fellow at The Cato Institute, has measured the hyperinflation in Zimbabwe and named the indicator Hanke Hyperinflation Index for Zimbabwe (HHIZ). The indicator starts in January of 2007 with an inflation of 13.7%, which is high, but no where near the levels we are seeing today.
In fact the annual inflation rate is a staggering 89,700,000,000,000,000,000,000%, which means that prices are doubling every 1.3 days. Eventually the inflation level becomec irrelevant as the econoomy stops functioning. What is causing this hyper-inflation? Obviously, Mugabe's Zimbabwe is a special case, but it boils down to that goods are in short supply.

Some will argue that although deflation is rare, that's exactly what we are seeing now! Prices fell from September to October. Although energy prices are down and probably will fall even more before they stabilize, the CPI (excluding energy) will also fall in November and December. This has a very simple explanation. In order to attract shoppers to their stores, Christmas shopping discounts and generally lower priced products and services will be common this season and ensure that prices will fall until January. That's when our inflation will pick up. Some time during the first half of 2009, inflation will again be in the limelight.

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This blog is intended for the interest of the readers only and the blogger bears no liability as a result of investments undertaken from advice given in this blog. I have used citations that are accurate to the best of my knowledge, information that is correct and I apologize in advance for any spelling errors.

Murderous, money management

While huddled together with dozens of other commuters in a cramped subway station in Oslo, it came to me. The actions taken by my fellow commuters can explain how investors behave in a time of uncertainty (like the current situation). I was witnessing irrational behavior.

First, let me rewind. Social psychology is the study of how people and groups interact (thanks Wikipedia). Diffusion of responsibility (also called the Bystander effect) may occur in such a group, when the number of individuals reaches a critical size and when responsibility is not explicitly assigned. Such a case may explain how rational people may make irrational decisions.

In an intricate murder case in New York City, Kitty Genovese was stabbed to death in an alley in Queens. Although tragic, it's not the murder that's interesting, but the actions or lack thereof, of the witnesses. According to a newspaper article published a few weeks after the homicide, 38 witnesses saw what happened or heard the cries for help. No one reacted or called the police. The investigators did not confirm that there were in fact 38 witnesses, but the theory is interesting nonetheless: will people act irrationally due to a lacking sense of responsibility?

Well, the same Bystander effect or diffusion of responsibility can be found in a lot of places - including the equity markets. For instance, investors have a strong tendency to buy too late and sell too late. Because one's not convinced the market is going to continue to be a bull market. When finally everyone else has bought, the transaction is made. The fear of making the wrong investment supersedes any rational behavior about fundamental value, just like in the murder case (assign more value to what your neighbor is telling you than what your head is saying). The same fear leads one into selling too late, since one never wants to cash out a negative position, accompanied by some self-justification in the form of: "Don't worry Jane, it's only a paper loss."

Fund managers are no different (at timing the market that is). The best equity, fund manager in Norway over the past five years is Jarl Ulvin according to Citywire. His fund has returned 232.33% while the average fund manager has only returned 137.17%. However, his fund has been outperformed by the average fund manager for the past three years (see diagram below).


Pretty good selling point still though, right? Jarl Ulvin is the best fund manager in Norway. Well, hopefully not and I'll explain why. Looking at the graph below, the line for Mr. Ulvin resembles the line of the average fund manager's performance pretty neatly. The difference is the size of the volatility (consistently larger for Mr. Ulvin's fund), not the direction. This trongly suggests that Mr. Ulvin manages a fund that is a lot riskier than the average fund, not that he's better at stock picking. His fund profited from the bull market between 2005 and 2007, but he has been punished significantly more than the average fund manager the past few months. In fact, if you invested your money in June 2005 in Norway's best fund manager, you would emerge with less money than if you invested in the average fund. It seems like Mr. Ulvin's "top performance" is a case of adding risk to his portfolio.


Obviously, if most stocks are going down, then stock picking becomes even more important. However, it seems like Mr. Ulvin does not score well here either. Falling markets also provide fund managers with an excuse: "The markets are sour, all funds are losing" (did anyone say lacking sense of responsibility?). What sets fund managers apart is the amount of risk taken, not competencies. Fund managers, just like investors, go with the flow and the psychology of the general market and are unable to time the market any better than the average Joe. Thus, investors should do what equity managers can't: diversify into different assets.

So, what were the actions taken by my fellow commuters that led me to think of the social psychology phenomenon? While waiting for the train to come to a complete stop, commuters walked across the platform along the side of the train, in a 45 degree angle. This is irrational, because the probability of the door opening up right in front of where one's facing is equal to the probability of it opening up 5 meters down the platform (unless you're in Japan where the pavement is marked showing where the doors will open). People react to surroundings and to other commuters instead of sense (instinct versus rationale). Since the "pack" walked in the same direction, no one wanted to break that pattern. They probably felt a sense of urgency as well that the subway may speed up instead of stopping, while they're left on the platform (which again is irrational or at least highly unlikely). As a result, I ended up taking the same approach to the train as all the other commuters.

Next time, I'll walk in the complete opposite direction in pure spite.

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This blog is intended for the interest of the readers only and the blogger bears no liability as a result of investments undertaken from advice given in this blog. I have used citations that are accurate to the best of my knowledge, information that is correct and I apologize in advance for any spelling errors.

The viscosity of the oil fund

I recently posted a blog about Norway and the future of Norway ("The Great Norwegian Depression?"). Although I realize that the points I made have been addressed earlier by far more cleverer people than myself, I would like to add a second part to that blog. Think of this as a sequel, where I shed some light on the diversification of one of the most important, national funds out there.

Norway's Government Pension Fund - Global (formerly The Government Petroleum Fund, which is managed by NBIM) unveiled a negative return of NOK 39 bn for Q2 despite beating benchmark indices due to active trading (trades in bonds and equities). However, with oil prices breaking through the ceiling, the net inflow was positive at NOK 46 bn (NBIM receives capital inflow from any oil activity in the North Sea). The negative returns were incurred as a direct result of (1) an increased exposure to equities (from 40% to 50%, which will be increased to 60%) and (2) turbulent markets including losses in AIG, Lehman Brothers and Bear Sterns. The negative return is within what can be thought of as acceptable volatility for the fund (within the mandate given by the Ministry of Finance). That's what Yngve Slyngstad, the CEO of NBIM, claims.

A negative return of NOK 39 bn for a fund that exited Q2 at NOK 1992 bn is a loss of less than 2% (10% on an annualized basis). A reported NOK 91 bn cheque was added to the fund in Q2 from offshore activites. If this sum is representative for any quarter, then an estimated NOK 360 bn will be added to the fund this year (that's about 15% of the total fund size). Obviously, a downward facing trend in the price of oil will affect these capital inflows negatively.

So, the question that needs to be addressed is not whether the negative return in Q2 represents an acceptable volatility in the fund. Instead finding out whether the risk could have been reduced without compromising returns is far more interesting. This is where there is room for improvement.

I've already mentioned that the capital provided to the fund stems from oil related activities. Glancing over the fund's equity portfolio (of more than 7000 companies) there is a large number of oil companies included. How is that even possible? Not only is about 15% of the fund exposed to the oil price and the oil activity through income from the state, but the returns of the fund itself is exposed to oil activities around the globe through the equity investments. It reminds me of all the employees who had their income and their 401(k) retirement packages, all put in the same Enron-basket.

First, let me make a few comments about diversification. Diversification is good since it reduces risk, no doubt about that. However, researchers have found that correlation between international stock indices (the FTSE100 and the CAC 40 for instance) increases dramatically in cases of stock market crashes. That poses a conundrum; it is in times of crisis where the diversification effect is most needed!

One could argue that there is a geographic, diversification effect since the inflow of capital stems from oil activities in the North Sea, while the returns from the investments are from foreign companies. That argument doesn't hold as oil is traded in an international market and thus affects all countries equally. What about maximizing the diversification effect of the equity portfolio - if oil companies were excluded, then one wouldn't have an optimal portfolio composition? That is true, but it makes a fatal assumption. The assumption that portfolios should be optimized individually, with regards to risk. Investor behavioralists call that a bias - forgetting to diversify the total portfolio.

So what should NBIM or rather the Ministry of Finance do? First things first. Stocks are cheap, no doubt about that and Buffett is buying ("Be fearful when others are greedy, be greedy when others are fearful." I recommend you read his contribution in the New York Times about a month ago). Since NBIM has an infinately long investment horizon, they should vacuum the markets for equities in order to reach their 60% target. After all, Buffett has proven himself numerous times before.

Secondly, they should review their portfolio strategy with regards to diversification. In other words, set new investment guidelines for the fund managers that excludes/limits oil companies. There may be some politics involved when excluding some of the world's largest companies from the investment map, but the fund's goal is not to please fat cats nor engage in politics.

Thirdly, limiting the investments to equities and bonds raise a whole new set of problems (this is a political issue and is not decided by NBIM) . One of the most successful funds to this date, is the The Yale Fund (the model was developed by David Swensen and Dean Takahashi) which has yielded a return of 17% the last ten years. There are pros and cons to all investments strategies, but this strategy is proven. The fund invests in about six different asset classes. And what is the foundation of the model? Diversification. What is it that NBIM is lacking? Diversification.

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This blog is intended for the interest of the readers only and the blogger bears no liability as a result of investments undertaken from advice given in this blog. I have used citations that are accurate to the best of my knowledge, information that is correct and I apologize in advance for any spelling errors.

The Great Norwegian Depression?

This is my first blog. Ever. I'll try and update the blog as often as possible hopefully once every week. But I'm not making a promise. Anyways, I'll start my blogging career with this update on how the Norwegian economy will prevail (or not) from the current crisis.

Norway has roughly the same number of inhabitants as the Caribbean island of Puerto Rico. Still Norway is an important piece of the puzzle that makes up the world. However, the picture is about to fade. Although Norway contributes in large parts to peace processes, philanthropy and a stable energy inflow to many countries world wide, without any action, our position at the top won't last for long.

The stock market crash in 1929 in the US lead to a depression, which lasted for about a decade. Whether Norway will face the same dismal era in the forthcoming years depends on completely different profiles than the Minister of Finance, Kristin Halvorsen, and the Head of the Norwegian Central Bank, Svein Gjedrem. When push comes to shove, they will be looking for the consumers. That includes yourself and the author.

Japan is there. The interest rate has not budged much from its level at 0.5% in the past, few years (providing incentives for the carry traders). The problem with the Japanese economy is that the consumers are too smart to be lured into consumption. If the interest rates are decreased (to 0% which was the case a couple of years back and is definately a scenario that the Japanese Central Bank will be discussing at the moment) then this should stimulate spending. After all, about 55% of the total consumption in Japan comes from households. However, the Japanese realize that if they then increase consumption and borrow more, they will find themselves worse off later on when interest rates increase again. Instead, they save more in order to prepare for such an outcome and retirement (John Mauldin explains the Paradox of Thrift: what is good for the individual is hard on the economy, as by definition increased savings reduces consumer spending).

USA were there. Although the FED chose not to intervene in 1929, which is in stark contrast to the current crisis, the current financial packages are only aimed to aid liquidity, not to stimulate growth.

I am not saying that Norway will find itself in a deep recession with zero interest rates and zero growth. In fact, the world's leaders have coughed up packages estimated to be worth over $3000 bn. But, there shouldn't be any doubt that the crisis is in any way over. The initial credit crunch as a result of the US sub-prime market lead to the more recent banking crisis. Obviously, banks, financial institutions and stock markets around the world will be the first to get hit by the problems. This has yet to culminate into an economic crisis.

A crisis where the unemployment rates will rise, real estate values will drop, interest rates will fall and where the fall in demand from oil from the large, industrialized countries will far outweight the rise from countries such as China. We have started to see signs of the economic crisis surfacing. GM is finding itself in a slump after having gone through the second worst quarter of sales, post-war adjusted for population increases. The same tendency will be seen in Norway. The only light at the end of the tunnel is that the supposed fear for hyper-inflation has been called off.

Tourists will stop coming to Norway (at least a lot fewer than in previous years). Restaurants, travel agencies, hotels and manufacturing companies, existing purely on the mercy of government subsidies for cheap power, will go bust. Maybe a weakening krone may be able to save them. I think not. The only companies/sectors that will survive are those that are competitive and have an international, competitive edge. Those are few and far between, but some IT companies and the salmon-exporters should do fine. Despite how bad the state of the economy in the world, people will still enjoy their plate of fresh, Norwegian salmon (or Japanese sushi). Tobacco companies and alcohol companies will make record profits this quarter. Hurtigruten will go belly-up during 2009 unless the government throws it a lifeline again. So will Color Line with its introduction of the Color Fantasy (talk about bad timing).

It's difficult to discuss the future of the Norwegian economy, without mentioning the shipping industry. Shipping companies will struggle the next few years. The fleet is about to double as we head into 2009/2010 (number of new vessels entering the market should worry most investors). In addition, the increase in demand for exports around the globe will fall. Said plainly, there are no positive catalysts for the shipping industry. Only those with an international, competitive advantage will prevail (I am not mentioning company names, but stock picking will be more important than ever in the shipping industry)

So, after presenting this gloomy outlook for Norway's economy (for those that are wondering if we are in a secular bear market...I am guessing that's the BIG question everyone's asking), what does Norway need to do to avoid the worst case scenario? Norway's GDP per capita growth since the the oil-age of the 1960's has been unparalled (contrary to what most Norwegians believe - we were far from being the poorest country in Europe in the 50's). This is obviously due to the welcoming tax-income from oil operations, which has yielded one of the largest state-owned fund's in the world - The Norwegian Pension Fund.

Unfortunately, although the comfort of the fund has been warmly welcomed as a saftey net, it has had a devastating effect on our appetite for perfection. We now find ourselves in a state of apathy towards most issues relating to growth and prosperity. Norwegians take the great welfare of this country for granted. What are we going to occupy ourselves in 30-50 years time? Our competencies are concentrated around oil and the offshore business, which will have lost its position as the most important source of energy within the next 50 years.

Mark Nucera ("The Bergen Brief"), a former hedge fund manager in the US, now situated in Bergen, Norway, makes quite a few valid points in his letter posted on Developing Trader (http://developingtrader.com/071107.php). The growth in Norway (and the world) will be marginal, at best, in the next few years. Why not use such a slump in the economy to boost the infrastructure? Research and development? Education? This will stimulate growth and counteract the downward-facing trend we find ourselves in. Also, it will create jobs for the entrepreneurs who are facing a tough year ahead.

In order to fully grasp the extent of the Norwegian apathy, let's make a comparison (most Norwegians hate being compared to the Swedes - and vice-versa). But for the sake of the comparison, let's look at how Sweden is doing (similar size, strength of work-force, neighboring country. The only difference really is that Norway is blessed [cursed] with a lot of oil). Sweden, without any income from oil activities, has had an impressive growth since the WWII. Although, neither Ericsson, Volvo nor SAS are on Swedish hands anymore, most people would deem these companies successful. In addition, there is AstraZeneca, IKEA, Skype and TetraPak. All companies started by Swedes. The common denominator being innovation, technology and research. They are fantastic at doing one thing, really well. Even Warren Buffet would have turned down an offer from Ingvar Kamprad (IKEA founder and still acting CEO) to take IKEA public when it was still fairly unknown. "Sell furniture? Cheap? I don't think so."

Having said that, Sweden are facing serious challenges of their own. Their banks have spearheaded the growth in the Baltic states (Nordea, Handelsbanken, Swedbank, etc). The real estate market in Sweden is on the brink of a collapse. Still, Sweden is more prepared for an economic slump. Why?

It's about time I conclude and come full circle. Our government is only reacting, instead of being proactive. The manufacturing industry has historically been important for Norway (like the car manufacturing industry has for Detroit). The manufacturing will never reach its peak again, unless one of the factors of production becomes a lot more competitive (for instance, a fall of 50% in the wages for workers would be thought of as such an improvement in one of the factors of production). Still we are subsidizing manufacturers, educating steel workers and giving state contracts to uncompetitive, Norwegian businesses. A solution would be to hire steel workers from less developed countries and let our education system produce more engineers (which are in high demand in Norway). It's a win-win situation.

Let me me finish up with one final example. Norway has the third, largest reserves of Thorium (may be used instead of Uranium in nuclear reactors), after the US and Australia. In other words, two of the largest countries in the world (both are net-importers of energy today) have an incentive to research on how to utilize their Thorium reserves in nuclear reactors. Why shouldn't this be a focus area for Norway? Specialists (the author attended a Thorium conference in September 2008) say that Thorium can be used in special reactors without the possibility of a meltdown (one of the two major advantages of Thorium against Uranium. The other being that it has a signficiantly lower half-life). However, the government has put a lid on the project. 2000 kg of oil produces the same energy as 0.7 kg of Thorium. Wouldn't this be a nice solution to end both Global Warming and a possible, dire economic slump in Norway?

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This blog is intended for the interest of the readers only and the blogger bears no liability as a result of investments undertaken from advice given in this blog. I have used citations that are accurate to the best of my knowledge, information that is correct and I apologize in advance for any spelling errors.