Comic: How to break up the Euro...

Infinite Possibilities. This hypothetical manual should be much bigger...and there should be ample supply of whisky to play the role we're all familiar with...

Nigeria Deleveraging [1]

"We have destroyed ourselves..." - from a scene in the movie Terminator Salvation

The fuel subsidy probe and the rent-seeking framework which the probe reports have unravelled have confirmed and given legal effect to what a few citizens have surmised about over the years. James Rickards, in his book, Currency Wars, alludes to a concept known as 'rent-seeking' which he describes as "the accumulation of wealth through non-productive means". That is precisely what has been going on in many sectors over time, so it does not come as news that our collective economic prosperity has continually been threatened by the actions (and inactions) of a tiny, influential fraction of our 167 million-strong population. In the body of knowledge that defines economic history, this is not strange. 

For the purposes of speculation and on a lighter note, comic relief, let us equate part of our essence as a systemically corrupt nation to the height of irresponsible debt levels in the developed world today. In doing this, our aim is to investigate, over the next few weeks, the mechanism of  'deleveraging' on corruption in Nigeria - the developed world continues to deleverage on debt - and to find out if indeed we have reached the point of deleveraging. As we proceed, I must emphasize a clear difference between the two independents. Sovereign debt is largely monetary and can be measured to an acceptable degree of accuracy. The innate propensity for financial impropriety and misappropriation of funds, on the other hand, cannot be measured directly; only its effects can be measured. In trying to measure its effects, we may (bearing in mind the natural human proclivity for either understating or overestimating an issue) reach erroneous and typically hazardous conclusions. However, it should be clear to readers that the intent of this material is not to approximate this propensity to a set of mathematical equations, for we have, in view of the global financial crisis, seen how the grand designs of risk valuation can cause social and economic disasters of incalculable proportions.

To be continued...

A Poem: The 99%

Grandma we were at school
And our teacher who's not so cool
Kept repeating 'ninety-nine percent'
Using terms that were indecent

Are you serious?
Tell me child
What did he say to make you so furious

He said that the ninety-nine percent continue to multiply
Without thought to the world's resource supply
And that the fertility of the simple
Continues to threaten the prosperity of the nimble

Then he mentioned Occupy Wall Street
Dismissing them as an ignorant human fleet
Whose incoherent demand for justice
Has pushed the society to the precipice

Is that all he said dear?
Yes grandma that's all
Well he's right!

As Walmart and Co. Besiege Nigeria's Shores

Straight to the matter at hand, one perspective at a time...

Will the entrance of global retail firms into the Nigerian market aid in the tracking of consumer spending? Possibly, but the figures might be distorted as socio-economic inequality continues a northward trend in Africa's most populous state. Contrary to popular belief, I posit that a financially free middle class is being suppressed from emerging; in its place, a CREDIT driven middle class will emerge. As this section of private sector debt increases, any hopes of restoring a savings culture (whether under the mattress or in bonds and equities) will be extinguished. The dynamics leading to the emergence of this class of individuals will be x-rayed in a later post.

Will the prospectively high importation activities of these giant retailers put downward pressure on the Nigerian naira? Most certainly, in the medium to long term, all other metrics remaining constant. Through a cancerous combination of failed policies and widespread corruption, the manufacturing sector has remained dormant for the better part of the existence of the Nigerian state. If the government collects less in taxes than a retailer's activities cost the government (by the selling of the naira), what net economic benefit does the Nigerian state derive? If the Nigerian manufacturing sector were alive and well, the resources would, to a greater extent, be kept within the system. The CBN will have a greater workload as the western traders arrive. 

On a lighter note, the health and pharmaceuticals sector may see an upsurge in revenues from the sales of dietary supplements and other related drugs as the consumption of processed foods and the like outpace their more natural sources. So the need to fill in the nutritional gap cannot be overstated. The concept created by the illusory observance of an emerging, 'financially free' middle class so busy they might not have time to pay religious attention to their nutritional requirements will engender this revenue surge. 

Hon. Hembe's Fatal Presumptions

"The only thing that one really knows about human nature is that it changes. Change is the one quality we can predicate of it. The systems that fail are those that rely on the permanency of human nature and not on its growth and development. The error of Louis XIV was that he thought human nature would always be the same. The result of his error was the French Revolution. It was an admirable result."  - Oscar Wilde

Clear verdict from history. That's all for now. 

The €uro Will NOT Crash: the Chinese View

In the business of international relations and more importantly, the agitation for global dominance, national and regional CURRENCIES have become INSTRUMENTS of WARFARE on one hand and (to use Nixon's phrase) PEACEFUL COMPETITION on the other. From the removal of the gold exchange standard in August 1971 through the Asian currencies meltdown from July 1997, the movement of speculative and non-speculative capital has continued to determine the general prosperity of nations. As noted in the classic, The Alchemy of Finance, speculative capital basically moves in search of the highest total return. I infer that speculative capital movements will form part of the foundations for an "inquiry into the nature and causes of the debt of nations". 

In moving in the direction of bailing out the Eurozone, however, Chinese speculative capital has a longer-term view of the concept of highest total return. A mediating currency is a diplomatic imperative in the unfolding drama between the US dollar and the Chinese renminbi. Factoring in the fact that Chinese holdings of US government and corporate debt continue to go through a coordinated series of devaluation, the inflation-wary, German-led Eurozone will become for China the new DEBT frontier in years to come. Sovereign debt will become one of the hottest commodities over the next couple of decades and so speculative capital will continue to play a crucial role in global resource allocation. The European Union surpassed the United States last year as China's largest trading partner. Discounting the fact that ten of the twenty-seven EU countries do not use the common currency, with Germany, France and the Netherlands constituting a substantial weighting for the Eurozone area, we safely conclude that the survival of the Euro is in the best interest of China. 

The Paradox of LTROs

Even though the long-term refinancing operations (LTROs) of the ECB should realistically stoke the fires of inflation (as the liquidity in the financial system is increased), banks and other related financial services firms who accepted the cheap fiat money being offered by the ECB have, more often than not, chosen to hoard their cash (and many times deposit it again with the reserve bank even though deposit rates are low) in the form of reserves rather than loaning it to the real economy. This may be understandable considering that regulators will be hoping to infer a minimum of 9% capital adequacy ratio from the balance sheet of the banks by June 2012. From this writing, I may safely conclude that the REGULATORS are helping the BANKS achieve the core CAPITAL ratio requirement. So the gold bulls may have to reduce their momentum considerably as we approach H1 2012. This world is interesting...  

Ignoring the 99%

In certain sensitive, geopolitical regions around the world, heads of state are sitting tight, even though their time up. From Russia through Syria to Senegal, we see the same pattern - 21st century governments deciding to ignore the loud, though unclear, demands of the 99% and reinforcing their political positions against the dictates of the state, utilizing pseudo-democratic tactics to advance their sinister goals. We can expect the socio-economic faultines that have been developed over the last four years to morph into deeper crevices with the potential for great social upheaval unlike anything we have seen post-recession.

The Implications of Global Central Banks' Quantitative Easing

JP Morgan's recent submission gives us cause to think about the COST of bailing out the world's financial system from the spillover effects of the economic crisis of 2007-2008. Below is a chart released by a JP Morgan commodity analyst showing the assets on the balance sheet of the G-4 central banks as a percentage of their national economic output. This "G-4" includes the Federal Reserve of the United States, the Peoples' Bank of China, the European Central Bank and the Bank of Japan. The co-ordination among the central banks has been remarkable.  

Implications:

1. We can expect the spot price of gold and more importantly gold futures to hit records highs as investors and speculative players hedge against inflationary tendencies going from 2012 to 2013. Gold ETFs will experience substantial volatility this year too. 
2. Apart from the recent Galleon case (and on a lighter note MF Global), no major bank chief has been indicted for directly playing a role in engendering the recent crisis. And so the central banks continue to fan the embers of the MORAL HAZARD problem. To avoid a crisis of confidence and more importantly a re-enactment of the bank run that characterized the GREAT DEPRESSION, these reserve banks may have acted rightly, but its been four years since the recession. On the flip side, in managing the crisis in the Nigerian context, the Central Bank of Nigeria set up a "bad bank" to purchase the toxic assets of the banks and went further to take punitive steps to hold the bank chiefs responsible for their actions.
3. Energy costs are going to increase going forward as the action of the central banks of "flooding the world with cheap money" combine with the system-wide reinforcing effect of geopolitical conflict in some oil-producing states. The oil producers, in a bid to shore up their purchasing power against the volatility of the US Dollar, will, without doubt, hike energy prices. The positive feedback effect will only serve to make the entire financial system even more volatile. 
4. Net oil-importers such as Kenya and Uganda will most likely have a painful period ahead. Last year, the value of the Kenyan shilling fell more than 20%. Kenya has made efforts to secure a $143 million loan from the International Monetary Fund to hedge against this threat. They can only go so far. 
5. Net oil-exporters such as Nigeria, in the absence of a resurgence of Niger Delta violence, might see a surplus in revenues from oil this year given that the National Assembly is adjusting the 2012 budget oil price benchmark to $75 - way below the volatility range shared generally by commodity analysts. However, the windfall may be of little effect if the upsurge in food imports (growing at 11% annually) is not pared.  
6. The global equities market has had a generally good start this year - one of the best in years. No thanks to global Quantitative Easing. But as interest rates remain high in emerging and frontier markets, the bond market might have the upper hand this year, trumping the equities markets again. In my native Nigeria, the efforts of the management of the Nigerian Stock Exchange (NSE) to boost the stock market capitalization to pre-crisis levels may not come to fruition this year. Sadly. 
7. Following from the widening interest rate differential between the developed and emerging/frontier markets, the pace of carry trade will accelerate even further this year, in the absence of substantial fluctuations in exchange rates. As speculative capital continues to besiege the shores of emerging markets such as China for example, any effort by the financial authorities to reduce the surplus external position (comprising the current and capital accounts) by increasing imports may not yield the necessary results.  

As for Greece, I assume they have already defaulted and the market discounting mechanism has factored that in as usual. Who will argue that a debtor has not defaulted on a debt commitment if he's asking for some haircut from his creditors? 

*        *        *

Historical: My thoughts on the Chinese Premier's Financial Times article of 23rd June, 2011 [uncensored]

The Chinese Premier, Wen Jiabao's article can be accessed here. My thoughts (November 14th 2011) below:

- I believe that he should have made a distinction between the parts of the world where inflationary tendencies are HIGH and where he sees them LOW (due to reduced consumer spending and confidence). That distinction is very important as it guides monetary policy in any clime. As is obvious from the current state of affairs, inflationary tendencies are dangerously LOW in the US and the Eurozone (still under watch though) ---> the US Federal Reserve maintained the interest rate @ 0.25%, while the ECB lowered theirs by 50 basis points to 1.25%. All they are trying to accomplish is to help SMEs access to credit facilities and boost consumer spending. But apparently, as we can see, that is not enough. But the story is different in emerging markets like China. Inflationary tendencies are HIGH there; the after-effects of the stimulus package that the Chinese government initiated (similar in principle to the Quantitative Easing [QE] initiated by the US Fed). 

- He said that his government was going to rein in government spending and in effect reduce deficits to somewhere below 3% of GDP and external debt to 60% of GDP. Simultaneously he intends to adopt a loose fiscal policy, to support a policy of economic development through domestic demand. This double move is CONTRADICTORY. Cutting government expenditure is a sure way to reduce fiscal deficits, but increasing infrastructure spending cancels out the gains. The overall effect might be ZERO change in fiscal policy. My view is that China can handle deficits to some degree for now. Inflation has been hovering around the 6% level since this year, and a contrasting mixture of loose fiscal policy and tight monetary policy will serve to keep inflation in check. China's main worry as it grows economically will continue to be INFLATION. Its also a factor that African economies have not been able to handle that's partly the reason it's difficult to reconcile GDP growth in Africa to SOCIAL improvements (the Ugandan and Kenyan currencies have been brutalized this year, causing interest rate hikes to 23% and 16.5% respectively, to shore up their values. Of course this hasn't helped much). The 4th part of my series on Afro-Chinese matters covers this to some degree, though I focused more on the demographic trends rather than inflation. 

- All in all, China has been historically effective in managing inflation. According to Wen's article again, the Chinese strategy to keep inflationary tendencies LOW is to increase IMPORTS. This is good as the SUPPY of non-China goods and services (to the Chinese) will INCREASE, driving costs and prices LOWER. But as data from tradingeconomics.com suggests to me, balancing export volume with import volume will present itself as a major challenge too. [Another story to watch is the new Free Trade Zone (similar to NAFTA) deal being proposed by the US President for the Asia-Pacific region --> 8 countries have indicated interest but China is yet to make a move on that]. 

Let's go back to the topic of the Chinese Premier's article, it says: "How China Plans to Reinforce the Global Recovery". After reading this article, I believe Wen Jiabao made the following errors:

 - he did not understand the IMPLICATION of the TOPIC of his article; because if he did, he would know that it doesn't make sense that your main thrust for reinforcing global recovery would be 'IMPORT VOLUME INCREASE' when developed countries who have the greatest capacity to export to China are still mired in the after-effects of the credit crunch and business confidence is still relatively LOW.

- the article which as stated by the Financial Times is a rare move by CONSERVATIVE China, was written as a DEFENSIVE TACTIC in response to the developed world's call on China to re-evaluate her growth model --> China has been maintaining her fixed exchange rate regime and only allowing it to appreciate slowly (in essence favouring her exports on the international market). China's present currency level is seriously UNDERVALUED. It should be worth more than it presently is. Intellectual Property theft has also been another issue against China altogether. The last paragraph of his article reinforces my argument. Besides the tone of the article to me is that of a CHINESE-ECONOMIC SCORECARD. Like when Nigerian governors celebrate their 100 days in office. It falls short of addressing very critical issues (again, the date of the article is June 23, 2011). 

#OccupyNigeria: Between 'Strike' & 'Protest'

As 2011 rounded up with the fall of the 40-year-plus totalitarian Libyan regime, many observers reached the conclusion that such a revolution would wreck the fragile social fabric of sub-Saharan Africa if it ever happened to occur in the 'frontier' region. That scenario is currently being tested as Africa's biggest oil exporter - Nigeria - is currently under 'occupation', ironically, by her own citizens.

However, there are clear divergences between the triggers that sparked the Arabian Spring and the Nigerian case. In north Africa, these massive uprisings were mostly initiated by the citizens with decades of suppression and sinister containment of the citizenry by government serving as the main catalysts. In Nigeria, on the other hand, the protests - actually a strike action by the labour unions - can be safely approximated to knee-jerk reactions to the removal of subsidies on Petrol Motor Spirit by an 8-month old government, even though it may have served as an opportunity to protest against the wider corruption, excesses and inefficiencies of government. This divergence is particularly noteworthy because it is inconceivable that Nigerians may be asking for the resignation of President Jonathan - a duly elected leader - under a year into his administration. The #OccupyNigeria movement is increasingly becoming laced with an unfortunate lack of focus and concentration on the issues at hand. As is obvious from various sections of the nationwide protests, political opponents of the Jonathan administration have seized the opportunity to appeal to the fancies of the protesters. A growing challenge has become the dynamics of managing the protesters by the leaders of the labour unions. It is also remarkable that the more common word on the streets is now PROTEST, not STRIKE, even though it was initiated under the legal framework of the latter. The strike action initiated by the national labour unions is slowly slipping out of the control of the union leaders. I perceive that a call to end the strike by the union leaders may not necessarily end it since a critical reference point has been developed in the mind of the common protester - the Arab Spring mentality - which essentially usurps the initial motivation for the mass action. The situation is becoming more fluid and getting potentially difficult to place a timeline on when and at what point the protest will really end. 

The Subsidy Quasi-Revolution

Nigeria may be likened to a foster child who has been rotated through a sequence of irresponsible parents and when 'seemingly' responsible parents come along, the child ceases to believe that his interest and welfare has become the priority of the new parents. With a reference to typical human behaviour, that reaction is perfectly normal.

Unfortunately, Nigeria will have have to choose between the devil and the deep blue sea under the current circumstances. Many Nigerians protesting under the idealistic inclinations of the 'Arab Spring' fail to realize that historically, REVOLUTION tends to redistribute POVERTY more than it redistributes WEALTH...

Selective Cleansing

In the on-going onslaught on the Nigerian state, the perpetrators of violence and mayhem have maintained an obvious MO; waste the masses, bomb social and religious institutions, but RAID the banks. Apparently they must be in short supply of the necessary funding to keep their engine of indoctrination and violence running. The raiding of the banks is also not as frequent as the destruction of human lives. That systematic destruction needs funding. 

By engaging in SELECTIVE institutional cleansing, it is clear to the average Nigerian that an agenda more complicated than the headline news tells the citizenry is being carried out, with the intelligence of the malicious activities increasing linearly as the days go by.