Category Archives: Economy and Meltdown

Guest Post: Is Tunisia the New Hot Spot for Energy Investors?

[ZH: Yet another example of the slow re-colonization of the African continent – a topic we have been discussing for months now – most recently here]

Submitted by James Stafford of,

Until recently Tunisia was considered to be a minor league and relatively underexplored venue in Africa’s rapidly expanding oil & gas scene. This situation has quickly changed with new bid rounds and forced relinquishments creating an opportunity for new companies to come in.

Major American E & P companies like Shell have jumped at the opportunity to acquire ground that had been dominated for decades with little to no work conducted, mostly by European State oil & gas companies in this former French protectorate.  For the first time major spending has been committed to test Tunisian basins which are arguably equally prolific as those in neighbouring environments with more work performed, such as Libya.

Tunisia is now in focus for investors because exploration is increasing within the producing Pelagian Basin, which leads us to ask the following questions:

Should Tunisia now be on energy investors watch list?

Is Shell just the start of “big oil” making inroads into the country? And which are the plays that people should be watching?

To help us look at the developing situation in the region we managed to speak with oil industry veteran John Nelson.

John Nelson is CEO of Canadian-listed Africa Hydrocarbons Inc. (#0000ff;”>NFK). A veteran geologist, Nelson spent much of his career in East and Central Africa—much of it for Mobil Oil–studying regional and mapping rift basins at a time when no one else was shopping around in Africa’s interior. Over his 27 years in the industry, Nelson has also had junior E & P experience, recently serving as CEO for Lion Energy Corp., which was bought out by Africa Oil Corp ‘AOI’ in 2011 as a way for AOI to gain access to their impressive Kenyan land package that John had put together.

#0000ff;”>Africa Hydrocarbons Inc has a 47.5% interest in the Bouhajla Block, located onshore Tunisia and surrounded by major Shell Oil.

In an exclusive interview with, Nelson discusses:

•    What makes Tunisia a great game for the juniors
•    How Tunisia’s geology compares to the East African Rift
•    What’s hot in Tunisia: conventional or unconventional plays?
•    Why security isn’t as grave a concern as one would think
•    What some of the next great exploration areas will be for juniors
•    Why it’s a lack of capital, not venues that is holding new entrants back
•    How to mitigate risk in Somalia
•    Why Ethiopia may be about to see its first major discovery
•    Why things are moving—but slowly—in Eritrea
•    How close we are to commercial viability in Kenya

James Stafford: Is Tunisia right now a venue for the juniors or majors, and what makes Tunisia a good venue for small companies?

John Nelson: There is a good cross-section of different sized oil companies exploring and operating in Tunisia. Some of the majors are present such as ENI, Total, CNOOC and Shell; however, most of the activity is with the smaller companies.

Junior companies can be very successful on projects that may not meet the economic threshold of the majors, but can propel juniors quickly to mid-tier producers. This makes Tunisia a good place for smaller companies to explore.

The basins in Tunisia are well established and understood. Services for seismic and drilling are available. There is a capable work force and French rule of law. Infrastructure in the way of roads and pipelines can be found across the country. Fiscal terms are good and the government is stable and reasonable to deal with. There are a number of smaller Canadian companies already there.

James Stafford: Can you tell us a bit about Tunisia’s potential. What is the biggest field and what are the best exploration prospects?

John Nelson: There is a lot of geological diversity in Tunisia which creates a number of different play types to explore for. The biggest onshore oil field is the Sidi el Kilani field in north central Tunisia. This field has produced over 50 Million barrels of light sweet crude from a small number of wells. In fact it is the similarities in Africa Hydrocarbon’s targets to Sidi el Kilani that got me interested enough in the “home run” size of the first drillable target, to decide to come and run this company.

James Stafford: How does the geology compare to East Africa and the East Africa Rift System?

John Nelson: The geology of Tunisia is not exactly like that of the great Tertiary rift system of east Africa. There are of course some geological similarities on a smaller scale where extension has caused the formation of horst and graben structures in some areas of Tunisia. In general what we are looking for is actually arguably more straight forward.

James Stafford: What’s the business atmosphere right now in Tunisia?

John Nelson: Business as usual. We have not seen any significant risks or changes in business practices since we have been involved there. In terms of North Africa, Tunisia is probably at the top as a jurisdiction in which to do business, and stability of the politics, etc. The economy seems to be doing well. There is construction going on in many of the cities. The country has not suffered at the same level from debt and poor fiscal mgmt like some of the Eurozone countries on the northern Mediterranean side. The country, like many countries these days, has unemployment issues especially with the younger generation.

James Stafford: So if Big Oil is not looking in Tunisia, how does that help NFK?

John Nelson: It is hard to compete against majors when it comes to acquiring sizeable acreage and making commitments. It allows smaller companies to cost effectively get positioned and undertake exploration initiatives. However, if a significant discovery is made then Big Oil may appear back on the scene to partner with or acquire small companies like NFK. Shell Oil surrounds our Block now but we were there first and were able to position ourselves with over 130,000 acres.

James Stafford: Africa Hydrocarbons has a nice piece of contiguous acreage in Tunisia. Can you tell us a bit about the two blocks in question and where you are right now in the exploration process?

John Nelson: We have a 47.5% interest in two adjoining concessions, the Bouhajla and Ktititir blocks, located in north central Tunisia and only 25 kms west of the Sidi el Kilani oil field. The blocks were acquired approximately 3 years ago when the govt made them available for bidding after being off the market for over 25 years. Our local partners were there first, and that is the opportunity.

James Stafford: What are you chasing here? Conventional or unconventional plays? What do you think you’ll hit with drilling?

John Nelson: We have several conventional type prospects and leads on our blocks and that is what we will be targeting initially. Our first well will be testing a fractured carbonate chalk reservoir, which is very similar to what is found producing at Sidi el Kilani. Last year, Shell acquired a large land position around us and have committed to spending over $150MM on their blocks. We have heard that Shell and others have an interest in testing shale (also called “unconventional”) plays within the region. The possibility for an unconventional play type also exists on our acreage but we have chosen what we believe is the “low hanging fruit” to target first.

James Stafford: You’ve mentioned before the ability to “de-risk” exploration and development in Tunisia. Can you take us through the math here and demonstrate the economic feasibility of operating in Tunisia?

John Nelson: Our situation is somewhat unique compared to many others in Tunisia or exploring in other remote parts of Africa. Only 25 kms from our block is the facility and pipeline for the Sidi el Kilani oil field. The facility was built to handle up to 25,000 bbls/d but now is only handling 1000 bbls/d. So there is much excess capacity in this nearby facility. There is also a pipeline in place from the field all the way to the port facility on the coast that is also under-utilized.

That means it won’t take much time or money to get any future production on stream. As a result, we can still be profitable in the event of a smaller discovery size due to the infrastructure already being in place. It also allows the option to truck oil to the facility to obtain some cash flow while onsite facilities and a short pipeline are built to Sidi el Kilani if we make a discovery.

In other words if we are successful on our first well next month, we should be able to start cash flowing very very quickly.

James Stafford: Do you need a major operator in there like Tullow with Africa Oil in Kenya? What happens if you make a discovery? Can you develop it cost-effectively?

John Nelson: In our situation we do not need the expertise or deep pockets of a large partner. In the event of a discovery we would be able to adequately finance a development project. We anticipate that fewer than five wells would be needed to optimize drainage of our first target area, which is substantially larger than the area of production of 50 million barrels at Sidi el Kilani

James Stafford: How does the cost of drilling wells compare in Tunisia, Kenya, Somalia …?

John Nelson: Our costs to drill a 2500m well is in the area of $7 million. The cost seems excessive compared to drilling costs in North America, but on an international scale it is reasonable. This actually isn’t very deep, and given the size of the target, not very expensive. We also have easy terrain and a network of roads in our area of Tunisia. Access is pretty easy and services are relatively close if needed.

In more remote projects such as in Puntland, Kenya, Ethiopia or other areas far from infrastructure, the drilling cost of a similar well may be well over $50MM.

James Stafford: Outside of Tunisia, where should smaller companies be looking? Can you rank the prospects for us here in terms of junior capabilities and potential?

John Nelson: Juniors provide a valuable service to the industry by often being the first entrants into a new area or applying new technology to older areas. There are niches in most parts of the world. Myanmar is opening up. New opportunities may now come up in Venezuela. The rift basins of Niger, Chad and Sudan are attracting new investment. The new discoveries off of Israel are opening up a lot of new exploration initiatives there that look quite attractive. There is not so much a shortage of ideas and opportunities as there is a shortage of capital to pursue them.

James Stafford: We understand that you have experience in Somalia—specifically in Puntland. Can you debunk any myths about working in Somalia and take us through the challenges?

John Nelson: There were a lot of concerns about security issues both onshore Puntland as well as piracy in the offshore. It took a lot of careful planning to mitigate much of the risk. Local communities were engaged, informed and employed. Our security people worked with the govt and contractors to remove any possible threats along transportation routes. The airstrip and drilling camp were well protected. In the end, all the people and equipment were mobilized and the drilling took place without incident.

James Stafford: What about Ethiopia and Eritrea? Eritrea seems open for business now after preferring to focus on its mineral resources for so long–and thanks to the new technology on the scene–and it’s got Red Sea territory that is virtually unexplored.

John Nelson: Eritrea has been slow to open up to oil and gas exploration despite a fairly high level of interest. New laws and policy changes move slowly in many parts of Africa. Eritrea has been explored in the past and there are known oil seeps there. No major discoveries have been made yet.

James Stafford: How do you view prospects in Ethiopia, as a possible extension of finds in Kenya?

John Nelson: Ethiopia has a variety of play types throughout the country that are soon to be drilled. Africa Oil is currently drilling in SW Ethiopia along the Tertiary rift trend that extends north of Kenya. They may make the first significant oil discovery for Ethiopia in that area.

James Stafford: How close are we to commercial viability in Kenya, and what do you think the next year to year and a half will show?

John Nelson: Tullow and Africa Oil are close to determining commerciality. The recent testing suggests the rates and accumulations may be sufficient. Some additional drilling success in some of the other sub-basins on their acreage in blocks 10BA and 10BB as well as in Ethiopia will help initiate further development decisions. There is a lot of drilling and testing to be done over the next couple years. I am pretty sure the results will lead to major infrastructure plans for the area. It will take time–years–due to the remoteness and current lack of infrastructure in the area as well as political involvement of neighbouring countries.

James Stafford: So what can we expect by the end of the year from Africa Hydrocarbons? What do potential investors need to know?

John Nelson: We anticipate drilling our first well in April and should know the results in May. In over 27 years, I haven’t seen many wells with this kind of risk-reward—a $7 million well that is geologically so similar to a proven field only 25 km away where one well produced more than 20 million barrels.

We have worked up the target with 2-D and 3-D seismic that are remarkably clear, and that give us what we call in the business a “play chance” that is much much higher than your typical International exploration well. Usually with a target this size you are looking at a 10%-15% chance of success – we have heard our chances rated by third parties between 28% and into the low 30% chance of success. This is actually a geometric difference in probabilities – really an order of magnitude.

With success on our first well, we would look to start production from Bouhajla North, and follow in that area by preparing to penetrate the reservoir again with new wells. We would also establish a reserve and resource calculation to highlight the size of the produceable reservoir in that area.

Concurrently we would develop an inventory of prospects all over our acreage which we would develop with additional seismic programs.

Real success just on our first well would turn us from an explorer into an intermediate producer immediately.

James Stafford: What happens if you hit—what kind of NPV do we get compared to current market cap.

John Nelson: Well James, if we don’t hit we are backstopped by cash in the treasury as well as our land position and additional targets which we would then set our sights on.

But with a discovery similar to a Sidi el Kilani well, our NPV10 based on our 47.5% working interest would be close to $100MM, which is about 10 times the current market capitalization of the company of $9 million – we will know within 8 weeks. .

James Stafford: Thanks for taking the time to speak with us John.


No Country For Rich, Fat Men

Given the increasing weight of taxation on the middle- and upper-incomes in this country and the first step towards savings ‘wealth’ taxation, it is perhaps no surprise that the nation’s employers have decided enough is enough with another implicit tax – healthcare. As the WSJ reports, cost-conscious companies (such as spare tire manufacturer Michelin North America) are passing on the additional costs of healthcare to their obese workers. Are you a man with a waist measuring 40 inches or more? Have high blood pressure? Starting next year, your unhealthiness will cost you.

Employees who hit baseline requirements in three or more categories (blood pressure, glucose, cholesterol, triglycerides, and waist size) will receive up to $1,000 to reduce their annual deductibles. Those who don’t qualify must sign up for a health-coaching program in order to earn a smaller credit.

But, six in 10 employers say they plan to impose penalties in the next few years on employees who don’t take action to improve their health, according to a recent study, and current law permits companies to use health-related rewards or penalties as long as the amount doesn’t exceed 20% of the cost of the employee’s health coverage. Increasingly companies have flipped from the incentive scheme (to be healthy) to a penalty or ‘fat tax’.

Typically 20% of a company’s workforce drives 80% of health-care costs, and with companies unable to grow top-lines, the search for ever more cost-cutting means the balance of carrot and stick seems to be tilting increasingly to the stick.

So the people got their pro-equality Obamacare but if you are an 80/20 risk factor – you will be less equal than others.

Via WSJ,

Are you a man with a waist measuring 40 inches or more? If you want to work at Michelin North America Inc., that spare tire could cost you.


Employees at the tire maker who have high blood pressure or certain size waistlines may have to pay as much as $1,000 more for health-care coverage starting next year.


As they fight rising health-care costs and poor results from voluntary wellness programs, companies across America are penalizing workers for a range of conditions, including high blood pressure and thick waistlines. They are also demanding that employees share personal-health information, such as body-mass index, weight and blood-sugar level, or face higher premiums or deductibles.


Corporate leaders say they can’t lower health-care costs without changing workers’ habits, and they cite the findings of behavioral economists showing that people respond more effectively to potential losses, such as penalties, than expected gains, such as rewards. With corporate spending on health care expected to reach an average of $12,136 per employee this year, according to a study by the consulting firm Towers Watson, penalties may soon be the new norm.



Employee-rights advocates say the penalties are akin to “legal discrimination.” While companies are calling them wellness incentives, the penalties are essentially salary cuts by a different name, says Lew Maltby, president of Princeton, N.J.-based National Workrights Institute, a nonprofit advocacy group for employee rights in the workplace. “No one ever calls a bad thing what it really is,” he says. “It means millions of people are getting their pay cut for no legitimate reason.”


Companies may say they have tried softer approaches, but many haven’t exhausted their options, …



Six in 10 employers say they plan to impose penalties in the next few years on employees who don’t take action to improve their health, according to a recent study of 800 mid- to large-size firms by human-resources consultancy Aon Hewitt. A separate study by the National Business Group on Health and Towers Watson found that the share of employers who plan to impose penalties is likely to double to 36% in 2014.


Current law permits companies to use health-related rewards or penalties as long as the amount doesn’t exceed 20% of the cost of the employee’s health coverage. …



“It opens a Pandora’s box,” says a full-time CVS employee who works at a distribution center in Florida. “It’s none of their business.” …



Honeywell International Inc. HON recently introduced a $1,000 penalty—deducted from health-savings accounts—for workers who elect to get certain procedures such as knee and hip replacement and back surgery without seeking more input. The company had offered $500 for participating in a program that provides access to data and additional opinions for workers considering surgery, but less than 20% of the staff joined up. Since it flipped the incentive to a penalty, the company says, enrollment has been above 90%.



Typically, 20% of a company’s workforce drives 80% of health-care costs, according to Cigna’s Mr. Smith, and roughly 70% of health-care costs are related to chronic conditions brought on by lifestyle choices, such as overeating or sedentary behavior. But when employers target those conditions, employees themselves may feel targeted, especially when it comes to their weight. While companies can’t say it outright, many of their measures—such as high cholesterol and high blood pressure—are proxies for obesity.


A 2011 Gallup survey estimated obese or overweight full-time U.S. workers miss an additional 450 million days of work each year, compared with healthy workers, resulting in more than $153 billion in lost productivity.



Protecting Yourself From Japanese Insanity

I’d hate to say it but this time really is different. Never before has there been coordinated global money printing of the scale of today. Ever. Japan intends to double its money in circulation in just two years. This is incredible stuff. But it only mimics the U.S. Federal Reserve which has tripled the amount of dollars in circulation since 2008.

Most stock brokers and mainstream media will tell you that this money printing is what’s needed to stimulate economies and whether it succeeds or not, the outcome will be relatively benign. Don’t believe them. It’s highly likely that this is not a normal economic cycle and the consequences will be more extreme: success will mean all the printed money filters through to economies resulting in double digit inflation or failure will bring serious deflation. In other words, the most probable outcomes aren’t pretty and you need to prepare your investment portfolios as such. Today I’ll suggest some ways that you might be able to do this.

Sayonara to Japan 

First to Japan. You’ve got to love mainstream media, investors and stockbrokers. The Japanese central bank’s plans to end deflation have been widely greeted as having surpassed expectations. They’re described as “bold”, “inventive” and just what Japan needs after sitting on its hands for 20 years. Nowhere have I seen words such as “stupid”, “insane” or “half-witted”. Because anyone with a brain can tell you that Japan’s plans will have terrible consequences, whether they succeed or not.  

First, let’s look at what Japan intends to do:

  • It will double current stimulus to 7.5 trillion yen (US$81 billion) per month. This means buying the equivalent of 70% of the total long-term government bonds in markets.
  • It will buy Japanese government bonds with maturities of up to 40 years, seeking to push the average duration of Bank of Japan (BoJ) bondholdings to seven years, from the current three years. 
  • It will increase purchases of financial instruments linked to the stock and property markets to lift the prices in those sectors and encourage other investors to buy them. More specifically, the BoJ will increase purchases of exchange traded funds (ETFs) by 1 trillion yen per year and real-estate trust funds (REITs) by 30 billion yen per year.
  • The BoJ put a timeline of two years on its prior promise to achieve 2% inflation. 

To put this into some context, Japan’s stimulus of US$81 billion a month compares to the U.S.’ own US$85 billion program. But Japan’s economy is much smaller than the U.S.. Adjusted for GDP, Japan’s stimulus will be twice as large as America’s. It makes Bernanke look like a patsy.

Now I’m not going to detail the reasons why the BoJ package will be a disaster for Japan, as I’ve done it previously here, here and here. Suffice to say, if Japan succeeds with its 2% inflation target, interest rates will rise at some point and they just need to reach 2.8% for the interest on government debt to equal government revenues (currently, interest of government debt takes up 25% of government revenue). The bond market will revolt well before it reaches that point though.

If Japan fails in its bid to increase inflation, you’ll see government debt balloon. Japan’s current government debt to GDP is 245%, by far the highest of any country. The debt is also 20x government revenues. Bondholders aren’t going to sit there earning less than 0.6% on Japanese government bonds while debt increases and the yen tanks.

And to reiterate a point that I’ve made previously, those that assume the Japanese government bond market can never blow up as domestic Japanese own 91% of the market are looking through the rear-view mirror. Ageing Japanese need to fund their retirements and won’t be able to support the government bond market as they’ve done in the past. Foreign investor holdings of government bonds is 9% and rising. They’re going to be want better returns for the risks that they’re taking on.

I’m on the record suggesting that I don’t think the BoJ plans to lift inflation will work. Whether right or wrong, it seems inevitable that the yen will significantly depreciate from here. And that the bond market will crack at some point, though putting a date on that is very difficult given extreme government intervention in the market.

Others will follow suit 

Japan is likely to prove a prelude of what’s to come in much of the developed world. The West, like Japan, has way too much debt and economies haven’t been restructured to make them competitive again. And the West is falling into the same trap as Japan by trying to inflated its way of over-indebtedness. You can be certain of more desperate measures from western central banks as they try to stave off a Japanese-style deflationary slump. Investing in this type of environment will be tricky, to say the least.

Take the U.S. for example. Many of the country’s cheerleaders suggest that the economy is recovering, led by the housing sector. What they don’t tell you is that GDP growth of 2.2% in 2012 is still way below the 3.2% average since World War Two. Nor do they emphasise the still very high unemployment rate, above 11% if you include people that have dropped out of the workforce since 2008. More importantly, all the evidence suggests deflationary forces – principally households intent on paying down debt – are beating the Federal Reserve’s (Fed) best efforts to lift inflation.

The velocity of money is one of the best indicators that deflation is getting the better of the Fed. Since the financial crisis, the Fed has flooded the economy with printed money, trebling the so-called monetary base. That base consists of highly liquid money, such as coins, paper money and commercial bank reserves with the central banks.  

US monetary base - Mar2013

Under normal circumstances, increasing the monetary base to this extent would be highly inflationary. But the problem is that this money is not making its way into the economy or changing hands (money velocity). That’s why money velocity in the U.S. has dropped to a more than 60-year low.  


Rising money velocity indicates that the same quantity of money is being used for several transactions. It’s turning over, signalling a robust economy. Declining velocity, on the other hand, indicates money isn’t changing hands and that the economy is anything but healthy.

What declining velocity of money suggests is that banks are sitting on excess money because households aren’t willing to borrow as they’re busy paying down debt. Meanwhile businesses, which are less indebted, aren’t confident enough in the economy to borrow money and invest it.

If you’re thinking that Japanese businesses and households may have exhibited similar behaviour over the past 20 years, you’d be right. That’s why Japan also has money velocity reaching multi-decade lows. 


Declining money velocity is one of several signs that the Fed is failing in its battle to produce inflation in order to revive the U.S. economy and reduce the country’s debt.

The larger point is that as long as this remains the case, Bernanke will continue with stimulus. And if stimulus continues to fail, he (or whichever like-minded academic takes over from him) will get more desperate and use unconventional methods like Japan is now (such as buying stocks directly, for instance).

How do investors position themselves?

The question then becomes: how do you allocate your assets given this atypical economic environment? In investing, no bet is a sure thing. But what you can do is look at the facts, the probable outcomes and invest where the odds are in your favour.

So let’s take a look at the probable outcomes. I see four possibilities:

1) Mild inflation and a global economic recovery. This is the outcome that stock markets are currently betting on. If it happens, stock would be the place to park your money, while bonds, precious metals and cash wouldn’t be.


2) Inflation does lift off but central banks tighten policy early, resulting in economic contraction, and likely recession. Stocks would initially benefit then suffer. Bonds would initially perform poorly, then outperform. Precious metals would rise with inflation, then probably fall as contraction takes place. This outcome appears unlikely though as central banks will be loath to switch off stimulus early. Ben Bernanke is obsessed with the Great Depression, when stimulus was stopped too soon before recovery could happen, in his view.

3) A global economic recovery happens but inflation gets out of hand as all the printed money flows through to economies and central banks seem powerless to stop it. In this instance, stocks, bonds and cash would get punished. Precious metals would benefit most.

4) A more serious deflationary depression happens. Stimulus fails and debt compounds until the weight of it kills economies. Under this scenario, long-term bonds would outperform, though low current yields make substantial outperformance unlikely. Cash could outperform if you’re in the right currencies. Precious metals may also outperform if confidence in currencies dissipates. You wouldn’t want to own stocks if a deflationary depression occurs. 


As you may have gathered, I think the most probable outcomes are 3) and 4) with 4) being the most likely. Precious metals should outperform under both scenarios 3) and 4) and therefore overweighting this asset class makes sense. Holding some cash also makes some sense, though it could suffer under serious inflation. Long-term government bonds may be worth holding, though currently at almost all-time low yields, upside appears very limited. Meanwhile, you’d want to stay almost entirely out of stocks if scenarios 3) and 4) turn into reality. 

Channelling Harry Browne

How you invest your money will obviously depend on your own circumstances, including which country that you’re located in. Some of you may feel uncomfortable holding large quantities of precious metals or staying out of stock altogether. This is understandable.

If that’s the case, I’d guide you towards a safe, easy-to-follow investment portfolio that’s likely to perform under any of the probable outcomes mentioned above. The portfolio was first advocated by the late Harry Browne.

Browne was an American investment newsletter writer who wrote numerous books and found fame after writing the 1970 bestseller, How You Can Profit From The Coming Devaluation. That book accurately forecast the 1970s slump and the need to be substantially overweight precious metals, particularly silver. He went on to run as a Libertarian Party candidate for the U.S. Presidency in 1996 and 2000.

Later in his career, Browne advocated what he called a bulletproof portfolio, which could perform under any economic environment. This portfolio turned into the Permanent Portfolio, a mutual fund that’s now listed in the U.S..

Browne’s original idea, outlined in his book Fail-Safe Investing, was that a safe, easy-to-follow investment portfolio should consist of 25% in long-term government bonds, 25% in cash (money market funds), 25% in stocks (growth style mutual funds) and 25% in gold.

His thesis was that each of these assets would outperform during one or more economic environments, whether it be prosperity, serious inflation, recession or depression. And this outperformance would outweigh the underperformance of some of the other assets during particular periods. For instance, gold’s outperformance during the 1970s inflationary period more than offset the underperformance of stocks, bonds and cash.

Browne surmised that such a portfolio would deliver good long-term returns with limited volatility. He’s been proven right as the Permanent Portfolio has done just that, outperforming the vast majority of mutual funds in the U.S. with very few down years. Note that the listed fund has deviated somewhat from Browne’s original proposed allocation, though not by a lot.

Now I’m not advocating that you necessarily go out and invest directly in the Permanent Portfolio fund as it depends on your particular needs and circumstances. However I am suggesting that Browne’s ideas may be worth considering as a potential guide to navigating the uncertain economic environment ahead. 

Interestingly, investment guru Marc Faber has proposed a remarkably similar investment portfolio to that of Harry Browne, the only difference being that instead of owning long-term government bonds, he suggests real estate instead (he thinks inflation is on the way and is a well-known bear on long-term U.S. government bonds).

This post was originally published at Asia Confidential:


Guest Post: Economy In Pictures: Have We Seen The Peak?

Submitted by Lance Roberts of Street Talk Live,

The general mantra from mainstream analysts and economists since the first of the year is that the “economy is set to finally turn the corner.”  The premise of the assumption is that the Fed’s continued monetary actions, and now specific targeted goals of suppressed inflation and targeted employment, is going to push the economy into “escape velocity.” 

Normally, I devote my writings each day to pointing out the data trends behind the headlines and discussing my personal views on the economic, and financial, implications relating to what the data analysis reveals.  Today, I leave the analysis up to you.

The following series of charts displays several important economic variables ranging from incomes and production to economic growth.  The question for you to answer: “Is the economy about to boom OR has it peaked for the current economic cycle?”

As you look at each chart below compare what you are visualizing versus what you are being told.  

Wages & Salaries

Incomes are the lifeblood of the economy.  In order for consumers to consume (which makes up roughly 70% of the economy currently) wages must rise at a rate to support increases in consumption.


Consumer Spending:

As state above, personal consumption expenditures (PCE) comprise about 70% of the gross domestic product calculation.  As PCE goes – so goes the economy.


Production and Manufacturing:

The chart below is the STA Economic Output Composite Index which is an index comprised of the Chicago Fed National Activity Report, ISM Composite, several Fed regional manufacturing surveys, Chicago ISM PMI, and the NFIB Small Business Survey.  This is a very broad measure of the economy.



The chart below shows both the seasonally adjustment employment levels compared to a 12-month moving average of the non-seasonally adjusted data.





Regardless of your personal views about the economy, the political environment or the markets – what is important is to separate emotion from investing.  While the Fed’s continued liquidity injections have sharply boosted asset prices in recent months the bond market, as shown in the chart below, has continued to show a preference of safety over risk.  With rates plunging in recent weeks the indictment from the bond market concurs with the longer term data that the economy remains at risk.



While the stock market continues to ramp up due to the Fed’s interventions the disconnect between the markets, and the real underlying economic fundamentals, will ultimately resolve itself.  I am not suggesting that a crash is looming as none of this data suggests that a recession is imminent, however, the data also does not support the mainstream view that the economy is set to accelerate or that the markets are entering into the next great secular bull market.

The reality is that the economy is continuing to muddle along through the greatest monetary experiment in modern monetary history.  However, what is becoming more readily apparent is that the impact from these ever expanding programs continue to support Wall Street and the financial system but fails to improve the diminished state of Main Street.


Kim Jong-Un Launches Morale-Boosting "Mine's Bigger Than Yours" Weapons Display On State TV

North Korean State TV provides 127 seconds of sheer unadulterated weapons-brandishing propaganda as Kim Jong-Un visits the test firing of various anti-Western civilization policy tools – from rocket-launchers, drones, and automatic weapons, the omnipotent leader himself even gets in on the action brandishing an admittedly small weapon… ironic really when all that really matters is the big red button ‘threat’.