Warnings for Norway

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Nov/07/2007
Warnings for Norway

A well written letter warning Norway about its economic future, popped into my mailbox. I recommend you to read it, as it contains some fresh thinking and good contrarian views.

It's written by Mark Nucera, an American hedge fund manager, who moved to Norway to study the unique oil driven economy over here. He's one of my fellow students at the business school NHH Bergen.

The Bergen Brief

By Mark Nucera

NHH '09

The world is hyper-inflating. I have been telling this story at NHH since mid-August. But my commentary and advice continues to be ignored. So now I turn to the people of Norway, since the leaders at NHH have refused to acknowledge this former hedge fund manager's repeated warnings. And the implications for Norway are enormous.

Norwegians today should know something about inflation, considering the price of oil has risen from $10 to over $90 per barrel in less than ten years. A price rise of over 800% in oil should be sending off alarm bells nationwide. But like the United States in late 1990's during the technology boom, where recent college graduates were making more than their college-educated parents, there seems to be little discussion in Norway how unusual the present environment truly is. The money is just too abundant and just feels too good to question...

With tradesmen earning up to 400,000 NOK and oilmen making above 1,000,000 NOK, life seems great. But the Norwegian government has refused to prepare the country for the future. For this reason, Norway will become impoverished again unless action is taken soon.

I understand this information is difficult to hear from an American. However, this author left one failed economy and has little interest in witnessing another economic implosion on a national scale, especially considering my repeated warnings in the United States concerning the housing bubble, the weak U.S. dollar, and the military invasion of Iraq. Since the United States has failed, Norway must rise and become the nation that your ancestors believed it could be. The world needs a strong Norway, because the United State and almost every other Western country failed to anticipate change correctly. Norway is the only nation with both the time and money to prepare for the future. Do I need to pass out a Viking helmet to every Norwegian to remind you of your glory?

Norway is in trouble for three reasons: 1) Norway's largest industries will experience significant problems going forward 2) Norwegian infrastructure is inadequate to compete globally in the future and 3) the Norwegian Petroleum Fund, which is the money the country has to improve its industries and infrastructure, will be decimated very soon and will not even cover the pension obligations.

All of these problems are avoidable. And Norway can become stronger and wealthier than ever if immediate action is taken. However, time is running out. I have exhausted several months talking to deaf ears at NHH, so it is time for the people of Norway to learn about your problems and understand how the Norwegian way of life is in trouble.

We must start with the Petroleum Fund (aka the Pension-Fund Global), because Norway's future is completely dependent on the amount of money in the Fund. The Petroleum Fund will determine Norway's future...

The reason why the Norwegian Petroleum Fund is in significant trouble is because the world has entered an inflationary depression. Up until this moment, Norges Bank Investment Management (NBIM) has performed the one of the most remarkable jobs in world history. And Norway is much wealthier as a result of their work. But the Petroleum Fund was not built to withstand depressions---it is like the Opera house in Oslo without the walls protecting against the 50-year flood.

The two greatest symptoms of an inflationary depression are when energy prices and food prices rise significantly faster than income. Well, oil prices have went up like a rocket. And now the price of wheat, milk, cocoa and even fruit are increasing much faster than salaries. Considering the amount of debt held by American, British, Spanish, and even Danish citizens, the world is in crisis and cannot absorb both high food and energy prices at the same time. Any recent reading of the Financial Times should indicate how much trouble the global banking system finds itself; the second largest bank in the world, has went through 15% of its Tier 1 capital in less than less than a year and will probably have to be bailed out by the U.S. government!

While all this inflation in the world is currently benefiting Norwegians in terms of salaries, this same inflation will decimate the value of the Norwegian Petroleum Fund (aka the Pension-Fund Global). Inflation literally destroys the value of stocks and bonds. And the Petroleum Fund has invested 100% of your money in stocks and bonds! With economic history as a guide, a decline of 50-80% in real terms is quite possible and this destruction of the Fund's value would cripple Norway's future.

The people of Norway must demand that NBIM change their strategy. The strategy must shift from trying making money to protecting the money. Considering the size of the Petroleum Fund this task will not be easy, but the talent at NBIM is strong enough to complete this task. If I can think of 10 ways to protect the money, surely the entire staff at NBIM can come up with 20 or 40. But this process must happen soon. I would estimate that NBIM has less than three months to secure the Fund's money or Norway will lose the economic ability to decide its own destiny.

Three Norwegian industries are in immense danger: shipbuilding, oil & gas and shipping. And it is vitally important that Norwegians are aware of Norway's future problems.

1) The first systematic shock to Norwegian industry will occur in shipbuilding. Over time, Norway will find it very difficult to compete with Asian and Eastern European labor costs. But it is the continued strength of the Norwegian Krone that will literally kill the shipbuilding industry in Norway, making the Norwegian Navy this industry's only future customer. The shipbuilding industry's biggest obstacle presently is the Norwegian central bank.

In Norway, there is a housing bubble. But this housing bubble is due much more to inadequate supply in city centers than it is due to Norwegian foolishness with money, as compared to Americans, British or even the Danish. Norwegians are smart!

But your local governments made a choice. They decided it was very important to preserve the look, feel and size of your main city centers, by not allowing the cities to expand vertically. And the effect of this decision is a real estate bubble. So Norwegian zoning laws helped sow the seeds for this real estate boom.

In response to surging real estate prices, the Norwegian central bank has aggressively raised interest rates. But since the Norwegian Krone is closest currency to gold, higher interest rates will only cause the krone to appreciate even more. Norway cannot maintain the highest salaries in the world, the highest taxes in the world, the highest interest rates in the developed world and the strongest currency globally without having Norwegian industries lose their international competitiveness. By raising interest rates to combat a real estate bubble in Norway that could have been fixed by numerous other means, such as allowing the cities to go up vertically, the Norwegian central bank literally placed a shotgun in the mouth of Norway's shipbuilding industry and pulled the trigger.

Once the inflationary depression worsens globally and shipyards around the world receive fewer orders, the Norwegian shipyards will be among the first to collapse.

2) The second systematic shock to Norwegian industry will occur in oil & gas. The Western world cannot continue to run huge current account deficits (when imports exceed exports) to finance their energy needs. Numerous countries in the West are doing everything possible to make petroleum and natural gas obsolete, either through investment in the private sector or secretly in government labs.

It is extremely important for Norwegians to admit that the oilmen, who work two-weeks-on/four-weeks-off, are paid ridiculously high salaries. And it is not my purpose to criticize these workers by making this statement. But all Norwegians must be willing to admit these high levels of income from oil & gas is unsustainable...

Furthermore, there has been no widespread discussion regarding what new industries are going to replace all of these high paying jobs. First of all, a huge amount of Norwegian government's tax revenue is derived from employment in oil & gas via income taxes. Second of all, many businesses including restaurants, bars, retail stores, homebuilders, tradesmen and helicopter ferry services revolve around oil & gas money. The reason why carpenters and plumbers in Norway have went from poor to rich in thirty years is due almost entirely to the oil money!

Norway must either expand its more promising industries or find new industries to replace oil & gas. And time is running out. If these other industries cannot produce the same or higher salaries for Norwegians than the oil & gas industry, the Norwegian economy will begin a long-term downward spiral. This part of the "Brief" will be discussed more later, because I have some bold ideas about how to use the Petroleum Fund to prevent this downward spiral from ever happening in Norge.

3) The third systematic shock to Norwegian industry will occur in shipping. The Norwegian shipping industry is conservatively run, but these companies are not economically prepared for an inflationary depression. A significant fall in global trade will result in many vessels losing up to 95% of their value. During the Great Depression, the British government bailed out the shipping industry to protect their economy. But since the Norwegian government literally hates the shippers over tax issues, the Norwegian shipping firms will have no government assistance and most will go under.

I still find it hard to understand why the Norwegian government is willing to provide economic assistance to Norwegian farmers but not to Norwegian shippers. Both industries are largely price-takers, meaning they have no control over the market prices. I understand that farmers are poorer and more humble than shippers, but the shippers provide important economic activity in Norway. Tourists that visit Norway say the country is beautiful and they like Norwegian people, but these tourists also say that they will not come back due to the fact that bottled water costs $4.00 at the 7-Eleven. Considering the continued rise of the Norwegian Krone, Norway will soon have few tourists left. At least a business traveler will have to visit Norway if that is where the important shipping companies are located in the world, regardless of prices, but this information seems to go unmentioned by the politicians in Norway.

This "Brief" will continue with a discussion on how to save Norway's industries before we discuss Norwegian infrastructure. Because this when you will begin to understand how powerful a position that Norway truly is in...

If the Norwegian Petroleum Fund avoids losing money, which will only occur if the Norwegian people demand Norway's central bank to do so, then Norway will be the only Western nation with large financial resources when the entire world is experiencing a depression. Since most Western countries are already broke, Norway would be one of the few nations able to expand during this time of widespread economic distress.

We must remember that an inflationary depression will literally destroy the value of most companies globally. But if Norway has the money to spend, then Norway can buy leading companies across numerous industries at bargain prices. Norway can expand its banking, chemical, and manufacturing businesses. So instead of Norway employing primarily Polish and Lithuanian workers, Norway can also gain the brightest minds from Britain, Denmark, Holland, France, Spain and the United States.

In addition to intelligent and hard-working individuals, Norway will also gain revolutionary technology that will provide the Norwegian economy with the innovation necessary to produce high salaries in Norway for several decades. This is through this process of economic imperialism that Norway will be able to withstand the systematic shocks to its shipbuilding, oil & gas, and shipping industries.

Norway must protect the assets of the Norwegian Petroleum Fund as quickly as possible and then use those assets to acquire leading international businesses. Obviously, a planning committee needs to be assembled. Norway's larger companies will need time to decide what businesses they want to acquire. And this planning committee will need to evaluate the cases made by these Norwegian companies, approving only those acquisitions that are best for the long-term economic health of the country.

The two fastest-growing economies in the world since 1965, Singapore and Botswana, have both used planning committees to grow their economy at record pace. Botswana made sure their planning committee did not have political interference, since the committee's decisions could only be changed by a unanimous vote in Parliament; this model would work well in Norway. But Norge must be extremely careful that only the most capable and honest individuals serve on the committee, because Norway's future will largely depend on what industries this committee believes are best for the country's economic future.

A study of economic history indicates that Norway has approximately two years from the present date to decide which companies to buy. The depression will have worsened a great deal within twenty-four months and the price of international businesses will have collapsed. Buying businesses at or near the bottom of this economic depression will represent the best buying opportunity to purchase companies during the past 45 years!

For the record, a stock market crash (1929-1932) preceded the Great Depression. And the global stock markets crashed once again (2000-2002), but this time around central banks around the world decided to simultaneously increase the global money supply to stop world from deflating into a depression. However, the central banks significantly increased the rate of global inflation as a result---this is why oil has gone from $10 to $90 per barrel and why the price of milk has almost doubled in the past year. With the EU, U.S. and British central banks all lowering interest rates in the past three months and by them injecting billions of euros, dollar and pounds into their respective banking systems, the likelihood of this inflationary depression is now certain---it cannot be stopped without massive bank failures.

This economic depression will have negative effects on the Norwegian economy, but these effects will be nowhere as bad as they were in the 1930's. Since this depression is inflationary, Norway's fishing, oil & gas, and agricultural industries should provide a level of protection and do relatively well during this time. Other industries, such as tourism, will perform horribly. One of the main ideas in this "Brief", the acquisition of international business by Norwegian companies and financed by Norwegian Petroleum Fund, will provide some cash to the economy. However, it is important not to rely on these businesses to protect Norway throughout the depression.

Over the long-term, Norway would be much better off by increasing research and development spending or marketing budgets at these firms, since other multi-national corporations that compete with Norwegian enterprises globally will find themselves in a very weak financial state. In other words, Norway would encourage growth at their businesses when competing companies will just be struggling to stay in business. As a result of this tactic, Norwegian firms will become larger and much more profitable once the economic depression ends, providing increased tax revenue, employment opportunities and economic protection for the Norwegian people.

What this author is trying to say is that the Norwegian economy will encounter some turbulence during the inflationary depression. Norway should use this opportunity to make huge investments in the country's infrastructure, so Norwegian GDP does not shrink too much and Norwegian banking system can remain safe. And part of the Norwegian Petroleum Fund should be used for this purpose; I imagine this is exactly the moment you were saving the money for.

Norway's highways, sidewalks, train-tracks, public transportation, schools, and public buildings do not resemble that of a leading economy. If Norway wishes to maintain and improve its current standing of living, you must invest in your country. Businesses that do not invest in themselves go bankrupt and the same framework applies to countries too. While Norway could have invested in its infrastructure sooner, the timing for such projects could not be better.

Millions of constructions workers will be unemployed in the United States, U.K, Spain, Denmark, France and Italy. Therefore, Norway has a golden opportunity to build the country for the next 100 years on the cheap. I know Norway has opted against using temporary work visas in the past, but all these workers want is to provide for their families. Norway will be doing these temporary workers the greatest service in the world, by allowing them to come to Norway and put food on the table for their spouse and children. Surely Norway remembers what life was like before the oil, when the fishing or farming season went poorly and people had little to eat.

Thus, Norway must develop a large immigration department to handle these workers. By all means, do it in a unique way. Perhaps a test that determines if potential workers share Norwegian values might be helpful. Norway will probably have to open some international immigration offices, so Norway should expand the size of its international consulates immediately.

And lastly, Norway must set up a commission that develops a priority list for infrastructure projects, with a focus on highways, public transportation, high-speed trains, state-of-the-art schools and hospitals. These are all musts to maintain your economic way of life.

There is an American rapper by the name of Eminem who has a song that goes…"Will the real Slim Shady please stand up?" Adapting this lyric to the present environment, will the real Norwegian please stand up? Because the strength of your collective voice will determine the life your children and your grandchildren will have to look forward to…

************************************************************************

About Mark Nucera

Mark Nucera was the President and Chief Investment Officer at Nucera Asset Management from 1999-2006. He was one of the most cited experts on the financial markets in U.S. business periodicals by 2001. And he gave his first national television interview in the U.S. in 2002. His expertise is in macroeconomics, economic history, investments, and economic development on national, regional and local levels. Mr. Nucera's investment background was primarily in international equities, commodities and several specific sectors of the U.S. domestic economy, with real estate as a recent addition.

Mr. Nucera is a graduate of the University of Chicago. And he is presently a graduate student at NHH in Bergen. He moved to Norway because he loves the country, its people and its values. Mr. Nucera is exerting every fiber he has in his body to empower Norwegians to believe in themselves and prepare for the future. The world needs a strong Norway---long live Norge!

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