-->The World's Best Capitalists

The Daily Reckoning

Baltimore, Maryland

Tuesday, 20 May 2003

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*** The euro's new-found muscle...

*** Gold up, dollar down...Stocks on the skids...

*** Old Glory...on baseball caps and dog collars...the Idea
of America...and more!

A one-eyed man among the blind...

That's how a currency analyst at Commerzbank AG in Frankfurt
described the euro this morning.

Since beginning its feeble life in 1999 at $1.16, the euro
has suffered a humiliating decline (to a low of $0.81)...
followed by a heroic rebirth. Nearly four years on, and the
Esperanto currency is right back where it started.

Yesterday, the euro closed at $1.16...after flirting with the
$1.18 mark mid-day.

Oddly enough, not much of the euro's new-found muscle can be
attributed...well, to the euro. The French and German stock
markets are down 56% and 62% respectively since the top of
the bubble, and the fiscal crisis sweeping the West - brought
on by aging, retiring baby boomers - is reaching a climax
sooner than in the U.S..

This past week witnessed three days of general strikes in
Paris and around France, largely brought on by fears of the
impending pension crunch.

Still, a sagging yen, a sickly and weakening dollar...and
apathy from the Treasury Department...have made the euro look
"buff" to currency traders and investors alike.

"I 'own' the euro," our friend Jimmy Rogers told us in a
conference call a week or so ago. Not because he finds it
particularly appealing, he explained - and not necessarily
for the long-term - but because there's just nowhere else to
go.

The euro, to the chagrin of many around the globe, is simply
the least porous paper in a sea of sinking currencies. And
it's making the price of wine much less cheap for your
"effete expat" friends in Paris.

Here's Eric with the details...

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Mr. Fry with the news from New York...

- Yesterday, your New York-based editor spent the entire day
in Baltimore conducting meetings with your Paris-based
editors and with many of the other folks who labor to create
the Daily Reckoning each day. (This stuff doesn't just appear
like manna from Heaven, you know.)

- While we were busy chatting about ways we might improve the
Daily Reckoning, the stock market was hitting the skids. The
Dow Jones Industrials collapsed 186 points to 8,493, and the
Nasdaq crumbled 3 percent to 1,493...Blame the dollar!...Or,
more precisely, blame Treasury Secretary John Snow.

- While speaking to the press in the French resort of
Deauville, Secretary Snow offered a lame, touchy-feely
definition of dollar strength."What you want to be strong is
you want people to have confidence in your currency," said
the illustrious Treasury secretary. But he failed to state
the obvious definition: stability against benchmark
currencies like the euro and the yen.

- Snow's lame remarks represent a brazen departure from the
credible, strong-dollar policy advocated by the Clinton-era
Treasury Secretary, Robert Rubin. By failing to characterize
dollar strength in traditional terms, Snow seemed to imply
that further dollar weakness would be desirable. His reckless
comments sent the dollar careening nearly 1% lower to $1.1635
per euro. The dollar's troubles sparked a major gold rally -
sending the precious metal up a lofty $9.50 to a three-month
high of $364.40.

- The dollar's shocking weakness is not entirely Snow's
fault, of course. The Treasury Sec's remarks would get"no
traction" if the dollar did not, in fact, have some serious
problems.

-"As Warren Buffett or Benjamin Graham might say," writes
Andrew Kashdan of Apogee Research,"the market has ceased to
be a voting machine and has become a weighing machine. The
weight is the magnitude of the world's capital required to
plug the gaping hole of the U.S. current account deficit. All
those dollars sent abroad will come back home eventually, but
not necessarily at the current exchange rate.

-"The trade-weighted dollar index is still well above the
levels at which it resided in the early to mid-1990s. Helping
to prop up the dollar are increased purchases by foreign
central banks (a trend we noted back on January 24). The
latest available data on international transactions show that
$93 billion out of a total $474 billion of net assets
purchased by foreigners last year went toward expanding
foreign official dollar reserves. [On the other hand, private
investors are selling dollar assets], private flows in the
form of direct investment continued to decline, and, as of
the 2002 fourth quarter, amounted to just over $30 billion
vs. more than $300 billion as recently as 2001.

-"If Snow secretly wishes for a weaker dollar, he won't have
to work very hard to get it," says Kashdan."Across town, Fed
Chairman Greenspan is doing his part to break the buck with
his new determination to give us more inflation. All else
equal, the chairman's obsession will not encourage foreign
investors to keep plowing money into U.S. assets...So far,
U.S. stocks haven't seemed particularly perturbed by the
dollar's decline, but the drooping currency may act
alternately as both cause and effect in a declining stock
market - another vicious circle in action.

-"The larger context of the dollar decline has held Stephen
Roach's attention for some time, part of what the Morgan
Stanley economist calls a 'rebalancing of a U.S.-centric
world...[and] a realignment of relative prices - namely the
prices of dollar-denominated assets compared to those of non-
dollar-denominated assets.' Roach asks, 'Can a saving-short
U.S. economy continue to finance an ever-widening expansion
of its military superiority?' The U.S. is not about to become
a financial pariah in the global markets, of course, but the
peace dividend has gone the way of most other dividends: it
has shrunk to near oblivion. And that's just one more factor
that's causing the foreign bid for U.S. dollars to do some
shrinking of its own."

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Back in Baltimore...

***"After 9/11, so many people bought flags that the shops
ran short. Old Glory festooned nearly every porch and bridge.
Patriotism swelled every heart. Europeans, coming back to the
Old Country after visiting the new one, reported that they
had never seen anything like it.

"Citizens wave, wear, display and decorate airplanes,
windows, baseball caps, car bumpers, dog collars and front
porches with Old Glory. Sometimes they even fly them on
flagpoles. And sometimes, when necessary, they send their
sons and daughters to die for it.

"America is different. It's not Europe, Africa or Asia. It's
a nation of people who chose to become Americans. Even the
oldest family tree in the New World has immigrants at its
root.

"Why should we care more about it than say, France, for
example, Lithuania or Chad?"

Bill Bonner recently set out to try to answer that question.
What he came up with was a series of classic essays from some
of history's most profound thinkers. America is different...
but what is it, really? Follow this link to find out:

The Idea Of America
http://www.agora-inc.com/reports/901SIOAB/America/


Cheers,

Addison Wiggin,
The Daily Reckoning

P.S. Ed Crane, President of the CATO Institute, read The Idea
of America and wrote back to us:"The Idea of America is a
gem! The thoughtfully selected essays in this volume offer a
window into the soul of our great nation."

And our friend Jim Rogers, author of Adventure Capitalist
adds:"I hope everyone will read this to see why America
became a great country - so we can keep it a great country."
Again, you can find out more by clicking here:

The Idea Of America
http://www.agora-inc.com/reports/901SIOAB/America/


P.P.S. After completing his record-breaking journey around
the globe in a bright yellow Mercedes, Mr. Rogers also
reported that contrary to popular belief - especially by and
about Americans -"the world's best capitalists are in
Communist China"...

China?

That's right...more of Jimmy's comments below...


The Daily Reckoning PRESENTS: The world's best capitalists...
are in Communist China. An excerpt from Jim Rogers new book:
Adventure Capitalist


THE WORLD'S BEST CAPITALISTS
By Jim Rogers


The Chinese work from dawn to dusk.

But not only do they work hard, they also save and invest
more than 30 percent of their income. We in America at the
moment save about 1 percent of our income. It is because the
Chinese work so hard and save so much of what they earn that
their economy is growing faster than ours.

In the city of Zhengzhou I observed the Chinese work ethic in
action in its most simple and primitive form: the
attentiveness of a waitress, Mae Wang.

Employed by one of the restaurants in town, her behavior was
simply an exaggeration of that which was typical of all the
workers in China. Mae Wang, when a restaurant patron caught
her attention, literally ran to the table to be of help. Like
a sprinter. Across the room. She ran to see what she could do
to serve you. For me she was something of a metaphor, a
motif, if you will, stated as part of an overture to the
symphony of Shanghai.

Shanghai lay before us like Oz. We were approaching what I
predicted would be the Emerald City of twenty-first-century
capitalism - within our lifetimes. Zhengzhou was the first
stop on the beeline we were now making for the city. Nanjing
was the final stop. In Nanjing, I looked out our hotel room
window and saw building cranes everywhere I looked; it was
here, in Nanjing, that someone informed me that fully half
the building cranes in the world were currently in China. My
itinerary, it appeared, was trying to prepare me, to educate
me, for what lay ahead.

We finally arrived in Shanghai, and I instantly fell in love.
Again. Yet again, Shanghai had changed. This was the fourth
time I had been there, and every time it was a different
city, a different country. Had it changed for the better? The
city is modern, full of high-rises. It is trendy,
fashionable, sophisticated. And rich. I happen to like big
cities. I do not dream of returning to Demopolis, Alabama,
where my phone number, as late as my college years, consisted
of a single digit. For me, Shanghai is one of the great,
exciting places in the world. And I would be very happy to
live there. It would be like moving to New York in 1903, as
New York was really blossoming.

Before 1949, before the revolution and the establishment of
the People's Republic, the Shanghai stock market was the
largest in Asia, the largest between London and New York.
Shanghai was the center of commerce - and sin, the axis of
everything in the Far East. In 1988 I visited the Shanghai
exchange. To reach it, you walked down an unpaved road into a
somewhat ramshackle storefront featuring little more than a
thousand square feet of office space, and to buy stock you
simply walked up to a counter, overseen by a single
attendant, and paid for your shares. An over-the-counter
stock was exactly that.

The attendant totaled the transaction on an abacus. And in
1988 there were only a handful of stocks publicly traded. I
bought a bank stock, more for its historical than intrinsic
value. (The certificate hangs today, framed, on the wall of
my home in New York.) At that time, in remarks recorded by a
television crew, and later broadcast on PBS, I predicted
great things for China:

"This is history being made," I said, in voice-over as I
purchased my shares."This is the way American stock markets
evolved over two hundred years ago. Someday I'm going to
invest a whole lot of money in China, so it's important to
know how things work now. Before the revolution, China had
the largest stock market in the Orient, and if I'm right,
someday it will again."

The stock exchange in Shanghai today, a little more than a
decade later, is located in a brand-new office building, a
gigantic, broad, square structure containing a vast,
ultramodern trading floor, where maybe three hundred people
work at computer terminals. Completely electronic and
growing, it technologically dwarfs the New York Stock
Exchange, where, thanks to powerful anachronistic interests,
brokers are still running around exchanging pieces of paper.

Naturally, I opened an account.

Earlier, to accommodate the growing number of foreigners who
wanted to invest there, the Chinese had begun creating a
class of shares known as B shares. The market's A shares were
limited to purchase by the Chinese. By the time Paige and I
arrived in 1999, all the foreigners, having failed to get
rich quick as they had expected to do, had started bailing
out, victims of just one more of the many bubbles that had
burst, and the market in B shares had bottomed out.

You know a market has bottomed out when everybody gives up in
despair and does not even want to talk about it. That is the
way B shares stood when I was in China. It was purely
fortuitous - it happened to be that way when we were there,
and I happened to notice because I have been around markets
for decades. There was nothing but despair and disgust,
outright animosity toward the B shares. They were selling for
twenty cents a share, and I stocked up. I bought a lot of
shares in a lot of different companies, first because they
were so cheap, and second because I believed China to be the
wave of the future; not knowing how any stock in particular
would perform, I expected all of them to do well.

Had A shares been available, I would not have bought them;
there was not the necessary hostility toward them. It was the
foreigners who had all dumped their stock, screaming,"Get me
out of these B shares!" It so happened that within a year or
so the Chinese made some changes in the law. The A shares and
B shares became the same. And the B shares went through the
roof, along with the entire Chinese stock market. For a lot
of reasons my investment turned out to be a good one, but
that is irrelevant (although the lesson of buying totally
depressed shares usually works out - if not always so
quickly).

I have no intention of selling. I do not know what my shares
are worth today. I do not want to know what they are worth.
They are not for sale. I still own these stocks and hope to
own them forever. I hope that they are in my estate.
Certainly China will suffer setbacks along the way, just as
the United Kingdom and the United States did in their rises
to greatness. But I would have to be a sucker to sell my
shares. It would be like buying shares in New York in 1903
and selling them in
1907.

While I was on this trip, Zhu Rongji, the Chinese premier,
was at Harvard Business School making a speech. And somebody,
some aspiring something-or-other, raised his hand and asked,
"Are you going to devalue the Chinese currency?" There had
been a lot of speculation that the Chinese government was
going to devalue before making the yuan convertible. We are
not going to devalue the currency, Zhu answered. If you
really think we are going to devalue the currency, he said, I
suggest you buy puts on the currency.

Now, buying puts is an extremely sophisticated way to profit
when something collapses. But here was the premier of a
Communist country telling this whippersnapper to buy puts,
essentially telling him,"Call my bluff, if you don't believe
me."

The Chinese understand money, finance, capitalism. This was
the premier of the country. This was not his treasury
secretary or the head of the central bank or the president of
the stock exchange. This was the guy running the country. He
knows money, and that sophistication permeates the whole
society - finance, getting rich, saving, investing for the
future, educating your children.

Compare that economic sophistication to the demonstrable
ignorance of a fellow like George W. Bush, who recently, in
remarks of his own, showed that he did not know the
difference between devaluation and depreciation, an absolute
embarrassment, especially for someone who attended business
school.

Forget that he is the president of the United States and not
the voice of Communist China. Do not get me wrong; it is not
just Bush. No recent U.S. president has understood basic
economics. Bill Clinton did not even know that the biggest
stock market bubble in decades was occurring while he was
president. He did not even know it popped when he was in
office.

I would cast a pox on both their houses - the Democrats and
the Re-publicans.

Regards,

Jim Rogers
- from Adventure Capitalist

P.S. In China, savings are not taxed, whereas here in the
United States the government, by taxing them two or three
times, discourages savings. Surprisingly, as I write this,
President Bush has proposed shifting the U.S. tax system to
one that taxes consumption rather than income. The change
would be as historically significant as America's shift from
a tariff-based tax system in the nineteenth century to an
income-based tax system in the twentieth. Such an approach is
critical; it is essential for the future health of the
nation. So I hope it actually happens.