-->Digital Mongolia

The Daily Reckoning

Paris, France

Tuesday, 17 June 2003

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*** Big rally on Wall Street continues...More
contradictions...

*** A housing bubble...

*** Bull Run on in stocks? Or Bear Trap? You decide...
Gregory Peck lives! And more...

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You have come at the right time, dear reader; it's getting
good.

We mean the massive, epochal drama in the world's markets.

When we left you yesterday, we hung on the side of a
cliff...caught in a contradiction.

On the one hand, never before have the forces of slump, dip
and deflation been greater. Why? Because for the last
quarter of a century, the Dollar Standard has permitted an
increase in cash and credit greater than the world has ever
seen. As oft repeated here, during the Bretton-Woods/gold
standard era, 1948-1969, world money reserves (gold)
increased only 55%. Since then, they've shot up more than
2,000%.

Where did that money go? Debt and capacity. Foreigners
(notably those with straight black hair and single eyelids)
built factories to make things they could sell...in order
to get their hands on those dollars. They built so many
factories, and worked so cheap, that they are now driving
down prices all over the world.

The dollars gushed towards them, trillions of them; what
could they do with them all? As the years went by,
Americans made less and less that the foreigners might want
to buy. All the dollar-holders could do was to buy U.S.
financial assets, and lend the dollars back to the U.S..

America was the world's biggest creditor when Ike was
president. By Ronald Reagan's second term, about 15 years
into the Dollar Standard era, the nation slipped to net-
debtor status. In the following 15 years it broke all
records - becoming the world's biggest debtor and the
greatest debtor of all time. Currently, the U.S. owes the
rest of the world about $2.5 trillion more than foreigners
owe it in return.

But Thomas Gale Moore, then a member of President Reagan's
Council of Economic Advisors, must have anticipated Ben
Bernanke when he noticed the U.S. crossing the
creditor/debtor threshold in the mid-'80s. Not to worry,
said he,"We can pay off anybody by running a press,
frankly, so it's not clear to me how bad that
is...[becoming a net-debtor]."

Debt levels in the U.S. are at all-time highs. Why is this
deflationary? Because the more you owe, the more interest
you have to pay...which reduces your spending power. And
because you eventually need to pay down your
debt...(especially if you're trying to prepare for
retirement). This is why inflation always leads to
deflation.

But on the other hand, never have there been so many people
so determined to prevent it. Bernanke, Bush, Greenspan,
Snow...McTeer...Poole...and all the Fed governors...have
proclaimed that if there is deflation, 'it will be over our
dead bodies.'

Which is all right with us.

We see creeping deflation ahead...even if it is opposed by
every single Fed governor, every hack at the Treasury
department, all the ships at sea and all the saints in
heaven.

Then again, we see inflation, too. Maybe not so much now as
later...and not so much creeping as galloping. So there you
have a prediction. And one that didn't cost you a penny: we
predict both inflation and deflation. We have been
unwilling to cut an arm off with a penknife to free
ourselves from the apparent contradiction. Caught in this
Promethean crack, we await the vultures...

Eric must be on vacation. Here's Addison with the latest
news:

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Addison Wiggin, writing from Paris...

- Investors are once again lending their hearts and souls
to the 'second-half-strong-recovery' story: all the major
indexes levitated by more than 2% to kick off the week. The
Dow Jones Industrials tangoed up 202 to nearly 9318. The
S&P 500 shimmied 22 points forward to settle in above the
mystical thousand-point level at 1010. And the Nasdaq
swayed rhythmically...adding 40 by day's end to finish at
1667.

-"With investors wholeheartedly putting their faith in the
'second-half-strong-recovery' play yet again," writes
Apogee Research's Andrew Kashdan,"it's worth considering
the other side of that trade. First of all, instead of
searching for statistical anomalies in the unemployment
data, as the perennial optimists among us are wont to do,
we view the jobs recovery much the same way Justice Potter
Stewart defined hard-core pornography: 'I know it when I
see it'. And when it comes to actual jobs, not even the
most enthusiastic bulls have claimed a sighting yet."

- Despite his brethren's leap into the unknown, the savvy
investor wouldn't have to torture any statistics to find
reasons for sweating the details with respect to the
economy. All the major categories real economists use to
judge the health of the economy look decidedly peaked:
besides the lack of jobs, retail sales remain weak, pension
funds are racking up losses, manufacturing activity is
still contracting (if at a slower rate), and business
investment has yet to pick up.

- In fact, while the first great recession of the 21st
century was declared DOA roughly 18 months ago,"real
business fixed investment" has been dropping steadily
since; down by a 2.2% annual rate over the period. Is that
bad? Well...yeah."Typically," according to Kashdan,"[real
fixed business investment] increases by a little more than
8% in the first year of a recovery - yet more proof that
this so-called recovery is anything but typical."

- According to a report in the St. Louis Fed's monthly
"National Economic Trends", from 1955 to 1994,
manufacturing capacity grew by 3.4% per year, almost
identical to the 3.3% growth of real GDP. Yet since 1994,
the capacity growth of 4.7% has far outstripped the 3.1%
growth in real GDP. In other words, the U.S. has a bumper
crop of idle factories just waiting for something to do.
Lakshman Achuthan, managing director of the Economic Cycle
Research Institute, warns investors to be wary of excessive
optimism."We are firmly on track for a sub-par recovery,"
writes Achuthan."The implication there is that the pace of
growth will fall short of that needed for stronger job
growth."

- If the economy continues to refuse to sit up straight in
the job creation department, we catch ourselves wondering
(as we straighten in our chairs): how much longer can the
'mortgage boom' last? At some point, people are going to
eschew even the"lowest mortgage rates in history," as one
piece of junk e-mail in my inbox puts it...aren't they? If
they can't count on their jobs, what choice will they have?

- The Economist's recently published survey of property
markets around the world proffers disturbing implications
for the U.S. housing market. Few are suggesting the housing
bubble will pop in cataclysmic fashion, like the equity
bubble did, which is what allows Greenspan and others to
stick to their claim that this bubble is a non-event. But
since the mid-1990s, U.S. house prices have jumped by about
30% - the biggest real gain ever recorded over a similar
time span, according to The Economist. The gains in some
European countries have been even larger. A P/E ratio
comparing U.S. house prices to rental income or implicit
rent is about 16% above its 30-year average. Similarly, the
house price-to-income ratio, which can be measured in
various ways, is well above its long-term average.

- For further insight, we turn once again to our other man
in New York, Andrew Kashdan."Could it be that much of the
money sloshing around at the behest of the Fed has ended up
in the housing market?" asks Andrew."Whatever the cause,
just like when stocks go up, some people are loathe to call
it inflation. More importantly, even if prices merely stay
in a range while valuations catch up, investors and
consumers will be in a much grumpier mood for some time to
come. We'd hate to think how they might behave if U.S.
housing prices actually declined, as they did back in the
'80s." [Ed note: For more Kashdan, see Andrew's recent
article:

The Economy: Bad, Ugly, and Some Good
http://www.dailyreckoning.com/body_headline.cfm?id=3255 ]

- But that's not really a problem, right? After all, house
prices always go up - don't they?

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Bill Bonner, back in Paris...

*** It's just like old times. Yahoo rose 7% yesterday. Why?
Because of an analyst upgrade. Ha...ha...ha...ha...

***"This rally is for real," says the cover of Barron's.
"Stocks are likely to be 10% higher by year end." Maybe.
But (ha...ha...ha...ha...) how they heck would they know?

The S&P 500 is about 40% undervalued, they say, using the
'Fed Model' as if it made a lick of sense.

Then they quote Byron Wien, who puts the S&P at 45%
undervalued. Heh...heh...

*** But who can argue with a bull market. The Nasdaq is up
21.8% so far this year. The Dow is up almost 10%...and the
S&P 500, 12.4%.

It's a"Bull Run," Barron's concludes.

Which reminds us of something. Oh yes...June of '95...and
the people with straight, black hair...

In Japan, the Nikkei Dow rallied 15 times, more than 15%
each time, between 1980 and today. On 4 occasions it rose
more than 30%. And twice more than 50%.

Early in 1995, the Japanese were desperate to revive their
economy and put some life into their stock market. They
administered two remedies - one fiscal, the other monetary.
The government began a number of initiatives that put about
$100 billion into the economy. The Bank of Japan cut rates
from 1.75% to just 1%. Then, 6 months later, it made
another half-point cut.

These measures seemed to do the job. The economy sat up in
bed and began doing a little light work. The stock market,
on the other hand, made what looked like a miraculous
recovery. The Nikkei rose from 14,000 to 22,000 from July
'95 to June '96.

If that were all there was in the health records, we could
consider the patient cured and the story ended. But, alas,
the recovery proved temporary. Stocks soon began to fall
again. Investors who bought into the 'Bull Run' story in
June of '96 subsequently lost most of their money, as the
Nikkei collapsed back to 14,000 and kept falling. This
morning it is trading at 9,034.

*** Henry's class put on a spectacle last night, preparing
to end the school year. The boys still have another 2 weeks
of school to go, but their spirits are already flying high
in anticipation of 8 weeks of summer vacation.

The show included everything but animal acts. There were
piano players with impressive talent...and violin players
with none at all. (The violin is an unforgiving instrument;
lacking frets, it allows the musician to squawk notes so
far from the chromatic scale that even a tape recorder
couldn't reproduce them.)

What was most surprising is that Henry's French Catholic
school shows no signs of obnoxious, revolting youth. There
were no baggy pants. No rings. And no cynicism, nor even
nascent suspicion towards bourgeois culture. A tall boy
played Vivaldi on the flute and was applauded as though he
were a football hero. Another boy rendered Chopin on the
piano; the others listened quietly, almost reverentially,
as though they were in the company of a rap singer with a
loaded pistol in his hand.

Henry won a prize for having a 'Bon Esprit.'

*** Henry, 12, has grown tall and handsome lately, with a
broad face and dark, wavy hair.

Reading the paper recently, we noticed that Gregory Peck
had died.

"No, he lives..." murmured Henry's grandmother at the news;
she pointed in Henry's direction.

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The Daily Reckoning PRESENTS: A cell-phone in a yurt? The
Adventure Capitalist ponders the effect of leapfrogging
technology on the nomadic tribes of Mongolia...


DIGITAL MONGOLIA
By Jim Rogers

Mongolia is about the size of Iran or Alaska, which makes
it about a fifth the size of the lower forty-eight states,
and its total population of 2.6 million is about the same
as Kansas City's. More than a quarter of its citizens live
in the capital city, Ulan Bator, leaving a very small
number of people spread over a very large geographic area.
It is hard to believe that as recently as the mid-
fourteenth century the Mongols controlled most of Eurasia
from Korea to Hungary, having conquered it more than a
hundred years earlier.

It was against invasion by the Mongol hordes that the Great
Wall of China was begun. They were invading Japan when a
sudden typhoon sank their ships and drove them away. The
Japanese have used the word kamikaze,"divine wind," ever
since. Marco Polo claimed to have traveled from Venice to
visit the Mongol Empire. The Mongols swept the world as the
great horsemen of their day, and a simple invention gave
them much of their power.

Their use of the stirrup gave them control of their fast
ponies at a time when others were using horses mainly as
beasts of burden. Eventually everyone had the new
technology and the Mongols faded into history, outpaced by
even newer technologies.

Outer Mongolia is now a name almost synonymous with the
word"backwater," evocative of the remote, the retrograde,
the unimproved.

Yet Ulan Bator, the capital of Mongolia, is perhaps the
most technologically up-to-date city in the world, totally
digital. With the fall of the Soviet Union, a free and
independent Mongolia benefited from numerous sources of
foreign aid, and with no infrastructure to upgrade, it
leapfrogged about three generations of technology. The
whole city is wired with fiber-optic cable, enabling you to
jack into the Web from almost any phone in town.

You can't do that in Russia. There, it is hard enough to
make a phone call out. To send e-mail in Russia, you have
to pay a physical, not a virtual, visit to an Internet
service provider - which we did all along our route. As it
happens, every decent-sized town in Russia has an ISP,
often a battered office jammed with half a dozen aging
computers and half a dozen roughly dressed youths staring
at their screens. Descending on them, we would find them
shocked and delighted to greet visitors from the exotic
West.

"How much to plug into your lines?" we would ask,
brandishing our laptops. At a dollar an hour, they were
wildly overcharging us, but we were overjoyed to be able to
update our Web site. In the absence of these
entrepreneurial outposts, we would have been out of touch
with friends and family for weeks at a time. It was just
one more example of how dramatically the world had changed
in the space of a decade.

Another change spawned by the digital age, and one of the
more significant changes for the world traveler, was access
to money. Paige and I had been through twenty-two
countries, and to my surprise I had suffered very few of
the problems I had experienced on my last trip regarding
currency. Last time, crossing borders, both entering and
exiting countries, I had had to hide my cash, confronting
border guards who wanted me to declare it on special forms.
(Of course, many border guards had simply been looking for
a bribe.) Back then I would hide currency in the frame of
my bike, my shoes, my helmet, anywhere I figured border
guards would not look.

To avoid carrying large amounts of cash, I would have funds
wired to me at banks in capital cities, so I would have
money for food, hotels, and gas. On this trip none of that
had been necessary. I did not need to carry a lot of money.
Now, on the verge of the new millennium, Visa, Master-Card,
Diners Club, and American Express were accepted everywhere.

And even in Russia, not to mention up-to-the-minute Ulan
Bator, we could just march off to the nearest ATM and take
out whatever cash we needed, when we needed it, sometimes
even in dollars. One had to be attentive, however. In
Siberia I once obtained some cash, but while I was putting
my credit card away, the machine took back the money! It
took two days to get the cash back.

Running phone lines across Mongolia, a country so large
with a population so small, would be both a technological
nightmare and economic insanity. So the country, in another
instance of leapfrogging technology, went straight to
digital communication. Everybody in Mongolia has a digital
cell phone. The nation's nomads, crossing the country on
horseback, carry them. There is a cell phone in most yurts.

This leapfrogging of technology has impacted history for
centuries.

In early-nineteenth-century America towns were desperate
for canals to put them on the trade routes. Those
unfortunate cities without canals went straight to the
newfangled railroad. Soon the old canal routes disappeared.
(Remember the Erie Canal?) Then along came the Interstate
Highway System, and the old railroad towns that ignored the
impact of the highway disappeared. San Diego is a major
U.S. city now, but not Tucumcari, New Mexico, a major
railroad interchange.

So, figure out what will replace the highway system and
jump on board while everyone else is angling for the new
interstate.

On the road to Ulan Bator we saw nomads moving their camps,
uprooting themselves and all their horses, camels, and
goats, and traveling to new grazing grounds. These were the
descendants of Genghis Khan, who had swept across the
steppes on horseback. The women, we noticed, were expert
riders just like the men.

We started snapping pictures. Photographing a yurt, we were
invited inside by the woman who owned it. She showed us
around the humble dwelling and served us salted tea. In
this part of the world, I was surprised to discover, they
do not put sugar, honey, or milk in their tea; they drink
it with salt. (Of course, there has never been much sugar
grown in Mongolia.) Just one more culinary adventure.

Regards,


Jim Rogers
- excerpt from Adventure Capitalist