Mines Of Mongolia / The Daily Reckoning

verfasst von - ELLI -, 19.02.2003, 14:21

-->Mines Of Mongolia

The Daily Reckoning

Stradham, New Hampshire

Tuesday, 18 February 2003

---------------------

*** The U.S. may not be looking up at the moment. But hey!
At least we're not Japan...

*** SBGS (stocks-bounce-gold-stumbles) rally
continues...everywhere but snow-ridden Wall Street, that
is...

*** Where are the customers' yachts? Try looking in
China...or Mongolia...



At least we're not Japan, huh?

"The bond yield [on 10-year notes in Japan]," hedge fund
manager Peter Tasker told the Financial Times,"is far lower
than in any phase of human history, including the 1930s and
the deflation of the 1880s".

Maybe it's the crick in his neck...or the back-up of airline
traffic around the Eastern seaboard on the day we were
slated to travel...but your editor was kind of cranky when
he went set out to review the financial news this morning.
Consumer capitalism - the world as we have known it - seems
like its on its last legs.

We just learned, for example, that bankruptcies hopped up
5.7% in 2002 to a record 1.5 million. Meanwhile, consumer
credit retracted by the largest amount since the Federal
Reserve began keeping tabs on it in 1968. Retail sales for
January were a robust 2%, far better than the expected
0.6%...but much of that increase can be chalked up to
skyrocketing gas prices and the lowest oil supplies in the
past 28 years.

Without the U.S. consumer buying even more things he doesn't
need, with money he doesn't have, how will the world
continue to grow? A war with Iraq, the IMF warns, could
hamper world growth even more - by as much as 50%...

But at least we're not Japan. Despite a litany of anti-
deflationary speeches and aggressive talk by prime minister
Koizumi, the bond market tells a different story. Yields on
the 10-year bond dropped to 0.75. In other words, bond
traders don't see anything like inflation - or a recovery -
in Japan for years to come.

Eric, what's happening in New York?

----------

Eric Fry, reporting from Manhattan...

- All of the New York and Chicago financial markets hung out
the"Closed" sign yesterday in observance of President's
Day. But even without a formal holiday, it's unlikely anyone
would have shown up for work at the NYSE yesterday.
"Blizzard" is not an overstatement for what's happening here
in the Northeast. Your co-editor is looking out his window
at three-foot snowdrifts...and it's still snowing!

- While the U.S. markets took the day off, most foreign
markets continued the rally that started in New York last
Friday. Britain's FTSE 100 Index and France's CAC 40 Index
both gained about 2%. The dollar's nascent rally also picked
up steam, as the greenback gained about half a percent in
Tokyo trading. The U.S. currency had its biggest gain in a
week against its European counterpart, rising to $1.072 from
$1.079 late Friday in New York. The gold market, by
contrast, continued the sell-off it started last week. The
spot gold price dropped $4.60 to $346.70 an ounce.

- Even if the tone is improving somewhat on Wall Street, the
tone on Main Street is far from melodious. Corporations and
consumers are both keeping their wallets planted firmly on
their hips. If corporate capital spending fails to recover
soon, consumer spending will become all the more essential
to our economic well-being. Unfortunately, the recent stats
from the consumer sector offer little reason for cheer. Even
more troubling, the once-buoyant mortgage refi market -
consumer spending's best friend - is starting to sink a bit.

- Businesses throughout our fair land are feeling the pinch
of an increasingly penny-pinching consumer. Take the yacht
industry for example, where buyers have become increasingly
scarce, according to representatives from the annual Miami
International Boat Show taking place this week...more about
that in a moment...

- In 1940, author Fred Schwed's classic,"Where are the
Customer's Yachts?" served up some timeless investment
advice gleaned from the brutal Depression-era bear market on
Wall Street. But as bad as things had become by the time
Schwed published his book, the title of his work implies
that a few brokers, at least, could afford to own a yacht.

-"Once in the dear dead days beyond recall," the witty
stock market commentator Fred Schwed wrote in 1940,"an out-
of-town visitor was being shown the wonders of the New York
financial district. When the party arrived at the Battery,
one of his guides indicated some handsome ships riding at
anchor. He said, 'Look, those are the bankers' and the
brokers' yachts.'

-"'Where are the customers' yachts?' asked the naïve
visitor"...(The phrase,"Plus ça change, plus c'est la même
chose" comes to mind).

- Today, in 2003, neither customers nor stockbrokers nor
investment bankers are buying yachts.

-"War worries are starting to drag on sales in the $29-
billion U.S. recreational boating industry," Reuters reports
from the annual Miami International Boat Show,"particularly
at the top and bottom ends of the market."

-"The number of entry-level buyers turning out at early-
year boat shows appears to be down," says Reuters,"and the
luxury end of the market, boats over 40 feet, is showing
signs of softness...The U.S. recreational marine industry
sold about 515,000 boats last year...down from 541,000 in
2001 and 574,000 in 2000, according to the National Marine
Manufacturers Association."

- The withering wherewithal of the Wall Street crowd is no
mystery. Last week, Charles Schwab reported that its
customers' average daily trading volume had tumbled 23% in
January from the level a year earlier and was...back to late
1998 levels.

- Wall Street's customers have been faring even worse than
its brokers, of course. After three straight years of
double-digit losses in the stock market, very few customers
could scrape together the funds to buy a small"Sunfish,"
much less a 50-foot Hatteras yacht. One would imagine that
the only seaworthy craft of interest to the typical Wall
Street customer would be a lifeboat.

----------

Back in New Hampshire...

*** Though Japan's sun may still be setting, the rest of
Asia is not necessarily sharing its fate. As the world's
major markets wallow in bubble aftermath, amid fears of war
- and as its major economies struggle under enormous debt
loads - China is looking more and more attractive. Whether
the U.S., Europe and Japan like it or not, China appears set
to become a major player of the future.

"The world has long been suspicious of the Chinese growth
story," reports Morgan Stanley's Stephen Roach."Skeptics
are still worried that China's rapid growth dynamic is not
sustainable. Some even warn of an imminent crisis in the
Chinese economy.

"I disagree, and expect the strength of the Chinese economy
to continue well through 2003. Our central case calls for
real GDP growth to average 7.5% for the year as a whole, an
outcome that would keep China on the solid growth trajectory
that it has maintained over the past decade.

"While still a relatively small economy, China's growth is
now strong enough to have a major impact on the dynamics of
the broader global economy. Currently, China accounts for
only about 4% of a $32 trillion world economy. However, in a
weakened global climate, China's growth rate is now strong
enough to have accounted for fully 17.5% of the growth in
world GDP in 2002 - second only to the growth contribution
of the United States. At the same time, while China accounts
for only about 5% of the world's total manufacturing
exports, it accounted for 29% of last year's growth in such
trade.

"In short, China is now making a highly disproportionate
contribution to the growth dynamic of a sluggish world
economy. That has put the world on notice that China's
global impact now needs to be taken quite seriously."

Notice taken, Steve...

Addison Wiggin,
The Daily Reckoning


The Daily Reckoning PRESENTS: Who the heck goes to Mongolia
looking for investment opportunities? Why, Doug Casey...who
else?


MINES OF MONGOLIA
By Doug Casey

In late October, I spent over a week in the obscure country
of Mongolia, wedged in between Russia and China, on the high
plains of east central Asia. It wasn't perhaps the best time
to visit, but on the bright side, the cold of late October
did serve to decrease the number of tourists. And of course
I did a bit of the tourist thing, going to museums (which,
ironically, were themselves decrepit enough to look like
they belonged in museums), and art galleries (some art here
is quite weird and innovative, and quite cheap).

I didn't see all of the country; that would have been tough,
since it's about the size of Alaska. But I did see the
capital, Ulan Bator (UB to the cognoscenti), and hours and
hours worth of territory to the south, in and around the
Gobi. Eighty percent of the country is steppe, desert and
semi-desert; unless you're a geologist on an Easter egg
hunt, believe me, it all looks the same.

Insofar as you care at all about Mongolia, I presume what
you're interested in isn't stuff you can read on a
government website; you want to know how it really is. And
maybe how you can profit from it, although that thought
makes better cocktail party conversation than reality -
unless you want to totally upend your life.

The bottom line is that, for most of the roughly 2.7 million
Mongols, things are (relative to our cushy standards in
America) pretty tough, although much better than they used
to be. Someone with a"good" job - a translator, a
bureaucrat, a secretary - might make US$100 per month.
Someone with lesser skills, like a laborer or a waitress,
might make about US$60 - before the 10% withholding tax.
That's assuming you live in an urban area and have a job,
since statistics indicate there's 20% unemployment. But,
although people don't make much money today, at least it's
real money (well, kind of, with the Tugrik at about 1100 to
the dollar), and they no longer have to play the Soviet game
of"They pretend to pay us, and we pretend to work."

Mongolians may not have much today, but they had a lot less
of it in Soviet times. The biggest department store in UB
resembles a supersized 7-11, and since most things are
imported, they're not particularly cheap. If you're a
typical Mongol, you don't make enough to rent an apartment,
so you share one with far too many other people. Although in
the summer you've got fresh local fruit and vegetables to
supplement some cheap cuts of mutton, in the winter you eat
cheap cuts of mutton. Period. For entertainment you go to a
bar and drink.

On the bright side, women wear a miniskirt and high heels
just about everywhere. And there are enough cars on the
streets to cause serious traffic jams twice a day, whereas
before 1990 there was only the odd truck, or broken down
Lada. Until I made a discovery described below, it was a
great mystery how all the cars got paid for with wages being
what they are. Looking at the official figures was no help
at all.

The published figures show that Mongolia has a GDP of about
US$1 billion. Entirely apart from the fact it isn't much -
less than that of most counties in the US - it doesn't mean
much either. Be that as it may, the government reports it
took in the equivalent of US$262 million last year, and
spent US$328 million - a $66 million, or roughly 25%
deficit. The county's imports were US$614 million, and its
exports were $466 million - a $148 million, or roughly 30%
deficit. Big percentage numbers.

We know how this is possible, at least for a while, in a
country like the U.S.: the U.S. has a reserve currency it
can export, and it has an immense amount of capital to
dissipate. Mongolia has neither of those advantages, so it
makes do entirely with foreign borrowing (roughly $760
million of government debt), and about $200 million of
foreign aid per year.

I consider numbers like these to be unsustainable,
especially as the world economy heads down in the years to
come. That doesn't have to be a bad thing. In fact, if I
were advising the government, I'd urge them to default on
their debt now, because they will eventually. And the sooner
they can get the burden off taxpayers' backs, the better.

But any progress will, I fear, be slow. The statistics show
that about 2/3 of Mongolia's exports and 30% of GDP are from
mining. And most of that comes from the giant Erdenet copper
mine to the northwest of UB.

The mine was built in the Soviet manner, which is to say the
object wasn't to produce efficiently (i.e., profitably), but
to employ the maximum number of workers and peasants, and
crank out copper at any cost. Which was pretty easy because,
since socialist economies don't have free market prices,
they can't calculate costs. Hence, they have no way of
knowing whether they're creating, or consuming wealth by
cranking out copper, or anything else.

In any event, the mine (which apparently still has a
resource of about 1.7 billion tonnes of.62% material - one
of the largest in the world), employs about 7,000 people,
and a whole city has grown up around it. If the work force
was cut by over 90% and modern technology used, the mine
likely would be quite profitable.

But the answer I've found to the who-pays-for-the-cars
riddle in UB is not the copper mine; it's placer gold.
Especially since the metal last moved over $300, it turns
out there's been a placer mining boom in Mongolia.

The word is that about 100,000 people, or over 5% of the
country's entire economic population, are engaged in illegal
placer mining - which is to say going to a stream and
panning, the way it's been done for millennia. Estimates are
that their number is going up rapidly. That makes sense to
me in a country where there's so little economic activity.

And that's in addition to people working the streams
legally. Mongolia has legal placer production of about
500,000 ounces a year, worth about US$150 million, or
roughly 15% of official GDP. The way an E.U. consultant
figures it (probably accurately) is that each of the 100,000
illegal miners produce, on average, one gram per day, which
totals up to 100 kilos a day, or a tonne (31,000 ounces, or
about $10 million) every 10 days. And the illegal placer
business is probably about the same size as the legal one.

Of course, the miners can only work half the year, since
this place gets unbelievably cold. But US$150 million, even
divided among 100,000 people, is $1,500 - which means that
each of the miners is making considerably more in six months
than a top paid person could make all year. I'd say there
are going to be a lot more Mongolians hitting the field next
year.


Regards,

Doug Casey,
For the Daily Reckoning

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• Mines Of Mongolia / The Daily Reckoning - - ELLI -, 19.02.2003, 14:21