The Daily Reckoning - Pao Mo Reloaded (Karim Rahemtulla)

verfasst von Firmian, 12.02.2004, 21:16

-->Pao Mo Reloaded

The Daily Reckoning

Madrid, Spain

Wednesday, 11 February 2004


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

*** Dinner in Madrid... even there, American politics is on
the menu...

*** Greenspan humps up Capitol Hill... the dollar drifts
lower...

*** Financial Reckoning Day in France, too! But in
disguise... Bernstein, Duncan and the worst case scenario...
and more...

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

Where was George W. Bush?

The question came up at dinner last night. We dined in
Madrid at El Ampare, a marvelous restaurant. While we were
eating a delicious ox sirloin, helped down by a tide of
rich rioja, the conversation turned to politics.

Our dinner companions were Spanish and Argentine... but
American politics is an irresistible topic almost
everywhere.

Of great interest to everyone is the way in which the two
parties in the U.S. have switched roles. The democrats'
front-runner, John Kerry, puts himself forward as a war
hero... with scars to prove it. Where was G.W. Bush when
their hero was getting shot at, Kerry's supporters what to
know?

We will return to our dinner conversation below, but
first... we take a look at the world of money. Our book was
translated and released in France a week or so ago. The
last report from the publisher was that 53 copies had been
sold. The book was a hit in America - where it made the top
of the NYTimes business bestseller list. This rather
surprised us; we did not think so many Americans would want
to read about the ruin of their own economy.

In France, by contrast, we imagined book buyers would line
up to gloat over America's decline. Not so far; reviewers
tell us that we must be way off-base. 'Everyone knows the
U.S. is in full recovery,' they say.

The recovery is an imposter, we point out. But, so far, the
French media - like their American counterparts - seem
unconscious of the threat of a meltdown.

It may be an odd recovery, they reply, but it is good
enough for us.

The trouble with the recovery is that it had not enough
trouble to recover from. Now, without the fuel of pent-up
purchasing power, it runs out of gas. Without enough
worries to grip onto, stocks should have no wall to climb.
Without a dense fog of gloom over Wall Street... the sun has
nothing to break through.

Business profits are up, say the positive-thinkers. But
they are up for the same corrupt reasons that the recovery
is a fraud. Americans don't find new and better-paying
jobs. Instead, they find new and more costly houses.
Loading themselves up with mortgage debt, they buy more and
more from overseas - on credit, to be sure. American
businesses don't need to hire more people - because they
are not really producing much more. Both the hiring... and
the cost of hiring... falls outside of the U.S. economy.
American businesses get the temporary advantage of a new
credit-induced spending boom, with no offsetting new
employee cost. Profits go up, especially profits made from
financing all this spending.

But how do people get rich, dear reader? They do not do so
by mortgaging their houses in order to buy the things they
want. No, they get rich by making the things that other
people want to buy. The old virtues... thrift, industry,
discipline, forbearance - that is what it takes. Now, as
always.

A reviewer in London recently objected to the moralistic
tone of our book. Modern economists hate the idea that they
cannot tinker their way out of a crisis. Of course, today,
they can make things better. But only by undoing the damage
they did yesterday.

Here's Addison, with more news:

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

Addison Wiggin in Paris...

- Dear reader, we will share a little secret with you.
Bill, as you know, travels frequently. On many days, the
Daily Reckoning is assembled here in the DR HQ after Bill
has written his leading thoughts and e-mailed them to us
from afar. Sometimes, he is... how shall we say this
politely?... out of touch. Today was one of those days.

- You see, while bemoaning the slack sales of the French
edition of Financial Reckoning Day over his huevos in
Madrid this morning, the French office was (and is) all
abuzz. Sales are extraordinary. In fact, the French FRD is
currently the best-selling book in France, according to its
Amazon.fr ranking. We tried to reach Bill by phone to tell
him, but did not succeed... and so, you will actually get
the news before he does.

- Of course, this has nothing at all to do with the stock
market or the economy, but we thought you might enjoy the
irony... as we have.

- Meanwhile, the worst-case scenario for the U.S. economy -
growing unemployment and a dollar crisis - looks like it's
in a holding pattern awaiting comments from Sir Easy at
today's Humphrey-Hawkins address before Congress. As we
mentioned Monday, the January jobs report was nearly 50,000
jobs shy of most analysts expectations. The dollar has
fallen nearly 2 pennies and gained back 1 since the G7
issued its own incomprehensible press release over the
weekend. But now we wait again...

- During the semi-annual Humphrey-Hawkins, Greenspan humps
his butt up Capitol Hill to give the elected few a view all
his own. Provided we'll be able to unpack his comments
after he's made them... we're expecting to hear more on one
of two subjects... ummmm, jobs or the dollar. Prescient of
us, eh? Then again, he could give us his recipe for making
a strong cosmopolitan, and we wouldn't really be the wiser,
would we? [Ed note: as we go to press, Greenspan has just
given his address... and investors seem to like what they
think they've heard. The stock market, gold, and bonds are
all rallying sharply. Details tomorrow.]

- Perhaps for a clearer, spin-free diagnosis of what's
happening to the U.S. economy, we should choose our speech
givers more carefully. Peter Bernstein, author of The Power
Of Gold and economic consultant, spoke before roomful of
students last Friday at the National Association of College
and University Business Officers... and sounded every bit
the Daily Reckoning reader, or at least commiserator.

-"As [Bernstein] sees it," writes HedgeWorld.com's Chidem
Kurdas who was there,"Asian economies are gaining while
the United States is losing jobs. Moreover, Asian
populations are saving and lending to Americans, who need
to borrow to finance excess spending. Mr. Bernstein
questioned the long-term viability of the 'we buy and they
finance' arrangement and identified the growing federal
budget deficit as a major reason for international
imbalance.

-"Another concern is the continuing growth of income
inequality in the United States. The recent increase in
profitability comes at the expense of workers, with the
share of employee compensation falling, Mr. Bernstein said,
claiming that people are forced to hunt for bargains and
that is what makes Wal-Mart an icon of the American
economy.

-"Bernstein's worst-case scenario involves growing
unemployment and a dollar crisis. Acknowledging that such
dire warnings in the past typically have not come to pass,
he advised holding stocks in case this forecast is wrong,
but at the same time preparing for the worst.

-"Think of the non-equity side of your portfolio as a
hedge, not a volatility reducer, he recommended. Because
hedging is expensive, he advocates using instruments such
as gold that would provide the greatest upside if economic
imbalances generate shocks. 'The hedge should give you the
biggest bang for the buck if I am right,' Bernstein said."

-"Is Alan Greenspan Behind China's Bubble Too?" asks
Bloomberg's William Pesek, a journalist rapidly growing in
our esteem. Pesek suspects, as do we, that the Fed's
commitment to keep rates at their 1958 low for a
"considerable period," followed by their"patience" in
changing their bias, has fueled speculation in Asian assets
to such a degree that China can't afford relax the yuan's
peg to the U.S. dollar...

- Our friend Richard Duncan, author of"Dollar Crises:
Causes, Consequences, Cures," suspects that somebody other
than Greenspan is behind the wheel."The amount of new
yen," writes Duncan in an op-ed in the Financial Times,
"that Japan 'printed' and converted into dollars during
January 2004 alone was enough to finance 13 per cent of the
U.S. budget deficit."

- Mr. Duncan's point? While all eyes in the financial media
are focused on profligate spending by the Bush
administration and historically low rates set by the U.S.
Fed, Japan is still taking the cake when it comes to
government intervention in the markets."By accident or by
design," Duncan notes,"Japan is carrying out the most
audacious endeavor to conjure wealth out of nothing since
John Law sold shares in the Mississippi Company in 1720."

- Duncan:"In mid-2003, economists at the U.S. Federal
Reserve published a paper explaining why the Fed was not
'out of bullets' despite having cut short-term interest
rates to 1 percent. That paper stated that 'the Fed could
even implement what is essentially the classic textbook
policy of dropping freshly printed money from a
helicopter,' if necessary, to stimulate the economy.

-"Today, that helicopter is in the air. But, strangely, it
is not the Stars and Stripes that is painted on its side,
but rather the Rising Sun. That much is clear. What still
is not quite discernible, however, is who is actually in
the pilot's seat."

- A better question yet: can it be piloted at all?

- One thing is sure, the money is still fluttering its way
down into the vicinity of Wall and Broad in Lower
Manhattan. The Dow rose 34 points yesterday to
10,613... still inching its way closer to the January 27th
high of 10,748. The S&P and Nasdaq tacked on 5 and 14
respectively.

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

Bill Bonner, back in Madrid...

***"Just a few weeks ago," began a dinner companion,"it
looked as though Bush had the race for re-election won. He
was way ahead. Now, it looks like it might be a real race
after all."

We have not kept up with the news. But from what we were
able to tell from last night's conversation, the democrats'
attacks are starting to sting. We will bring federal
deficits under control, they promise.

Of course, only conservative republicans would care about
the budget deficit...

But attacks on Bush's military prowess have been sharp. How
the wheels of poetic justice grind - slowly, but surely.
Bush puffed himself up as a warrior president."Bring 'em
on," he taunted his enemies. And now the Democrats bring on
his Vietnam-era record.

While Bush was hiding out in the National Guard or AWOL on
the beach at Ft. Lauderdale, our man was doing his duty,
they say.

But that is the delightful thing about politics. No lie is
so powerful as the one that is wrapped in deceit and
covered under a manure pile of humbug. While John Kerry
brings out his war record, the master-mind of the war
itself - Robert MacNamara - appears on college campuses
finally admitting that the whole war was a blunder.

The Indo-China wars tripped up millions, of course -
French, and then Americans. Honest farm boys went to war in
good faith on bad advice. There were Yale graduates, too.
Aiming for the White House, they might have hit a
Vietnamese peasant once or twice.

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

The Daily Reckoning PRESENTS: Karim Rahemtulla with his own
doubts on the Pao Mo* bubble...

[*"Pao Mo" = bubble in Chinese]

PAO MO RELOADED
By Karim Rahemtulla

China is touted everywhere as the investment destination of
the century. Don't believe it. My experience tells me that
the only people who can really make money in China are the
Chinese... or at best those who have real, extensive, on-
the-ground experience in the country.

My first journey to China, about ten years ago now, was
courtesy of an all-expenses-paid research trip funded by an
investment group out of Florida. The outfit wanted me and a
gaggle of other editors to give some coverage to the
'China' story. Yes, my friends, China was a story ten years
ago as well.

This was before the Asian Financial Crisis, when Chinese
companies were going public in their local markets with the
help of some shady Hong Kong business types. Hong Kong, if
you were not aware, was born of illicit trade... and it
hasn't changed since birth. It's just cleaner, not as
smelly and you now can say thanks in English before getting
ripped off.

As my plane landed in Cheng-Du, in the Sichuan Province, I
noticed that it was quite dark outside. I am more used to
seeing the lighting grids that illuminate most U.S. cities
when I travel. There was not a single light in sight. It's
hard to be all lit up when you don't have electricity in
the rural areas! We landed. As we walked through the
customs and immigration lines, I noticed that one of the
agents had pulled over a cadre of Japanese businessmen and
was giving them a good amount of grief. I guess old
memories die hard in China.

The first thing I noticed outside the terminal was a huge
sign for Jeep Cherokee - remember, this was circa 1995. A
huge Mercedes pulled up and whisked us to our hotel. I was
beginning to get the feeling that China had really come of
age. The hotel was arguably the best hotel I have ever
stayed in, five star all the way. Satellite TV, electric
shades, marble baths - these guys really knew how to live.

The next morning, I was ready for the tour of the steel
mill that we were scheduled to visit. You see, the mill
used to be owned by the state and was now privatized and
owned by a Hong Kong-listed company. Bicycles - I have
never seen so many. Cars? I have never seen so few. As we
navigated through crowded streets, it was apparent that
China would have to do a lot more than a few hundred
billion in trade to get up to speed as a First World
country. All around us, poverty made its sometimes pungent
presence known fully and completely. A chicken in every
pot? How about just a pot first?

We reach the steel mill and were greeted by a huge turnout
of employees and staff all wearing their Sunday best and
smiling. They could smell the profits reeking from our
First World clothes. The Chinese had a weird sense of
fashion. The up and comers wore Western suits - with the
labels still showing - the sign of prosperity. We were led
around the factory, given a tour of the smelter, offered
bamboo hard hats (I still have mine) and warned of the
dangerous environment. Apparently the amputees had the day
off for this tour.

As we toured the facility, many of the upper-level
executives who spoke very good English began to cozy up
with us. The plant was spectacular, no? It was now the
lowest-cost producer of steel in China - ever since the
state let go. We were now on our way to see the local
communist party head who agreed to give a little speech to
mark our visit. We entered an building that was set up like
a small amphitheater. The officials welcomed us with smiles
and nods. I held on tight to my wallet. The head red said
nothing of significance or worth remembering. But as he
wiped his hair back, I noticed that he was wearing a real
Rolex watch. (As a one-time watch enthusiast, I can spot
the real thing from a mile away - it's all in the
magnification.) I asked myself how a Communist Party
official could afford such a luxury on barely $20 a month
for a salary. Then I remembered that I asked myself the
same questions in 1982 when I visited Russia as younger,
more naïve young man. He must have gotten rid of the
manilla envelope by now.

The meeting ended. We were invited to a party with the
party. At the party, the officials and executives were
getting very friendly and anxious. They began extolling the
virtues of the steel mill, its huge profitability and the
capitalist changes taking place in China. No one was
biting. They loosened their ties and announced that it was
time for some"woolong ye" (not to be confused with"falun
gong.") It was barely 2pm and out of nowhere appeared a
bevy of beauties with bottles and glasses. Woolong ye is
the Chinese equivalent of moonshine... I guess. I don't
drink alcohol (before 6 pm anyway) and so I refused to
partake in this party with the party.

These Chinese were not shy about showing their fondness for
hooch. It was too late. An hour had passed and I was the
only sober one in the room, probably in the entire plant.
They started to spill their guts - figuratively. The plant
was not owned by the Hong Kong company. It was still owned
by the state... ha ha. The company executives in cahoots
with Mr. Rolex had"leased" the plant to the Hong Kong
company so they could pitch it to unsuspecting foreigners
(read Americans who love a bargain) and then turn over
their shares in the this public company at a nice profit.
If a few of the analysts and writers on the trip wrote
about this Hong Kong small cap that also traded on the
Nasdaq bulletin boards - their retirement would be set in
stone, or better yet, U.S. dollars. Then, they could tear
up the lease agreement and the state would be none the
wiser. I mean, how many people are there in China? A
billion two, three? How easy is it to pull a fast one?

It's all in the numbers.

The trip ended badly, in more ways than one. I left feeling
that I had wasted my time. As I mentioned before, I came to
the conclusion that the only people who would make money in
China then were the Chinese. If you want to invest in
China, be careful and look to experience. It is one of the
few countries where I would gladly pay a fund manager like
Mark Mobius a point or two to lead the way.

Fast Forward to 2004. Just days ago, China Life, a wildly
successful Chinese Life Insurance company, saw its shares
tank. In fact, they are down 30% in about a month. The
decline worsened as news came that an investigation into
the company's parent company yielded lots of
irregularities. I wonder if the company's CEO wears a
Rolex?

Next stop - India.


Regards,

Karim Rahemtulla

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gesamter Thread:

• The Daily Reckoning - Pao Mo Reloaded (Karim Rahemtulla) - Firmian, 12.02.2004, 21:16
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