The Daily Reckoning U.S. Edition
Home . Archives . Unsubscribe The Daily Reckoning | Tuesday, March 29, 2011
--------------------------------------------------------
March 2011: From a noted expert with 30 years of research experience...
"The biggest story since the Gutenberg printing press..."
It could build fortunes. It could crush old orthodoxies. It could make the fastest-movers into epic-scale tycoons.
And it starts right here. Today. You may have just one chance to act on this glorious new wealth revolution. Click Here to Find Out Why...
*** Offer Must Close Thursday, March 31st ...and promptly at 5pm...Investing in Latin America A Trip Through Some Emerging Markets with Douglas Clayton
A few words of introduction for a "frontier investor"...Chris Mayer
Doug Clayton is an investor who works the frontiers. He likes to go into markets that are already so beaten up they can't help but get better. "I like markets where you don't have to be very smart," he says. "Where you can invest in some basic things and know you'll do well."
Clayton founded Leopard Capital in 2007, and he set up the first private equity fund in Cambodia in 2008, investing in everything from beer brewing to housing. He spends time poking around in markets like Myanmar, Laos, Bangladesh and Sri Lanka. And he tends to stick with basic things where it is hard to go wrong.
More recently, he's taken Leopard Capital to explore possibilities in Latin America.
I caught up with Doug Clayton in Colombia. Clayton was in Colombia with a couple of his friends and colleagues checking out investment possibilities. I was doing the same with a few of my Agora Financial friends and my contacts from InterBolsa, a broker-dealer and asset manager in Colombia.
So one day our respective crews met up for dinner in Bogota, in a comfortable restaurant called Casa Vieja ("Old House"), which specializes in traditional Colombian food. It was appropriately named, as it seemed to be an old house. The creaky, polished wood floors, the old pictures on the walls and the antique pieces added to the feeling that we were eating at an eccentric friend's home. There were mountains of food, and it was all delicious.
"The stomach is the real seat of happiness in this world," that happy idler Jerome K. Jerome once wrote. And with knees under table and an abundance of good food and drink on top, we happily talked about investing opportunities in this big troubled world.
Clayton had just returned from Haiti and was gushing with enthusiasm for the place. Haiti is just the kind of market that gives off the scent that attracts Leopard. It's a devastated, knocked-down market that needs everything.
Hence, the opportunity. Clayton would like to build a hotel there. He paid four-star prices for a very basic room. "It's hard to get a hotel room in Port-au-Prince," he says. The place is full of relief workers and NGOs. And the devastation of the quake destroyed supply. So there is an acute need for hotels...or housing of any kind.
He had a lot of good things to say about Haiti and the perseverance of its people. "We never had a bad meal," he reports. People are trying to move forward.
Clayton has been thinking about different markets in Latin America as well, including Cuba. In a fascinating essay, Clayton writes up some research he discovered and why he thinks Cuba is on a path much like China in the 1980s or Vietnam in the 1990s. He also offers a few ideas on how to play it. I enjoyed the essay, and with permission from Doug and some edits, I've republished it at the end of this letter.
I hope you enjoy it, too. And if you want to learn more about Leopard Capital, check out his website, here. The book the US Congress never wanted you to see...
Ron Paul's "Lost" Gold Bible
Buried away in secret since late in the last century, this 200-page guide shows you:
We're spreading the word...and so, until April 6, 2011, you can claim a copy of this long "lost" Gold Bible – Absolutely FREE. Find Out How Here.The Daily Reckoning Presents CUBA: Preparing for Perestroika
Dividing Old Havana from Chinatown is Cuba's Capitolio Nacional, a monumental edifice with a fateful past. El Capitolio was conceived during the Roaring '20s, when the island led the world in sugar exports and the future seemed sky blue. Douglas Clayton
President Gerardo Machado dreamed of turning Cuba into the Switzerland of the Americas. He decided that his 4 million countrymen needed a domed capitol building even taller and more ornate than the one he toured in Washington. So Cuba's Congress dutifully poured 3% of the country's GDP into their new home. (This would be akin to the US Congress spending $420 billion for a new office today, but let's not give them any ideas...)
It took 8,000 skilled Cuban laborers just three years to complete El Capitolio, which featured gilt ceilings, a giant diamond embedded into the pristine marble floor and the world's third-largest indoor statue. However, the showy project couldn't have been more poorly timed. Work completed in 1929, just as America's stock market crashed and the Great Depression unfolded.
The Smoot-Hawley tariffs crushed Cuban sugar prices by 74%. When El Capitolio's ribbon was cut in 1931, Cuba's economy lay in tatters. Machado was forced out of office, and his dream building would perform congressional service for only 28 years before Fidel Castro's revolutionaries swept into Havana and opted for more austere premises. I don't need to recite the history from here, which you probably well know.
The winds of change are gathering in Cuba, though. Since Fidel Castro's health nearly failed in 2006, power has passed to his younger brother, Raul Castro. Raul has quietly reshuffled more than 30 cabinet members to prepare his party and people for a sweeping economic policy overhaul – Perestroika al Cubano. Even the semi-retired Fidel seems to have glumly accepted that change is inevitable, candidly admitting to a visiting US journalist that "the Cuban model doesn't even work for us anymore."
The global economic crisis whacked Cuba hard. Venezuela cut back on its largesse as its own economy worsened. Tourism and remittances softened, while nickel export prices tanked. Furthermore, three severe hurricanes left a wake of destruction in 2008. Unable to service Cuba's estimated $21 billion foreign debt, and running out of generous leftist patrons to hit up, Raul Castro has, apparently, decided he has little choice but to pry open Cuba's economy.
Castro's wild card is Cuba's oil and gas reserves. The island currently produces 60,000 bbl a day. But its US-facing northern waters hold an estimated 5-20 billion barrels of oil and 20 trillion cubic feet of natural gas. (Note: This compares with 29 billion barrels of oil reserves in the entire US.) Accessing this undersea oil requires the sophisticated drilling technology the US excels in. But as long as sanctions remain in place, the US oil majors are excluded from that bonanza. Amidst the applause of oil industry lobbyists, the dance for reengagement has begun, with both partners taking some unprecedented steps.
Raul Castro has issued a far-reaching five-year road map for Cuba's future economic reform. The proposed changes would put Cuba on a very similar path to that taken by China in the 1980s and Vietnam in the 1990s. Here are some of the ideas: permit real estate transactions amongst Cubans, merge the two-tier currency system, close down inefficient state enterprises, decentralize state ownership, facilitate private ownership of businesses, distribute idle land to farmers, open state-owned wholesale markets and further encourage foreign investment – particularly in tourism.
In recent months, some planned reforms have already been implemented in an effort to delay Cuba's impending insolvency. Costly subsidies on sugar and personal care products are being scaled back. The government announced plans to shed 500,000 state workers (that's 10% of the country's government work force in a country where 85% of workers work for the state) and guide them somehow into the private sector.
Cubans are being encouraged to grow and sell their own fruits and vegetables. The government is inviting foreign investors to develop 10 golf course estates in Cuba, with a new law allowing 99-year land leases to foreign buyers of plots in such projects. In the old days of Fidel's revolution, such policies were unthinkable.
So what is the potential for a liberalized Cuban economy?
Just look 90 miles across the straits to Florida. A million Cuban- Americans call Miami home. Cuba has 60% of Florida's population and 80% of its landmass, but greater natural resources and a much longer coastline, so one might conclude that the two are of comparable overall potential.
Perhaps to underscore their similarities, remember the fact that England and Spain cleanly swapped the two in 1763. Today, Florida's economy is 12 times larger than Cuba's. One reason is that Florida gets 20 times as many tourists as Cuba, plus an inflow of affluent retirees.
When the US government stops restricting its citizens from traveling to Cuba, the island will become an instant tourist magnet. Offering short flights, sunny beaches, cool music, "old world" architecture and cheap surgery, Cuba should have no problem drawing several million American tourists a year, as further-away destinations like Costa Rica have done.
Should reforms become comprehensive enough, agriculture seems an obvious investment play: Half the land is arable, labor is cheap and rain is plentiful. Cuba's once-vaunted sugar industry stands in disarray, with 80% of the old mills shut down. However, today's high sugar prices provide ample incentive to revive the sector, along with other traditional crops such as cigar tobacco.
Despite its long coastline, fisheries and aquaculture remain largely overlooked. Cuba is a world-class producer of nickel, but other mineral deposits remain underexploited. And then there's the oil. The entire power system needs to be updated, financial services developed, retailing expanded – the opportunities seem endless.
Beyond the subsidized basics, most consumer goods have to be imported, and imports draw heavy duties. Telecom services are costly due to government monopolization and inefficiency. The list goes on. In this environment, it is tough for most Cubans to get by unless they receive remittances, tourist gratuities or tea money.
All in all, we eagerly await the implementation of Cuba's economic reforms. As this process unfolds, Cuba could transform into one of the world's most attractive frontier investment destinations. America has a long track record of turning bitter rivals into productive partners (a recent example being Vietnam), and re-engagement with Cuba could be one of Obama's most notable foreign policy legacies.
Some frontier investors are not waiting for that and are already investing in Cuba. While 100% foreign ownership is permitted, most investors enter joint ventures with Cuban state enterprises, which typically contribute land, labor and sometimes capital. Over 250 such joint ventures exist, mostly for specific sectors or projects. Investments are made in foreign currency, eliminating exchange rate issues, and there are no restrictions on capital repatriation. Corporate income tax is 30% for joint ventures and 35% for wholly owned foreign companies, but tax holidays of five-seven years are available.
A few Cuba-focused investment groups have been established that non-US investors can access. Canada-listed Sherritt Group is a major player in Cuban nickel mining and, formerly, telecoms. A private investment group backed by European investors, Coral Capital has restored Havana's historic Saratoga Hotel, which was recently ranked by Conde Nast as the 16th best hotel in the world. Coral is now planning a number of golf course, marina, housing and hotel projects, as is Leisure Canada, a Canada-listed investment vehicle.
Regards,
Douglas Clayton,
for The Daily Reckoning
Joel's Note: Thanks to both Doug and Chris for their insights into frontier investing. It's a sad thing indeed when markets crumble...when economies falter...when once-promising lands, like Cuba, fall under the iron fist of some crackpot dictator, their currency laid to waste and people left to starve. But, as shown above, there ARE opportunities to be had for the intrepid investors who don't mind wading into the mud to uncover them. Nothing comes easy, as Fellow Reckoners well know....especially rebuilding broken economies.
On that exact point, Chris recently wrote up a review of an indispensable book, penned by Adam Fergusson, titled When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany.
The book, which looks at precisely what happens during a government- induced economic meltdown, is a useful read for anyone who fears what is going on this very moment in Washington DC...or, for that matter, any other money-printing capital around the world.
We think it's a very important book...and we want to get it into your hands – free – along with some more of Chris' breaking, boots-on-ground research. To find out more, here's a note Chris recently sent to his subscribers. Give it a read and let us know what you think.Bill Bonner How Inflation is Preventing a Real Economic Recovery
Reckoning from Baltimore, Maryland...Bill Bonner
Oh what a wicked twist...
What a nasty turn...
What a bummer!
Now, consumer prices are rising. The feds wanted inflation. Apparently, they've got it. The latest figures show consumer prices rising at 0.5% per month. Doesn't sound like much. But multiply by 12. It's over 6% per year.
Producer prices are going up even faster – at a 20% annual rate, if you extrapolate from last month.
Of course, one swallow does not a springtime make. And maybe these early birds of inflation will prove to be loners. We won't know for a while. But prices on energy, food, and auction-priced goods are definitely going up.
And as they go up, consumers are left with less spending power. Instead of encouraging the real economy forward, inflation is pushing it back.
Instead of causing more spending, the higher prices are absorbing what little purchasing power households had left. Instead of increasing demand, inflation is reducing it.
Let's go back:
The real economy depends on two major things:
Jobs. And housing.
Most people spend money that comes directly from their jobs. And most of their accumulated wealth is in their houses. Neither looks good.
Here's a little note on the job situation:Massachusetts employment organization has canceled its annual job fair because not enough companies have come forward to offer jobs.
And Floyd Norris, at The New York Times, tells us that the price of housing is not likely to go up anytime soon:
Richard Shafer, chairman of the Taunton Employment Task Force, says 20 to 25 employers are needed for the fair scheduled for April 6, but just 10 tables had been reserved. One table was reserved by a nonprofit that offers human services to job seekers, and three by temporary employment agencies.
Shafer tells the Taunton Daily Gazette the lack of employers means the task force won't have enough money to properly advertise the fair.
The task force has been organizing the job fair nearly every year since 1984.To judge by the overall level of home sales in the United States, the housing market has stabilized at a level well below the peak period of 2005 and 2006 but still higher than the sales rates that characterized prosperous periods in the 1980s and 1990s. Still, few of those sales are of new homes and a rising proportion are forced sales of homes no longer worth the amount that was borrowed.
And now, as predicted, the feds' policies are making things worse.
Yet sales of newly built single-family homes have plunged to the lowest levels seen since the government began collecting statistics on such sales in 1963. The Census Bureau reported this week that only 17,000 new homes were sold in February, for an annual rate of 250,000 after taking seasonal factors into account. Both of those numbers are the lowest on record.
The February sales pace was undoubtedly depressed by harsh weather in the Northeast, and a rebound in March or April is possible. But the total number of homes sold over the 12-month period – 349,000 – is lower than in any comparable period.
As a result, this cycle has been very different from previous ones.
Too many houses were built in many areas during the boom, and now housing starts have plunged... There are fewer newly built homes available, and in some areas, buyers complain that builders have not been willing to cut prices to meet the prices available on used homes in the same area.
The percentage of forced sales rose to nearly half of all sales in early 2009, at the height of the credit crisis, but fell to around 30 percent as the economy began to improve and banks imposed moratoriums on foreclosures. Now it is on the rise again, producing new pressures on prices and increased competition for home builders still trying to sell homes built in more optimistic times.
And more thoughts...
Mr. Market went into correction mode almost exactly four years ago. After years of letting himself go, he had to work out some issues...get clean...get straightened out.
The feds couldn't leave well enough alone. They fought this correction with everything they had.
Mr. Market wanted deflation – to get rid of 50 years' worth of debt build-up.
The feds wanted inflation – to boost the economy...and, not coincidentally, reduce the real value of the debt in the system.
Mr. Market took down asset values...reduced prices...bankrupted businesses...and forced households to cut back.
The feds pumped more cash and credit into the system – trying desperately to tempt the economy back to its bubble ways.
So far, neither Mr. Market nor the feds are getting all they want. But they're both getting something...
Generally, the private sector is de-leveraging...but in an odd, uncertain, hesitating kind of way. A report in yesterday's Financial Times tells us that the "rich" are cutting back their credit card debt. But the "poor" are actually increasing theirs.
Subprime borrowers have reduced their debts too – mostly by defaults, foreclosures and write-offs. They probably have been unable to pay down debt, for an obvious reason – they don't have any money.
We saw a report that all of the increase in consumer debt could be traced to the government's student loan program. The FT article made no mention of it. But it would be just like those wily feds – sneaking bottles of Jim Beam into the rehab center!
Prime borrowers, on the other hand, learned a lesson in the sharp crisis of '07-'09. They're still de-leveraging and drying out, no matter how much gin the feds put in the punch.
De-leveraging has put the real economy in a funk. Households struggle to make ends meet.
But the feds' easy money – zero interest rates, $1.8 trillion in deficit spending, QE1 & 2 – is boosting up prices of speculative assets and global auction-priced goods. They're having the first effect Mr. Bernanke wanted.
It's that secondary effect that must be causing some worry at the Fed. Instead of giving households a helping hand, lifting them up out of the icy water...inflation is forcing them under water!
Regards,
Bill Bonner,
for The Daily Reckoning
Wednesday, 30 March 2011
Posted by
Britannia Radio
at
08:56