 | | The Daily Reckoning | Wednesday, April 20, 2011 |
- The freest marketplace the planet has ever known vs...the state,
- One beaten-down industry lurking attractively close to the "buy" signal,
- Plus, Bill Bonner returns with tales from the ranch and much more...
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|  | | | The State is Falling | | ...And Other Reasons to be Optimistic | |  | | Joel Bowman |
Reporting from Leblon Beach, Rio de Janeiro...
It's true, Fellow Reckoner...the Empire has no clothes on. It's running out of (credible) money. And its outlook "just" turned negative. Even the wizards at S&P Ratings have said as much...so it MUST be so!
And yes, it's true that unemployment levels remain stubbornly rooted in economic reality...that home prices are still falling, even as sales are drying up...and that prices from the grocery store to the gas pump are on the rise, thanks, in large part, to arrogance and/or ignorance from the nation's central banking cartel.
It is true, too, that what was once seen as the freest, bravest nation in the world is fast succumbing to a toxic cocktail of prison-state policies at home and military strongmen attitudes abroad. In the end, such aggressive domestic and foreign policies are as expensive as they are futile...and, ultimately, fatal.
But let us not despair, Fellow Reckoner. Every coin has two sides. Perhaps the sugar in your editor's caipirinha has gone to his head...or maybe the stunning local fauna here on Brazil's hottest beach has temporarily impaired his judgment...but we are nevertheless inclined to believe that there is much in the world to be happy, and hopeful, about today.
Governments around the world are coming under increasing financial stress, yes. But this isn't necessarily a bad thing. In fact, it's inevitable, as every once-proud, now-fallen state throughout history shows us. To be sure, the times ahead certainly deserve a healthy dose of caution. But, for freedom lovers the world over, they also inspire cautious optimism. Permit us to explain...
Right now - as in today, this very moment, as we type - more people are working in and gravitating towards the freest marketplace that ever existed: the Internet. Hundreds of millions of people from Tehran to Tucuman, from Cairo to Columbus and beyond are trading, exchanging and working together without (or, at least, a long way ahead of) the overreaching arm of the state to regulate them into the ground. They are building new business models in everything from the exchange of everyday goods and services to raw information and, most importantly, ideas. You can now do things from your desktop - or laptop...or the palm of your hand! - that would have been unimaginable even 15 years ago. You can book hotels and flights, coordinate intercontinental conferences between like-minded individuals, sell (or buy) your (or another's) family heirlooms, download music, books and games, purchase theatre tickets, self-diagnose illnesses, trade stocks, bonds and precious metals, view independent financial research, even sit in on Ivy League economics courses (if you were reallydesperate for something to do...or just looking for a laugh). The list is infinite...and growing by the second. You can probably think of a hundred other applications right off the top of your head...
The Internet is also playing a crucial role in the battle against the state, against tax slavery and the old, antiquated notion that we are free only to the extent that we are "permitted" to be free. It is hardly surprising, then, that the Internet now "employs" more people than any other industry in the world. More people buy and sell on eBay, for instance, than work for the entire United States government. Facebook has a "population" of 664 million people - around 10% of the entire population of the world...and it's not even in China yet! - who are voluntarily organizing themselves into groups of common interest and exchanging information (however tedious such exchanges might sometimes seem: "OMG, just popped out to get a delish mocha latte!! Kisses!!!").
And, as you would expect in a free market, people tend to initiate and enter into exchanges with others based on conduct and on the reputation that derives from it. Witness Airbnb.com, a hub where individuals can host and rent accommodation all over the world. Simply type in a destination you would like to visit and cruise through the hundreds, sometimes thousands, of available spaces. Or post your own space for a bit of extra rental income. Often times, the decision to rent a room - or an apartment, penthouse, igloo, whatever... - comes down to "likes" or "digs" or the weight of recommendations posted by other users. Thus, both hosts and guests are impelled to treat each other with common courtesy and to make sure they deal in an honest fashion, lest they find doors closed in their faces or unlet rooms in their own house.
[Your editor and his girlfriend have enjoyed a wonderful apartment here in Leblon Beach, Rio de Janeiro, for the past ten days or so. We rented it from a young couple - she Colombian, he Swedish - who use the site to make some extra cash on the side. We could scarcely have met nicer people and the place - clean, quiet, exactly what we were looking for - was about half the price of nearby hotels.]
To those who would scoff at the triviality of social media or the pie- in-the-sky promises and possibilities of the Internet, we would remind you that we are in the very early stages of development here. Yes, there are many "teething" problems. This is first generation stuff, after all; the Internet's equivalent of a crude feudalism. And yet, next to the decidedly sub-evolved, freedom-averse, dead weight of "the state," it looks pretty darn good.
It is important to remember that freedom is an idea, not a point on a map. As such, no single place can ever hope (nor should it) to contain freedom. The moment the state - any state - even attempts to impose restrictions on it, freedom - and those who value it - begin moving elsewhere...naturally.
Capital, as Chris Mayer explains in the essay below, is similarly nomadic, ever marching from over-priced assets to cheap, beaten down opportunities. It moves where it is treated best, in other words, where value is deep and plentiful. The cure for low prices, as they say, is low prices. Today, Chris shares his thoughts on one sector presenting such an opportunity. Enjoy...
[P.S. Your editor receives no compensation for mentioning the Airbnb website, above. We just had a fun time here in Rio and a good experience with the site...so we thought we'd pass it along...voluntarily. Feel free to check it out next time you're on the move...or not.]
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| | The Daily Reckoning Presents | | Is There Any Hope for Shipping? | |  | | Chris Mayer |
"Many shall be restored that now are fallen and many shall fall that now are in honor." This quotation from the Roman poet Horace is spot on in describing the ebb and flow of markets. No wonder it appears as an introduction to Security Analysis, that investing classic by Ben Graham and David Dodd.
In short, the wheels of finance never stop turning and no asset stays on the top, or the bottom, of the heap forever. The latter is certainly a cheerful message for the beleaguered shipping industry.
Shipping has been a Waterloo for many an investor in recent years, but in the spirit of Horace, let's see if the fallen shall soon find honor.
It would be hard to find a group of stocks more battered than the lot of dry bulk shippers, which mainly haul iron ore, coal and grain. The stock of DryShips, an industry bellwether, is down 95% from its 2007 peak. This reflects the decimation in shipping rates.
The irony is that even though iron ore and coal are booming and food worries are front-page news, shipping rates are where they were during the pit of the financial crisis. The Baltic Dry Index is already down 40% this year!
The reason is simply that there are too many ships. In fact, new rates on so-called capesize vessels are below the costs to run the ships. Yet pathetically, new ships continue to hit the market. Last year was the biggest year of new ship deliveries in history. This year should see another slug of additions, expanding the world fleet by 15%!
Talk about a horrible industry... yet it won't always be this bad. It can't be. Unfortunately, as accurate as Horace's sentiment is, he says nothing about timing.
Still, the forces of capitalism, like microbial organisms that break down dead carcasses, are beginning to work on the shipping business. Owners of vessels are starting to scrap their ships. In some cases, the ships are worth more as scrap steel than as ships.
For instance, a typical owner of a capesize vessel can pay $25,000 a day to keep his ship running...or he can scrap it and collect $10 million. What would you do? Exactly. And that's what shipowners are doing in record numbers. In fact, they are scrapping ships at the highest rate in 28 years.
Some shippers are going out of business completely. South Korea's second largest operator of dry bulk ships finally called it quits after losing money in six of the last seven quarters.
So it's bad, which means ships are cheap.
A friend and reader works in a private equity firm. He told me he has begun to play in this space. "Typically, the value of ships falls $1 million for every $1,000 decline in the day rate, so boats are cyclically cheap right now," he says. "The play is to buy ships today, charter them out for three-five years through the soft market and flip them when it turns." The day rate, or spot rate, is what you can get for a ship today. Charter rates are negotiated longer-term contracts.
My friend's is a contrarian position and he knows it. "We're looking at buying some vessels with a group that did this successfully in the last cycle." They all know there may be more weakness to come but believe now is a good time to accumulate ships. They will not always be so cheap.
"The challenge is managing the mix of charter and spot contracts to get you through the downturn safely but with enough flexibility to capture the upside when things turn," our man on the spot continues. "The contracts can get you a decent yield, but the real return will come from flipping the ships when values recover." He adds the consensus sees little upside, but "there could be big money in taking the opposite view."
There often is.
The dry bulk trade isn't going away.
All those big emerging markets need iron ore, coal and grain. The main sea lanes are to China, which makes up a third of the dry bulk trade. Japan is the largest importer of coal. And grain moves from the US and Brazil to the markets of the Middle East and Asia. None of these trends look like they will end anytime soon.
The industry just has to work through its huge backlog of ships, which scrapping ships, bankruptcy and no new ships should do. It will take time yet, but it will definitely happen, as Horace well knew.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel's Note: We like what Chris has to say at least as much as we like the way he says it. In today's opening essay, we mentioned the importance of reputations in free markets. The Internet publishing industry is no different.
As it so happens, Chris enjoys one of the lowest cancellation rates - and the highest renewal rates - of all the investment newsletters we publish. That's a reputation you don't build unless customers are happy. Period.
Right now, we're offering a full year to Chris' premium service, Mayer's Special Situations, for the price you'd regularly pay for 9 months. In other words, we cover your first quarter while you decide if you like it. If not, grab your refund and we'll part friends. Sound fair? See how right here.
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| | | | Bill Bonner | | The Best Way to Deal With Squatters | |  | | Bill Bonner |
Reckoning from Gualfin, Argentina...
We have just returned from the ranch. We'll give you a brief resume of our visit. There is not much of financial interest in it...unless you are interested in how to not make money in cattle ranching and wine growing. But life isn't all about making money. And if these Daily Reckonings had stuck to economics and investments, over the last 11 years, your editor would have gone mad years ago.
"You have to understand," began our lawyer in Salta. "This is a political problem. It's not a legal problem. You have all the rights on your side. But you don't have all the politics on your side."
Our man was explaining how to deal with the problem of squatters. There are 20 or so families who live on our land. Most of them have been there for generations. They have no title to the land they live on, but by custom, recognized by law, they are allowed to continue raising their goats, cattle and sheep on thousands of acres of mountain wilderness.
There are only two requirements. First, they must pay us a token number of animals in "rent." These animals are largely unsaleable. So we usually don't bother to collect them. But without the gesture of payment, the people become squatters. And if they are allowed to squat for 20 years, they become legal owners of the property.
Second, they must respect the mutual agreements regarding water and grazing rights that have governed this area for hundreds of years. Beginning in the month of August, for example, they are only allowed to use water one day out of four. Water is scarce in the winter and spring. It must be allocated fairly.
"Whatever you do, don't try to throw them off your land - even if they don't pay. I have a client - a rich guy from Buenos Aires. He was in a similar situation. When some of his people wouldn't pay - you know, they get stirred up by the idea of "indigenous rights" - he took them to court. Of course, he won. But that was just the beginning. One of the leftist political parties got wind of the story. They decided to make a big deal of it. They printed a newspaper that told the story about how he threw poor women and children off his land and then burned down their houses. It was mostly lies. But it was useful politically for them. They even got Christina Kirschner to make a visit so she could be seen protecting poor people from wicked landowners.
"In the end, they caused so much trouble for him that he couldn't stand it. He had to pay off everyone - the politicians, the poor people...the lawyers. It ended up costing him a fortune.
"So don't think about trying to get rid of the people who aren't paying. Instead, just make sure you hold them to the terms of the their deals with the other families up there. As long as they're respecting the rules for using water and grazing their animals on the right land, don't worry about the rent. It isn't important anyway. Just try to get along with them."
That seemed like good advice. Besides, the economics of the situation are on our side. Or they're against us, depending on the way you look at it. Life up in the mountains is so hard...so unforgiving...so unprofitable that the next generation of squatters doesn't seem to want to stay here anyway.
Of course, the same could be said for the ranch itself. It is not profitable. From what we can tell, it will never be profitable.
Here are the basic numbers. We have 500 cows spread over thousands of hectares. It is high, cold and dry. We're lucky if 50% of the cows have calves each year...many of which do not survive. And then, when they go to the market, the young animals are thin - only 120 kilograms. This gives us a total income of about $30,000, with which we need to pay a staff of 6 gauchos, along with gasoline, tools, taxes, and all the other expenses of running a working ranch.
Why do we bother? Why don't we leave...along with the squatters? We're not sure...
Driving down to the ranch from Salta, we found the land greener than we'd ever seen it. After three years of drought, this year it rained.
"We got 250 millimeters of rain this year," Jorge reported. "About 4 times as much as last year."
The hills were green. The mountains were green. Cachi, the big mountain we see up the valley, was white, covered with snow. Even the desert floor itself was green.
"It's so beautiful...so spectacular," said Elizabeth as we drove up the valley. But the same water that turned everything green also made it difficult to arrive. We could not cross the river at the usual ford. We had to drive an additional half hour. Then, arriving at the farm, where there was usually a dry riverbed, we found another river. Could we get across? We didn't know. But there was a track leading into the water and coming out on the other side. We put the truck in 4-wheel drive and plunged in. It took us to the other side without too much trouble.
Everybody at the ranch seemed happy. Jorge had a big smile. Maria seemed relaxed. All the gauchos too - Nathalio, Javier, Pedro, Norberto, Gustavo and Jasimiro - all seemed to be in good spirits.
At first, we attributed this era of good feelings to the backhoe. Then, we realized; it was just the rain.
"Oh, it is a great tool," said Jorge of the backhoe. "We can do things we never could do before. We've been able to clear out many of the rocks from the fields. And we've been able to put in a water pipe so the cattle out in the field won't have to walk all the way down to the river."
To give you an idea of the scale of these infrastructure improvements, the water line is 5 kilometers long. It takes water from a spring in the mountains and feeds it to the middle of the high pasture.
"Wow... You did all that with the backhoe?" We were impressed.
"No... We just cleared the track with the backhoe. We dug the trench by hand. We wanted to save the backhoe for other things."
Sunday was a special day in the religious calendar. Palm Sunday. We celebrated it at the little church on the ranch with a priest who drove up from a town down in the valley. We are not exactly True Believers. But we never miss a good show, especially when it offers the hope of everlasting life. To tell you the truth, we'd probably settle for twenty years or so more. But if eternity is on offer, who are we to refuse it?
Arriving at the church at the appointed hour, our "palms" in hand...we found no one there, except Maria, who explained that the padre had been held up by the river.
When he finally arrived so did dozens of local people...women and children mostly. We said hello to everyone and introduced ourselves to the priest. He was a replacement padre, while the usual man was in Rome on a special training mission.
"Where do you come from?" he wanted to know.
We explained that we were a family from the Irish diaspora currently living in the USA.
He seemed to be a likeable fellow...warm and agreeable. He gathered the worshippers at the front door and proceeded to give them a remarkable discourse.
In a nutshell, Jesus entered Jerusalem, his path strewn with palm fronds, in the traditional manner of welcoming a king. He must have known it was a set up. But he went along with the prophecy of Isaiah anyway, entering the town on a burro.
But then came the remarkable part...
"And here you have a family of Irish people as owners of the ranch. You are very lucky, because the Irish are very religious. Very good Catholics.
"So you can follow their example. They set a good example for you. Obey them. When they tell you to work, you should work. And help make this cattle ranch a great success."
"Where did he come from?" Edward whispered.
We found out later. Franco's Spain! He had left Spain in 1970 and had been in the valley ever since.
Perhaps we should have set him straight. We are not really Catholics; we're Episcopalians. And we're not really Irish either.
But then...who cares? This isn't really a cattle ranch either...
More to come...
Regards,
Bill Bonner
for The Daily Reckoning |
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