The Markets
I've spelled out my Big Picture reasons for being a Permabear any number of
times, most recently in August (Vol. 17, No. 10). Less philosophical reasons
are to be found here every quarter in the Open Positions section, where
anyone with even a mild sense of history can see that if the market were
just to fall back to average historical levels we'd be looking at a 50%
meltdown. I'm not even talking about the kind of P/E ratios, price/book
value ratios, and dividend yields you see during bear markets-that would be
truly ugly; I'm just talking about a return to the mean.
Very few seem to care, however. I've seen a number of polls taken
indicating the average investor (which means the average person today, since
everyone except, possibly, homeless people has at least two mutual funds)
thinks he's going to get an average of 15%, or 20%, or even 30% per year
compounded in the market over the next decade. I think they may get numbers
like that all right, but they'll have a minus sign in front of them.
it's well known how, when the market gets completely out of control, pundits
start talking about a "New Era," in which old parameters of value no longer
apply. Of course that's exactly what's happening today. A column in the Wall
Street Journal early this year talked about how the business cycle has
finally been abolished due to the instant communication and "just in time"
inventory controls made possible through the computer. The main things the
article taught me were 1) the journalist writing it knew almost nothing
about what actually causes business cycles (they're primarily creatures of
excess credit creation), and 2) people think that not only will the market
never turn, but neither will the economy.
POST MORTEM 9/1/00
It pays to take seriously the old Wall Street saw "There's no telling how
tall a tree can grow." And I admit failure to see how large the current
bubble would expand.
A Country, Not a War
In many ways Vietnam resembles a larger and somewhat improved version of
Cuba (127,000 sq. mi, about the size of Nevada, with roughly 80 million
people). The authorities still use quaint Marxist-Leninist jargon about the
"masses," the "cadres," the "workers and peasants," etc., etc., but I can't
believe the average person pays any attention to it.
The figures show the Vietnamese economy growing by nearly double digits
since doi moi, or economic reform, was initiated in 1990. I suspect they're
accurate. Saigon and Hanoi have lots of restaurants, motorbikes, and art
galleries; a decade ago there were none. Indeed, in the eighties, most
people had only a single change of clothing. Every household in the cities,
and most villages in the boonies, now have TVs. People now know how well the
rest of the world lives, and they don't want to miss out on a good thing
just because some aging politicians are attached to a pathological ideology.
Indeed, one of the more encouraging signs of the times here is how little
known the ruling cadres are, either in country or abroad. Political
solidarity and class consciousness are history; I got plenty of indication
that people don't use the banks not just because they don't trust their
solvency, but because they don't want the State to know how well they might
be doing.
Of course this can be said of every country on the planet, but the
Vietnamese are making big progress in spite of their government, and its
schizophrenic policies. The government wants the hard currency tourists
bring, but they make getting a visa harder than actually traveling to the
place. The government wants economic progress, but insists on retaining
control of "key" sectors (e.g., steel, transport, communications, heavy
industry) of the economy, all of which are making big losses; the
telephones, for instance, are simultaneously the world's worst and most
expensive. And there's not likely to be much domestic market for all the car
companies building plants here until the government does something about its
insane 200% tariffs; few people can yet afford a 50cc motorbike. They want
the country to modernize, but they make it a bureaucratic nightmare for
foreigners to invest.
Corruption is, therefore, a major plus in Vietnam.
The benefits of corruption
In any socialist economy, corruption is as endemic as bureaucracy. Indeed,
corruption is a very good thing whenever it occurs in socialistic economies,
because it actually enables something to happen. Why, after all, should a
bureaucrat take the risk involved in signing a paper, granting a permission,
or whatever, when he has absolutely nothing to gain, but a lot to lose if
something goes wrong? A bribe, which is the most common form of
"corruption," gives the functionnaire an incentive to take the risk. This is
why U.S. laws such as the 1977 Foreign Corrupt Practices Act, making the
bribing of foreign officials illegal, are very ill-advised, and have served
only to hobble U.S. companies overseas. The U.S. has now succeeded in
pushing this foolishness onto the 29 OECD countries; the net result may well
be less bribery, but also less economic activity, because bureaucrats will,
quite reasonably, delay and dally rather than risk their careers by forging
ahead. The solution to corruption is to abolish all forms of government
intervention, and the resulting bureaucracy which makes bribery necessary.
Legislating against bribery is to seek a cosmetic solution to a symptom, and
doesn't attack the problem itself.
I mention this because of a shocking encounter I had with the Vietnamese
counsel in Jakarta. I needed another visa to return to Saigon on a Monday,
and had only a morning to get it. To ensure I didn't experience a delay
which might cause me to miss my plane, I offered to pay a "fee" for speedy
service. Even though only the two of us were present, the counsel said that
wasn't the problem, and proceeded by the book. As it turned out, I got it
just barely in time to rush to the airport. I'm still wondering who that guy
really was, because a more typical encounter was one a friend who was with
me had. Upon arriving in Jakarta, the Indonesian immigration official noted
that his passport was within six months of expiry--a no-no under some silly
law. The problem was quickly solved with the transfer of a C-note discretely
tucked into the appropriate page of the document, and a mutual exchange of
thanks. My friend was, in fact, damn lucky he'd encountered a typically
corrupt official--or he would have been put on the next plane to
god-knows-where.
A fairly backward place
China and Thailand, for instance, can be described as gigantic shopping
centers under construction. Vietnam hasn't even made plans to dig the
foundation. Hanoi must look just as it did 30 years ago, and this is almost
as true of Saigon; the only exceptions are a few new business hotels going
up. The difference is that Saigon has always been (relatively) more
bustling, vibrant, and commercial; Hanoi is staid, conservative, and
political. It's the same dichotomy you get in varying degrees between
Shanghai and Beijing; Rio and Brazilia; Toronto and Ottawa; New York and
Washington, or cities in any of a dozen other countries where business is
centered in one place, and government in another. The first evidence of this
culture clash that strikes you in Vietnam is probably the traffic, which in
Hanoi is about 70% bicycles, with some motocyclettes, and a very few
vehicles; in Saigon, there are relatively few bicycles, but lots of cars and
motos. That pretty well describes the difference between the two cities in
almost all ways. Needless to say, I prefer Saigon.
But that's not to say Saigon has a lot to recommend it. You can get a nice
snake skin belt for $15; pure silver handicrafts selling for only a few
percent above bullion; and a good meal costs maybe $10. But there's not
really a lot to do. Even in the few bars there were no bar girls, certainly
a far cry from the city's fabled fleshpot days of the 60's and 70's.
And Saigon is a different world from Vietnam itself, which is almost
entirely rural, as in water buffaloes and wooden plows. As everywhere in the
Third World, people are pouring into the cities, where they live in shacks
made of cardboard and corrugated tin. But it beats working 14 hour days to
scrape a living out of an acre of paddy (which is the family average) and
going home to a straw hooch with no electricity or running water. At least
in the cities the opportunity exists to join the middle class, and get a
room in a building put up by the French before WWII. That's the highest
reasonable ambition at the moment because, except for hotels catering to
foreigners, there is no new construction in Vietnam. When peasants come in
from the provinces, the far wealthier and more sophisticated city dwellers
pay them perhaps 20,000 Dong (the equivalent of about $2) a day, for menial
labor. The immigrants spend $.15 a day for a place to sleep, maybe $.60 a
day for food, and send home $10-20 a month, which is really a fortune in the
countryside. And you think you've got financial worries.
Nanocap investing
I fear I can't regale you with any real business opportunities in Vietnam.
Often I make a habit of opening up the Yellow Pages in a city and calling
lawyers and real estate people to get a grip on the local situation. In
Third World countries, those occupations will generally see any foreigner on
a moments notice, because he might be rich. And the lawyers and brokers are
always centers of influence. A number of times in the past I've landed in a
city knowing no one, intending to stay 24 hours, and wound up staying over a
week, going to parties and meeting everyone worth knowing. That's not what I
did this trip in Hanoi, Saigon, Bangkok, or Jakarta, although I did in
Vientiane. That was really off the beaten path, with more opportunities; but
that's for another day.
How do you invest in Vietnam? The closed end Templeton Vietnam
Opportunities Fund (TVF, $8.37) is the only practical liquid way. But the
only way they, in turn, can invest is by taking direct positions in what
remain essentially state-owned businesses, and hoping things work out.
Investing here at the moment amounts to entering a lobster trap, or a roach
motel; once you get in, there's no assured way to get out. Templeton's other
alternative is to invest in publicly traded foreign companies that are
making direct investments in Vietnam. I have not, as yet, looked at one of
their quarterlies to see exactly what they're up to.
There has been talk of a stock exchange in Saigon for several years; it's
inevitable it will happen. But the government is moving with all the speed
of a postal clerk. Only about a dozen of its 7,000 parastatal companies have
been "equitized," which is to say the workers can buy perhaps 25-35% of the
shares, and the public can buy about the same, but the government retains
control. And although people can sell, there's no organized market.
This does present potential, however, because very few can gauge what these
companies are worth. Predictably, the infusion of capital, and the
incentives offered workers through ownership are having good results. The
largest of the dozen equitized companies, Refrigeration Electrical
Engineering, is paying a 24% dividend on its 1993 purchase price of $9.50.
The gray market in the shares is now supposed to be about $25 with earnings
for 1996 of $9.70 (a P/E of about 2.3-1), and projected earnings this year
of $16, for a P/E of 1.4. The company has 160,000 shares out. The others
aren't micro caps, but nano caps. Over half of the remaining 7,000 State
companies have capital of less than $100,000.
New markets in countries as poor and unsophisticated as Vietnam typically
yield values like that, and they're completely unlinked from what happens in
New York. In today's world, an investment in a country like this, while it's
still small and poor, will almost certainly grow tremendously. And prices
will gravitate to the international mean. I've pointed this out in other
countries, like Ghana, Zimbabwe, Burma, and Zambia. It's a predictable
pattern. If you have a bright kid or grandchild who wants to make a fortune
in an exotic country, ship them off to one of these countries. The
opportunity is there.
Vietnam is still backward and isolated enough that it may not get hurt much
from a continued meltdown in Southeast Asia and the rest of the world.
Investment will dry up, development will slow drastically. But there's been
(relatively) so little new investment here that there's also been little
opportunity for malinvestment. I have no doubt this country will develop,
notwithstanding the government. But I don't think there's any particular
hurry, at the moment,
That said, several things stand out in my mind.
Art
I visit galleries wherever I go, and tend to buy a lot of art, if I like
it; there are unknowns with the talent of Picasso out there. Vietnam seems
to have more painters per capita than any other place I can think of; part
of it must be the lingering French influence, which also shows up in the
food. This may be the best place in the world to buy quality original art at
real world prices; competition brings talent to the fore, and keeps prices
down for quality work. To my way of thinking a lot of the "art" we have in
U.S. galleries is more a product of clever promotion than real ability. I'm
surprised the large Vietnamese-American community hasn't (at least to my
knowledge) arbitraged the situation. If you're an art dealer, you might find
a trip here rewarding. Especially if you have a bent for surreal and
abstract works, as do I.
A suggestion. Whenever you're in a city you want to get to know, make a
point of systematically visiting all the art galleries or antique stores, or
clothing boutiques, or whatever it is that you know something about. It
ensures you see parts of town and meet people that are off the tourist
track, even while it greatly increases your knowledge of that area.
Traffic
I fancy myself something of a connoisseur of Third World traffic, but must
say I was completely overawed by this country. It's not just that red lights
act only as advisories, but the magical way traffic starts flowing as soon
as there's any weakness in the cross traffic; it is completely Zen-like, and
I've never seen anything like it. The country sustains about 6000 traffic
deaths per year, almost all near Saigon or Hanoi. Quite a toll for an
aggregate of 7 million people in those two cities, and astonishing for a
total of 150,000 vehicles, including trucks, in the whole country. But the
countryside coming into the city was something else again. At one point I
remarked to the others with me coming back from the property on how strange
it was we hadn't yet seen some real mayhem, the traffic was so incredibly
chaotic. Unfortunately, not five minutes later we passed the recently
mangled remains of a merchant's tricycle, fresh blood everywhere, crying
relatives, and a just-covered body. Believe me, you don't want to be in an
accident in the Third World, because I've seen plenty, and they're uniformly
ugly; but the odds in Vietnam are truly intimidating. Everyone drives like a
16-year-old kid who's just been given the keys to a Corvette, a bottle of
Jim Beam, and instructions to have a good time.
That, however, is in and around the cities. In the countryside there are so
few vehicles that farmers use the roadway as a convenient platform for
drying grain. That might change. Fourteen auto companies currently have
built or are planing to build auto plants here with a total annual capacity
of 180,000 units, almost all for export.
The war
In one of the two next issues I'll have an essay about the direction
military technology is going, how that relates to U.S. government policy,
and how that relates to what's likely to happen to the U.S. Or in it. I'll
leave a discussion of the Vietnam War for then. I think it's still a real
factor regarding What's likely to happen to the markets.
The Vietnamese have a funny saying of fairly recent manufacture: "Vietnam is
a country, not a war." That didn't keep me from visiting the famous War
Remnants Museum in Saigon. Plenty of propaganda, but it was pretty touching
nonetheless. There's no doubt there were plenty of atrocities like My Lai,
large and small. That's not an indictment of American soldiers; if the
Vietnamese had sent an army to America, with whatever good intentions, the
same thing would surely have happened.
Despite the fact the War Museum is an obligatory stop for any foreigner,
there were very few visitors; testimony, I think to the fact there are still
so few visitors to the country. In fact, I saw very few other Europeans in
Vietnam. But they must be hiding somewhere, because the English language
Vietnam Courier is easily available.
Surprisingly, I encountered no hostility or resentment at all, from anyone.
Maybe that's because a whole generation has grown up since 1975, when the
war ended. Maybe it's because if the Vietnamese resented people that invaded
their country they could hardly talk to anybody.
There's a lot to be said about the U.S.-Vietnam War, but one thing that
struck me is what an embarrassment it is to have the richest country in the
world drop nearly 8 million tons of bombs and 20 million gallons of
defoliant, while deploying over 500,000 men at a time, in a country like
this. Even today, a generation later, the place is so poor it's hard for the
average American to comprehend.
POST MORTEM 9/1/00
I haven't been back to Vietnam since then, but have no reason to believe
anything much has changed.
INDONESIA
Some background
We drove about 4 hours from Jakarta to the property, in far western Java. I'm not
going into all the relevant details about Indonesia here; you may
already feel overdosed on Vietnam, and have probably picked up plenty by
osmosis from the Bre-X scandal. Java is one of the world's most densely
populated regions, with 91 million people living in an area the size of
Arkansas. But you'd never know it once you leave Jakarta, a gigantic city of
10 million, daily spreading further into what's left of the jungle, with
giant office and apartment towers growing out of empty rice paddies. Where
is the money coming from? My guess is there are going to be a lot of
bankrupt bankers the next few years.
One cultural difference, in particular, struck me between Indonesia and
Vietnam. In Vietnam there were motorcycle and bicycle repair shops
absolutely everywhere; there were none to speak of in Indonesia. That's the
type of thing that makes me much more interested in Vietnam as a long-term
proposition. I like places where people have a knack for dealing with the
nitty gritty of the material world. The cultural climate in Indonesia is
more laid back, less driven, running more on island time. Part of it may be
due to the Muslim influence (Inshallah-everything is God's will), whereas
Vietnam is a warrior nation, acculturated to the Confucian work ethic. There
does seem to be little or none of the hard-line Islamic fundamentalism that's so
problematical elsewhere.
It's not easy to generalize about Indonesia, however, in that the country
is comprised of over 13,000 islands, and each has its own culture; to this
day there are violent encounters between the army and the locals in places
like East Timor and Kalimantan. Indonesia has been accurately described as
the Javanese Empire, and the whole country certainly turns on Jakarta. Most
visitors never think about it, since there's little reason for them to get
out of Java, unless it's just to Bali, which is the next island to the east,
an anomaly in that it has a Hindu population. Indonesia does have some
interesting historical quirks, among them serving as the origin of the
phrase "run amok." The most recent example of that phenomenon was in the
60's, when Suharto took over from Sukarno, and something like 500,000 people
got killed. It might be something in the water.
POST MORTEM 9/1/00
It turned out I was right about the bankrupt bankers. And the devolution of
Indonesia into at least a dozen different countries is continuing apace.
*************************
Last month I called four of the world's best known billionaires (Turner,
Perot, Buffet, and Soros) idiot savants. To buttress that opinion I have
some choice words from Soros delivered in an October speech in Hong Kong.
George is probably the least objectionable of these characters, which is a
sad testimony based on the following. Quoth Soros:
"I am at loggerheads with the laissez-faire ideology that contends that
free markets are self sustaining, and market excesses will correct
themselves. The benefits of global capitalism are unevenly distributed.
Capital is in a much better position because it is much more mobile than
labor. And financial capital is better situated than industrial capital
because once a plant has been built, it is difficult to move it.
I am fully convinced that the present global capitalist system can be
sustained only by deliberate and persistent efforts to correct and confine
its deficiencies."
Everything he says is both original or true. Unfortunately, the parts which
are true are unoriginal, and the parts which are original are untrue. The
true parts, regarding the relative mobility of capital in general, and
financial capital in particular, were first pointed out by Marx, close to
150 years ago.
**********************
I've made a number of passing references over the years to the American
War Between the States making such outrageous assertions as, among others:
the South had every right, legal and moral, to secede; slavery was about to
become a dead duck anyway; and Lincoln was certainly the most disastrous
president this country has ever had, even though he's been apothesized by
both statist historians and a thoughtless public as the best. Now, finally,
there's a book which makes the case for these and many other controversial
points in a scholarly yet very readable style: my friend Jeffrey Rogers
Hummel's Emancipating Slaves, Enslaving Free Men: A History of the American
Civil War. (order from your bookstore, or send $20 for the softcover, $30
for the hardcover, to Box 11154, Piedmont, CA 94611, or call 510-835-0319).
The events surrounding the 1861-1865 period are among the most seminal and
misunderstood in American history. I urge you to read this book, and make
sure a copy gets into the hands of any high school or college students you
know.
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