International Investing

China was once the largest economic superpower in the world. This excerpt from The Malay Archipelago by Alfred Russel Wallace could have been written last week:

In the Chinese bazar are hundreds of small shops in which a miscellaneous collection of hardware and dry goods are to be found and where many things are sold wonderfully cheap You may buy gimlets at a penny each white cotton thread at four balls for a half penny and penknives corkscrews gunpowder writing paper and many other articles as cheap or cheaper than you can purchase them in England The shopkeeper is very good natured he will show you every thing he has and does not seem to mind if you buy nothing

From the Daily Reckoning:

“On the household front, millions of homeowners haven’t even finished paying their heating bills from last winter, and over six million Americans asked for energy assistance funds so their power wouldn’t be shut off. (In California alone, 1.7 million households are behind on their utility payments.)

“Signs of the stretched consumer include the following stunning facts:

- Home equity loans have a seven percent delinquency;
- Subprime mortgages, past due over 60 days, are pushing 14 percent;
- Over one million homes are in foreclosure and three million more are empty, and up for sale;
- Ten million homes have mortgage balances greater than their value. (No wonder some homeowners are walking away from them);
- In the auto market, 25 percent of all car loans are higher than the car is worth. (The average balance these cars are underwater for is $4,300!)

“Jobs are also falling off a cliff. If it hadn’t been for the Birth Death computer model at the BLS creating service jobs out of thin air, the payroll data would have shown over 280,000 people actually lost their jobs in April. Currently, 2.7 million workers have exhausted their unemployment benefits, and with no job prospects or income, hello collector!”

From the WSJ, showing scary near-term projections:

Like every other investment, this one is probably over prices and won’t beat the index in the long run. But so what? Even if it’s value goes to zero, you can still drink it:

Most wines around the world go on sale only after they are bottled. But in Bordeaux the process starts far earlier. International demand for the biggest and best-known names is huge, and growing. That’s especially true for the five so-called first-growth Bordeaux wines - chateaus Lafite, Mouton Rothschild, Latour, Margaux, and Haut-Brion - but several dozen other labels also are increasingly sought after.

“Everyone wants to be on the market,” says Patrick Maroteaux, the owner of Château Branaire-Ducru, who also heads the industry association that organizes tasting week.

Since the quantities of wine made are limited, prices can and do shoot up. After setting a price per bottle, the chateaus sell as much as 90% of that year’s product to the market makers in Bordeaux, starting in mid-May.

The new leader is going to make some tough political choices. Very likely this will cause the currency to strengthen. Bloomberg has the details:

Merrill Lynch & Co., Goldman Sachs Group Inc. and Deutsche Bank AG predict gains of as much as 4 percent in the next six months. They say pressure will mount on the central bank to let the ruble appreciate to stem inflation even if it risks damping profits of oil and energy exporters, which according to Merrill Lynch fund more than half of the federal budget.

The last time Bank Rossii, which must submit proposed changes in monetary policy to the government, allowed the ruble to strengthen was in August, when the inflation rate was 8.5 percent. It’s now 13.3 percent, five times the average of the Group of Seven industrialized nations. Two interest-rate increases this year failed to restrain consumer prices, and Russia “isn’t ruling out'’ letting the ruble gain, Bank Rossii Deputy Chairman Alexei Ulyukayev said April 24.

“Ruble appreciation will continue to be a key anti- inflation tool given the limited domestic monetary instruments the central bank has at its disposal,'’ said Ramin Toloui, a senior vice president at Newport Beach, California-based Pacific Investment Management Co., which manages more than $800 billion. “That favors continued ruble appreciation.'’

In From Dawn to Decadence Jacques Barzun noted that, “A decadent culture offers opportunities chiefly to the satirist.”  Maybe so, but these days it is nearly impossible to distinguish satire from fact:

The Federal Reserve, along with other central banks, said Friday that it was increasing the funding it is providing to banks and announced that, for the first time, it was willing to accept bonds backed by auto loans and credit cards. 

Remember all the criticism Enron took over doing just this (after getting permission from the SEC by the way)? Now the Bank of England is encouraging it:

While market-based estimates and the write-downs announced by firms may be unduly pessimistic, if such concerns persist there is a risk they could become self-fulfilling.

[…]

In that environment, firms may find that previous mark-to-market loss estimates have been overstated and some writebacks of reported losses may occur.

So instead of marking-to-market, you can just mark to anything you feel like…

This excerpt is from Charles Darwin’s The Journey of the Beagle, published in 1839. As you can see from this passage he recognized the role of property rights in the ascent of man above a substinance living:

Whether we look at it as a cause or a consequence, the more civilized always have the most artificial governments.  For instance, the inhabitants of Otaheite, who, when first discovered, were governed by hereditary kings, had arrived at a far higher grade than another branch of the same people, the New Zealanders, — who, although benefited by being compelled to turn their attention to agriculture, were republicans in the most absolute sense.  In Tierra del Fuego, until some chief shall arise with power sufficient to secure any acquired advantage, such as the domesticated animals, it seems scarcely possible that the political state of the country can be improved.  At present, even a piece of cloth given to one is torn into shreds and distributed; and no one individual becomes richer than another.  On the other hand, it is difficult to understand how a chief can arise till there is property of some sort by which he might manifest his superiority and increase his power.  

From today’s WSJ. I keep searching for the punchline but it appears to be real:

Federal Deposit Insurance Corp. Chairman Sheila Bair is finalizing a legislative proposal that would allow the Treasury Department to make direct loans for close to one million homeowners in the latest government initiative to stabilize the slumping mortgage market.
…

For loans to qualify, mortgage investors would “pay Treasury’s financing costs and agree to concessions on the underlying mortgage to achieve an affordable payment.”

To modify one million loans, the FDIC estimated it would require a $50 billion public debt offering. Treasury would recoup the costs because it would have the first priority to recover funds if homes are sold, refinanced, or if the borrower goes into default.

So the State plans to modifying private contracts to appease the chattering classes.  If contacts can be changed by bureaucratic whim, what good are they? If this goes through count on the cost of a mortgage to go up to compensate the banks for the risk of more state control.

And another tax payer funded bailout. It’s like these politicos have the memory of a goldfish…

A case in point about the incompetence of state control. According to this story, during a period of record high oil prices, the Mexican national oil company is actually LOSING money:

Mexico’s Cantarell oil field — discovered in 1976 and one of the world’s largest — is drying up. Pemex reported a 2007 net loss of US$1.48 billion (euro98 billion) this week, as its revenues are drained to fund schools, hospitals and public works. Meanwhile, every other major oil company is reinvesting unprecedented profits in oil exploration.

Mexico could lose its standing as a major oil exporter in five years if it does not find more oil, experts say.

And yet the fact that the company is state owned is celebrated in Mexico!

The sentiment dates back to March 18, 1938, when President Lazaro Cardenas kicked out the American and European oil companies that refused to pay union wage demands while reaping Mexico’s oil profits.

Every year on that day, school children learn about the bold eviction of foreign companies, especially those from the United States, whose annexation of half of Mexico’s territory after the 1846 Mexican-American War still hurts.

Women offered their jewelry to help pay to establish the national oil company. Arriola says her grandparents gave their chickens and pigs, and she is hell bent on protecting the company 70 years later.

Put these bureaucrats in charge of a desert and in short order there would be a shortage of sand…