Mutiny on the Hill

The Daily Reckoning – Weekend Edition
March 11-12, 2006
Baltimore, Maryland
by Kate Incontrera

Kate’s Note: You may have noticed that the title of the weekend edition has changed from "Market View" to "Views From The Fuse." No, "The Fuse" is not my WWF name, and yes, there is a story that goes along with the name change.

VIEWS FROM THE FUSE: MUTINY ON THE HILL

In August of 2005, the Chinese National Overseas Oil Company (CNOOC), attempted to purchase California-based Unocal Corp., but withdrew their bid at the last minute, citing "regrettable and unjustified" political opposition by the United States.

On the CNOOC situation, Whiskey and Gunpowder’s Byron King said, "At root, by offering to buy Unocal, CNOOC is holding a mirror to the face of the modern American economy, and a lot of people do not like the reflection that is staring back at them.

"It is the face of an economy in decline. It is the image of an economic system that is focused almost entirely on moving money and shuffling paper. It is the embodiment of a political system that promotes image over substance, in a manner reminiscent of that famous architect Albert Speer. It is reflective of a nation that has abandoned its past, and has all but forgotten the underlying need to make or build something that other people in this world want to buy."

Hmmm…sound familiar? This past Thursday, after weeks of debate, picketing, and media frenzy, Dubai Ports World abandoned its plans to manage five U.S. ports. "Because of the strong relationship between the United Arab Emirates and the United States and to preserve that relationship," said a statement release by Dubai Ports World CEO Edward H. Bilkey, "DP World has decided to transfer fully the U.S. operation of P&O Operations North America to a United States entity."

President Bush had been promising to veto any legislation that blocked the ports deal – but Wednesday an amendment was attached to a $91 billion supplemental spending bill for the war in Iraq and hurricane relief that would have blocked the use of any federal funds to implement the ports deal. The House Appropriations Committee voted 62-2 in favor of the amendment, leaving no doubt that Congress would override the president’s veto.

Apparently, DP World’s announcement that they would be leaving it up to an American company to purchase the five ports in question wasn’t enough for the Senate Democrats, who are pressing ahead for the legislation blocking the deal to go through, just to "be on the safe side."

Oh, and it doesn’t stop there – no, we haven’t alienated ourselves from the rest of the world quite yet. House Armed Services Committee Chairman Duncan Hunter introduced a bill barring not only the DP World deal – but ALL foreign ownership or management of "critical infrastructure" such as ports. So, if you’re foreign, and you own a port, you’re going to have to sell it.

Did we mention that about half of U.S. port terminals are foreign owned? And the Council on Foreign Relations website helpfully points out that non-Americans own 80 percent of the terminals in Los Angeles. Bad luck for them, since Hunter’s bill requires corporations controlling critical infrastructure to have a chief executive officer and a chairman of the board of directors who are U.S. citizens.

The LA Times tells us, "Hunter dismissed claims that his measure would alienate foreigners and constrict a U.S. economy that has become increasingly globalized." Never mind the fact that our economy is heavily reliant on foreign investment to pay our budget and trade deficit – we can do it without them.

"We have to ask ourselves, do we want that capital to leave here and never come back?" said Charles Ogburn, executive director of Arcapita, a Bahrain-based investment firm. "Or do we want it to come in this form of investment, recycled back into the U.S. economy?"

Basically, over the last few years, Arab investors have put out billions of dollars investing in American companies, but many Middle East experts warn that this outrage could scare of foreign capital and lead Arab investors to shift their money to India or China – and who could blame them?

Says James Zogby, president of the Arab American Institute, a Washington think tank, "Capital doesn’t like risk and it doesn’t like controversy."

Kate Incontrera
The Daily Reckoning

P.S. "We’ve basically opened a huge can of worms, or at least pulled the lid back a bit further on a can that was already open," wrote Outstanding Investment’s Justice Litle after the CNOOC deal fell through in August.

"If we want to define our terms of engagement and live consistently by the rules we set, that’s well and good…but picking and choosing our deals based on public sentiment feels dodgy, and China has a right to call us out on that. Sadly it feels like things will be only be getting more complicated rather than less…"

Justice’s words are certainly ringing true right now…and it’s that kind of insight that made Outstanding Investments the #1 top performing investment newsletter for the past five years by Hulbert Financial Digest, the leading independent rating service. For more from Justice.

— Daily Reckoning Book Of The Week —

Protectionism
by Jagdish N. Bhagwati

A leading international economist looks at many of the key issues of trade policy now confronting the United States and the world in this timely book. Jagdish Bhagwati provides a clear, informative, and witty analysis of the protection debate and offers a prescription for reform.

THIS WEEK in THE DAILY RECKONING: ‘What trials and tribulations lie ahead for Ben Bernanke?’ wonders Bill Bonner in "Bernanke’s Big Test," below…

Bernanke’s Big Test    03/10/06
by Bill Bonner

"Bernanke’s test is coming. He, too, will have his opportunity to blunder. Will the stock market crash? We don’t know, but if it does, it has a lot more room to fall than it did in 1987."

Sugar High      03/09/06
by Jim Rogers
"With world sugar prices at 85 percent or so below their all-time high, the chances of moving higher are strong."

The Detroit of Europe    03/08/06
by Steve Forbes
"The formerly communist state of Slovakia badly needed to simplify its overly complicated tax code to free itself from the stagnation and corruption of its formerly state-controlled economy…"

Something Wicked This Way Comes  03/07/06
by Bill Bonner
"We always try to get our day off on the right foot by reading Friedman’s column before breakfast. There is something so gloriously naïve and clumsy in the man’s pensée, it never fails to brighten our mornings."

The Bernanke Agreement     03/06/06
by The Mogambo Guru
"I leap to my feet and shout, ‘Hooray! Hooray for Ben Bernanke!’ and then I am shocked at hearing myself say it! I feel dizzy at the experience!"

HEADLINE, NEWS And INSIGHT: Everyone knows that much of the financial data reported by the government is fudged – but do you realize to what extent? Paul Craig Roberts looks at the economic world’s most scarce commodity – truth. See "How Economic News is Spun," below…

Goodnight, and Goodbye
by Paul Mampilly
"The Wall Street Journal reported last week that individual investors are once again active and buying stocks. The disillusion has begun to break and optimism is returning."

The Rich Get Richer
by Bill Bonner
"Why are the rich benefiting so much from globalization while the working classes, at least in the West, are not? The answer is simple…"

How Economic News Is Spun
by Paul Craig Roberts
"The few reporters and columnists who are brave or naive enough to speak out are constrained by editors, who are constrained by owners and advertisers."

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FLOTSAM AND JETSAM: The uproar over Dubai Ports World’s planned purchase of franchises at several American port facilities continues – even though the deal has been squashed. Not surprisingly, most people know next to nothing about the extravagant Middle Eastern city. Read on…

The Truth About Dubai
by J. Henderson

Being owned by the United Arab Emirates (UAE) is enough to make Dubai Ports World a subject of demagoguery in Washington, DC. The nation’s capital is a place where people seem unable to comprehend the profit motive. And Dubai Ports could not possibly build a profitable global ports operation if it had a reputation for lax security.

The instigators of the current furor, captive to anti-Arab stereotypes, seem entirely ignorant of reality in the city of Dubai, the second largest emirate within the UAE. As I discovered on a recent trip to Dubai, the city is the furthest thing one could imagine from being a hotbed of Islamic extremism. Dubai is rapidly evolving into the leading financial and commercial center in the Middle East.

Less than 10% of the city’s economy depends on oil revenues, with the majority generated from international trade and tourism. A tolerant, cosmopolitan, and culturally diverse city, roughly 85% of its population is comprised of non-citizens. Most are workers from across South Asia and Southeast Asia. While Arabic is the official language, English is the language of business and finance. English-speaking tourists will find no difficulty conducting business in Dubai.

The city also caters to five million upscale tourists per year from places like Russia, Germany and France and across the Middle East. Dubai is a playground for the rich, with ultra-modern five-star beach hotels and sprawling duty-free shopping malls. Every high-end Western brand imaginable is on offer. Gold, silver, and diamond jewelry are Dubai’s specialties. Dubai offers its travelers an indoor ski slope (in the desert!), world-class tennis, golf, and horse racing events, and the opportunity to buy property on man-made Persian Gulf islands formed into the shape of the world’s continents. Already lined with dozens of modern skyscrapers, Dubai is currently experiencing a construction boom that includes plans for the tallest building in the world, the Burj Dubai (scheduled for completion in 2008).

The extravagant city is often compared to Las Vegas, but I found it to be more like the Singapore of the Middle East. Though tourism is vitally important to the city, its economy is built on a foundation of international trade. With its meager oil reserves dwindling, the tiny emirate has diversified its economy by building its duty-free port into the re-export center of the region. It also aspires to be the region’s leading financial market, having recently built the Dubai International Financial Center to lure global financial firms with a Western-based commercial system conducted in US dollars.

Much of the political slandering of Dubai is based on a protectionist desire to prevent the free flow of capital across borders mixed with a stereotypical impression that the city is a murky bazaar of money laundering and arms trafficking. In fact, Dubai has long been a crossroads of trade, barter, and informal cash transfers. Historically it has weathered many efforts by colonial powers and foreign governments to control its economic destiny. This began in the 1800s when the British imposed an exclusive trade arrangement monopolizing its lucrative trade links with India. More recently, Dubai traders created black markets in gold, helping Indian expatriates to bypass India’s ban on gold futures trading from 1962-2004. Dubai traders have also helped import consumer electronics and clothing into nearby Iran, helping people there sidestep US economic sanctions (which only apply to US corporations).

In a region of the world not known for economic freedom, market capitalism has deep roots. Dubai is a key center of hawala, an unregulated private system of payments and currency trading between the Middle East, South Asia, and Southeast Asia. Similar to a banking system of clearing checks, hawala brokers facilitate transactions and money transfers for a 1%-2% commission. For less money than a typical bank rate, the centuries-old payments system eases currency and gold transfers between Dubai’s many migrant laborers and their families abroad.

Unfortunately, hawala is under pressure from the US government, which is trying to impose its own bank reporting and record keeping regulations throughout Dubai. The US regulatory efforts are a misguided attempt to prevent money laundering and the financing of terrorism. If informal cash transfers are regulated in Dubai, they will flee to other unregulated locales. Neither legitimate nor illegitimate informal payments can be eradicated by banking regulations. The restrictions will, however, crush the only available means for Dubai’s many expatriate workers to send money to their families abroad. The regulated banking system is not a viable option for them. In India, for example, family members are likely to live in remote villages without the modern financial services institutions found in urban centers. They may be too uneducated or illiterate to utilize formal banking services, or too poor to afford the higher fees associated with highly regulated money transfer vehicles.

Most important, expatriate workers are likely to have fled areas of ethnic or religious strife, where minorities are subject to oppression and reprisals. Secrecy, anonymity, and security of financial transfers are critically important to such people, and perhaps essential to the survival of their families back home. Hawala makes it possible to work in Dubai and send money home securely. US-style financial disclosure regulations could destroy Dubai as a refuge for ethnic minorities in desperate need of employment outside of their home countries.

Instead of persecuting Dubai, the US government should be encouraging its embrace of globalization and social openness. It could also learn a thing or two from Dubai’s remarkable example of decentralized power. Each of the seven emirates within the UAE retains a substantial degree of sovereignty and independence. Dubai has effectively opted out of OPEC oil production quotas despite the UAE’s membership in the cartel. In an era of high oil prices, this kind of competition in the Arab world is welcome.

The UAE is in many respects the model Arab country. It is a staunch American ally that has apprehended several major al-Qaeda suspects. In diplomatic and economic terms, the UAE could not be friendlier to America. Critics have pointed out that two September 11 terrorists from the UAE moved money through Dubai. Yet several of the terrorists resided in New Jersey and Florida, moving money through these states as they completed their training.

If guilt by association is applied across the board, then Congress would have to scrutinize Saudi Prince Al-Waleed as the largest shareholder of Citigroup, a possible conduit of terror financing. After all, most of the September 11 hijackers were Saudi citizens. Tarring entire countries like the UAE with the "terrorist" brush is absurdly unfair, and blocking all Muslim investments in the United States would be impractical and self-defeating.

The national security issue is a red herring. In my own experience, security at Dubai’s airport was rigorous. My baggage was searched thoroughly by hand. Interestingly, this search was faster and more thorough than the one I experienced upon entering or leaving the United States.

President Bush is correct, whatever his motives, to support Dubai Ports World’s planned acquisition of some US port operations. Tragically, this and future foreign investments are threatened by the national security hysteria and anti-Arab atmosphere that Bush initially created. The net result may be less foreign investment in the United States as Middle Eastern investors take their petrodollars elsewhere.