Where to Wait Out the Bird Flu Pandemic

We have a special treat for you today, dear reader – an essay from Bill in the middle of the week. This topic is so interesting and timely that it simply couldn’t wait until Friday…

At the time of the Great Plague, some people in Europe believed the disease was caused by foul air; many built high walls around their houses to keep out the bad breezes. Others went about flogging themselves with whips; they thought the malady was brought on by sin, which could only be relieved by punishment.

What worked was distance. Generally, the farther you got from major population centers, the more likely you were to survive.

So, if the bird flu breaks out big time, you will know where to find us: out beyond the pampas, nestled up against the Andes, a five-hour drive from the nearest metropolitan center, on our own remote estancia.

Investing in Latin America: Provoking Gales of Laughter

The last time we mentioned our new ranch was to an Argentine friend in London, who promptly fell to the ground, rolling around clutching his sides…practically rupturing internal organs.

What provoked this dangerous attack of mirth was our humble innocence. Out in the wilds of Argentina, in Salta Province, your editor was out of his element, out of his league, and probably out of his mind, said our Argentine friend.

"Did you see the property?" asked the Argentine.

"Yes, of course," we replied.

"How do you know that what you saw was what you bought?" the gaucho wanted to know.

"Well, it has a deed…and a legal description…doesn’t it?"

"Yes, but how do you know that was what you actually saw?"

"Well, I have to trust the real estate agent…"

That was what caused the first outburst. The second concerned not fixed property, but property of the very moveable kind.

"You got 600 head of cattle," began a question. "But did you count them? Where are they?"

"I don’t know where they are. It’s a big place. I’m not going to spend days out in the bush counting cows."

"Then how do you know there are 600 of them?"

"Well, that’s what’s in the contract. If it turns out to be untrue…we’ll sue the seller."

This last phrase was followed by such peels of laughter we thought we’d have to call an ambulance.

"I’ve got news for you," volunteered our friend when he was finally able to speak. "It doesn’t work that way in Argentina. It’s a system based on trust. You can always trust that the seller is lying to you. And if you go to court, they’ll laugh at you even more than I am."

Investing in Latin America: A Financial Adventure

Investing money south of the Rio Grande is an adventure. A financial adventure, of course, but the real risk is to the investor’s amour propre. Man is a social animal. He feels most comfortable when he is surrounded by other men just like himself…that is, men who are equally timid and lazy-minded. He says he always tries to get value-for-money, and he’ll readily cross the road to get a better deal on toilet paper or TV sets. But when he makes his important buys – property or shares, for example – he stays right where he is.

The Bank of England will sell him a note on which he will earn 4.4% yield over the next 10 years. He gets the same deal from the U.S. Treasury. But in Brazil, he can get nearly three times as much: 12.75%. And Brazil’s government has a surplus; its trade balance is positive, and its inflation figure is only 4.4%. In Britain and America, the financial authorities do all they can to stimulate credit; in Brazil they practically stifle it, with a central bank lending rate recently cut to 19.5%. Yes, buying Brazil’s bonds is an adventure, but buying bonds from the central banks of England or America could prove even more exciting.

Price and risk tend to be harnessed together, like two dumb animals: When one goes forward, so does the other. Bonds, stocks and property tend to be cheap in Latin America; are they low risk, too? Maybe. On the other hand, bonds, stocks and property are expensive in North America and Europe. Is that not where the greater risk lies?

Investing in Latin America: A Pound Is a Dollar Is a Peso

A pound is a dollar is a peso. No matter what currency you spend, in nominal terms, the price is about the same. We have no explanation for this; perhaps it is merely a coincidence. But when you buy a cup of coffee in London, you pay about three pounds. The same cup of coffee in New York costs $3. And in Buenos Aires, you pay three pesos. But the dollar is worth barely half of a pound and an Argentine peso is worth only a third of a dollar. So, the real cost of the cup of coffee in Buenos Aires is only 1/6th as much as London.

This is more or less true in property prices, too. For the price of a single London townhouse, for example, you could buy an entire apartment building in almost any city in Latin America. A luxury apartment in Buenos Aires, a city equal in charm, culture and liveliness to almost any European capital, can still be bought for only 750,000 pesos. You couldn’t buy an equivalent place for $750,000 in New York, but you might in Cleveland, Philadelphia or Pittsburgh. And you couldn’t get close to the equivalent in London for six times as much; wave that kind of money in front of a London estate agent and he will suggest a bed at the YMCA. Likewise, for the price of a modest country property in England, you could buy a 100,000-acre ranch in Paraguay or Argentina…or a luxurious home on a private beach in Nicaragua.

On a recent trip to Argentina, we looked at an amazing place. It might have been Arizona or New Mexico, with cold water coming down from the Andes cutting through barren hills. On the flatland by the river were 1,000 acres of grapevines, several rustic houses built of adobe, and a marvelous old winery that had been built in 1870, which produced nearly 500,000 liters of wine per year.

There were rows of Lombardy poplars lining the vineyards, which was irrigated from the river. The weather is perfect, with sunshine almost every day. Rarely does it get very cold, even in winter. And surrounding the vineyard are 50,000 acres of wilderness. It was a delightful scene. In California, with less land, it might be priced at $20 million or more. In France or Italy, it would be impossible to find such a place at any price. But in Argentina, the asking price: $1.6 million. Another wine area, near the charming little town of San Rafael, offers buyers building lots in the middle of a vineyard for just $20,000. The property is about five minutes from the airport and 10 minutes from town…and the weather is better than Arizona. What’s more, you can get a cook, a gardener or a chauffeur for only about $10 a day.

Why so cheap? Because it wasn’t long ago that Argentina’s export industry, and its middle class, were practically wiped out. Inflation ran over 1,000% per year. The whole country went broke. So recently burned, the locals are still shy. And the foreigners have their doubts, too. They’ve heard that the Latin American currencies are slippery and their courts are unreliable. The Anglo-Saxon worries about getting cheated, getting sick, or worst of all, of getting laughed at.

In Nicaragua, we discovered that a "good" title is not always as good as we thought it was. Yes, you can take the matter to the courts, but the judges were almost all appointed by the communist Sandinistas. If you knew what was good for you, you settled the matter without ever appearing in court. Or, if you were unlucky enough to go to court, you’d better know whom to bribe and how much.

We are open-minded, here at The Daily Reckoning. Often, bribery seems as good a way to settle a legal issue as any other. Compared to U.S. court cases, bribery is often cheaper, more efficient, and even more reliable. A good judge is merely one who stays bought. But down in the diarrhea countries, the Norte Americano is at a disadvantage. He never knows quite how many bills to stuff into the envelope. He is clumsy. He is awkward. He is frustrated. He knows he wants to do something to someone, but he doesn’t know what to do or whom to do it to.

We gringos pride ourselves on being from a sophisticated, developed nation. But we are rubes and rustics when we go South of the Border. We don’t understand the measures: square meters, menzanas, hectares. We don’t understand the lingo. And we can’t even dance.

Once we attended a party in Nicaragua. After a few drinks and a few chords, everybody was on the dance floor. Every derriere shook, swayed, bobbed and swiveled in time with the music – except for one! Young, old, infirm, delusional…all seemed to be able to samba, rumba, calypso, tango, cha cha cha…without practice or persuasion.

"I don’t know if you northern Europeans are built for this kind of thing," said a friend. It was as if we didn’t have the ball bearings in the right place. We could swing our hips, but not fast enough to keep up with the music.

Nor could we keep up with the pace of life in the Latin countries. Things never seem to happen when you expect, but generally so long after that you have forgotten about them. We built a house on the coast – again, in Nicaragua. It was supposed to be ready for a once-a-year family visit about nine months after it was begun. But when we arrived, the house still lacked a roof. This sort of thing is alarming to the man who wears two watches. But to the Latin American it seems perfectly routine and not worth mentioning. What’s the hurry, anyway? Eventually, the house was completed – two years later. By that time, we’d forgotten why we had it built.

But in the intervening time, something remarkable had happened. The country had been "discovered" by thousands of American retirees, speculators and developers. The house we built for peanuts was now worth walnuts or cashews. And the lot for which we paid $120,000 had gone up. A similar lot was sold for $350,000, believed to be the highest price ever paid for a building lot in the country.

Nations…regions…people…empires – all go through cycles. Sometimes they are ascendant. Sometimes they go down. The cycles are short, or long, clear or confused. But nothing ever stays in the same place for very long. Latin America is still cheap – following a long period of revolutions, bad government, inflation, bankruptcy and cucaracha. It looks like an opportunity, for anyone who doesn’t mind being laughed at.

Regards,

Bill Bonner
for The Daily Reckoning

October 19, 2005

They have arrived in Anatolia. Now, they’ve crossed the Black Sea to Rumania! And now they’ve attacked Greece!

Europe is watching the movement of Avian Flu bugs as if they were a Mongol army. The whole continent is on the verge of hysteria, with newspapers predicting 50,000 deaths in Britain alone.

Surely the great Anglo-Saxon Empire will have to stir its heavy frame – taking its fat derriere up out of the imperial easy chair – and panic. The troops will have to be called out. Places will have to be quarantined. People will have to be inspected, approved, and given permits to walk the streets. Oh…and police the Internet. You can go on the Internet and find the genetic code for the Spanish Flu virus, a variety of avian flu that killed millions in 1919-1920. It was perhaps the worst biological assault on the human race ever. What is to prevent a terrorist, a madman, or a postal worker from replicating the virus and releasing it on an unsuspecting world? Nothing, say the experts.

So far, only 60 people have died from avian flu. That is about the number of Democrats who have been gored by wild deer or Republicans who have drowned in their own bathtubs. But if the virus gets smart, that is if it mutates in a way that makes it more easily transmitted, the result could be devastating to both parties as well as people of integrity and intelligence. Indeed, the whole species and its economies could suffer greatly.

Unlike the Y2K scare, says a Bloomberg columnist, this bug is for real. If it makes the vital mutation, the death toll could equal that of the Great Plague. So far, half of the people infected with the virus have died. We think of these diseases as carrying off the weak, like a form of natural selection. But the bug of 1919 was a cunning little critter; it suborned the victim’s own immune system and turned it against him. Most of the dead were young adults, many of them soldiers back from the trenches, who were strong and healthy.

And even if you are lucky enough not to die, you may find your life disrupted in a major way. Airlines are likely to lose customers, or even be grounded by "flu czars" in various countries. People will avoid unnecessary travel, shopping, entertainment; they will stay at home and try to stay away from public places. Schools may be closed. Public events will be cancelled or postponed. Office buildings will be emptied. Businesses may close, or move key teams to "safe" areas…where they can work in isolation. Sales will plummet, except for stockpiled items such as water and toilet paper. Businesses will fail. Economies will collapse. Stocks and property prices will fall sharply, as buyers disappear. Foreclosures and bankruptcies will soar.

There will be a financial panic as well as a health panic. International trade will be curtailed (America’s trade imbalance will be resolved in the worst possible way…so will its property and debt bubbles.). People will flee to the safety of U.S. Treasuries, and gold…and the wide-open spaces. More below….

But first, more news from the lads at The Rude Awakening…

————–

Chris Mayer, reporting from Gaithersburg, Maryland:

"The volatile oil stocks took another wicked tumble yesterday, while boring old New Zealand Telecom gained more than half a percent…Sometimes boring is better."

————–

Bill Bonner, back in London with more views on a wide range of subjects…

*** We are still laughing at U.S. Treasury Secretary John Snow. The man is visiting China, advising the Chinese to "spend more, save less," and learn how to use "sophisticated" financial products from Wall Street.

Meanwhile, from Slate comes a report on one of America’s most sophisticated financial businesses:

"Refco was a model 21st-century business – a highly digitized, high-tech services company that traded complicated financial instruments on behalf of customers all over the globe. But its meltdown shows that its real assets were not its New Economy algorithms and brainpower. Rather, this extremely modern company depended ultimately on the kind of assets that built American capitalism in the 19th century: trust, integrity, and the personal reputation of executives."

Refco was, coincidentally, the outfit that helped Hilary Clinton trade cattle futures. Thanks the firm’s sophisticated techniques, it made sure the former first lady was one of the most successful traders of all time. Every trade was a winner. More recently, it paid off its former CFO with a $46 million check when he left a year ago. The company went public in August. It was briefly worth $4 billion. Now, it is a carcass being picked over by vulture funds.

*** "The best way to think of the Refco meltdown is as a modern-day bank run, says our good friend, former banker and Capital and Crisis’ editor, Chris Mayer.

"In the old days, when banks had to stand on their two feet – and couldn’t depend on the Fed for a lifeline every time they fell through the ice -depositors were the watchdogs of the banking industry.

"Even a whiff of scandal, whether it threatened the bank’s solvency or not, could send depositors lining up for their money back. Essentially, this is what happened a Refco. Refco is in the trust business. It helps facilitate trades and people trust it to settle transactions.

"When the market found out CEO Phil Bennett owed the company $430 million, its image was tarred. Customers no longer trusted Refco. Like bank depositors of old, they pulled out. And a 150-year old company – just like that – is in bankruptcy only weeks after the initial scandal broke."

*** Can you suffer a run on a central bank? On the central bank of the world’s hegemonic power…its Alpha Nation…its most sophisticated economy…its only surviving empire? Yes, you can.