Bali High

I have just returned from ten glorious days in Bali. There wasn’t a terrorist in sight…nor, for that matter, too many tourists. The only explosions were the afternoon thunderstorms. The only apparent danger was the annoying k- knockers – a toy with two balls on a string clacking together at high speed, which seems to be the distraction of choice for every man and boy in Bali.

Bali is mending much faster than initially expected. The bombsite in Kuta is under repair; recent Balinese exorcism rites settled the ghosts. Even a few tourists are trickling back. The most interesting newcomers are Russians – planeloads of them, landing on strange-sounding charters. Like any new aliens in a new land, the island was awash with rumors of Russians disembarking with suitcases full of cash.

Bali over Christmas was a supremely pleasant place to be. With fewer crowds, it seemed that everyone relaxed. The Balinese, of course, complained about the loss of business. But banks are extending credit, and those laid off were heading back to their villages and didn’t seem too concerned. Everyone agreed that this is only a temporary lull, and that the streets, hotels, and sites will soon once again be filled by the swarming masses of flip-flopping sun worshipers.

Terror Aftershocks: CNN Syndrome

Everyone, that is, except the media. Bali, if you read The New York Times, is still a smoldering cauldron of terrorist cells and future bombsites. You don’t realize just how silly all of this is until you arrive. In fact, we nearly canceled our trip, showing that we, too, were suffering from CNN Syndrome. That is, the more you listen to CNN or read The Herald Tribune or The Wall Street Journal, the more clouded your decision-making process will be. It reminds me of an insightful comment made recently by a prominent Hong Kong developer: “If you want to lose money in China, read The New York Times or The Washington Post.”

Luckily, we came to our senses and, after almost being scared off by a New York Times article warning of the “continuing threat of terrorism in Indonesia”, we made a blunt calculation: we balanced the potential threat of exposing our two babies to death and destruction with the lure of a six-bedroom villa, lush gardens, a 23-metre pool, and a staff of 16, including a masseuse. We opted for the villa and we are here to tell the story.

I am not arguing that the threat of terrorism isn’t real. It’s very real, and it’s very scary. But learning to live with the new realities of post-9/11 vacationing means coping with and adjusting to the asymmetrical aftershocks of terror. It’s not quite the equivalent of walking around with Winston Churchill after a World War II Nazi bomb blitz of London, but there are some similarities. The irony is that modern terrorism is now so random, you have as much chance of being a victim of an attack in Hong Kong as you do in Bali. And short of hiding under your bed, there is very little that you can do to improve these odds. That, however, isn’t the way the story is covered in the press. Press reports today are filled with the latest ‘urgent’ warnings from governments, think tanks, and intelligence sources, all of which may have legitimate reasons for their concerns, although your vacation isn’t one of them.

The result is the creation of an extraordinary new level of travel paranoia that creates interesting opportunities for those willing to defy conventional wisdom. If you aren’t willing to do this, you risk becoming a slave to the headlines, as we almost did when we were planning our Christmas holidays. Which gets me to the point of this article: the decision-making process in regards to where and how to travel is very similar to how we decide to invest our money. Travel decisions, like investing, are made on the basis primarily of emotional and psychological considerations, based on information shared by all. The cow paths to Aspen, St. Bart’s, and Gstaad are as tired and well worn as the investment strategies and recommendations made on Wall Street. And often, as unsatisfying and expensive.

Terror Aftershocks: Contrarian Travel

Like investing, you can break down travel strategies into three familiar categories: contrarian travel, momentum travel, and value travel. I had thought of taking a chartist approach, but even the most precise traveler doesn’t resort to charts and graphs when deciding whether to go to Bermuda or Belize. Perhaps it’s my journalist nature, but I am usually most satisfied by contrarian travel. When I stretch out on three seats in economy with a pennies-to-the-dollar air ticket, I know that I am in for a good vacation. My latest experience in Bali over Christmas was a spectacular reaffirmation of my commitment to contrarian travel in an era of terror. It was a real Bali high.

My fascination with contrarian travel began in the early 1980s when I discovered that tourists were abandoning Haiti in droves because of the outbreak of a strange disease called AIDS. For a while, the experts said, and the media slavishly reported, that AIDS had originated in Haiti! I have long forgotten the convoluted reasons why. That was nonsense, of course.

But that didn’t stop hordes of tourists from avoiding the island like the plague. I enjoyed the unforgettable experience of traveling through that country without a tourist in sight.

My next contrarian adventure was Moscow shortly before the failed counter-coup against Boris Yeltsin. It was a glorious moment of transition – before the anarchy and gangsters that soon enveloped Moscow’s streets, yet long enough after reform to allow for the blossoming of menus, nightclubs, and fantastic bargains on antiques, art, and whatever else the dollar-starved Russians could sell.

Throughout the 1990s, I took an increasing number of contrarian trips. Burma – politics aside – is my tourist fantasy of what Asia should look like. Rangoon oozes bygone colonial charm with its dilapidated colonial structures and sputtering General Motor buses built in the 1930s. Staying at the Strand remains one of the finest hotel experiences in the world. In 1993, I visited Angkor Wat during the UN occupation of Cambodia. Sure, the occasional rumble of Khmer Rouge artillery rattled my nerves, and you definitely needed to stay on the set paths, but we had the ruins to ourselves. It was magical. Other great contrarian travel experiences were in Cuba in 1995, smoking cigars and drinking mojitos in huge nightclubs with the most incredibly beautiful women the world has ever seen; visiting the Dalmatian Coast shortly after the war in the Balkans ended; and enjoying China after the crackdown in Tiananmen Square. Contrarian travel is definitely not always politically correct travel.

Terror Aftershocks: The Most Spectacular Hotels in the World

Bali today, however, may just be the greatest contrarian opportunity of my lifetime. One could argue that Haiti, Cuba, and Cambodia have their rough patches. Not so with Bali. How often does one have the chance to visit an island that has by far the most spectacular hotels in the world? An exaggeration? Consider that Amanresorts has four properties on or near the island; the Four Seasons, two. Every major luxury chain has built spectacularly luxurious palaces here. In addition, there are the most extraordinary villas for rent at very reasonable prices. Do the math. Add Bali’s superb Hindu architecture and culture, emerald-green rice paddies, endless beaches, and the kindest people on earth; subtract the usual ugly hoi polloi of backpacking and low-rent tourism; and you get a vacation nirvana circa 1965, but with far superior accommodations.

However, like all contrarian opportunities, the window of opportunity is short. As I left Bali, the streets were still quiet, but the pace is picking up. Within a year, the place will be back to normal. Great for the struggling Balinese; but, for contrarian travelers, it’s the equivalent of getting a tip on CNBC or from Heard on the Street.

Momentum travelers will soon replace contrarians. They are the ones who flocked to Thailand, Australia, and Vietnam over Christmas this year after reading all those scary articles in the press about Bali. Most travelers, like investors, prefer momentum travel’s characteristic herd instinct.

Momentum travel is a favorite of the Gulfstream crowd. The herd on Wall Street and in corporate America thinks and moves as one, and vacations are no different. Witness the success of the Four Seasons Hotel Resort chain. Like investing and fashion, the media slavishly cheers on every move. And that is the problem. If every travel magazine, and every dinner party conversation, swirls around a few key locations, those locations, like a tired stock tip, become grossly overpriced in terms of cost and spiritual satisfaction. Going to Aspen or the Dominican Republic becomes the Cisco Systems of travel opportunities, and you can expect about as solid a return. As such, any information on ‘hot spots’ in 2003 from Vogue is about as reliable as equity research. For this reason, I am not a fan of momentum travel.

Then there is value travel. Value travel is the comfort food of vacations. It means visiting the old faithfuls of your childhood – summer homes with in-laws where families have gone for generations, or the same hotel on Bermuda that you have religiously gone to every Easter since you were 12 years old. Whether it is lolling around Lake Geneva, a country home in the English countryside, or the nooks and crannies of Long Island Sound on the eastern seaboard of the US, you can’t go wrong with these vacations. These trips are like a good Dow stock: there is a steady dividend on modest experiences, but little exceptional growth. The travel industry, like mutual fund companies, loves this kind of mentality. That may be good for travel agents and mothers, but it won’t be as rewarding for you.

With the world becoming an increasingly nasty place, the ability to spot the contrarian travel opportunity will make the difference between a dull, costly, and ultimately unsatisfying vacation experience and the immensely rewarding opportunity of being where no one else is. For those who went to Bali over Christmas, it was the travel equivalent of purchasing gold a year ago or Japanese bonds five years ago.


Peter McKillop
for the Daily Reckoning
January 27, 2003

P.S. Naturally, one must use one’s head and not go overboard. While I believe that Iraq would be an absolutely fascinating place to visit, now is not the best time. Nor am I inclined to make a trip to Jerusalem or Colombia, although my friends tell me I would have a great time. A trip to Syria, however, to experience its remarkable ruins, would be highly worthwhile. I am also sure that the all- clear is sounding along the Kenyan coast, so I would highly recommend the overnight train to Mombassa from Nairobi through the game parks of Tsavo, ending with a stay for a few nights on the beaches of Malindi, just up the coast from Mombassa. You will enjoy the sublime peace of being far from the madding crowd, served by grateful staff happy to see you back, and feel secure in the knowledge that you have just invested in the travel bargain of a lifetime.


Another GUDD week. Gold Up, Dollar Down.

While the rest of the world watches the stock market, here at the Daily Reckoning, we keep our eyes on the dollar. Both have been going down of late. We were out of stocks, but through no fault of our own, we were still in dollars, like it or not.

Our rent here in the Paris headquarters has gone up more than 20% in the last 12 months, not to mention our liquor and foie gras.

Recently, the dollar has gone down 9 days in a row.

We take it personally. Why didn’t we take a bigger position in euros, we ask ourselves? Why didn’t we buy more gold when it was below $300? They ‘had’ to go up against the dollar, we kept explaining to anyone who would listen. Here it is…gold over $350 and the euro over $1.08…and, oops, looks like we forgot to listen to our own rant!

Now what to do? Won’t the price of gold and the euro drop…giving us one last chance to load up before they go to the moon? Or is it already too late? “If you’re not on the train, you have to ride a bicycle,” goes the expression in Europe.

The dollar/gold trend is one that is likely to last for many years…a long time to spend on pedaling. The dollar rose – unnaturally and unusually – against gold for 20 years. That is not something that is likely to be corrected in a couple of trading sessions. Maybe we shouldn’t worry about the price…maybe we should just make our move now…and not look at it again for the next 10 years?

There are so many things we don’t know. As we get older, we learn more and more…but know less and less. For the more we look into things we thought we knew, the more we realize we knew nothing at all.

We bring this up only to prepare you, dear reader, for out latest confession: we don’t what to make of the war against Iraq (though we can’t help talking about it…more below) …nor do we know how the inflation/deflation match will turn out…nor can we tell you whether U.S. stocks will end the year up or down. But the closer we look into it, the more we’ve come to believe that gold is going up, if not in the short run, certainly in the long one.

The government can “produce as many U.S. dollars as it wishes as essentially no cost,” said Ben Bernanke.

What Bernanke meant to say was that the he and other Fed governors could control the supply of dollars. He failed to mention what they could not control – the demand for them. Was it not obvious that demand would go down – eventually – since supplies have gone up for so long? And then, we curse ourselves because we forgot to get out of the dollar when the getting was good. Now, it’s not quite as good – because demand for dollars has already dropped sharply since Bernanke let the cat out of the bag.

But at least we, as Americans, still keep score in dollars…we pay our taxes, tuition and medical insurance in dollars. Think of the poor foreigners who hold somewhere between $3.7 trillion and $9 trillion (we know the gap is cosmic…we have seen both numbers reported and have not yet been able to reconcile them) in U.S. dollar assets. While we fret and regret…these poor saps must sweat and lose sleep. Imagine the hedge fund manager with a billion in U.S. dollars. He’s lost $100 million or so – on the exchange rate alone – in the last year. Every day, another few million evaporate. How long will he stand for it?

“The real collapse of the dollar is coming soon,” Dr. Kurt Richebacher whispered to colleague Dan Denning on Friday.

Over to you, Eric…


– The long-running “Wall Street Horror Show” played to a packed house again last week. Now into its fourth year, the show’s longevity would be the envy of any Broadway producer. Incredibly, despite the show’s tedious plot, audiences keep returning to watch the performance over and over again.

– The tragic story line goes something like this: The evil protagonist, Mr. Market, masquerades as a faithful, all- weather friend to the lumpeninvestoriat. Deceived by his seeming kindness, they entrust their life savings to him. At that precise moment, Mr. Market begins to torment the lumpeninvestoriat by destroying their net worth – bit by bit – through various diabolical means. They do not suspect Mr. Market’s treachery…until it is too late, until long after the wretched loss of their life savings.

– Although the “Wall Street Horror Show” builds on the conventions of classic Greek tragedy, the script introduces its own unique twist: the chorus is not impartial. Instead, a chorus of Wall Street strategists merely FEIGNS impartiality, while helping to advance Mr. Market’s deception. Throughout the tragedy, the chorus urges hesitant investors to dispense with their doubts and to place their complete faith in Mr. Market.

– A fascinating subplot of the “Wall Street Horror Show” involves a minority of investors known as “goldbugs”. Throughout the early scenes, the lumpeninvestoriat heap ridicule on members of the goldbug cult for refusing to trust in Mr. Market. As the drama unfolds, however, the goldbugs’ faith in Mr. Gold is vindicated, much to the tragic realization of the lumpeninvestoriat).

– The latest act of the “Wall Street Horror Show” featured the Dow Jones Industrial Average losing 455 points in a single week, 238 of them on Friday alone. The Dow tumbled 5.3% to 8,131. This harrowing decline dropped the blue chips to a 2.5% loss for 2003. The Nasdaq fared a bit better than the Dow, sliding 2.5% to 1,342. In case you’re keeping track, The Dow and S&P are now back to levels last visited in mid-October.

– Tragedy also envelopes the US dollar. The greenback lost value each and every day last week, and has dropped every day since Jan. 14. The currency that James Grant calls the “Coca-Cola of monetary brands,” is trading more like the “Shasta Cola” of monetary brands.

– The dollar finished the week at $1.08 per euro, down 1.5%. The U.S. currency, says Barron’s, “is a collateral victim of overseas investors cutting exposure to U.S. financial assets.” Maybe so…Or maybe the US financial asset to which foreigners wish to “cut their exposure” is the dollar itself…At least, that’s the message from the gold market. The yellow dog is sprinting like a greyhound. Gold for February delivery jumped nearly $12 last week to $368.40 – another new six-year high.

– Given the volatility in the currency and gold markets, corporate earnings have become a mere side-show. Maybe that’s just as well. Corporate earnings haven’t been much to look at these days. Company after company has been reporting uninspiring earnings, punctuated by even less inspiring predictions about future growth prospects.

– Even so, the lumpeninvestoriat cling to their misguided faith in Mr. Market. But their faith appears to be wavering.

– “The widespread lack of interest in stocks among individual investors is evident in weak commission income among discount brokers, mutual-fund sales volume and surveys of nonprofessionals that reveal unusual bearishness,” says Barron’s. “Estimates of mutual-fund activity indicate that cash has been withdrawn from stock funds, on a net basis, so far in 2003. McManus of Bank of America Securities notes that if the stock-fund flows end up being negative for the month, it will mark the first time since 1990 that there were net redemptions in this sector during the month of January.”

But maybe the redemptions are the result of poverty, rather than disinterest in stocks. Maybe the spirit is willing, but the pocketbook is weak. After three straight losing years, investors are probably running a little light on the capital required to express their faith in stocks-for-the- long-term…And that’s a tragedy.


Back in Paris…

*** Home foreclosures are “going through the roof,” as the Rocky Mountain News puts it.

*** Bankruptcies are hitting new records, as several news sources reported.

*** McDonald’s reported its first quarterly loss – ever.

*** The wine industry is going a little sour, says the Seattle paper – too many bottles and not enough heavy drinkers. (Let the record show that we do our part here at the Daily Reckoning. We had a problem with alcohol for many years. We fought it for years, but finally capitulated…)

*** “We are teetering at the edge of deflation,” says George Soros, which makes us wonder. Soros was hobnobbing with the rich and powerful at the World Economic Forum in Davos. Anything said at these get-togethers is almost guaranteed to be wrong. Still, we can believe the world is teetering. It teeters easily…and often for many years at a stretch.

*** What’s got it teetering now is that populations in rich consumer nations are discovering that they are not as rich nor as young as they thought they were. They’re going to have to stop spending so much money – which means they have to stop buying so much from low-cost producers in Asia and the Far East. Anything that can be exported gets marked down…which is why prices on goods fell 1.5% in December (biggest drop in 45 years)…while services (not subject to import competition) rose 3.2%.

*** “What do you think of the war against Iraq?” asked a French politician at a dinner party last week.

Your editor had been silent almost all evening. After 10 P.M., he still had no opinions worth sharing, and no thoughts worth having. Still, his dinner companions seemed to want a fight. They had been complaining about how the CIA, American oil companies, the Bush Administration, Rumsfeld et al manipulate international events. They were convinced that American foreign policy was corrupt and self-serving…and now they expected the American at the table to provide a target for their sharp wits.

“But it’s not really what you think, at all,” he began. “American foreign policy is not venal…These are oil men in the White House, yes…of course…but they don’t want to get control of Iraq in order to gain access to the oil. That’s much too simple and too logical. What is really going on is that the U.S. finds itself on the threshold of Empire. Through no real fault of its own, it is alone on top of the world – the planet’s only superpower.

“But nature abhors a monopoly. She will not permit it for very long. So, Americans have to find some way to destroy themselves…they must make some ‘mistakes’ that will redress nature’s balance. And we seem to have found one: the U.S. needs foreign capital investment in order to finance government deficits and consumer spending. These investments depend on the strength to the dollar. So, what must policy makers do? They must ruin the dollar – which is what the Fed seems to be doing. That will pull the financial run out from under the super economy….

“And the war on Iraq…? Well, it’s probably just a way of making the financial problem worse…spending huge amounts of money going to war with laughably unequal opponents…while spreading out the U.S. military in areas that represent no real threat to any major enemy. You don’t see U.S. forces massing on the frontiers of China or Russia…not even on the edge of North Korea! The Iraq war…and the War Against Terror…they’re like the deployment of the Roman legions all over the periphery of the Empire. They cost a lot of money; but ultimately, they could not keep out the barbarians.

“Of course, the process could take centuries…”

Whether this made any sense or not…your editor could not say; it was too late. But it had the desired effect. The table conversation turned to other subjects.

The Daily Reckoning