Bombay Dreams

Wow…it sure is quiet here in the DR HQ. That’s because two of The Daily Reckoning’s most animated characters have gone to far-off lands in search of profit opportunities. You knew about Dan Denning and his tour of China and Japan, now James Boric has flown to India.

Tomorrow, I will catch a plane to London and then fly straight on to Bombay.

For nine days, I will be meeting with some of the most powerful businessmen in all of India. I want to confirm my suspicion that, over the next 15 years, India will emerge as the next Asian Superpower.

On paper it seems like a no-brainer.

With a population over 1 billion, a huge growing, well-educated middle class, a stronger stock market, an improving education system and a democratic government, the foundation is set for some serious growth. Now I want to see it for myself. And I couldn’t have planned a better time to visit this rapidly growing Asian country – from both a financial and a political perspective.

Let’s start with a little politics.

Invest in India: Crisis Averted

If you have been following the news at all in the past three weeks, you must have heard something about the recent Indian elections. What a fiasco.

In a major upset, India’s Congress party (led by Italian-born Sonia Gandhi) defeated the incumbent Bharatiya Janata Party – which is credited for drastically improving India’s financial and economic situation. This shocked the financial community.

Foreign money managers immediately pulled millions of dollars out of the Indian market. They feared the new government (the Congress Party and its leftist alliances) would oppose the privatization of major Indian businesses — effectively ending much of the economic progress made in the past and putting a damper on economic growth in the future. As a result…

The Sensex (the major Indian stock index) fell as much as 17%. Trading had to be stopped several times during the day on May 17. And when it was all said and done with, the index ended the day down 11%. It was the single biggest drop in India’s history.

It was all doom and gloom – until a sudden announcement was made…

Sonia Ghandi declined the opportunity to serve as India’s prime minister. Instead she (and the Congress party) appointed Manmohan Singh – India’s former finance minister – to take the helm. He accepted. And the market rebounded. After all, the financial world in India loves Singh.

Singh was one of the central figures in modernizing the Indian economy in the last 15 years – lobbying for state-run businesses to privatize, improving India’s central bank situation, opening the country up for foreign investment and encouraging free trade with outside countries. And with him leading the new Indian government, I expect the economy will continue to grow.

Invest in India: Short-Term Bumps, Long-term Bulls

It seems the financial world agrees with me.

Since May 22 (the day Singh was officially appointed India’s new prime minister), the Sensex has recouped almost all its losses – a good sign for investors. And although you can count on the market to be bumpy in the short term, the long-term prospects remain very bullish for India. In fact, Goldman Sachs is predicting India’s economy will overtake the UK’s by 2035, and by 2050 it will be the third-largest economy in the world – behind only the United States and China.

We’ll see if they are right. But the foundation is laid for rapid growth in India.

For the first time ever, India is no longer a debtor country. It has forex reserves in excess of $116 billion. It expects to double its college graduates in the next six years. Its currency has been upgraded to "investment grade" by Moody’s, for the first time ever. Major Western companies like Microsoft, IBM and GE are all opening offices in India’s main cities. And technology (phones, computers and Internet access) is starting to make its way into India’s towns.

This is an exciting time for India – and for long-term investors willing to put money in Indian stocks. And when India does emerge into a legitimate superpower (eventually growing into the third-largest economy in the world), I expect a surge in one industry in particular…

Invest in India: Telecom Boom

When a country emerges from Third World to superpower, one of the first industries to rise is telecom. And the boom is already taking place in India…

– The number of cellular subscribers has just about doubled every year since 1999 – rising from 1.6 million to 10.5 million now.

– The number of phone lines has increased fivefold since 1996.

– Internet connections have skyrocketed from 1.04 million in 2000 to 4 million in 2003

– 84% of all Indian towns are wired for phones and Internet access. Yet only five of every 100 people have them. In other words, the room for growth is enormous.

Couple that with the fact that India has now opened the telecom industry up to competition, and the stage is set for explosive growth in the future.

Of course, there are no guarantees you will make money – especially in the short term. Anytime you own stock in an emerging country like India, you have to be prepared to lose. But the rewards if you are right can be huge. In fact…

The best-performing foreign markets ALWAYS beat out the U.S. markets – ALWAYS. For instance…

In 1987 Japan’s market rose 43.2% compared to the United States’ 3.91% rise. In 1989, Austrian investors could have made 104.8% profits. U.S. investors only made 31%. And in 1998, Finland’s market rose 122.6%. Again, the mighty United States lagged behind – only rising 31.72%.

And if you want a more recent example, look at China. The USX China Index rose 104% last year. That’s impressive. The Dow Jones only rose 25%. And I believe you will have the same kind of opportunity with India in the next few years – that’s why I’m headed there now.

I will be staying at the Taj Mahal Hotel in Bombay for nine days. During my time there I am penciled in to meet with several of the top executives in the country – including people from Morgan Stanley, McKinsey, HDFC Bank, ABN AMRO Bank and ASK Raymond James.

I will also be meeting up with wily traveler Dan Denning – who has already been in Asia for the last three weeks. Together, I expect we will cover a lot of ground, meet a ton of great people and have some fun in the process.

Of course, I will let you know what I discover. I will write to you from Bombay, and you can expect to read about my adventures in The Daily Reckoning.

Regards,

James Boric
for The Daily Reckoning
June 10, 2004

Editor’s Note: James Boric is editor of the small cap advisory letter Penny Stock Fortunes, where he looks for great companies at penny stock prices. James also writes a weekly e-mail called the CXS Alert.

James is the most hardworking, knowledgeable Small-cap analyst in the business…and his track record reflects this! James has just flown to India to sniff out more great companies.

Oh la là…

No sooner were the electrons in place for yesterday’s advice – "buy gold," we said – then the price of our favorite metal dropped $6.60.

Do we know what we are talking about, readers might ask?

Why…no…as a matter of fact, we don’t.

Our conceit is not that we know anything, but that we know we don’t. This humility gives us such an edge…so much confidence in our own stupid superiority, we cannot help but be endearingly humble. And insufferably pompous about it.

Among the many things we don’t know is why the price of gold slumps – even in the face of what appears to be the greatest rush of new money and credit the world has ever seen. In our endearing humility, we have no idea. But in our insufferable pomposity…we have a theory.

Our theory is the same one we have clung to for years: America’s credit-led, degenerate capitalism is a fraud; the ‘recovery’ is a sham; there is no normal cyclical ‘heating up’ of the economy…and so, no real inflationary pressure.

Gold should be soaring. The whole world expects inflation; it needs it. Especially America. But gold is telling us not to hold our breath. The dollar – which rose to $1.20 per euro yesterday – whispers its warning to inflation may be on its way…but not right away.

When we speak of ‘inflation,’ we use the word in the popular sense – meaning, a rise in the cost-of-living driven by an excess in the supply of money compared to the supply of the things it is used to buy. This kind of inflation requires that more people have more money to spend…while the quantity of available goods and services increases modestly.

But the world is not set up for that kind of inflation. The mass of goods coming out of China grows larger every day. Worldwide, labor costs – the single largest component of most goods and services – are falling.

More importantly, and more immediately, too many people already owe too much money. The ratio of debt to income in the U.S. has never been higher. How, then, can people spend more money chasing goods and services? They can’t, unless they can go further into debt. But as they borrow more, debt builds up like carbon monoxide in a closed garage. Pretty soon, the consumer will pass out at the wheel. The man will be dead before anyone notices. He will stop shopping. He will stop spending. He will borrow no more.

And God forbid interest rates should rise!

But interest rates are rising, whether the Fed wants them to or not. "Inflation expectations," say the papers, attempting an explanation. Maybe. But it could also be that lenders are getting worried; they must wonder if they’ll get their money back at all.

Higher interest rates are already having an effect. In Britain, "the property boom is coming to an end," announced the TIMES on Wednesday, after polling estate agents around the country. "Family homes are struggling over 300,000 pounds," said one. "Demand appears to be slowing in the mid to higher range," said another. "Things have definitely slowed down," said a third.

Is the boom really over? We don’t know. And it will take months to find out. At first, sellers will hold on – wondering why they are not getting more offers. They will be reluctant to lower prices; ‘everyone knows it is worth more than that,’ they will say to themselves. Gradually, the backlog of unsold houses will build up. A few desperate sellers will cut their prices, and little by little, news will spread across the nation: the housing boom is really over.

Refinancing applications are falling in America. Consumers are spending less than economists expected. On both sides of the Atlantic, people need cash to pay their bills. They’re beginning to wonder where they will get it.

We don’t know when the coming deflationary slump will actually begin, neither in England nor in America – nor even if it will happen at all. But readers are urged to act as though it started yesterday.

And now we turn to our colleagues in L’Amerique du Nord for more information:

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Eric Fry, from Wall Street…

– As the nation mourned yesterday, Mr. Market also hung his head in sorrow…over the death of easy money. In a delayed reaction to Greenspan’s threat to raise interest rates quickly, the stock market and gold both tumbled yesterday, while the dollar soared. The Dow Jones Industrial Average fell 64 to 10,368, while the Nasdaq dropped 33 points to 1,991. Gold slipped $6.50 to $386.85, while the dollar soared a stunning 2% versus the euro to $1.226.

– The deflationary emergency that compelled Alan Greenspan to cut interest rates to 46-year lows has now passed, while the new IN-flationary emergency that would compel him to RAISE rates from their 46-year lows has not yet begun. At least, that’s the esteemed opinion of the man himself.

– Deflation is vanquished, says the chairman, and inflation isn’t a problem. But fear not, dear reader, "Should that judgment prove misplaced," says Greenspan, "[the Fed] is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability."

– No one doubts the Fed’s preparedness to TALK about raising rates, but the Fed’s resolve to walk the walk is far less evident. For the last couple of years, the threat of deflation – or at least the phantom of the threat of deflation – so spooked Mr. Greenspan that he slashed short-term interest rates to the emergency rate of 1%. Although, the threat of deflation was never visible to everyone, Alan Greenspan saw it as clearly as a child in a darkened bedroom sees a crocodile in the closet.

– Happily, the frightful deflationary apparition that haunted the Greenspan Fed finally vanished. Yet, the emergency 1% Fed funds rate still persists – a rate that is a whopping 200 basis points below the official inflation rate. Again we wonder; where is the emergency?

– Ironically, applying emergency measures to ordinary circumstances – like calling in a napalm strike to start a backyard bar-b-que — often creates its own emergency. And in earlier financial epochs, Federal Reserve chairmen who held interest rates too low for too long created the emergency known as inflation.

– Why then has Greenspan maintained Depression-era interest rates in an economy that is growing better than 4%, not to mention an economy where home prices are soaring at double-digit annual rates and where the Nasdaq Composite sells for more than 60 times earnings? Why has the chairman suppressed short-term interest rates for so long that bond fund manager Bill Gross considers it "atrociously speculative?"

– The main answer, we would guess, is that a little bit of inflation is quite a lot of fun. Everyone FEELS richer while they are becoming poorer. Most folks prefer inflation to deflation because most folks OWE more money than they own. Only billionaires like Bill Gross – or masochists – advocate the sort of "hard money" policies that preserve the value of the currency for the lending class, while causing discomfort for the borrowing class.

– The borrowing class likes borrowing valuable dollars and repaying the debt later with devalued dollars. That’s the sort of "monetary arbitrage" that makes an "atrociously speculative" Fed funds rate so outrageously remunerative.

– Thus far, Alan Greenspan’s emergency rate seems to have caused very little harm…Maybe that’s because the oil market has, in effect, "tightened" credit for him. The big jump in energy prices over the last several months has drained liquidity from the economy better than a rising Fed funds rate ever could. But if oil now begins a significant retreat, as every Wall Street expert seems to be predicting, hiking rates might become a more urgent priority, not withstanding the disinflationary effects of falling energy prices.

– On the other hand, if oil is merely catching its breath before resuming its climb, hiking rates would still seem the prudent course of action.

– The recent reversal in investor sentiment toward the oil market seems even more dramatic than the reversal in the price of oil itself.

– Suddenly, EVERYONE knows that oil is destined to fall to $30 a barrel or lower, thanks to OPEC’s renewed guarantee to ramp up production.

– "In another four months, we could be awash in oil," writes Bear Stearns oil analyst, Frederick Leuffer. "As inventories build, speculators will shift their focus from concerns over terrorism to fundamental oversupply."

– Leuffer expects oil prices to tumble to $20 a barrel by early next year. "Sell oil stocks," he advises. Leuffer may be right. On the other hand, he may be wrong…very wrong. Short-term, Leuffer has plenty of company; even many oil bulls fear a short-term "correction" to the $30 level.

– Options pro Jay Shartsis, of R.F. Lafferty in New York, recently observed a number of troubling technical indicators in the oil market. "Last week, the price of crude put in a downside weekly reversal by trading at a new high above $42 a barrel but closing at $38.50," says Shartsis. "It is also noted that the two oil stock indices failed to make new highs recently when crude surged up to its own new high above $42. They are the OXI and OIH. This bearish divergence is a negative omen."

– Turning his attention to sentiment indicators signaling a top in the oil market, Shartsis notes the near-record long position held by the usually incorrect Large Speculators tracked by the Commitment of Traders Report and also notes that bullish sentiment commodity traders hit a recent extreme of 82.7%. "That’s a boatload of bulls," says Shartsis.

– Bearish short-term indicators notwithstanding, the big picture tends for crude oil do not readily accommodate a return to $20 oil prices. Demand is booming and supply is constrained, both geologically and geopolitically.

– "My observations in some 70 countries over about 50 years of travel and work tell me that we are already over the cliff," warns oil industry geologist, Dr. Walter Youngquist. "The momentum of population growth and resource consumption is so great that a collision course with disaster is inevitable. Large problems lie not very far ahead."

– Oil sellers beware…[Ed. Note: Dr. Youngquist’s analysis doesn’t even take the social strife and terrorist affections into account. But John Myers does. See here for his latest shocking exposé:

Terror in the Oil Fields
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Bill Bonner, back in Paris…

*** Japan raised estimates of its 1st quarter GDP growth rate to 6.1%. Most important: after a 14-year slump, Japanese consumers are finally ready to spend again. "Japan is a buy," says Moneyweek editor, Merryn Somerset-Webb. "We have more confidence in the recovery story in Japan than the one in America."

At least Japan might stage a proper recovery; it has something to recover from. Its real estate and stock market prices have collapsed 80% since 1990. America, in our guess, is not in the middle of a recovery but the early stages of a slump that began in 2000 and will last at least another 10 years.

*** Americans are about where the Japanese were 10 years ago – "leveraged to the hilt," says the Globe and Mail. Home equity borrowing, consumer debt-to-income, house sales – all are hitting new records.

Who finances all this debt? On Wednesday, the U.S. Treasury borrowed $16 billion – much of it from Asian lenders. Today, another $9 billion of U.S. bonds is to be sold. What will happen when foreigners grow tired of sending their savings to the world’s biggest debtor?

"When the day comes," comments Seth Glickenhaus in Barron’s, "I don’t want to be in anything except very short paper. It isn’t a probability because foreigners don’t have a better place to put their money. But they own a great percentage of our debt, and are buying a big percentage of new issues. We are at their mercy."

*** "The economy in Argentina is recovering quickly," writes Steve Sjuggerud from the pampas. "The country is growing at an 11% annualized pace – for comparison, that’s faster than China’s 9.8% growth. And now the President is treating investors LESS BADLY. Yet still (unlike China) no foreign investors are stepping up to the plate to capitalize… except us." [Ed. Note: Steve returned from another trip to Argentina yesterday. He went straight from the airport to the golf course, where he partnered-up with your editor for a round of golf. This guy has some great ideas. See his latest work here:

True Wealth

*** Meanwhile, our man in China, Dan Denning, sends a report.

"What’s happening here in China is not a simple financial asset bubble. It’s the emergence of hundreds of millions of people into the global marketplace as both consumers and producers. Look for China to unleash its dollar reserves on hard asset markets…well before the dollar itself starts declining again. And for truly long-term investors, anything that profits from the development of Chinese infrastructure, financial services, and health services is the best way to profit from development inside China.

"But that doesn’t mean there isn’t risk. The government is selling off assets because it needs money. And it needs money because the Chinese population is getting older. China has no meaningful pension system. U.N. population figures project that 13.5% of China’s population will be over the age 65 by 2025. Doesn’t sound so bad as a percentage. But with a projected population of 1.7 billion, that means China will have around 220 million senior citizens with no real social safety net. In other words, it will have a large nation of elderly people who need food and medical care. How will china deal with this problem?

There are no institutions to fill the void…not the state, which can’t afford it. Not the Church, which doesn’t exist in large enough numbers. And not the family, which was systematically eliminated by the one-child policy.

"Then again, Chinese culture is 5,000 years old. Communists can ruin a lot in a short time. Nothing is more destructive than the conceit that you can dispose of hundreds of years of tradition and evolution and replace it with a crackpot, egoistic, planned economy.

"But Buddhist, Taoist, Confucian thought is still at the heart of China. Not even an all-powerful state could eradicate that. How else to explain that Sun Yat Sen, the father of the Chinese nation, is more popular than Mao? As China moves into center stage on the world economy, its traditional culture and its emerging free market culture will replace the statist culture. The State cannot control what it has unleashed. And for that, we should all be grateful. China is a beautiful place with kind, hardworking people. The real bull market has just begun."