Digital Mongolia

Mongolia is about the size of Iran or Alaska, which makes it about a fifth the size of the lower forty-eight states, and its total population of 2.6 million is about the same as Kansas City’s. More than a quarter of its citizens live in the capital city, Ulan Bator, leaving a very small number of people spread over a very large geographic area. It is hard to believe that as recently as the mid- fourteenth century the Mongols controlled most of Eurasia from Korea to Hungary, having conquered it more than a hundred years earlier.

It was against invasion by the Mongol hordes that the Great Wall of China was begun. They were invading Japan when a sudden typhoon sank their ships and drove them away. The Japanese have used the word kamikaze, “divine wind,” ever since. Marco Polo claimed to have traveled from Venice to visit the Mongol Empire. The Mongols swept the world as the great horsemen of their day, and a simple invention gave them much of their power.

Their use of the stirrup gave them control of their fast ponies at a time when others were using horses mainly as beasts of burden. Eventually everyone had the new technology and the Mongols faded into history, outpaced by even newer technologies.

Outer Mongolia is now a name almost synonymous with the word “backwater,” evocative of the remote, the retrograde, the unimproved.

Ulan Bator: Totally Digital

Yet Ulan Bator, the capital of Mongolia, is perhaps the most technologically up-to-date city in the world, totally digital. With the fall of the Soviet Union, a free and independent Mongolia benefited from numerous sources of foreign aid, and with no infrastructure to upgrade, it leapfrogged about three generations of technology. The whole city is wired with fiber-optic cable, enabling you to jack into the Web from almost any phone in town.

You can’t do that in Russia. There, it is hard enough to make a phone call out. To send e-mail in Russia, you have to pay a physical, not a virtual, visit to an Internet service provider – which we did all along our route. As it happens, every decent-sized town in Russia has an ISP, often a battered office jammed with half a dozen aging computers and half a dozen roughly dressed youths staring at their screens. Descending on them, we would find them shocked and delighted to greet visitors from the exotic West.

“How much to plug into your lines?” we would ask, brandishing our laptops. At a dollar an hour, they were wildly overcharging us, but we were overjoyed to be able to update our Web site. In the absence of these entrepreneurial outposts, we would have been out of touch with friends and family for weeks at a time. It was just one more example of how dramatically the world had changed in the space of a decade.

Another change spawned by the digital age, and one of the more significant changes for the world traveler, was access to money. Paige and I had been through twenty-two countries, and to my surprise I had suffered very few of the problems I had experienced on my last trip regarding currency. Last time, crossing borders, both entering and exiting countries, I had had to hide my cash, confronting border guards who wanted me to declare it on special forms. (Of course, many border guards had simply been looking for a bribe.) Back then I would hide currency in the frame of my bike, my shoes, my helmet, anywhere I figured border guards would not look.

Ulan Bator: It’s Everywhere You Want to Be

To avoid carrying large amounts of cash, I would have funds wired to me at banks in capital cities, so I would have money for food, hotels, and gas. On this trip none of that had been necessary. I did not need to carry a lot of money. Now, on the verge of the new millennium, Visa, Master-Card, Diners Club, and American Express were accepted everywhere.

And even in Russia, not to mention up-to-the-minute Ulan Bator, we could just march off to the nearest ATM and take out whatever cash we needed, when we needed it, sometimes even in dollars. One had to be attentive, however. In Siberia I once obtained some cash, but while I was putting my credit card away, the machine took back the money! It took two days to get the cash back.

Running phone lines across Mongolia, a country so large with a population so small, would be both a technological nightmare and economic insanity. So the country, in another instance of leapfrogging technology, went straight to digital communication. Everybody in Mongolia has a digital cell phone. The nation’s nomads, crossing the country on horseback, carry them. There is a cell phone in most yurts.

This leapfrogging of technology has impacted history for centuries.

Ulan Bator: Canals, Railroads, Interstates

In early-nineteenth-century America towns were desperate for canals to put them on the trade routes. Those unfortunate cities without canals went straight to the newfangled railroad. Soon the old canal routes disappeared. (Remember the Erie Canal?) Then along came the Interstate Highway System, and the old railroad towns that ignored the impact of the highway disappeared. San Diego is a major U.S. city now, but not Tucumcari, New Mexico, a major railroad interchange.

So, figure out what will replace the highway system and jump on board while everyone else is angling for the new interstate.

On the road to Ulan Bator we saw nomads moving their camps, uprooting themselves and all their horses, camels, and goats, and traveling to new grazing grounds. These were the descendants of Genghis Khan, who had swept across the steppes on horseback. The women, we noticed, were expert riders just like the men.

We started snapping pictures. Photographing a yurt, we were invited inside by the woman who owned it. She showed us around the humble dwelling and served us salted tea. In this part of the world, I was surprised to discover, they do not put sugar, honey, or milk in their tea; they drink it with salt. (Of course, there has never been much sugar grown in Mongolia.) Just one more culinary adventure.


Jim Rogers – excerpt from Adventure Capitalist
June 17, 2003

P.S. We wanted to take Polaroids of her and all the kids, about eight of them, of all ages, several photos, so we could give some to the family.

She grabbed her youngest and asked us to wait. And then, like any mother, anywhere in the world – do not let anyone tell you that people are fundamentally different – she combed the child’s hair and changed his shirt before letting him pose for the pictures. The second shirt was slightly less dirty than the first. She wanted him to look his best. That mother could have been in Greenwich, Connecticut, as easily as on the steppes of Mongolia.


You have come at the right time, dear reader; it’s getting good.

We mean the massive, epochal drama in the world’s markets.

When we left you yesterday, we hung on the side of a cliff…caught in a contradiction.

On the one hand, never before have the forces of slump, dip and deflation been greater. Why? Because for the last quarter of a century, the Dollar Standard has permitted an increase in cash and credit greater than the world has ever seen. As oft repeated here, during the Bretton-Woods/gold standard era, 1948-1969, world money reserves (gold) increased only 55%. Since then, they’ve shot up more than 2,000%.

Where did that money go? Debt and capacity. Foreigners (notably those with straight black hair and single eyelids) built factories to make things they could sell…in order to get their hands on those dollars. They built so many factories, and worked so cheap, that they are now driving down prices all over the world.

The dollars gushed towards them, trillions of them; what could they do with them all? As the years went by, Americans made less and less that the foreigners might want to buy. All the dollar-holders could do was to buy U.S. financial assets, and lend the dollars back to the U.S..

America was the world’s biggest creditor when Ike was president. By Ronald Reagan’s second term, about 15 years into the Dollar Standard era, the nation slipped to net- debtor status. In the following 15 years it broke all records – becoming the world’s biggest debtor and the greatest debtor of all time. Currently, the U.S. owes the rest of the world about $2.5 trillion more than foreigners owe it in return.

But Thomas Gale Moore, then a member of President Reagan’s Council of Economic Advisors, must have anticipated Ben Bernanke when he noticed the U.S. crossing the creditor/debtor threshold in the mid-’80s. Not to worry, said he, “We can pay off anybody by running a press, frankly, so it’s not clear to me how bad that is…[becoming a net-debtor].”

Debt levels in the U.S. are at all-time highs. Why is this deflationary? Because the more you owe, the more interest you have to pay…which reduces your spending power. And because you eventually need to pay down your debt…(especially if you’re trying to prepare for retirement). This is why inflation always leads to deflation.

But on the other hand, never have there been so many people so determined to prevent it. Bernanke, Bush, Greenspan, Snow…McTeer…Poole…and all the Fed governors…have proclaimed that if there is deflation, ‘it will be over our dead bodies.’

Which is all right with us.

We see creeping deflation ahead…even if it is opposed by every single Fed governor, every hack at the Treasury department, all the ships at sea and all the saints in heaven.

Then again, we see inflation, too. Maybe not so much now as later…and not so much creeping as galloping. So there you have a prediction. And one that didn’t cost you a penny: we predict both inflation and deflation. We have been unwilling to cut an arm off with a penknife to free ourselves from the apparent contradiction. Caught in this Promethean crack, we await the vultures…

Eric must be on vacation. Here’s Addison with the latest news:


Addison Wiggin, writing from Paris…

– Investors are once again lending their hearts and souls to the ‘second-half-strong-recovery’ story: all the major indexes levitated by more than 2% to kick off the week. The Dow Jones Industrials tangoed up 202 to nearly 9318. The S&P 500 shimmied 22 points forward to settle in above the mystical thousand-point level at 1010. And the Nasdaq swayed rhythmically…adding 40 by day’s end to finish at 1667.

– “With investors wholeheartedly putting their faith in the ‘second-half-strong-recovery’ play yet again,” writes Apogee Research’s Andrew Kashdan, “it’s worth considering the other side of that trade. First of all, instead of searching for statistical anomalies in the unemployment data, as the perennial optimists among us are wont to do, we view the jobs recovery much the same way Justice Potter Stewart defined hard-core pornography: ‘I know it when I see it’. And when it comes to actual jobs, not even the most enthusiastic bulls have claimed a sighting yet.”

– Despite his brethren’s leap into the unknown, the savvy investor wouldn’t have to torture any statistics to find reasons for sweating the details with respect to the economy. All the major categories real economists use to judge the health of the economy look decidedly peaked: besides the lack of jobs, retail sales remain weak, pension funds are racking up losses, manufacturing activity is still contracting (if at a slower rate), and business investment has yet to pick up.

– In fact, while the first great recession of the 21st century was declared DOA roughly 18 months ago, “real business fixed investment” has been dropping steadily since; down by a 2.2% annual rate over the period. Is that bad? Well…yeah. “Typically,” according to Kashdan, “[real fixed business investment] increases by a little more than 8% in the first year of a recovery – yet more proof that this so-called recovery is anything but typical.”

– According to a report in the St. Louis Fed’s monthly “National Economic Trends”, from 1955 to 1994, manufacturing capacity grew by 3.4% per year, almost identical to the 3.3% growth of real GDP. Yet since 1994, the capacity growth of 4.7% has far outstripped the 3.1% growth in real GDP. In other words, the U.S. has a bumper crop of idle factories just waiting for something to do. Lakshman Achuthan, managing director of the Economic Cycle Research Institute, warns investors to be wary of excessive optimism. “We are firmly on track for a sub-par recovery,” writes Achuthan. “The implication there is that the pace of growth will fall short of that needed for stronger job growth.”

– If the economy continues to refuse to sit up straight in the job creation department, we catch ourselves wondering (as we straighten in our chairs): how much longer can the ‘mortgage boom’ last? At some point, people are going to eschew even the “lowest mortgage rates in history,” as one piece of junk e-mail in my inbox puts it…aren’t they? If they can’t count on their jobs, what choice will they have?

– The Economist’s recently published survey of property markets around the world proffers disturbing implications for the U.S. housing market. Few are suggesting the housing bubble will pop in cataclysmic fashion, like the equity bubble did, which is what allows Greenspan and others to stick to their claim that this bubble is a non-event. But since the mid-1990s, U.S. house prices have jumped by about 30% – the biggest real gain ever recorded over a similar time span, according to The Economist. The gains in some European countries have been even larger. A P/E ratio comparing U.S. house prices to rental income or implicit rent is about 16% above its 30-year average. Similarly, the house price-to-income ratio, which can be measured in various ways, is well above its long-term average.

– For further insight, we turn once again to our other man in New York, Andrew Kashdan. “Could it be that much of the money sloshing around at the behest of the Fed has ended up in the housing market?” asks Andrew. “Whatever the cause, just like when stocks go up, some people are loathe to call it inflation. More importantly, even if prices merely stay in a range while valuations catch up, investors and consumers will be in a much grumpier mood for some time to come. We’d hate to think how they might behave if U.S. housing prices actually declined, as they did back in the ’80s.”

– But that’s not really a problem, right? After all, house prices always go up – don’t they?


Bill Bonner, back in Paris…

*** It’s just like old times. Yahoo rose 7% yesterday. Why? Because of an analyst upgrade. Ha…ha…ha…ha…

*** “This rally is for real,” says the cover of Barron’s. “Stocks are likely to be 10% higher by year end.” Maybe. But (ha…ha…ha…ha…) how they heck would they know?

The S&P 500 is about 40% undervalued, they say, using the ‘Fed Model’ as if it made a lick of sense.

Then they quote Byron Wien, who puts the S&P at 45% undervalued. Heh…heh…

*** But who can argue with a bull market. The Nasdaq is up 21.8% so far this year. The Dow is up almost 10%…and the S&P 500, 12.4%.

It’s a “Bull Run,” Barron’s concludes.

Which reminds us of something. Oh yes…June of ’95…and the people with straight, black hair…

In Japan, the Nikkei Dow rallied 15 times, more than 15% each time, between 1980 and today. On 4 occasions it rose more than 30%. And twice more than 50%.

Early in 1995, the Japanese were desperate to revive their economy and put some life into their stock market. They administered two remedies – one fiscal, the other monetary. The government began a number of initiatives that put about $100 billion into the economy. The Bank of Japan cut rates from 1.75% to just 1%. Then, 6 months later, it made another half-point cut.

These measures seemed to do the job. The economy sat up in bed and began doing a little light work. The stock market, on the other hand, made what looked like a miraculous recovery. The Nikkei rose from 14,000 to 22,000 from July ’95 to June ’96.

If that were all there was in the health records, we could consider the patient cured and the story ended. But, alas, the recovery proved temporary. Stocks soon began to fall again. Investors who bought into the ‘Bull Run’ story in June of ’96 subsequently lost most of their money, as the Nikkei collapsed back to 14,000 and kept falling. This morning it is trading at 9,034.

*** Henry’s class put on a spectacle last night, preparing to end the school year. The boys still have another 2 weeks of school to go, but their spirits are already flying high in anticipation of 8 weeks of summer vacation.

The show included everything but animal acts. There were piano players with impressive talent…and violin players with none at all. (The violin is an unforgiving instrument; lacking frets, it allows the musician to squawk notes so far from the chromatic scale that even a tape recorder couldn’t reproduce them.)

What was most surprising is that Henry’s French Catholic school shows no signs of obnoxious, revolting youth. There were no baggy pants. No rings. And no cynicism, nor even nascent suspicion towards bourgeois culture. A tall boy played Vivaldi on the flute and was applauded as though he were a football hero. Another boy rendered Chopin on the piano; the others listened quietly, almost reverentially, as though they were in the company of a rap singer with a loaded pistol in his hand.

Henry won a prize for having a ‘Bon Esprit.’

*** Henry, 12, has grown tall and handsome lately, with a broad face and dark, wavy hair.

Reading the paper recently, we noticed that Gregory Peck had died.

“No, he lives…” murmured Henry’s grandmother at the news; she pointed in Henry’s direction.

The Daily Reckoning