Good Morning, Vietnam

The Daily Reckoning PRESENTS: Vietnam represents a sore point in U.S. history for most Americans. However, Chris Mayer points out that the nation is rapidly changing, with time and market forces doing their parts to mend old wounds and bring new growth.

by Chris Mayer

Vietnam – a nation of 83 million people on a thin strip of lush country slammed up against the Gulf of Tonkin and the South China Sea. To the west lie Laos and Cambodia. Excluding various islands, the land area of Vietnam is not much bigger than New Mexico, though it supports a population more than 40 times as large.

In the south is Ho Chi Minh City (locally, it’s still often referred to as Saigon, even though the name officially changed in 1976). And all along the coast on the way north are plenty of sun-kissed fishing villages and quiet, pristine beaches – such as those found in Nha Trang. The green jagged mountains inland, carpeted in dense misty jungles, provide a stunning backdrop. Most of the people on the beaches are adventurous foreigners – Americans, Germans, Australians and French. Mostly, they stay in foreign-built resort-style buildings dotting the bay. It is usually hot, often wet, and sometimes wetter.

The seafood is always fresh, usually alive moments before it’s eaten. Right up to the water’s edge, women pull up their full nets from colorful boats. And you’re also likely to see them skillfully handling thung chais, little round dinghies constructed of bamboo.

The women gut fish, chop squid, wrestle with shellfish and cook up interesting pots of fish, noodles, peppers and other goodies. This is one of the places in the world where the dollar goes a long, long way. A family can eat like kings for $7 or less. The bird’s nest soup is quite the local dish – flavored with ginger, scallions, chunks of pigeon and coconut milk.

In Hanoi, the capital city in the north, you see busy tree-lined streets full of cars, cycles, scooters, and – as if to remind you of its fading past – rickshaws. Old French villas evoke Vietnam’s colonial history. Street vendors will offer you shrimp on a stick, pho (beef noodle soup), fruit, steamed crabs, and other assorted foods. The swirl of noise and smells assaults your senses.

This is Vietnam. For Americans, it inevitably stirs up ugly memories, or at least a painful chapter in U.S. history. The Vietnamese people and countryside bear the physical and psychological scars of that not-too-distant conflict as well. Yet, Vietnam is rapidly changing, with time and market forces doing their parts to mend old wounds and bring new growth. Even here, the biting winds of globalization carve new pathways into the old country’s business landscape.

Vietnam still produces a lot of old-world agricultural goods – things like rice, coffee, cotton, tea, pepper, soybeans, sugar cane, peanuts, and bananas. More than 60% of the work force is engaged in agriculture in some way. However, the manufacturing and service industries are growing and taking bigger slices of the pie as the years roll by. The Vietnamese make garments and shoes, as well as glass, tires, and steel. They produce cement and paper and mine for coal. But there’s much more to the story.

The Vietnamese economy has quietly become one of the fastest growing in the world, approaching the scorching pace of India and China. It’s also become a magnet for foreign capital. In 2005 alone, investment in Vietnam totaled over $5 billion. Already, about 260 U.S. firms have invested directly in Vietnam. In 2006, another $6 billion is expected. This includes major technology and infrastructure projects.

In the last week of February came the most telling announcement yet. The Vietnamese government approved Intel’s plans to build the biggest single technology project in the history of Vietnam – a chip assembly plant in Ho Chi Minh City, an investment that could cost as much as $605 million.

This major turning point was barely mentioned in the mainstream press – if it was noted at all. While the country had attracted investments from a diverse range of companies, including Sony Corp. of Japan and Samsung of South Korea, none comes close to Intel’s plans.

Intel’s plant will engage in the final process of the chip-making process, in which the chips are packaged in ceramic casing and tested. The work is labor intensive and requires a sophisticated work force, which is why insiders are impressed with the deal. It means Intel believes the Vietnamese can do more than the expected low-skilled jobs. More foreign investment will surely follow Intel’s lead.

The attraction? The Vietnamese work very hard for very little by Western standards. The foreign private companies pay the best – on average, about $60 per month. State-owned enterprises paid only $19 per month. (It’s an old myth that foreign companies go overseas and pay poorly. In fact, in most cases, the foreign-owned companies pay more than the local alternatives.)

Those are cheap rates, even by the standard of the Chinese. And it doesn’t take long to get things done in Vietnam.

While in China, I heard Chinese business people talk about Vietnam like Americans talk about Mexico. Indeed, the Chinese are losing some of their manufacturing jobs to the Vietnamese. The rise of China is the best thing that ever happened to the economies of Southeast Asia, Vietnam in particular. Not surprisingly, China is Vietnam’s largest trading partner.

Much of what’s happening in China is only beginning in Vietnam. Recently, the state-owned Vietcombank announced plans to list its shares in Hong Kong or Singapore. This would be Vietnam’s first overseas initial public offering. And several Western banks are taking minority positions in Vietnamese banks, anticipating future IPOs and growth.

The market has a long way to go before it approaches the likes of even China in terms of a developed stock and bond market with some semblance of disclosure. Nonetheless, all great journeys begin with a humble first step. Vietnam is on its way.


Chris Mayer
for The Daily Reckoning
March 28, 2006

P.S. While I’m excited about the prospects of Vietnam, I found no direct investment ideas suitable for my Capital and Crisis readers. Buying Intel as a play on Vietnam is like buying General Electric because you like the light bulbs. Intel is not a meaningful play on Vietnam. Ideally, I’d love to find a “backdoor” play – watch this space.

Editor’s Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Daily Article series to here in The Daily Reckoning. He is the editor of CrisisPoint Trader and Capital and Crisis – formerly the Fleet Street Letter.

“Bernanke is not inheriting the best of situations,” said Paul Volcker.

If we were in Ben Bernanke’s shoes, we would have ducked the reading of the will. What can he possibly do about the legacy Alan Greenspan has left him: the trade deficit, consumer and government debt, the dollar, or the declining financial cycle?

“How would you like to be responsible for an economy that’s dependent upon $700 bn of foreign money every year?” added Volcker. “I don’t know what I would do about it, but he’s going to have to do something about it sooner or later.”

[Ed. Note: Coincidentally, Addison will be meeting Paul Volcker tomorrow at the Grants Conference in New York. We’ll let you know how it goes…]

Has he not inherited the wind? Will he not reap the whirlwind?

There are only two ways to reduce the empire’s reliance on foreign capital: Americans can save more money themselves, or they can spend less, thus needing less from overseas. Both amount to the same thing: nearly a trillion dollars less spending in the United States. Take away that kind of money from a consumer economy and you are going to have trouble. There is no way to avoid a recession – or a depression. Last year, two million people went broke – with the U.S. economy in full expansion. Think about what would happen if the GDP went down 5%! Or, if you are Ben Bernanke, think about hot tar and feathers!

Yet, Fed officials, imperial apologists, and their lapdog economists see no problem at all.

“There may be in the future some stress in some areas, but broadly speaking I think that consumer finances are enough to keep the economy at or close to its potential output growth rates,” said Ben Bernanke last week. “The increase in mortgage debt may not be a particularly serious problem.”

What about the “inversion” of the yield curve? The last five out of six times short rates rose above long rates, it has signaled a recession. But, Bernanke claims this old indicator is as out of date as spats and solvency. This time, he said, an inverted yield curve may come from investor confidence – a portent of more good things to come.

Unfortunately, it looks to us as though Americans have squeezed all the sweet juice of the orange already. What’s left is only a bitter pulp. The Financial Times reports:

“Levels of US household debt are vertiginous, rising 8.6pc in 2000 from already dizzy heights, then again 8.6pc in 2001, 9.7pc in 2002, 11.4pc in 2003, 11.1pc in 2004 and 11.7pc in 2005.”

Much of this borrowing is centered on housing, says the Financial Times, with “[real estate] agents, surveyors, and the army of workers linked to property made up 55pc of the 2m jobs created by the US economy from 2000 to 2005, according to Moody’s.

“The rolls of the National Association of Realtors have grown from 767,000 to 1.2m in five years.

“The Americans are now drawing down 6pc of GDP from the equity in their houses each year, much of it to pay bills or splash out on a spanking new V-6 Chevrolet Equinox.

“Goldman Sachs estimates that 68pc of this home equity withdrawal is spent outright on consumption. It warned that the drag on growth could reach 1.5pc of GDP by next year if property stalls.

“It is a portrait of a nation that is living further beyond its means than any advanced society has ever dared before.”

[Ed. Note: There’s only one way to stop a yield-curve inversion. The Fed has to slash short-term rates. What happens when you add that up with the dollar’s slow slump…ridiculous levels of consumer and federal debt…and disintegrating overseas confidence in the U.S. economy?

You get the perfect climate for gold hitting $2,000 – and if you heed Justice Litle’s advice, you can not only shore up your current wealth…but you’ll have a unique chance to take advantage of the biggest explosion in gold prices in precious metals history.

More news from our currency counselor…


Chris Gaffney, reporting from the EverBank world currency trading desk:

“I look for the Fed to signal an end to the rate increases and perhaps, shift the focus on the data, which we will be getting over the next few days. This release should set the stage for the U.S. dollar to get back on the long-term trend downward.”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig


Bill Bonner, with more thoughts…

*** American dreamers and schemers are not worried, and here, in his own words, is the mad prophet of the Great Tech Bubble himself, King George of the Gildered Age:

“A balance of trade or a balanced budget is not necessarily desirable at all. Indeed, a trade gap signifies a capital surplus. It means that people want to send us money. It means they trust the stability and order of the U.S. economy. You can see how this works when you realize that one-third of global GDP is in the United States. The United States generates fully one-third of global GDP.

“But the market caps of our companies represent 57% of global market cap. In other words, people all over the world want to invest in the United States and this is because the United States has the most stable environment for investment. It has the deepest and most creative capital markets. It’s got the largest and most liquid stock markets and it has the rule of law, we hope, rather than the rule of lawyers which threaten it.

“So, the way to think of this is: a foreigner with a dollar can do two things with it. He can buy an American good – buy an apple exported from the United States, for example – or he can buy an asset in the United States. If he purchases the apple, he eats it and we don’t have it anymore. If he purchases the asset in the United States, we keep it.”

But do we really “keep it” when a foreigner buys a U.S. Treasury note? Or, do we just “get it” good and hard? Of course, God doesn’t care who owns U.S. debt, U.S. factories, or U.S. ports. He is neither xenophobe, nor patriot.

As Americans go further and further into debt to our friends in the Far East, and sell off more and more U.S. assets, they transform themselves – from creditors into debtors, from capitalists into post-industrial serfs, and from independent citizens (who could tell the rest of the world to drop dead) into modern wage slaves. They are so deep in debt to the foreign-owned company store that they have to stand on tiptoes to kiss the derriere of a Chinese duck!

*** Is it really true, dear reader? You may have wondered yourself. Do things really work the way they’re s’posed to work? Does virtue really triumph over evil? Do prudence in investing and honest toil on the job really beat reckless day trading and a government job?

Maybe George Gilder is right. Maybe the trade deficit is nothing to worry about. Spend, spend, spend…whoopee!

It just doesn’t matter. Sin, debauchery, or debt – in this new Information Age, everything will work itself out…right? Play the tambourine, let the little ones dance about, refi and refi again. Save money? Forget it! Max out the credit cards, get a convertible, buy a Miami condo on credit, and still go down to the beach with a young blonde on our arm, in peace.

But wait. Is that the world we want to live in? There’s the rub, isn’t it? If we were able to do what we wanted – and get away with it – everyone else could, too. And what a depressing mess that would be. What if being naughty isn’t so much fun after all? What if we didn’t get away with it? What if we don’t go to the beach in peace? And, what if the burden of it floats on our soul like a dead fish at low tide – stinkin’ to high heaven?

What if we run out of time? Out of credit? Out of good humor? What if bad dreams disturb our sleep – or demon worries trouble our digestion? No thanks; it doesn’t seem worth the risk.

The Daily Reckoning