Mines of Mongolia

In late October, I spent over a week in the obscure country of Mongolia, wedged in between Russia and China, on the high plains of east central Asia. It wasn’t perhaps the best time to visit, but on the bright side, the cold of late October did serve to decrease the number of tourists. And of course I did a bit of the tourist thing, going to museums (which, ironically, were themselves decrepit enough to look like they belonged in museums), and art galleries (some art here is quite weird and innovative, and quite cheap).

I didn’t see all of the country; that would have been tough, since it’s about the size of Alaska. But I did see the capital, Ulan Bator (UB to the cognoscenti), and hours and hours worth of territory to the south, in and around the Gobi. Eighty percent of the country is steppe, desert and semi-desert; unless you’re a geologist on an Easter egg hunt, believe me, it all looks the same. Insofar as you care at all about Mongolia, I presume what you’re interested in isn’t stuff you can read on a government website; you want to know how it really is. And maybe how you can profit from it, although that thought makes better cocktail party conversation than reality – unless you want to totally upend your life.

The bottom line is that, for most of the roughly 2.7 million Mongols, things are (relative to our cushy standards in America) pretty tough, although much better than they used to be. Someone with a “good” job – a translator, a bureaucrat, a secretary – might make US$100 per month. Someone with lesser skills, like a laborer or a waitress, might make about US$60 – before the 10% withholding tax. That’s assuming you live in an urban area and have a job, since statistics indicate there’s 20% unemployment. But, although people don’t make much money today, at least it’s real money (well, kind of, with the Tugrik at about 1100 to the dollar), and they no longer have to play the Soviet game of “They pretend to pay us, and we pretend to work.”

Mongolian Economy: Cheap Cuts of Mutton

Mongolians may not have much today, but they had a lot less of it in Soviet times. The biggest department store in UB resembles a supersized 7-11, and since most things are imported, they’re not particularly cheap. If you’re a typical Mongol, you don’t make enough to rent an apartment, so you share one with far too many other people. Although in the summer you’ve got fresh local fruit and vegetables to supplement some cheap cuts of mutton, in the winter you eat cheap cuts of mutton. Period. For entertainment you go to a bar and drink.

On the bright side, women wear a miniskirt and high heels just about everywhere. And there are enough cars on the streets to cause serious traffic jams twice a day, whereas before 1990 there was only the odd truck, or broken down Lada. Until I made a discovery described below, it was a great mystery how all the cars got paid for with wages being what they are. Looking at the official figures was no help at all.

The published figures show that Mongolia has a GDP of about US$1 billion. Entirely apart from the fact it isn’t much – less than that of most counties in the US – it doesn’t mean much either. Be that as it may, the government reports it took in the equivalent of US$262 million last year, and spent US$328 million – a $66 million, or roughly 25% deficit. The county’s imports were US$614 million, and its exports were $466 million – a $148 million, or roughly 30% deficit. Big percentage numbers.

Mongolian Economy: Foreign Borrowing

We know how this is possible, at least for a while, in a country like the U.S.: the U.S. has a reserve currency it can export, and it has an immense amount of capital to dissipate. Mongolia has neither of those advantages, so it makes do entirely with foreign borrowing (roughly $760 million of government debt), and about $200 million of foreign aid per year.

I consider numbers like these to be unsustainable, especially as the world economy heads down in the years to come. That doesn’t have to be a bad thing. In fact, if I were advising the government, I’d urge them to default on their debt now, because they will eventually. And the sooner they can get the burden off taxpayers’ backs, the better.

But any progress will, I fear, be slow. The statistics show that about 2/3 of Mongolia’s exports and 30% of GDP are from mining. And most of that comes from the giant Erdenet copper mine to the northwest of UB.

The mine was built in the Soviet manner, which is to say the object wasn’t to produce efficiently (i.e., profitably), but to employ the maximum number of workers and peasants, and crank out copper at any cost. Which was pretty easy because, since socialist economies don’t have free market prices, they can’t calculate costs. Hence, they have no way of knowing whether they’re creating, or consuming wealth by cranking out copper, or anything else.

In any event, the mine (which apparently still has a resource of about 1.7 billion tonnes of .62% material – one of the largest in the world), employs about 7,000 people, and a whole city has grown up around it. If the work force was cut by over 90% and modern technology used, the mine likely would be quite profitable.

Mongolian Economy: Placer Gold

But the answer I’ve found to the who-pays-for-the-cars riddle in UB is not the copper mine; it’s placer gold. Especially since the metal last moved over $300, it turns out there’s been a placer mining boom in Mongolia.

The word is that about 100,000 people, or over 5% of the country’s entire economic population, are engaged in illegal placer mining – which is to say going to a stream and panning, the way it’s been done for millennia. Estimates are that their number is going up rapidly. That makes sense to me in a country where there’s so little economic activity.

And that’s in addition to people working the streams legally. Mongolia has legal placer production of about 500,000 ounces a year, worth about US$150 million, or roughly 15% of official GDP. The way an E.U. consultant figures it (probably accurately) is that each of the 100,000 illegal miners produce, on average, one gram per day, which totals up to 100 kilos a day, or a tonne (31,000 ounces, or about $10 million) every 10 days. And the illegal placer business is probably about the same size as the legal one.

Of course, the miners can only work half the year, since this place gets unbelievably cold. But US$150 million, even divided among 100,000 people, is $1,500 – which means that each of the miners is making considerably more in six months than a top paid person could make all year. I’d say there are going to be a lot more Mongolians hitting the field next year.

Regards,

Doug Casey,
For the Daily Reckoning
February 18, 2003

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At least we’re not Japan, huh?

“The bond yield [on 10-year notes in Japan],” hedge fund manager Peter Tasker told the Financial Times, “is far lower than in any phase of human history, including the 1930s and the deflation of the 1880s”.

Maybe it’s the crick in his neck…or the back-up of airline traffic around the Eastern seaboard on the day we were slated to travel…but your editor was kind of cranky when he went set out to review the financial news this morning. Consumer capitalism – the world as we have known it – seems like its on its last legs.

We just learned, for example, that bankruptcies hopped up 5.7% in 2002 to a record 1.5 million. Meanwhile, consumer credit retracted by the largest amount since the Federal Reserve began keeping tabs on it in 1968. Retail sales for January were a robust 2%, far better than the expected 0.6%…but much of that increase can be chalked up to skyrocketing gas prices and the lowest oil supplies in the past 28 years.

Without the U.S. consumer buying even more things he doesn’t need, with money he doesn’t have, how will the world continue to grow? A war with Iraq, the IMF warns, could hamper world growth even more – by as much as 50%…

But at least we’re not Japan. Despite a litany of anti- deflationary speeches and aggressive talk by prime minister Koizumi, the bond market tells a different story. Yields on the 10-year bond dropped to 0.75. In other words, bond traders don’t see anything like inflation – or a recovery – in Japan for years to come.

Eric, what’s happening in New York?

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Eric Fry, reporting from Manhattan…

– All of the New York and Chicago financial markets hung out the “Closed” sign yesterday in observance of President’s Day. But even without a formal holiday, it’s unlikely anyone would have shown up for work at the NYSE yesterday. “Blizzard” is not an overstatement for what’s happening here in the Northeast. Your co-editor is looking out his window at three-foot snowdrifts…and it’s still snowing!

– While the U.S. markets took the day off, most foreign markets continued the rally that started in New York last Friday. Britain’s FTSE 100 Index and France’s CAC 40 Index both gained about 2%. The dollar’s nascent rally also picked up steam, as the greenback gained about half a percent in Tokyo trading. The U.S. currency had its biggest gain in a week against its European counterpart, rising to $1.072 from $1.079 late Friday in New York. The gold market, by contrast, continued the sell-off it started last week. The spot gold price dropped $4.60 to $346.70 an ounce.

– Even if the tone is improving somewhat on Wall Street, the tone on Main Street is far from melodious. Corporations and consumers are both keeping their wallets planted firmly on their hips. If corporate capital spending fails to recover soon, consumer spending will become all the more essential to our economic well-being. Unfortunately, the recent stats from the consumer sector offer little reason for cheer. Even more troubling, the once-buoyant mortgage refi market – consumer spending’s best friend – is starting to sink a bit.

– Businesses throughout our fair land are feeling the pinch of an increasingly penny-pinching consumer. Take the yacht industry for example, where buyers have become increasingly scarce, according to representatives from the annual Miami International Boat Show taking place this week…more about that in a moment…

– In 1940, author Fred Schwed’s classic, “Where are the Customer’s Yachts?” served up some timeless investment advice gleaned from the brutal Depression-era bear market on Wall Street. But as bad as things had become by the time Schwed published his book, the title of his work implies that a few brokers, at least, could afford to own a yacht.

– “Once in the dear dead days beyond recall,” the witty stock market commentator Fred Schwed wrote in 1940, “an out- of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said, ‘Look, those are the bankers’ and the brokers’ yachts.’

– “‘Where are the customers’ yachts?’ asked the naïve visitor”…(The phrase, “Plus ça change, plus c’est la même chose” comes to mind).

– Today, in 2003, neither customers nor stockbrokers nor investment bankers are buying yachts.

– “War worries are starting to drag on sales in the $29- billion U.S. recreational boating industry,” Reuters reports from the annual Miami International Boat Show, “particularly at the top and bottom ends of the market.”

– “The number of entry-level buyers turning out at early- year boat shows appears to be down,” says Reuters, “and the luxury end of the market, boats over 40 feet, is showing signs of softness…The U.S. recreational marine industry sold about 515,000 boats last year…down from 541,000 in 2001 and 574,000 in 2000, according to the National Marine Manufacturers Association.”

– The withering wherewithal of the Wall Street crowd is no mystery. Last week, Charles Schwab reported that its customers’ average daily trading volume had tumbled 23% in January from the level a year earlier and was…back to late 1998 levels.

– Wall Street’s customers have been faring even worse than its brokers, of course. After three straight years of double-digit losses in the stock market, very few customers could scrape together the funds to buy a small “Sunfish,” much less a 50-foot Hatteras yacht. One would imagine that the only seaworthy craft of interest to the typical Wall Street customer would be a lifeboat.

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Back in New Hampshire…

*** Though Japan’s sun may still be setting, the rest of Asia is not necessarily sharing its fate. As the world’s major markets wallow in bubble aftermath, amid fears of war – and as its major economies struggle under enormous debt loads – China is looking more and more attractive. Whether the U.S., Europe and Japan like it or not, China appears set to become a major player of the future.

“The world has long been suspicious of the Chinese growth story,” reports Morgan Stanley’s Stephen Roach. “Skeptics are still worried that China’s rapid growth dynamic is not sustainable. Some even warn of an imminent crisis in the Chinese economy.

“I disagree, and expect the strength of the Chinese economy to continue well through 2003. Our central case calls for real GDP growth to average 7.5% for the year as a whole, an outcome that would keep China on the solid growth trajectory that it has maintained over the past decade.

“While still a relatively small economy, China’s growth is now strong enough to have a major impact on the dynamics of the broader global economy. Currently, China accounts for only about 4% of a $32 trillion world economy. However, in a weakened global climate, China’s growth rate is now strong enough to have accounted for fully 17.5% of the growth in world GDP in 2002 – second only to the growth contribution of the United States. At the same time, while China accounts for only about 5% of the world’s total manufacturing exports, it accounted for 29% of last year’s growth in such trade.

“In short, China is now making a highly disproportionate contribution to the growth dynamic of a sluggish world economy. That has put the world on notice that China’s global impact now needs to be taken quite seriously.”

Notice taken, Steve…

Addison Wiggin,
The Daily Reckoning