“The Sandinistas did some good things and some very bad things,” said Antonio.
We were racing along dirt roads near the Pacific Coast. Antonio was pointing out the big ranches that the Sandinistas had confiscated.
Now, landowners are getting their property back – or compensation. It is a long, hard process, though. The land may have been sold several times since the early 1980s. It will take years to sort out the mess in the land registry records.
“People come down here and they think they can do a title search like they do in America,” he continued. “But it isn’t that easy. You have to ask around. Some of the title claims are not recorded. You have to know who owned the property and how they got it.”
“But one of the good things the communists did was to make people appreciate a good patron,” he continued.
Longtime Daily Reckoning sufferers are familiar with the twisty roads we sometimes take. But it is a rare road that doesn’t lead somewhere. Not always where we intended to go…but often where we should have been.
Antonio is a patron. He employs hundreds of local men and women – building roads, building houses, tending cattle, cooking breakfast, doing laundry. He has teams of workers with machetes who cut the tall grass in the rainy season.
“Wouldn’t it be better to use a tractor with a bush hog?” I ask.
“Well, maybe, but this way gives people work,” comes the reply.
“At least you could give them scythes, so they didn’t have to bend over so much,” I suggest.
“What’s a scythe?”
Antonio’s family once owned 100,000 acres of cattle land in Southwest Nicaragua. Now, Antonio spends a good deal of his time trying to get the land back.
It is beautiful land, a tropical paradise along the Pacific coast. But nature rarely gives something without taking something away. Nicaragua has been hit by tidal waves, earthquakes, and volcanic eruptions. Antonio’s grandfather’s house, for example, was located just a few feet from our lodge – before it was swept away by a tidal wave in the early ’90s. Likewise, Managua was leveled by an earthquake which killed more than 20,000 people. The nearby town of Masaya was also hit – it has many houses with collapsed roofs and walls, still waiting to be repaired a decade later.
There are also dangerous bugs. My wife is a healthy woman. But when I found her unconscious on the bathroom floor, with her eyes rolled back in her head and foam coming out of her mouth, I knew that something about Nicaragua did not agree with her. (Dr. Rosales from nearby Rivas gave her a shot and some pills and she was soon as good as new. After Elizabeth recovered, we spent our days in idyllic bliss. We walked along the beach in the morning…and then took an early swim. In the heat of the day, we read and studied Spanish. Then, in the evening, we went horseback riding and took another swim in the warm ocean surf. There was little else to do, but we were happy doing little else).
Antonio drove his pickup down the narrow dirt road as though he were trying to outrun a tornado. Storms of dust followed us, choking the poor campesinos walking along the roadside, and covering the schoolchildren in
their bright white and blue uniforms. He rarely slowed down – even for cows, chickens or humans. Instead he just tooted his horn and counted on the survival instinct of his fellow mammals to keep them out of his way.
Gradually, Antonio is cleansing the gene pool of animals with slow reflexes. “One time, when I was in a big hurry to get to Rivas,” he explained, “I hit five chickens along the way.”
“You know, another good thing the Sandinistas did – they made people poor. Rich people can afford to be communists. But people in Nicaragua began to see themselves getting poorer and poorer as their relatives in Miami and Costa Rica were getting richer. People don’t mind being poor, as long as everyone else is poor. But when other people are getting rich, they don’t like it…”
Antonio is helping to answer one of the most puzzling questions of our time. Why has the level of government spending continued to rise in America? Government is an economic deadweight activity. That is, it is a cost…a net consumer of capital – a black hole into which wealth disappears. Typically, ceteris paribus, the more government, the poorer people are. That is why “the government that governs least, governs best.”
Since the fall of the Berlin Wall, there has been less need for defense spending in the U.S. And with the full employment, boom economy of the ’80s and ’90s, there is less need for social spending. Yet, taxes and government spending continue to rise. Why? Americans would be considerably richer if they didn’t give up so much of their income to government.
But, it is not absolute wealth that matters, it is relative wealth.
We drove through a small village. Looking into the houses through open doorways, I could see the simplicity and poverty in which the people of Nicaragua live. Their houses often scarcely have walls – just rude boards nailed onto posts. Nor do they have much furniture – little more than a hammock and a rocking chair. But what do they need? They have a tin roof over their heads – and chickens and pigs running around the yard. Occasionally, there is fish, too – taken right out of the ocean with a simple hook and line. They don’t even need fishing rods; the hooks are swung around and tossed into the sea, with the line wrapped around a short board as it is trolled in.
Some kind of festival was underway in the village. Several men were mounted on horseback, with a few dozen cheerful onlookers standing by the road. In the middle of the road, overhead, a chicken was tied to a rope stretched between two trees.
“They are playing a game,” Antonio explained. “The idea is to see who can grab the chicken’s head and tear it off. And it’s hard to do.”
“Is the chicken alive?” I asked, wondering what the SPCA might think.
“Well, not for long.”
The sight of the happy, well-fed natives enjoying their sport reminds us how little we really need to be happy. Just food, clothing, shelter. And a chicken that is smart enough to escape Antonio’s truck. Everything else is vanity, little more than an attempt to feel that we are better than others – or at least to avoid allowing other people to feel superior to us…
There are a lot of ways to feel superior, but in this age of materialism we gauge our superiority in dollars and sense. Nicaraguans can’t afford more government, because they are poorer than their neighbors. But Americans are rolling in credit (which they confuse with real money) – and don’t mind giving up some of it to a government that promises to tie up the rich – and wrench their necks off.
Your correspondent, back on the job… but still dreaming of the tropics…
August 20, 2001
*** No phone. No TV. No radio. No newspapers. No e-mail. For the last three weeks, I’ve been on vacation in Nicaragua. (About which, more below…)
*** Our vacation began idiotically and ended the same way. Henry had gotten a giant “Super Soaker” water toy for his birthday, which he tried to take on the airplane in Baltimore. The toy is either a water cannon or a water-powered rocket(I have never seen it in action). It is so big and clumsy that it might be mistaken for the space shuttle – if you thought the space shuttle were made of transparent plastic. But only a complete moron would believe it could be used as a weapon.
Nevertheless, the security guards took the Super Soaker toy away and put it in with the checked luggage on the grounds that Henry might be planning to use it to hijack the plane.
“When was the last time someone used a Super Soaker in a hijack attempt?” I asked the guard.
“Best to be careful,” he replied without a trace of humor.
*** But it’s a good thing I didn’t ask the question in Houston. Returning to the U.S., we discovered that the security forces of Houston were just as blockheaded as those of Baltimore. “Security regulations are taken very seriously,” proclaimed a regular airport announcement, “jokes or inappropriate comments may lead to your arrest.” But they would never take me alive…not as long as I had my Super Soaker.
*** Nothing much seems to have happened in the markets while I was away. The Dow and Nasdaq are not far from where I left them. Neither is Gold, although it is up a little. Amazon looks like it has fallen below the $10 mark. Still, let’s check in with Eric to see what happened on Friday…Eric?
Eric Fry reporting from Wall Street:
– Greenspan is beginning to resemble the Hank Aaron of 1976 or the Mike Schmidt of 1989 – certain Hall of Famers who decided to play “just one more season.”
– Aaron, a lifetime .305 hitter, and the all-time home run leader, batted .229 for the Milwaukee Brewers in 1976 and managed to hit only 10 balls out of the park.
– Schmidt batted .203 during the 42 games he played in 1989 and hit only six home runs. At least he had the good sense to hang up his cleats in May of that year.
– But the chairman of the Fed keeps suiting up every day and taking his hacks at the plate. His teammates politely pretend that the Hall of Fame central banker can still hit for power. But the fans are embarrassed for him. “The Chairman’s” bat no longer packs a wallop.
– It’s kind of pathetic really. The more he tries, the more the economy stumbles, the more stocks slide, and the more the dollar falls.
– Nevertheless, he will step up to the plate once again tomorrow and take another cut at driving the economy out of the park. I predict he will strike out – for the seventh time this year.
– Once the FOMC game is over, we will return to a world of withering corporate profits, declining employment, and leveraged consumers.
– Is it any wonder that on Wall Street these days sellers seem a little more anxious than buyers?
– SmartMoney.com’s Igor Greenwald offers some friendly advice to the chairman: Stay home on Tuesday.
– “Tuesday sounds like a fine day to go golfing. Maybe take your hard-working wife on a nice daytrip… Just so long as you cancel that Federal Open Market Committee meeting widely expected to produce another interest rate…Make up an excuse. Phone in a bomb threat. Go fly a kite.” He should do anything but show up and embarrass himself, says Greenwald.
– The prospect of another rate cut certainly did nothing to help the stock market last week. The Nasdaq fell more than 4%… again. The troubled index has now lost nearly 10% in the last two weeks.
– At this pace, the Nasdaq will hit 1,000 by Thanskgiving. In which case, cranberry sales may be very soft this year.
– As stocks struggle, the so-called defensive assets are gaining: namely bonds and gold.
– Treasury bonds soared, driving the 10-year yield down to 4.84%. Meanwhile, Newmont Mining and Barrick Gold each gained more than 7% on the week.
– Just when it looked like it could not possibly happen, gold revived and demanded attention. As we have noted once or twice in the Daily Reckoning recently, the gold price has been firming gradually for several days, coincident with the dollar’s weakness. But still, gold’s reaction to the falling greenback had seemed a bit muted, until Friday, when the monetary relic gained $4.10 per ounce to $282.00.
– But for non-gold stocks, last week was rough. Stocks tanked Friday in a disheartening fall sparked by an earnings warning from Dell Computer.
– The Dow dropped 152 points, to 10,241, while the Nasdaq fell 63 to 1867.
– “If the Dow Jones Industrial Average drops under 10,000 in the coming weeks or months,” observes Jim Stack’s Investech, “it will have done something that investors have never seen except in the depressionary 1930s – fall more than 4% in the six months after a 6th Discount Rate cut by the Federal Reserve.”
– Perhaps the Dow will manage to hold above the 10,000 mark, but a major rally seems highly unlikely.
– “Only an extreme bout of earnings optimism might put the major stock indexes in positive territory for 2001.” Moody’s writes. “Rallies of 11.6% in the S&P 500, 11.3% in the Wilshire 5000 and 25.8% by the Nasdaq composite are necessary to restore those market averages to year- end 2000 levels. Likely declines in 2001 would produce the first back-to-back annual drops in broad equity market averages since 1973-1974…”
– “The S&P 500 price-earnings ratio stood at a miniscule 9.3 at the end of 1975,” Moody’s continues, “whereas the P/E ratio still resides at a highly optimistic 26 at present.” Despite the very low valuations in 1975, “Stock prices did not definitely recoup the losses of 1973-1974 until 1980.” Six years later. Ouch.
Back to Bill in France:
*** Three weeks of splendid isolation. Did anyone miss me? “The graveyards are full of indispensable people,” says my friend Michel.
*** The dollar has fallen too – to less than 91 cents per euro. The big surprise of the next few months may be how far the dollar goes down. Ford announced 5,000 layoffs over the weekend. Instead of holding up the economy, the automakers are beginning to drag it down.
*** That leaves only housing – the last man standing. People are still borrowing the equity in their homes in order to maintain current spending levels. Business has been very good at the federally-backed lenders, Fannie Mae, Freddie Mac, and the Fed. Home loan systems now have debts of $3.2 trillion – about a third of GDP. And probably a third of this is in foreign hands.
*** These foreign holders of dollar assets must be getting a little nervous. If and when they decide to lighten up… the dollar will drop below the euro… and may keep falling.
*** September and October are often bad months for stocks. Consumer spending and stock prices have both held up through the summer. Just a guess: both will give way in early autumn.