Pearl of the Adriatic

From time to time we like to take a break from Fed bashing and market skepticism to bring you… what’s this?… a novel (and sunny) way to make money?

Imagine looking out from the balcony of your beachfront property across beautiful, uncrowded beaches to the crystal-clear water of the sea – waters that French diving legend, Jacques Cousteau, described as "the cleanest and clearest" in the world.

Think of a country…bathed in sunshine 300 days of the year…so mild that subtropical vegetation covers the landscape and the aroma of olive, fig, and lemon trees is carried on the breeze. Here’s a clue: in the early 20th century, this country was a holiday destination for the European royalty.

Italy? Spain? Greece? Nope. I am talking about Croatia – a soon-to-be-discovered paradise with more coastline than any other European country!

Most people associate Croatia with the Balkan war. But the war ended nine years ago, and times have changed. Now Croatia has become the gentle, friendly, Mediterranean country that it once was.

40 years of war and socialism made this area a no-go zone for investors and tourists alike. Real-estate values were destroyed, along with everything else…but this all about to change.

Croatian Property: A Potential Gain of 200%

We would like to show you why some properties in Croatia may gain as much as 200% in value over the next five years, and probably much more:

The election in 2000 brought a market-orientated government to power, and between 2000 and 2002 the Croatian economy grew by 2.9%, 3.8% and 5.2% per year. The new government has given foreign investors the same rights as local investors – free expatriation of principal and profits. This new found political and economic stability has opened a window of opportunity for enterprising individuals – Croatia’s most important assets are starting to draw the world’s attention…features are beginning to crop up on the holiday pages of national newspapers, in travel publications and on the internet.

An army of tourists will soon be swarming over the village markets, the beaches and the nightclubs.

Croatia boasts nearly 1,200 islands…and what beautiful islands they are! If you ever travel to Croatia, take a boat and go out to sea: you’ll be amazed by the clarity of the water…you can still see the seafloor miles from the nearest land!

The country offers some of the highest quality property in the Mediterranean, yet prices are the lowest in the region. And even though prices have already started to rise significantly, the general price level is still 50% below 1990 levels…and you won’t have to pay undefined8 for a cappuccino!

The current level of tourism is still less than 50% of levels hit at the peak of the 1987 tourism boom…yet the quality of the country’s infrastructure is be far superior…and improving every day.

Up to now, only the northern part of the country has been easily accessible. Anyone wanting to drive from Italy, Switzerland, Austria or Germany into the southern part of Croatia had to spend almost a day driving along a narrow coastal road that was literally hewn from rock. But seven months ago, a dual carriageway opened from Zagreb to Split, and it’s going to be extended to the tourist regions around Zadar in 2005 and Dubrovnik in 2008.

And accessibility by air is set to improve too. So far Dubrovnik…the ‘Venice of the Adriatic’, could only be reached by air if you changed at Zagreb, making it a four-hour journey from London. But we expect Western European discount airlines to soon start offering more direct flights to Dubrovnik, opening the floodgates to tourists and property investors.

Croatian Property: The Island of Korcula

Bargain hunters should look at the island of Korcula, which is linked to Dubrovnik by a three-hour ferry transfer. The main village, Korcula, is much smaller than Dubrovnik, but is equally charming. The east of the island offers gorgeous beaches although, as everywhere in Croatia, they are pebble or rock beaches.

Experience shows that for holiday properties that are more than one hour away from the nearest airport, more than 25% of all potential purchasers lose interest. An hour and a half, and 50% turn the offer down. With Korcula being a rather long ferry ride from Dubrovnik, prices have stayed very low. But the plan to build an airport on Korcula will change all that.

Here are some examples to give you a better idea: an apartment in the old town of Dubrovnik will set you back undefined5,000/sqm or undefined3,000/sqm if it requires renovation. In Korcula, you can still buy flats in need of renovating for undefined1,000/sqm! It’s not beyond the realms of possibility to imagine prices doubling in two years, and tripling in five.

Another offer we came across was a house in Lumbarda, in the northeast of Korcula. The area’s scenery is probably the most beautiful of the entire island. The ground floor of a two-floor house, with 80sqm living space, 250sqm garden, and direct access to the sea with the possibility of mooring a yacht or motorboat right in front of the house, was on offer for undefined135,000. The bay surrounding the house was nothing short of breathtaking.

Korcula is, by any stretch of the imagination, a gem of an island, only lacking in accessibility. In a few years, opportunities will no longer be available in places like Lumbarda. The properties will have all been snapped up. The same happened in Tuscany after World War II, and in Spain after the Franco-regime.

Whether you are looking for a nice holiday home in an idyllic corner of the world or the opportunity for a lucrative investment, Croatia deserves a closer look. The factors that I have mentioned above virtually guarantee that property prices there are going to catch up with the rest of the Mediterranean region. The country’s natural beauty and climate ensure that property will always maintain a high intrinsic value. And with stability on the political front, it’s difficult to imagine prices falling. At the same time, the improved access to the country should provide plenty of additional demand for property, which will only find limited supply.

Croatia certainly looks like a value property investor’s dream.


Sven Lorenz
For The Daily Reckoning
March 23, 2004

Editor’s note: Sven Lorenz is a globetrotting analyst, with a 15-year reputation for outwitting Europe’s best financiers, with incisive reports on neglected companies, wherever they may be found. His greatest coup must be the 2,131% gain he picked up from the 100-year-old German railway company, as it transformed itself into a property conglomerate.

We were talking to a woman at dinner a few weeks ago when we noticed she had tears in her eyes. We had been explaining why we expected the world to end soon. Normally, our palaver draws polite smiles or impolite yawns. It is rare for our audience to break down completely. Wisely, people don’t take it seriously. And, wisely, neither do we.

What would it really matter if house prices were knocked down 20%? Would the plumbing stop working? Would the paint suddenly curl and the drop ceilings fall down completely? Would the house be any less comfortable or less ugly?

And so what if Microsoft trades for $10 a share (which we think it will) rather than $25? Will the company earn less money or sell fewer products? Will its employees grow lean with hunger or its CEO get fat?

No. The only problem is that people have borrowed money against these assets. And when the world ends — which is to say, on the downside of the great credit cycle — the loans get called, worked out, renegotiated, rescheduled, written off, discounted or wiped out. The assets themselves go down in price and suddenly, people find themselves ‘upside down.’ They owe more on their cars than the cars are worth. Their mortgages exceed the likely price of the house. Overall, their debts are greater than their assets.

But what’s the harm? In our book, we refer to this settling up as a ‘soft depression.’ It is soft because the world is a much richer place than it was in the ‘hard’ depression of the 1930s. People are rarely on the verge of starvation in America today…instead, they are on the verge of obesity. A little belt-tightening would do them good.

Besides, the markets are there not to distribute capital, as economists pretend, but to teach virtue. In that sense, bear markets and recessions are like hangovers — without them, we might make spectacles of ourselves every night.

The man who has overstretched himself needs to learn…he must snap back into a proper attitude. The business that has overextended itself needs to shape up…or go into liquidation. The investor who has paid too much must realize his mistake. If there were no period of ‘correction,’ people would learn nothing…and continue in error all their lives.

Fear not, dear reader….the coming downturn will be good for you. But that is not to say that it will be delightful in every way. Corrections are only useful if they are painful. That was our complaint about the recession of 2001; there was not enough pain to bring much of a gain. People learned nothing; instead, they merely kept doing what they had been doing — going into debt — with even greater recklessness. This time…or sooner or later…happy insouciance is likely to give way to painful prudence…and then to raw desperation.

There are corrections and disappointments…and heartbreaks… everywhere in life.

Our line of chatter never got past the eardrums of our dinner companion. The woman’s moist eyes darted from us to her husband…sitting on the opposite side of the table, engaged in an animated conversation of his own. She couldn’t seem to follow our light conversation; she must have had heavier thoughts of her own. Dull as we are, even we could figure out what they were.

Her husband, a man of about 50, had a face like a soap-opera doctor…confident and very handsome, with white hair and dark, tanned skin. He had a manner about him which was suave and dignified, with a voice as rich and smooth as a fine port. It must have been intoxicating to the fair sex.

The wife, on the other hand, had not aged well. She had grown comfortably chubby….and looked as though she would make a nice grandmother. It must have been a long time since a man had courted her. Now, with her husband flirting by a younger, much more attractive woman, it was impossible to flirt with her at all. She couldn’t keep her mind on it.

But wait just a minute… that’s Elizabeth he’s flirting with…!

Meanwhile…back on Wall Street….


Addison Wiggin covering the markets from… er, Paris…

– What’s better than a toilet paper company in China adding an IT subsidiary then scoring 97% gains on the first day of their IPO?

– Well, nothing really. Except maybe the companies first product when compared to its stock certificate. At least the TP has a functional value. Still one loyal Daily Reckoning sufferer suggested we would be remiss if we pointed out the Chinese company’s contribution to the pao mo bubble without mentioning this gem: On January 24th, 2004, Barrington Foods International Inc. underwent a restructuring, and changed its name to U.S. Canadian Minerals Inc.

– "Now, when a food company turns into gold mining," our correspondent asks "are we a bit ahead of ourselves already?" Well, certainly we might respond. And add, as has been oft repeated since the gold price began knocking its head on the $400 level, the miners can certainly be as volatile as your average Nasdaq bespeckled tech stock. But at least the underlying asset has a tangible quality. And its pretty to look at too.

– You’ll have to forgive us. The lesser of your two evil Parisian editors spent the morning up close and personal with the French national past-time: bureaucracy. We woke this morning to discover our first-born could not hear. Needless to say we panicked and whisked him off to Necker Hospital (pour les enfants malades). Although we’ve been there several times before the woman behind the desk insisted we register again. Just as well, really. When she keyed in the information she spelled the kid’s name wrong and entered an incorrect address. If we have to go to the Necker again, we’ll actually have a choice of names under which to register him.

– After filling out paper work at the first desk we had to do it all over again at the desk directly behind. This woman had a whole paper full of bar code stickers to play with and promptly started affixing them to registration cards, folders, envelopes and other pieces of paper… all the while mumbling directions to someone (presumably the child’s father) in a strong foreign accent of indiscernible origin. We think she motioned us to sit in the waiting room amongst a gaggle of other screaming enfants, or at least that’s what we did next. Then we waited and waited. And waited.

– As we waited, we began to see the genius of it all, though. At one point we counted twelve administrative personnel. One in particular had the riveting job of stamping documents with an ink pad and stamp. That’s all she did. And when there were no documents to stamp, she sat… and primped. She was pretty so we didn’t mind. Until that moment we didn’t really understand what was going on. But then it struck us: this is why there are so many astoundingly attractive women in Paris. They get paid to primp.

– When one of the few doctors in sight finally deigned to take a look at our son’s ears, it turned out he has a sinus infection. The medicine prescribed 3 different drugs (prescription drugs being another French pastime) and sent us on our way in about 5 minutes. As instructive as the scene was, and as happy we were to discover our son was healthy… the morning was otherwise completely wasted. Of course, now you have to suffer.

– Like a child who is drawn to a hot flame despite the admonition of its parent not to play with fire, investors yesterday sunk and lost more money in the overvalued major indexes. "Last Friday saw this year’s first weekly back-to-back declines in the S&P 500," observe our friends at "The Dow Industrials have ended lower in 6 of the 11 weeks this year, the NASDAQ in 8 of 11… [yet] Cash is flowing into US stock mutual funds at the fastest rate since early 2000."

– The Dow closed at 10,064 yesterday, off 120 points or so on the day. The Dow is now 6.7% off its recent top of 19th February. Yet lumpus Americans added a whopping $30.5 billion to his US stock mutual fund holdings last month. Although down on January, last month’s rate – if annualized – suggests 2004 will top even 2000, when American retail investors poured a record $309 billion into stock market mutual funds.

– For it’s part the S&P lost 14 to 1095…the petulant Nasdaq fared even worse, losing 31. But the reflation rally has still been good to those who got in a year agao. On March 23 2003, the Nasdaq closed at 1369, it now trades 1910. Herein lies the impetus for Johnny Q. to "get back in the markets." Too bad insiders are cashing out 56 to 1 against them.


Bill Bonner back in London…

*** "WHAT IS THE MATTER with the whiny American voters?" asks Robert Kuttner in the Boston Globe. "They keep telling pollsters that they think America is on the ‘wrong path’. But don’t they read the statistics? Don’t they know that unemployment is at a comfortable 5.6 percent, that inflation is almost nonexistent, that the economy is growing smartly at around 4 percent?"

Ah ha… we have an answer. The figures lie. Kuttner points out that a lot of the cost of living numbers are an illusion. Adjustments and various finagles keep them lower than they really are. Education, health care, housing — everything you can’t import from China — are going up faster than the numbers reflect.

But the larger problem is that while the economy is ‘growing,’ what is really being measured is the rate at which Americans dig themselves a deeper hole. They spend more than they earn…it looks like ‘growth’ to the typical blind economist. But it makes the voters whine; they’re having a hard time keeping up with their growing debt burdens.

Kuttner also notes that couples are frequently forced to support their children much longer than they used to.

*** The Village Voice explains why debt is behind this trend too:

"The average collegian in the U.S. isn’t graduating into a world of boundless opportunity, but rather is $20,000-plus in the hole thanks to student loans and credit cards. So begins the snowball effect: The most desirable entry-level jobs often pay wages too low for the indebted, who must fork over a large percentage of their salaries to Sallie Mae or Citibank. Other posts are reserved for those who can afford to work unpaid internships, or whose parents can support them through an extra year or two of graduate studies.

"Employers are increasingly reluctant to defray the cost of health care, so tack on an extra several hundred bucks a year, even $2,000 or more for the technically self- employed ‘permanent temps’, as the saying goes. Though housing is supposedly cheaper than ever, due to record-low interest rates, the ambitious young aren’t necessarily enjoying the trend. Rents in many metro areas, where a good portion of knowledge-based jobs are located, remain sky-high…

"High levels of debt preclude the young from getting the sweetest mortgage deals, and they often end up in the clutches of sub-prime lenders. On average, people who had to borrow their way to a graduate degree are already behind $45,900; median debt for grad students has increased 72 percent since 1997. (Aspiring doctors have it the worst, with average loans of $103,855.) Add to those obligations an investment in a humble bungalow, and you’re on the hook for a quarter million or more – not counting interest."

*** Last week marked the 1-year anniversary of America’s war against Iraq. Is the world really a safer place, we wondered? If so, the papers have missed the story…

"Instead of making the United States safer from attack….the Iraq war has actually made it more vulnerable by fomenting anti-American feelings and taking military resources away from the hunt for Al Qaeda," says the International Herald Tribune today, attributing the idea to Richard Clarke, a former counter-terrorism official who has a new book out: "Against All Enemies: Inside America’s War on Terror."

More than 500 Americans have been killed in the Iraq war… most of them since the war was officially won. The death toll among the enemy — including women and children — is said to be over 20,000, according to the French newspaper "Liberation."

Before the war, Saddam Hussein was minding its own business, like any dictator — torturing his citizens and destroying his economy. Now, America is destroying its own economy… borrowing billions of dollars in order to try to ‘build a nation’ and ’empower women’, according to Thomas Friedman. But almost every day brings news of setbacks — bombings, murders, and terrorist attacks. And what do you expect, asks Friedman. It was a great project…’revolutionary’ and uplifting in almost every respect… but the Bush Administration bungled it by not sending more troops and spending more money. The NY Times columnist believes that it takes a lot of fighting men to build a civil society.

The trouble with a war against terror is that your enemy changes too often. Yesterday’s news brought the story of a terrorist-style attack on a paraplegic — a man so incapacitated he wouldn’t have been to jaywalk, let alone assault anyone. The poor man has been in a wheelchair, unable to move his arms or legs, for the last 55 years. We must have missed the trial, but apparently, the Israelis sentenced the man to death in absentia… and carried it out in Gaza. They blew him up as he was being wheeled to his home.

The Daily Reckoning