Profitable Tumbleweeds

In Argentina, you can get a good steak dinner for only three dollars…and that’s not all that’s cheap. Steve Sjuggerud explores this country’s vast (and inexpensive) natural resources…

While investigating timberland in the Northeastern tip of Argentina (the rainforest region), the Chinese came up. I was visiting Alto Parana, an enormous sawmill operation run by the Chilean firm, Arauco.

Maybe the Chileans "got it" first about the Chinese, as shipping goods from Chile to China isn’t that complicated…just put ’em on a boat. Whatever it is, I saw a warehouse full of finished lumber, about five football fields long and five stories high, with much of it headed to Asia.

"The Chinese are tough to deal with," the plant manager confided. "Sometimes it’s difficult to get paid."

It must be worth it, as Asia is Arauco’s largest market, making up one-third of sales. By contrast, sales to both Europe and the United States make up only half of their Asian sales. Just ask yourself, which is the "growth" market? No wonder Argentines want to work on their Chinese…

While in Argentina, I met with Pablo Marcet, the head of Argentine operations for Northern Orion, a copper company with $20 billion in metal in the ground in the middle of nowhere in western Argentina (lots of things are in the middle of nowhere in Argentina).

Pablo is a good man to know. Educated at Stanford and Harvard, he used to travel the world running mining operations for BHP Billiton. No more. Pablo has staked his own future on cheap copper in Argentina. One thing you learn in Argentina is that nearly everything local is really cheap. For example, I had a ham and cheese sandwich and a Coke at Havanna’s, a coffee shop one block from our ritzy Alvear Palace hotel. The sandwich and Coke cost me eight pesos… or less than three dollars. And that was in the fancy part of Buenos Aires. In the town of Posadas, near the good timberland, three bucks will get you a full steak dinner at a nice restaurant.

Argentinian Economy: Less than Zero

Natural resources are cheap and plentiful too. Pablo’s Northern Orion is a partner in Alumbrera, a world-class copper mine where copper is mined cheaper than anywhere in the world. Literally, the net cost of production is zero, or (unbelievably) less… thanks to gold being a byproduct of copper production.

Pablo hinted that Chinese, Korean, and Japanese businessmen have been visiting him; eager to do whatever it takes to secure their supply of copper for years to come. Note, Pablo didn’t mention any American visitors.

Last week I visited a farm, La Adela, which is owned by one of Argentina’s leading agricultural companies. One of the company’s strategies has been to buy up "marginal" farmland and then increase its value many times over by making it productive through modern technology. This business happened to already be positioned in the right place at the right time. Marginal farmland is now booming in Argentina. As an example, they sold two pieces of farmland in the latest quarter, totaling roughly 70,000 acres. It had acquired both within the last 10 years. The combined U.S. dollar profit on the sale of both was roughly 300%. This was not an anomaly…

The company also happens to own a "marginal land" farm in the Northwest of Argentina called Los Pozos. This is roughly 600,000 acres, acquired at $4 an acre.They took tumbleweeds and turned it into productive farmland.

This company makes a strong case that thousands of the productive acres at Los Pozos could soon be worth 50 times what they paid for it…you wouldn’t believe it, unless you were there. On my latest flight home, the man next to me worked for Pan-American Energy. He’s drilling for oil not far from Los Pozos, and he confirmed the marginal lands farming boom. "Everyone’s buying shiny new tractors out there," he told me. The farmland boom in Argentina is on. What’s driving it? There are many factors. You’ve got higher food/commodity prices worldwide. You’ve got Argentines who don’t want to invest their money in paper assets or put it in the banks. (Remember, their wealth in the banks was frozen for 60 days just a few years ago.) So they’re buying farmland, and now shiny new tractors. They’re buying real assets. And then there’s the new source of demand for what Argentina has… from the Chinese.

At this point in the story, it wouldn’t surprise you to learn that the Argentine government has just decided to open an agriculture office in China to promote Argentinean exports to Southeast Asia. The region accounts for an unbelievable 50% of Argentina’s total agriculture and food exports. What took them so long?

Argentinian Economy: Securing China’s Basic Goods

On an earlier trip this year, I was waiting in the lobby of the Intercontinental Hotel in Buenos Aires. There was one other group of people in the lobby, two Chinese and two Argentines. Their conversation was painful to listen to, as English was clearly neither party’s first language. And the body language was uncomfortable as well, as neither side knew the other’s customs. But it didn’t matter. Business needed to get done. This was clearly a big business deal for both sides, and it was going to get done.

Simply put, even in my hotel, I couldn’t get away from it… The Chinese desperately want to secure their future supply of basic goods… agriculture and commodities. The reasons are fairly obvious. As the latest issue of The Economist says: "If China’s consumption of raw materials and energy per person were to rise to wealthy country levels, the world simply would not have the resources to supply them."

Look, there’s China hype, and there’s China reality. There’s dumb money and smart money. There’s what China knows Americans are willing to pay any price for, and there’s what China is willing to pay any price for. We want to make sure we’re invested in the second half of each of those sentences above. We want to avoid the first half.

I don’t want to get caught on the wrong side of investor whims. And I don’t really want to put my money in China, as if history is any guide, chances are I’ll get out less than I put in.

What I want to do is what I always do… I want to buy a cheap asset with extraordinary intrinsic value, waiting to be unlocked. And I want to buy it when it is hated – when nobody else in the world is buying it.


Steve Sjuggerud
For The Daily Reckoning
November 9, 2004

You want to make big money, dear reader?

Start a hedge fund.

Warren Buffett says they’re risky fads. We say they’re risky flim-flams. But there’s no denying there’s money to be made in them – if you own one.

George Soros added $750,000 million to his fortune last years – thanks to his hedge fund profits. David Tepper, founder of Appaloosa Management, made more than half a billion. Together, the top five hedge funds earned $2.5 billion in 2003, according to Institutional Investor magazine.

So attractive are the profits, that both Wall Street and its equivalent in London, The City, are losing their brightest and best stars. Dinakar Singh and Eric Mindich, for example, are leaving Goldman Sachs to set up their own hedge funds.

The key to making a lot of money by operating a hedge fund – and here, we let you in on an industry secret – is to charge investors a lot of money just for the thrill and prestige of being in a top fund…then, make risky bets. If the fund is lucky enough to actually make money, take a big chunk of the profits yourself. If it loses money, make sure you leave the losses with the gullible investors.

That was Steven Cohen’s formula for success. He made
$350 million last year, reports The Times of London, by somehow convincing investors to give him 50% of their profits.

It is all too wonderful, as we keep saying. Hedge funds were supposed to be ways to protect your money. Now, like American capitalism and democracy, they have been corrupted and subverted; now they are devices for getting something for nothing.

For the moment, though, no one is complaining. Everyone seems to get wealthy…not by sweating, but by thinking. Not by making things and selling them at a profit, but by shuffling money around. Let’s see, how does it work? Hmmm… We’ll take a forward call on the yen and hedge it with a put on oil. (Clients love it when we explain this to them…they think we’re so smart.) Then, we’ll go long the S&P as a bet on recovery, while shorting the near-term German euro notes for no particular reason at all.

Hey this is fun…just like Las Vegas.

But it may be less wonderful than it appears, at least for the customers. What they are really doing is paying a lot of money to send someone else (the hedge fund managers) to Las Vegas to gamble for them. They send them off – all expenses paid – with a big wad of cash to lose. The investors are happy with a share of the profits and a little handsome tan from the reflected glory. The managers take risky positions knowing that if they win – they’ll get a big share of the profits. And if they lose, well…that’s the clients’ problem.

The wonderfulness of it to the hedge fund operator is obvious. The clients, meanwhile, are like rubes in Hollywood – overjoyed and gaga to be in such smart company. The more the hedge fund manager’s make, the more delighted the clients are.

No one other than cranks like Buffett and us bother to ask: Where does all the money come from?

Of course, it comes from the clients themselves. But they’re so blinded by the starry glitter of the hedge fund industry they can’t see their own pockets being picked.

After all, betting on currencies, bonds, and stock indices is a zero-sum game. "Investors" taken all together cannot come out ahead. For every trade made by one hedge fund, some financial institution – perhaps another hedge fund – must stand on the other side. One must lose every time the other wins.

This is different from real investing. If you put up some money to start a pool hall, for example, you might earn part of the profits of the establishment. No one has to lose so that you get your money. Everyone comes out ahead.

There are times, of course, when almost all seem to win at hedge funds too. Managers might take advantage of interest rate differentials, for example, borrowing in one currency and lending in another. A "carry trade" such as this could last for years. Everyone could make money. A big break in the currency markets could bankrupt them. But, heck, you have to take some chances.

Or, securitized mortgages of sub-prime borrowers might become the latest fashion with the hedge fund managers. As long as long-term rates are on a downward track, the funds make money. And don’t worry about a change in the trend; everyone knows the managers are geniuses.

In the meantime, the hedge fund industry has a beautiful game going – clients are happy to pay outrageous fees for outrageous performance. Later, they will realize that they needed every penny of profit to cover the enormous risks they never saw.

Our prediction: Over the long run, the typical hedge fund investor will make zero, minus the huge costs of the hedge fund industry.

More news, from our team at The Rude Awakening:


Eric Fry, reporting from Wall Street…

"We trust the bull market in commodities to run for several more years. But we also realize that this lengthy bull market can inflict severe short-term losses. That’s why we’re always on the lookout for ‘chicken longs’ or ‘backdoor plays’ in the resource sector."


Bill Bonner, back in London:

*** We’re wondering about the dollar. It is going down. Everyone says so. Nearly $1.30 per euro today, and we have guessed that it will soon sink to $1.50.

But there must be some surprise. The fundamentals are clear – the dollar has to go down. And everyone knows that it has to go down. What is it waiting for? And why aren’t these clear expectations – even major newspapers tell us the dollar must fall – already in the dollar’s price? Surely, the hedge funds are short. And even in our own humble finances, we too have shifted savings from dollars to euros.

The cost of living here in Europe has gotten to be very high – at least, for a man who earns his money in dollars. It already makes sense to do our shopping in America, not in Europe. Things already seem too expensive in Europe and too cheap in the United States. Yet, if the dollar continues its decline, things will be even more expensive in Europe and less expensive in America.

How will the dollar surprise us? Perhaps it will go down – just as forecasted.

*** "We urge everyone to come and see the suffering of Fallujah and its people and the crimes the Americans are committing in the name of democracy and freedom."

Reuters quoted a resident of the town in today’s London Times.

Support for the war against Iraq has dropped to its lowest level in Britain. Only 31% of our more loyal allies say that military action in Iraq was the right thing to do, down from 64% in April of ’03.

"We’re not here to kill," said on American sergeant from Texas, "we’re just here to separate the good from the evil."

We thought that was the kind of work only God could do. Americans think they have nothing to fear from God, why not give him a hand? This is America’s great crusade to bring freedom and democracy to modern Mesopotamia; who are we to argue with it?

Americans themselves have become less and less free ever since the republic was founded. Exactly how much freedom is left? We don’t know, but however much it is, U.S. leaders are eager to share it with diverse peoples in diverse and godforsaken places.

"We’re going to kick some butt," said another marine, a general, no less.

Kicking butt is what military forces were sent to do. First Osama bin Laden’s. Then Saddam Hussein’s. Both were bad guys, we were told, whose butts needed kicking. Now, the defenders of Fallujah. These enemies are described as "insurgents." How they became enemies of the United States of America is not exactly clear. But they now have three choices: Let their butts be kicked into submission, escape and likely become terrorists (if they aren’t already), or die.

How will it all turn out? That’s for the gods of war to decide.

*** "Americans seem to have become a lot more democratic over the years – more and more people are allowed to vote – but a lot less free," said our old Canadian friend, Pierre Lemieux yesteray. Pierre is French Canadian and co-author of our not-bestselling book, The Idea of America. He lives in the backwoods of Quebec and comes to Paris infrequently.

"People lined up for hours to cast their votes in the American elections," Pierre continued. "It’s a little like a sporting event, where the fans stand up and yell at the umpire or the home team…or do ‘the wave’ at a baseball game. It has no effect whatsoever on the outcome. It’s just how crowds operate. People get caught up in the spirit of elections like they get caught up in the spirit of a ballgame."

"Every votes counts," is the official line. But, in fact, almost none do.

"The odds that your vote will actually matter," said Pierre, a professor at the University of Quebec, "are so slight as to not be worth thinking about. The race would have to be dead even without your vote. And then, of course, your vote would have to be in an electoral state where it mattered. The actual number, that is the real odds that your vote will decide the outcome are something on the order of 8 chances out of 10 raised to the 8000th power. For comparison, the number of seconds since time began is something such as 3 times 10 to the 17th power. In other words you’ll be shipwrecked on an island with Paris Hilton and win the lottery every day…before your vote will matter much."

But people seem to need myths, rituals and team sports.

The Daily Reckoning