The Asian Bubble

The prospects for China and Thailand are looking bright…but bubblicious, at least in the short term. Doug Casey reports, below.

Asian countries are the current darlings of the financial press. Hardly a day goes by when someone doesn’t pay homage to their spectacular growth prospects – especially China’s. But if you ask me, they’re in a bubble.

I’m not trying to be negative about something most people seem to think is a "sure thing" just for the sake of being contrary. Although the fact everybody likes something as an investment is reason enough to be contrary. I’m a huge China bull, for instance. But the time to buy is during a crisis, not what’s likely the peak of a boom.

I’ve spent a fair amount of time in China over the years, not even counting living in Hong Kong. There’s no question in my mind the 21st Century will belong to China, much as the 20th did to America. Europe will mainly serve as a source of houseboys and maids for the Chinese. But, try as I might, I can’t see a safe direct way to take advantage of this megatrend at the moment.

Invest in Thailand: The Not-Undervalued Yuan

It’s widely touted in the press that the Chinese yuan is an undervalued currency. That’s become accepted as an article of faith by everyone from government officials to financial advisers. I’m not so sure when I look at property prices in Beijing and Shanghai. Further, the reported money supply has been increasing over 20% per year.

It might work out, but holding yuan in hopes of an upvaluation impresses me as a mediocre bet. Certainly if you hold them in a Chinese bank, most of which are insolvent. S&P reports that about 45% of Chinese bank loans, totaling about $850 billion, are non-performing. That’s why the Chinese government recently shelled out something like $45 billion to shore up two big banks.

The Chinese government reported that it held $403 billion of foreign exchange reserves at the end of 2003, net of the $45 billion they used in the bank bailout. That’s a rise of $117 billion from the end of 2002. It’s unclear in exactly in what form that money is held, but the vast majority is undoubtedly U.S. dollars. Supposedly, the Chinese have been selling yuan to buy dollars (in the form of U.S. Treasury securities) in order to enhance their exports. Maybe. After all, the U.S. appears to have a bottomless appetite for both foreign capital and foreign goods. But if I was a Chinese central banker, I’d feel pretty stupid holding all those floating abstractions, especially as they’ve lost about one third of their value against stronger currencies in the last couple of years. And I’d want to replace the paper with gold.

How about buying Chinese stocks? I don’t think it makes any sense. The huge amount of bad bank debt, combined with government bailouts, a rapidly expanding money supply, and an absolutely frenetic building boom has got to have created gigantic distortions in the country’s economy. You have no way of knowing how all that could affect any given company. But it’s not likely to be good.

And when you do buy, what you’ll want are small, entrepreneurially run companies, not doddering behemoths that were spun off by the State, overloaded with self- dealing, concrete-bound managers and zillions of extra employees. That describes most public Chinese companies. The Chinese press has recently reported that, in the first half of 2003, 8,000 communist Party members fled abroad, 6,500 are listed as missing, and another 1,200 committed suicide. Even with 65 million Party members, these are anomalous numbers. The speculation is that many of them were afraid of being caught in corruption.

All of this has caused me to write off China for the time being. But China is just part (albeit a major part) of Asia. And in many ways, the Orient is still one of the best places for an investor to be on the lookout right now.

Invest in Thailand: Beachfronr Property

Which leads me to Thailand. Thailand, where I spent almost three weeks over the Christmas holidays, has always been my favorite country in the Orient as a lifestyle choice. It’s an excellent choice for the holidays, as well, if only because you’re likely to be bedeviled with sappy Christmas carols only on December 25th itself. Santa Claus, like McDonald’s and Coca-Cola, can be found in every nook and cranny of the world.

As an investment, beachfront land here has been a standout, going up about ten times in the last decade alone. It’s not absolutely cheap any more; an acre of beachfront on Koh Samui will run about $200,000, minimum. Of course, that’s still cheap relative to what you pay in Hawaii, or Florida, or California. And it’s far more desirable, in my opinion. You’ll find the costs of food, construction, and servants are a tiny fraction of what they would be in the States. And although you can easily get absolutely anything you want, the lifestyle is far more laid back. One reason it’s so friendly is that it is the only country in this part of the world that was never colonized.

Thailand is actually the safest and surest way to play the boom in China, as well. As the Chinese middle class grows, they’ll travel. And they’ll pile into Thailand, as a first- choice foreign destination, simply because it’s such a delightful place. The price of land is going to go much higher.

Of course, things can go wrong for a while; timing is important. The main downside to Thailand is its government, under Prime Minister Thaksin. It’s currently a popular regime but, for reasons I’ll describe shortly, there’s serious trouble brewing. Thaksin used to be a general in the (notoriously corrupt) Thai police; to have risen to that height, you’ve got to presume Thaksin excelled at corruption. He also has an unfortunate authoritarian streak, reminiscent of Singapore’s Lee Kwan Yu and Malaysia’s Mahattir. Which partially accounts for a rather astounding 2,500 supposed drug dealers being killed in gun battles with police over the last year. And insane new rules forcing bars to close at 1am and soon, the rumor is, at midnight. Thailand is, in case you didn’t know, the party capital of the Orient.

Invest in Thailand: A Credit-Driven Boom

Thaksin thinks the Thais are too undisciplined; in fact he thinks everything is too undisciplined. So he’s trying to organize new international cartels for sugar, rubber, and rice – but cartels always end in disaster. Among other stupid economic ideas are the building of a $35 billion canal across the peninsula, lots of easy credit for both business and consumers, price controls, cash giveaways averaging $23,000 each to 70,000 local hamlets, subsidized home loans, and allowing debtors to put off loan repayments.

What this megalomaniacal nincompoop is doing is creating a credit-driven boom, and it’s going to result in a bust. Most Thai companies are highly leveraged, so it’s welcomed by everyone right now, especially Thai investors. All the world’s stock markets, which tend to move together, went up substantially last year – mostly, I believe, as a reaction to having gone down for three years. But there’s no good reason for the Thai stock market to have gone up about 100% last year (making it the world’s best-performing market) other than a booming money supply.

Fortunately, Thai culture will outlast Thaksin, the boom, and the coming bust. And the country remains perhaps my top choice as a place to both vacation and to have a crib in the Orient. But I’d hold off major investments until the bust. Which I expect will come within a couple years.


Doug Casey
For the Daily Reckoning
February 4, 2004

P.S. Here’s a travel tip. The best hotel in the world, for my money, is the Peninsula in Bangkok. It’s much classier, and half the price, of the Oriental across the river, which has been unjustly rated as the best for years. In Koh Samui, don’t even think of staying at the outrageously overpriced Meridian; stay at the excellent, and conveniently located, Nordic Inn, for US$50 a night.

P.P.S. I recognize that few will take advantage of "foreign country" tips; perhaps they’re too exotic. But most good investments are off the beaten path, and a little hard to get into. And often a little scary. It’s once they’re popular, and most of their potential has already been realized, that, perversely, they carry serious risk.

Editor’s Note: Doug Casey, author of bestsellers Crisis Investing and Crisis Investing for the Rest of the 90’s, has been seeking and finding incredible opportunities around the world for over 25 years. He has lived in seven countries and visited over one hundred more, actively – and successfully – speculating in international stock, bond, commodity and real estate markets. A version of this essay was first published in the February edition of Doug’s investment letter, International Speculator.

The cheerful mood over Manhattan…is it normal bullishness, or is treatment needed?

Americans are bullish, of course, about almost everything. Nothing can go wrong, they believe – at least not before the elections.

They are ‘delusional,’ we have said. And here we quote ourselves: "They believe things that couldn’t possibly be true for even a single minute will last forever." They cannot save a dime…yet, they set out to save the entire world.

Now cometh Yale University assistant professor of psychiatry, Bandy Xenobia Lee, with a clinical view. Appearing before the World Economic Forum in Davos, Mr. Lee read aloud the standard medical description of ‘narcissistic personality disorder.’ The sufferer:

** has a grandiose sense of self importance, e.g. exaggerates achievements and talents, expects to be recognized as superior without commensurate achievements

** is preoccupied with fantasies of unlimited success, power, brilliance

** requires excessive admiration

** has a sense of entitlement, i.e. unreasonable expectations of especially favorable treatment or automatic compliance with his or her expectations

** shows arrogant, haughty behaviors or attitudes

Americans think they are getting rich. As reported here yesterday, personal incomes rose a paltry 0.2% in Dec. Spending rose twice as fast. reports that wage and salary income actually went down in December for the first time in 14 months. Real wages have gone almost nowhere for many years. For certain groups, notably men working in factories, wages have fallen for decades.

What leads Americans to think they are better off is the rise in real estate prices. Sales prices for single-family houses rose at about 7% last year – or 2 times as fast as GDP. Sales numbers are rising at a double-digit pace.

The longer a trend keeps going, the more people believe it is eternal. House prices have never gone down in a single year for the last four decades. Having come to believe that house prices only go up, people see little risk in buying – at any price. Lower interest rates have allowed them to buy more house for the same monthly payment. God forbid interest rates would rise!

But interest rates do rise…and housing prices do fall. And sometimes housing prices fall even as interest rates come down, as has happened in Japan. Something is bound to happen. If the ‘recovery’ turns out to be for real, the economy will take off and interest rates will rise. If the recovery is, as we expect, a failure…the economy will weaken and house prices are likely to fall along with stocks. In the first event, many Americans will not be able to afford their mortgages…in the second, they will no longer want them.

But the self-delusion of our fellow countrymen seems to grow daily.

Residential construction (a consumption item) is increasing at a furious pace – up 14% in December. Non-residential construction (an investment item) actually fell 3%.

GE used to make money by making appliances. Now, half of its earnings comes from financing activities, says Bill Gross. GM also used to make money by making cars. Now, its profits too come from financial activities. As a percentage of total earnings, those coming from ‘finance’ have soared.

It’s become a "finance-based" economy, Gross concludes. What happens to such an economy? It needs more and more low-cost money in order to maintain the illusion of growth and prosperity. But eventually, the costs of financing a finance-based economy grow too large…and the whole thing falls apart.

Freeman Tilden described the end of a "finance-based" economy in his 1935 book, A World in Debt.

"…back in 1927 and 1928, when the world was a tornado of prosperity of the paper persuasion…I said that this thing had happened before, many times; and invariably it had also happened that the balloon was pricked, and deflation followed; that the inevitable penalty for a boom was a crash; that whatever political party happened to be in power when the smash arrived, would be the object of loathing and contempt; and that for several years the disillusioned populace would be so busy pitying themselves that they would become the victims of every impostor and imposture that effrontery and ignorance could contrive…"

February, 4, 2004…the tornado still whirls…and we’re a long way from Oklahoma…

Addison, what else is new?


Addison Wiggin, engaging in self-delusion…

– How we delude ourselves. A headline this morning in the Washington Post reads: "Spending Outpaces Incomes." Foolishly, we read further, thinking the article will explain why this is a bad thing. But so deep is our level of self-delusion, we failed to see that this was intended by the editors at the Post as a positive headline.

– Spending, we must pinch and remind ourselves, is what keeps the U.S. economy afloat…and with it, the world economy. "Personal spending had been flat in September and October," the Post explains, "prompting some economists to worry that consumers, who have kept the economy growing since the recession [that wasn’t], might pull back because of feeble job growth in the past several months." Well, you might expect that to be the case…

– …but yesterday’s consumer spending report from the U.S. Commerce Department allays such gloomy fears. Consumer spending grew at a ‘brisk’ half percent in the December holiday shopping season, double the rate at which personal incomes for the same period grew. Again, silly us, we thought that might be cause for concern. The Post, however, suggests that it’s "another sign that shoppers were continuing to add fuel to the economy’s expansion." No mention is made of where they got the money to spend. But we know, don’t we? [Hint: it’s starts with a ‘d’ and ends with a ‘t’ with an ‘eb’ in the middle].

– The spending report "exposes the weak underbelly of this recovery," Mark Vitner of Wachovia Economics Group wrote to his clients, reports the Post. "Tax cuts and lower mortgage rates saved the day in 2003…but the recovery will be in serious trouble if job growth does not pick up soon."

– It appears that consumer prices are falling, too. At least, that is, for people who don’t eat and wear very heavy sweaters. The Commerce Dept. report suggested that by suppressing food and energy from the figures, consumer prices rose at the slowest year-over-year pace since government busybodies began keeping track 44 years ago. The year-over-year rate of inflation in the CPI has slowed in each of the last three months.

– Still, the Commerce Dept. data detracted from the markets yesterday about as much as a pimple on a pretty girl’s face. The Dow closed up a weak 6 points at 10,505. The S&P 500 couldn’t eek out a full point, but it didn’t fall, either…it closed roughly where it started at 1,136. The Nasdaq added 3 points to 2,066. In all, it was a pretty limp day on the trading floor.

– The dollar fell to a fresh 3-year low against the yen and lost a tad against the euro yesterday. Despite the best intentions of the ECB, you can still purchase one unit of the Esperanto Currency for a buck and a quarter, if you’re so inclined. [For more on the best intentions of the ECB, see Mark Nestmann’s "Euro Into Eurotrash" piece on the Daily Reckoning website:

EU Finance Ministers Vote to Turn Euro into Eurotrash

– Gold traded briefly as high as $403 in London yesterday, but as of this writing is back down to $398 in Sydney…still lingering below the $400 remorse price. Ahead of Friday’s G7 meeting in Boca Raton, we’re not likely to see a lot of movement in gold or the dollar. Chuck Butler from the Everbank World Currency trading desk tells us currencies – the euro, the dollar, yen and yuan – will be the main course at the dinner table. Chuck’s bet for the biggest eater at the table? "I’ll buy all the euros they want to sell," says Chuck.

– What’s up with George Soros? opines that he’s planning an "October Surprise" for George W. Bush, in which he will orchestrate a crash in the dollar on the eve of the election, similar to the massive short position he took against the British pound in 1992.

– "The Hungarian-born Soros’ hatred of President Bush is no secret," says Jon Dougherty. So strong are his fanatical convictions, Soros’ apparently told the Washington Post he would give away his whole fortune "if someone could guarantee" Bush’s defeat. The operative word being "guarantee." (Of course, all of this was news to us, but what do we know of Soros’ secret passion?)

– On the other hand, "investors should listen to George Soros," writes Bloomberg’s William Pesek Jr., also on the Soros beat. "Not because he’s an influential market guru. Not because of his profitable 1992 bet on the pound’s fall. Not because then Malaysian leader Mahathir Mohamad accused him of speculating against the ringgit in 1997 [and calling him a ‘moron’ in the process.] Soros’ alerts about the world’s biggest economy and its most dynamic are important because many facts are on his side."

– "In the U.S.," Pesek continues, "the current account and budget deficits are spooking investors who wonder if the World’s number-one economy is living too far beyond its means and that a day of reckoning is near." We couldn’t have said it better ourselves…


Bill Bonner, back in Paris…

*** The Indian economy has "never been better." The BBC reports the words of the India’s Finance Minister, a Mr. Singh. Since the country began eliminating government controls and selling off state-owned enterprises, a process that began about 10 years ago, business is booming. The Sensex – the Mumbai (Bombay) stock index – has risen nearly 100% in the last 12 months. GDP growth is expected to exceed 8% this year.

*** Colleague Karim Rahemtulla responds to a recent theme in the Daily Reckoning with this a note about his LEAP investment strategy:

"Yes…the market is overvalued on just about every measure. Yet it is not falling. Your neighbors are once again boasting about their gains from four-letter stocks that are trading at 100, 200 and even 300 times earnings. We are in Bubble land again, without a doubt. But, as far as bubbles go, they all share two things in common. They end badly, and no one knows how big they will get before they end.

"So, you are stuck in one of two camps. Sit in cash and earn a piddly return at best. Or invest in a ‘musical chairs’ market and hope that you have a seat left at the end. Or…you could USE the market to enjoy the best of all worlds: low dollars at risk, a long time horizon, and unlimited upside with a very limited downside." [In the interest of conserving space, we’ve put the rest of Karim’s LEAP strategy on the Daily Reckoning website. See:

LEAP Ahead of the Market ]

Karim, by the way, is also the investment director of The Supper Club, a small ‘venture capital’ club we founded several years ago that has served members quite well. The next meeting of the Supper Club will be held in Puerto Vallarta on February 27th and 28th. If you’re interested in learning about the deals being presented, see: The Supper Club

Or send an e-mail to club’s director Vickie Beard

*** "Do you know what an ‘experience’ is?" asks a Daily Reckoning reader.

"An ‘experience’ is what one gets when one doesn’t get what one wants.

"And since you bring money and women into the picture, it is appropriate to mention that when a man with money meets a women with experience, the man with the money generally gets the ‘experience’ and the woman generally gets the money."

*** Uh oh…we mixed up the yin and the yang…

A reader from Singapore:

"In today’s article you used ‘Yin’ to imply the positive and ‘Yang’ the negative.

"The Chinese character for ‘Yin’ means ‘dark, malign, cruel, etc, anything negative…’

"The Chinese character for ‘Yang’ means ‘bright, uplifting, kind, etc, anything positive…’

"So Yin Yang = Bad Good (not Good Bad)."