The World's Best Capitalists
The Chinese work from dawn to dusk.
But not only do they work hard, they also save and invest more than 30 percent of their income. We in America at the moment save about 1 percent of our income. It is because the Chinese work so hard and save so much of what they earn that their economy is growing faster than ours.
In the city of Zhengzhou I observed the Chinese work ethic in action in its most simple and primitive form: the attentiveness of a waitress, Mae Wang.
Employed by one of the restaurants in town, her behavior was simply an exaggeration of that which was typical of all the workers in China. Mae Wang, when a restaurant patron caught her attention, literally ran to the table to be of help. Like a sprinter. Across the room. She ran to see what she could do to serve you. For me she was something of a metaphor, a motif, if you will, stated as part of an overture to the symphony of Shanghai.
Adventure Capitalist: Nanjing
Shanghai lay before us like Oz. We were approaching what I predicted would be the Emerald City of twenty-first-century capitalism – within our lifetimes. Zhengzhou was the first stop on the beeline we were now making for the city. Nanjing was the final stop. In Nanjing, I looked out our hotel room window and saw building cranes everywhere I looked; it was here, in Nanjing, that someone informed me that fully half the building cranes in the world were currently in China. My itinerary, it appeared, was trying to prepare me, to educate me, for what lay ahead.
We finally arrived in Shanghai, and I instantly fell in love. Again. Yet again, Shanghai had changed. This was the fourth time I had been there, and every time it was a different city, a different country. Had it changed for the better? The city is modern, full of high-rises. It is trendy, fashionable, sophisticated. And rich. I happen to like big cities. I do not dream of returning to Demopolis, Alabama, where my phone number, as late as my college years, consisted of a single digit. For me, Shanghai is one of the great, exciting places in the world. And I would be very happy to live there. It would be like moving to New York in 1903, as New York was really blossoming.
Before 1949, before the revolution and the establishment of the People’s Republic, the Shanghai stock market was the largest in Asia, the largest between London and New York. Shanghai was the center of commerce – and sin, the axis of everything in the Far East. In 1988 I visited the Shanghai exchange. To reach it, you walked down an unpaved road into a somewhat ramshackle storefront featuring little more than a thousand square feet of office space, and to buy stock you simply walked up to a counter, overseen by a single attendant, and paid for your shares. An over-the-counter stock was exactly that.
Adventure Capitalist: Predicting Great Things for China
The attendant totaled the transaction on an abacus. And in 1988 there were only a handful of stocks publicly traded. I bought a bank stock, more for its historical than intrinsic value. (The certificate hangs today, framed, on the wall of my home in New York.) At that time, in remarks recorded by a television crew, and later broadcast on PBS, I predicted great things for China:
“This is history being made,” I said, in voice-over as I purchased my shares. “This is the way American stock markets evolved over two hundred years ago. Someday I’m going to invest a whole lot of money in China, so it’s important to know how things work now. Before the revolution, China had the largest stock market in the Orient, and if I’m right, someday it will again.”
The stock exchange in Shanghai today, a little more than a decade later, is located in a brand-new office building, a gigantic, broad, square structure containing a vast, ultramodern trading floor, where maybe three hundred people work at computer terminals. Completely electronic and growing, it technologically dwarfs the New York Stock Exchange, where, thanks to powerful anachronistic interests, brokers are still running around exchanging pieces of paper.
Naturally, I opened an account.
Adventure Capitalist: Bottoming out the B Share Market
Earlier, to accommodate the growing number of foreigners who wanted to invest there, the Chinese had begun creating a class of shares known as B shares. The market’s A shares were limited to purchase by the Chinese. By the time Paige and I arrived in 1999, all the foreigners, having failed to get rich quick as they had expected to do, had started bailing out, victims of just one more of the many bubbles that had burst, and the market in B shares had bottomed out.
You know a market has bottomed out when everybody gives up in despair and does not even want to talk about it. That is the way B shares stood when I was in China. It was purely fortuitous – it happened to be that way when we were there, and I happened to notice because I have been around markets for decades. There was nothing but despair and disgust, outright animosity toward the B shares. They were selling for twenty cents a share, and I stocked up. I bought a lot of shares in a lot of different companies, first because they were so cheap, and second because I believed China to be the wave of the future; not knowing how any stock in particular would perform, I expected all of them to do well.
Had A shares been available, I would not have bought them; there was not the necessary hostility toward them. It was the foreigners who had all dumped their stock, screaming, “Get me out of these B shares!” It so happened that within a year or so the Chinese made some changes in the law. The A shares and B shares became the same. And the B shares went through the roof, along with the entire Chinese stock market. For a lot of reasons my investment turned out to be a good one, but that is irrelevant (although the lesson of buying totally depressed shares usually works out – if not always so quickly).
I have no intention of selling. I do not know what my shares are worth today. I do not want to know what they are worth. They are not for sale. I still own these stocks and hope to own them forever. I hope that they are in my estate. Certainly China will suffer setbacks along the way, just as the United Kingdom and the United States did in their rises to greatness. But I would have to be a sucker to sell my shares. It would be like buying shares in New York in 1903 and selling them in 1907.
Adventure Capitalist: Devaluing the Yuan?
While I was on this trip, Zhu Rongji, the Chinese premier, was at Harvard Business School making a speech. And somebody, some aspiring something-or-other, raised his hand and asked, “Are you going to devalue the Chinese currency?” There had been a lot of speculation that the Chinese government was going to devalue before making the yuan convertible. We are not going to devalue the currency, Zhu answered. If you really think we are going to devalue the currency, he said, I suggest you buy puts on the currency.
Now, buying puts is an extremely sophisticated way to profit when something collapses. But here was the premier of a Communist country telling this whippersnapper to buy puts, essentially telling him, “Call my bluff, if you don’t believe me.”
The Chinese understand money, finance, capitalism. This was the premier of the country. This was not his treasury secretary or the head of the central bank or the president of the stock exchange. This was the guy running the country. He knows money, and that sophistication permeates the whole society – finance, getting rich, saving, investing for the future, educating your children.
Compare that economic sophistication to the demonstrable ignorance of a fellow like George W. Bush, who recently, in remarks of his own, showed that he did not know the difference between devaluation and depreciation, an absolute embarrassment, especially for someone who attended business school.
Forget that he is the president of the United States and not the voice of Communist China. Do not get me wrong; it is not just Bush. No recent U.S. president has understood basic economics. Bill Clinton did not even know that the biggest stock market bubble in decades was occurring while he was president. He did not even know it popped when he was in office.
I would cast a pox on both their houses – the Democrats and the Re-publicans.
– from Adventure Capitalist
May 20, 2003
P.S. In China, savings are not taxed, whereas here in the United States the government, by taxing them two or three times, discourages savings. Surprisingly, as I write this, President Bush has proposed shifting the U.S. tax system to one that taxes consumption rather than income. The change would be as historically significant as America’s shift from a tariff-based tax system in the nineteenth century to an income-based tax system in the twentieth. Such an approach is critical; it is essential for the future health of the nation. So I hope it actually happens.
A one-eyed man among the blind…
That’s how a currency analyst at Commerzbank AG in Frankfurt described the euro this morning.
Since beginning its feeble life in 1999 at $1.16, the euro has suffered a humiliating decline (to a low of $0.81)… followed by a heroic rebirth. Nearly four years on, and the Esperanto currency is right back where it started.
Yesterday, the euro closed at $1.16…after flirting with the $1.18 mark mid-day.
Oddly enough, not much of the euro’s new-found muscle can be attributed…well, to the euro. The French and German stock markets are down 56% and 62% respectively since the top of the bubble, and the fiscal crisis sweeping the West – brought on by aging, retiring baby boomers – is reaching a climax sooner than in the U.S..
This past week witnessed three days of general strikes in Paris and around France, largely brought on by fears of the impending pension crunch.
Still, a sagging yen, a sickly and weakening dollar…and apathy from the Treasury Department…have made the euro look “buff” to currency traders and investors alike.
“I ‘own’ the euro,” our friend Jimmy Rogers told us in a conference call a week or so ago. Not because he finds it particularly appealing, he explained – and not necessarily for the long-term – but because there’s just nowhere else to go.
The euro, to the chagrin of many around the globe, is simply the least porous paper in a sea of sinking currencies. And it’s making the price of wine much less cheap for your “effete expat” friends in Paris.
Here’s Eric with the details…
Mr. Fry with the news from New York…
– Yesterday, your New York-based editor spent the entire day in Baltimore conducting meetings with your Paris-based editors and with many of the other folks who labor to create the Daily Reckoning each day. (This stuff doesn’t just appear like manna from Heaven, you know.)
– While we were busy chatting about ways we might improve the Daily Reckoning, the stock market was hitting the skids. The Dow Jones Industrials collapsed 186 points to 8,493, and the Nasdaq crumbled 3 percent to 1,493…Blame the dollar!…Or, more precisely, blame Treasury Secretary John Snow.
– While speaking to the press in the French resort of Deauville, Secretary Snow offered a lame, touchy-feely definition of dollar strength. “What you want to be strong is you want people to have confidence in your currency,” said the illustrious Treasury secretary. But he failed to state the obvious definition: stability against benchmark currencies like the euro and the yen.
– Snow’s lame remarks represent a brazen departure from the credible, strong-dollar policy advocated by the Clinton-era Treasury Secretary, Robert Rubin. By failing to characterize dollar strength in traditional terms, Snow seemed to imply that further dollar weakness would be desirable. His reckless comments sent the dollar careening nearly 1% lower to $1.1635 per euro. The dollar’s troubles sparked a major gold rally – sending the precious metal up a lofty $9.50 to a three-month high of $364.40.
– The dollar’s shocking weakness is not entirely Snow’s fault, of course. The Treasury Sec’s remarks would get “no traction” if the dollar did not, in fact, have some serious problems.
– “As Warren Buffett or Benjamin Graham might say,” writes Andrew Kashdan of Apogee Research, “the market has ceased to be a voting machine and has become a weighing machine. The weight is the magnitude of the world’s capital required to plug the gaping hole of the U.S. current account deficit. All those dollars sent abroad will come back home eventually, but not necessarily at the current exchange rate.
– “The trade-weighted dollar index is still well above the levels at which it resided in the early to mid-1990s. Helping to prop up the dollar are increased purchases by foreign central banks (a trend we noted back on January 24). The latest available data on international transactions show that $93 billion out of a total $474 billion of net assets purchased by foreigners last year went toward expanding foreign official dollar reserves. [On the other hand, private investors are selling dollar assets], private flows in the form of direct investment continued to decline, and, as of the 2002 fourth quarter, amounted to just over $30 billion vs. more than $300 billion as recently as 2001.
– “If Snow secretly wishes for a weaker dollar, he won’t have to work very hard to get it,” says Kashdan. “Across town, Fed Chairman Greenspan is doing his part to break the buck with his new determination to give us more inflation. All else equal, the chairman’s obsession will not encourage foreign investors to keep plowing money into U.S. assets…So far, U.S. stocks haven’t seemed particularly perturbed by the dollar’s decline, but the drooping currency may act alternately as both cause and effect in a declining stock market – another vicious circle in action.
– “The larger context of the dollar decline has held Stephen Roach’s attention for some time, part of what the Morgan Stanley economist calls a ‘rebalancing of a U.S.-centric world…[and] a realignment of relative prices – namely the prices of dollar-denominated assets compared to those of non- dollar-denominated assets.’ Roach asks, ‘Can a saving-short U.S. economy continue to finance an ever-widening expansion of its military superiority?’ The U.S. is not about to become a financial pariah in the global markets, of course, but the peace dividend has gone the way of most other dividends: it has shrunk to near oblivion. And that’s just one more factor that’s causing the foreign bid for U.S. dollars to do some shrinking of its own.”
Back in Baltimore…
*** “After 9/11, so many people bought flags that the shops ran short. Old Glory festooned nearly every porch and bridge. Patriotism swelled every heart. Europeans, coming back to the Old Country after visiting the new one, reported that they had never seen anything like it.
“Citizens wave, wear, display and decorate airplanes, windows, baseball caps, car bumpers, dog collars and front porches with Old Glory. Sometimes they even fly them on flagpoles. And sometimes, when necessary, they send their sons and daughters to die for it.
“America is different. It’s not Europe, Africa or Asia. It’s a nation of people who chose to become Americans. Even the oldest family tree in the New World has immigrants at its root.
“Why should we care more about it than say, France, for example, Lithuania or Chad?”
Bill Bonner recently set out to try to answer that question. What he came up with was a series of classic essays from some of history’s most profound thinkers. America is different… but what is it, really?
P.S. Ed Crane, President of the CATO Institute, read The Idea of America and wrote back to us: “The Idea of America is a gem! The thoughtfully selected essays in this volume offer a window into the soul of our great nation.”
P.P.S. After completing his record-breaking journey around the globe in a bright yellow Mercedes, Mr. Rogers also reported that contrary to popular belief – especially by and about Americans – “the world’s best capitalists are in Communist China”…
That’s right…more of Jimmy’s comments below…