Work and Play in Nicaragua

In the spirit of the delightful, sun-filled days of February in Nicaragua…even while Europe and the U.S. shiver in winter…we leave you with a DR Classique originally penned in February of 2000.

We sat on the terrace of Antonio’s house…listening to the waves on the beach below and eating lobster that had been pulled out of the ocean just in front of us. Antonio’s family had owned the property and raised cattle and horses on it. After we showed him what we were doing, he decided to join us. He bought one of the best lots and built a house. It has three bedrooms and a roof made of palm leaves. The bedrooms are air-conditioned, but the main section of the house is completely open – looking out over a pool and the ocean behind it. The temperature is never too cold and never too hot – with the help of the sea breeze – so you can spend your time outside comfortably.

Antonio’s mother had come over to supervise the meal. She added a touch of femininity to the all-male group. But after she left, the whiskey and cigars came out…and the talk turned to the most popular subject among ambitious, middle-aged, Type-A males – money.

Money is a curious subject. We were all there because we had some money and wanted to make more. But what made the place nice had nothing to do with money. The sea breeze takes no account of your personal balance sheet when it rushes by. The ocean was just as blue to a pauper as it was to a George Soros or Ted Turner. The sun was just as bright. Even penniless Nicaraguans ate the lobster they fished out of the sea – or maybe the red snapper we had the next day.

Nicaraguan Real Estate: Time is Cheap and Valuable

We wanted what the locals already had – to sit around, enjoy the beautiful place, drink beer, talk. But we could not afford it. Leisure time is too expensive. Their time is cheap, because there is little market for it. Ours is so valuable that we have little available to do what we want.

But you don’t make money so you can enjoy life. You make money so you can feel good about yourself…that is, feel superior to other people. And that means you have to give up many of the good things in life. You have to work, instead of play.

But the real trick is to turn work into play…for only when "work is play for mortal stakes is the deed ever really done for heaven and the future’s sakes."

…to quote Robert Frost…

This project in Nicaragua has been both work and play. My partners are already designing the homes they will build. I have one in mind, too – but it is in a section of dramatic cliffs…which is still unavailable for building. And we are already making money.

When we first came to Nicaragua a couple of years ago, the Pacific Coast was almost untouched. We thought it was inevitable that it would soon become developed. It is too close to the United States…and too beautiful to be ignored. So we decided to do our own development – creating a place we could sell and a place that we would like ourselves. Work and play.

I mentioned a piece of property we bought in Baltimore. The price in real terms on that property went down over the last 100 years by at least 80%. But while property values in Baltimore were falling, they were rising on the California coast. In the early part of the century, the "New York Times" carried an ad for a bungalow on the beach in Malibu, California. It was for sale, if I recall correctly, for $6,000. How much is it worth today? I don’t know, but I will bet that it is worth many times that amount.

There is no reason that I can think of why the trend should not intensify. There are more people with more time and money on their hands. And they like living on attractive beaches. There are few more attractive beaches than those in Nicaragua. And, unlike the "real estate" on the World Wide Web, the property cannot be reproduced or rendered obsolete. What’s more, the political and logistical obstacles have now been removed.

Adam Smith refers to the computer leasing stocks which blasted off in "The Great Garbage Market of 1968." These companies leased computers and were thought to be on the threshold of explosive growth. Computers at the time were the big mainframe machines that cost millions of dollars. It was thought that companies would not be able to buy them. So, computer leasing seemed like a can’t-lose formula. The only question was which company would get the "territory" first. The "first mover advantage" would be not just great, but decisive. Earnings were supposed to double each year for a decade.

What happened? Well, the territory disappeared. The mainframes became much cheaper, and small, cheap computers eventually took the market away. But even before that, the earnings of the computer-leasing companies turned out to have been vastly overstated. A moment of truth arrived when investors realized that their expectations could never be met. The stocks fell. Many of them went to zero.

Nicaraguan Real Estate: Good Oceanfront Property

The trends and fashions of real land can change direction, too. But so far, there is no indication that people will tire of good oceanfront property.

Our results have been very satisfying. Others have realized that the land was underpriced. It is moving up. Almost everyone who sees the property wants to buy. One of my partners bought another two lots from the rest of us while we were down there. But since he had fallen off a horse earlier in the day and may have hit his head, I cannot take this as a reliable indicator. Still, it is a good sign, I think; we are becoming reluctant to part with the land.

And we are being very careful to develop in a way that will enhance the beauty of the place, rather than destroy it.

I went walking along the beach in the morning. It is amazing how many different shapes a short stretch of beach can take. At one point, the waves crash against the rocks and a spray comes shooting up through a blowhole, as if a whale had made his way right beneath you. I came across a couple of local men fishing.

"¡Hola!" I said, in my best imitation of a person who spoke Spanish.

"Buenos días," they replied, clipping off the "s." They fished for a living. But they seemed to enjoy it. Work was play for them, too.

Your editor, at work and play,

Bill Bonner
The Daily Reckoning
February 20, 2004

We read in the paper that the central bank of Canada has decided to lower interest rates on its dollar.

Some nations put images of past presidents and heroes on their currency. Canada puts a picture of a bird, the loony. Lowering rates, the report tells us, "will create more loonies."

The burden of today’s Daily Reckoning is that the world has enough loonies already.

Elsewhere in the news, we discover that interest rates in the U.S. are down to levels not seen since 1958. We vaguely remember 1958; we recall nothing to complain about. And the years that followed brought a boom in the ’60s….with a major rise in stock prices. By 1966, stock prices had reached levels that many thought were loony. In fact, they had reached a major market top…and fell for the next 16 years.

Today, interest rates may be in line with 1958…but stocks are as expensive as they were in ’66.

In almost every other respect, too, 2004 is unlike 1958. Back in ’58, Dwight Eisenhower was president. The old WWII general warned of a "military industrial" complex and urged restraint. Today, George W. Bush tries to explain his whereabouts during the Vietnam War…and eagerly puts his signature on every numbskull project that crosses his desk. We do not have all the numbers in front of us, but we see in yesterday’s news that the U.S. national debt officially topped $7 trillion this week…and is rising by $550 billion each year. In two years of the George Bush administration, the national debt rose more than it had during the first 200 years of the republic. Under Ike, the WWII-era debts were actually being paid down.

Back in 1958, America was a not only a net exporter…but the largest net exporter in the world. Now, it is the largest importer.

Back in 1958, America was the world’s largest creditor. Now it is its largest debtor – with a net financial deficit of $4 trillion dollars.

Back in 1958, the national savings rate was over 10%. Today…it is near 1%.

Back in 1958, total debt in the U.S. was under 150% of GDP. Today it is over 300%…a level never before seen.

Back in 1958, a gallon of gas cost…what…we don’t recall, but we remember spending 25 cents for a gallon only a few years later. We also remember someone coming out to pump the gas and clean the windshield while we waited.

We’re not saying 1958 was better. Back then, if you wanted to buy a house or a car, you had to save up to make a down payment. And we had to watch Amos & Andy or The Honeymooners on TV; we had no reality shows or celebrity boobs at half time. And you couldn’t come down here to Nicaragua and work in an air-conditioned office as though you had never left home.

In 1958, our family built a house. We do not recall any hassles with zoning boards, building inspectors, environmental panels or other busybodies. Our father designed it and built it himself…following his inner architect. It is still standing…as big an eyesore as ever.

And when Eisenhower spoke, you didn’t have the pleasure of trying to figure out how the sentences fit together or what they meant; they were pretty straightforward. And you didn’t have the thrill of trying to guess what the dollar would be worth next year…or how America could possibly pay its bills.

Nor did we have the benefit of at least 80% of the laws now on the books. People were still allowed to call each other names or make jokes without going to jail. You could still drive around country roads and throw beer cans out the window.

And can you imagine…when you took a trip on an airplane, you were treated as though you were an important customer, rather than someone bent on the destruction of the planet. There were no x-rays…no body searches…no moronic questions…no Homeland Security. In fact, there was no Homeland at all…just a big, open, free, cheap, solvent, loony and agreeable country we called America.

We miss it.

But here’s more news, from a different corner of the world…


Dan Denning in the land of wine and cheese…

– Let’s talk bad breadth this morning, human beings. I’m fond of watching the S&P 100 (OEX) because of its high concentration of financial and tech stocks. Twenty-seven of the OEX’s 100 stocks are techs and financials, making up 40% of its market cap – or about $2.7 trillion.

– The OEX is overbought, according to a chart I sent yesterday to Strategic Insider readers. The chart I refer to is "Bullish Percentage chart." It tells you how many stocks on the S&P 100 are in bullish point and figure patterns. When the bullish percentage on the OEX goes over 70, stocks are overbought. When it goes below 30, the OEX is oversold.

– Right now, the OEX is executing what I’m calling a "walking-the-plank formation." The current bullish percentage is over 85 – higher than at any time in the last seven years.

– But wait, there’s more. In intra-day trading, the Dow Industrials briefly set a new 32-month high, at 10,753 (mea culpa for misstating the Dow’s all-time high the other day, I caught the error after we went to press). According to James Gray, editor of the UK "Options Trader" service, despite the Dow’s modest decline by the end of the day, most of the stocks in the index are hurting more than it appears.

– Gray says that other than JP Morgan (JPM), United Technologies (UTX), and McDonalds (MCD), there were "twenty seven companies whose share price actually fell harder than the Dow from their recent price peak. In other words, 90% of the index fell more than the Dow itself."

– Gray continues: "Confused? Don’t be. The Dow is weighted according to the market capitalization of the components, which means that the bigger you are, the more influence you have on the index. So Wal-Mart (WMT), the world’s largest company, carries more weight than smaller companies.

– "So all of these expert market commentators who tell you that this is just some routine profit taking as we approach new highs are misleading you somewhat. The average fall in the Dow 30 components, instead of being 0.8% as reported by the index itself, is 4.6%. Twelve component companies have fallen by more than the average. The greatest offenders are Intel (INTC) down 13.6%, SBC Communications (SBC) down 12.8% and General Motors (GM) down 10.7%."

– If appearance and reality are going their separate ways on the stock market, they’ve parted ways in the currency markets, too – at least for now. In fact, yesterday, the dollar rose to a one-month high against the yen, and even gained some respectability against the euro and the pound.

– The Japanese took center stage yesterday in the theater of the central banking absurd. Vice Finance Minister for International Affairs, Zembei Mizoguchi, said it "won’t be the case" that Japan will tolerate a stronger yen. This came after news that Japan’s economy grew at 7% in the fourth quarter, the fastest rate in a decade. Aziz McMahon, a foreign-exchange strategist in London, said that Japan’s "central bank is winning at the moment."

– At the moment, perhaps. "The Bank of Japan has to be feeling pretty cocky right now," writes Chuck Butler in the Daily Pfennig, "[since] their latest barrage of intervention has successfully defended their line in the sand at 105 [yen to the dollar]." Yet what does the BoJ really have to show for its efforts? Japanese central bankers spent 250 trillion yen last year to keep its currency down…but the yen has still strengthened 10% v. the dollar. Is there another 250 trillion in the budget for this year? I doubt it.

– Central bankers "are yesterday’s heroes," writes Stephen Roach. "With their policy arsenals dangerously depleted, they are woefully ill-equipped to cope with the ever-daunting complexities of a post-inflation era…I fear modern central banking is on the brink of systemic failure."

– Take that, you Pollyanna tech bulls. And while you’re at it, short the dollar, anything sensitive to a rise in interest rates, and semiconductors for good measure. Buy oil, gold, and high yield. And leave the central bankers to shame, humiliation, ignominy, and defeat.

– "My bet is that in 2005, foreign central banks will have had their fill of countering the dollar’s natural inclination," says Northern Trust’s Paul Kasriel. "When that happens, the dollar will likely go into an uncontrolled tailspin and the Fed will have to jack up interest rates." This suggests being long-term "short" the bond market, although the short term is trickier.

– "It will be interesting to see how the most highly leveraged U.S. economy in at least 55 years (as far back as my data goes) reacts to all of this," Kasriel says. Interesting indeed. Not well, I suspect. Especially for homeowners.

– "In the interim," he adds, "commodity prices in dollar terms, which already have been on a tear, will likely continue to rise. The combination of [a] falling dollar and global reflation is a recipe for higher commodity prices."

– Wednesday’s pause became Thursday’s hesitation. Today, Friday’s retreat? I don’t know. And last night, I found myself staring at the computer screen, muttering "Go you dollar," in hopes of making my weekend revelry a little cheaper. But I know better. The dollar’s nice little run isn’t fooling anyone.


Bill Bonner, back in Nicaragua…

*** "There probably are some bubbles in the making, but you can’t worry about those now," said Bank One chief economist Diane Swonk. "[The Fed has] a dual mandate – employment and inflation – and they’ve got no inflation and not enough employment."

The crowning illusion of our time must be the idea that you can get what you want, rather than what you deserve. People widely believe that if the Fed wants to create more jobs or more inflation…it can do so. After all, it controls interest rates and, indirectly, the economy itself.

Why then are there ever recessions…crashes…busts? Well, sometimes the policymakers err. Yes, sometimes they do.

*** Near the entrance to our ranch…we noticed 2 new shacks.

"What’s that…" we wanted to know?

"Well, the local people are beginning to build new houses for themselves," explained our partner Antonio. "Before, they didn’t have any jobs. But now they’re working at the ranch and they’re beginning to spend their money."

And so, we’re creating our own little bubble here in the wilds of Central America.

Prices are soaring up and down the coast. Naturally, when prices go up, people jump at the chance to pay more. A year ago, we looked out and saw a virgin beach…a beautiful stretch of nature…just as God intended it. So attractive was the view that we decided to build a house where we could enjoy it every day.

Now, looking out from the half-finished house….we see condominiums going up almost in front of us! Is this progress…or what?

*** No one appreciates life down here more than Edward. Our youngest son, 10, has a hard time sitting still in school…and struggles to get through every day. But down here, he is in his element. He gets up early, puts on his cowboy boots and takes off. He flies down the hill on his bicycle…goes fishing…horseback riding…swimming…It’s hell for leather all day long.

By the end of the day, he is happily exhausted. Often, even before dinner is served, he slumps in his chair and falls fast asleep. His father has to carry him home.

Edward has also become the pet of the maids and kitchen staff. The local women caress him…they pinch his cheeks…they hug him and offer him treats. And last night, while we continued our endless – and no doubt extremely important – meetings, we saw the girls had put on some music in another room and were taking turns dancing…with Edward!

The poor boy. We fear that life ever hereafter will be a disappointment for him…never quite measuring up to those delightful sun-filled days of being spoiled rotten in Nicaragua.

The Daily Reckoning