In this issue of The Daily Reckoning we turn our eyes back to the former “banana republics”, partly for opportunity…and partly for instruction.
On the opportunity side, we find companies with little debt and huge potential. It is not exactly a virgin market — but more like one that has been in a women’s detention center for the last five years; it’s ready for a new dress and a drink.
But we first we take up our lessons:
Run huge deficits and borrow the money from overseas? “Si, we tried that…” Try to stimulate a debt-saturated economy by printing more money? “Si, that too.” Bail out the banks…giveaway money to the people…hand out special favors to cronies and campaign contributors? “Doesn’t everybody?”
Argentina tried a few other things too – such as locking up the banks…starting a war with England…and creating a whole new currency. The inflation rate hit more than 1,000%. Nicaragua brought in the Sandinistas, and sent the whole economy into reverse for an entire decade. Peru thought a Japanese president might give it some of Japan Inc’s magic…then they chased him into asylum in the embassy. Strongmen…juntas…revolutions…mob democracies… defaults…devaluations…is there any trick the Latinos haven’t tried?
But the world is a topsy-turvy place. The clouds of mismanagement that once cast such long shadows over Latin America have drifted into the higher latitudes. Suddenly, the banana republics look like good places for you money as well as your holidays.
In a nutshell: the United States and Britain have been victims of their own good luck; the banana republics had the good fortune of bad fortune. In the last twenty years, for example, the world rushed to lend the Anglo-Saxon tribes money. North of the Rio Grande and the Isle of Wight, credit was as abundant as calories. But when lenders visited the tropics, they hid their money in their underwear, and left their watches in the hotel safe. Our man in Rio sweated and counted his change. Our man in London or New York splashed out, and bought a $5 million house…and another one as an investment.
In the air-conditioner zone there was no one to borrow from. Residents of the banana republics were spared the lure of debt, thanks to the near universal agreement on the part of lenders everywhere, who wouldn�t give them a dime.
And now, England and America are caught in the debt trap, while the Latinos swagger down their avenidas with hardly a care in the world. The price of soybeans is at an all time high…and their balance sheets have some of the lowest debt ratios in the world.
An investor in Latin America has the trade winds at this back; the rainbow currencies are rising; so is the price of food. Most of these countries are net exporters – of bananas and other agricultural commodities, often of metals as well. Like China and the oil exporters, they are building up large piles of dollar reserves and watching their own currencies go up against the greenback. Several have had to intervene in foreign exchange markets not to protect their local currencies…but to keep them down.
But nothing seems to be able to keep down the worlds growing appetite. There are more and more people in the world; most of them are getting richer. Naturally, they expect a little more butter on their cabbage…and a little more meat in their soup. But where will it come from? You can print as many dollar or pound notes as you want. Add a nought and you have multiplied the money supply by ten. But how fast can you increase food production? Where do you get the land? The water? Some analysts believe the world is already close to a peak in food production. For every new acre put into service, they say, another acre is taken out. In America, for example, farmers are switching from producing grain for food to planting grain – particularly corn – to be used as biofuel.
Thirty percent of the past summer’s crop was thus destined for the gas tank rather than the stomach. In other parts of the world, notably China, farmland is being taken over for urban development, or destroyed by pollution, drought, or over use. Farm prices are at record levels…and may go higher. Corn stocks are nearing a 33-year low…wheat stocks are approaching 60-year lows.
What better time to invest in one of the world’s top food producers? says legendary British investor Jim Slater. Writing in the Investors Chronicle , Slater says, “Brazil has an abundance of the four major commodities that the world is short of,” which he identifies as water, arable land, energy, and mineral wealth. Brazil, he points out, has 90% more recoverable water than its nearest rival. It is the world’s largest exporter of soybeans, beef, chicken, orange juice and sugar. Its leading oil company has recently struck a huge deposit. “Before long,” he predicts, “Brazil will be a net exporter of oil.” Finally, the country is also a huge producer of iron ore, quartz, chrome ore, industrial diamonds, gold, nickel, tin, bauxite, uranium and platinum.
Sell the gringos; buy the Latinos.
The Daily Reckoning Australia