Those Irresistable Hearts of Darkness

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"The horror! The horror!"
~ Heart of Darkness, Joseph Conrad

The trouble with vacations is that they are much too serious. Instead of war, depression, bankruptcy, and hyperinflation, we are dealing with things where the stakes are really high. Instead of reflecting on trade deficits and subprime credit markets, we have to think about things we actually know something about, and issues over which we might actually have some influence.

One daughter has a boyfriend covered with an exterior of colorful tattoos, and an interior as dull as airplane cutlery. Another daughter has a boyfriend who seems gentlemanly and ambitious. The latter is almost too good to be true, while the former is almost too bad to be false. One son wobbles between medical school in the United States, and business school in France. The other is wondering whether to pursue a career as a bank manager…or a bank robber.

The point is, every decision is important; and every bit of parental advice has to be carefully considered…and judiciously administered. Even good advice is likely to be taken badly. The counselor has to be on guard; like a zoologist giving antibiotics to a sick polar bear, he is lucky to avoid having his limbs torn off.

So for us, it is a great joy to be back from our vacation, back in work-a-day world, where we can get some rest…and have a good laugh or two.

We noticed that the outrageous trends that were going on when we left, have become even more outrageous. Seeing a disaster coming…investors are rushing to get in on it before it is too late.

China is clearly in a bubble. Shanghai stocks are up 250% since 2005 — and 35% this year alone. Still, investors are so eager to get in at these prices — while they can still get hurt — that they take up Chinese bank IPOs at twice the PE ratios of banks in developed countries. And what do they actually get when they buy a share? What exactly is a bank chartered and regulated by communists? They haven’t a clue.

But so much foreign money is elbowing its way into China that, in 2007, the central bankers are getting bruised just trying to keep up with it. China is expected to accumulate more than half a trillion dollars in foreign exchange reserves — twice as much as last year. How does it get that money? It prints up currency of its own to buy the foreign currency from businessmen and investors — who are selling Chinese made goods (including stock certificates) to foreigners at a breakneck pace.

Everywhere, extravagant amounts of cash are flooding into overpriced investments in absurd places. Local central banks are printing money at a furious pace (lifting the great global tide of liquidity) to keep from increasing the value of their own currencies. This freshly minted cash comes into the world like a newborn baby — ready to claim its fair share of resources all its life while being a burden in the long run; but at the crib, it’s a joy to everyone.

And now we enter the dark heart of this whole cockamamie tale.

China is not the only place investors can get themselves into trouble. More than a third of the money that trades hands on the Brazilian stock exchange comes from overseas investors. Brazil has always been the "country of the future," but six years ago, Brazil’s future was so dismal it looked like it would default on foreign loans. Now, foreigners give it so much money it doesn’t know what to do with it all. At the present rate, Brazil’s dollar reserves could go up 100% this year.

Meanwhile, who would have thought that investors would scramble to buy Hugo Chavez’s paper? But, then again, why wouldn’t they? If they will buy banking stocks in a country organized on Marxist-Leninist principles, why not the slippery bonds of a Latin American strong man who professes to be a follower of Trotsky? Investors not only take up the Venezuelan bonds happily, they do so at less than 7% yield…barely 200 basis points more than the sovereign debt of the United States of America.

Officially, the Venezuelan Bolivar is quoted at 2,150 to the dollar. On the black market it trades for 3,750 to one. And it’s sinking fast — down 15% so far this year. No wonder. The money supply is increasing at 65% per year…while the inflation rate is, officially, 20%. And Chavez is still increasing government spending by 50% a year.

But Venezuela has oil; and it is to the black goo, not to Hugo Chavez, that investors look for security. But just as investors often search for ways to turn a silk purse into a sow’s ear, so do governments more than occasionally strive to turn their good fortune into national catastrophe. Caracas seems to be doing so in classic manner, spending more than even his country’s oil revenues will permit. What will happen when the Venezuelan treasury runs out of cash and credit? Will Hugo Chavez cinch up the nation’s belt in order to honor his commitments to the foreign capitalists he despises? Two months ago, Ecuador threatened to default on its bonds; Chavez cheered it on.

Even long-dated dollar-denominated bonds issued by Iraq, trade at yields less than 10%. In that heart of darkness, too, investors are counting on oil to make sure they get their money. The trouble is, whether in the jungles of South America or in the deserts of the Middle East, the politicians above the ground can destroy a nation’s credit faster than the oil below ground can salve it.

Back in the U.S.A., one of the good things investors are intent upon getting too much of, is in Las Vegas. "Excess” is an old word, but it seems to have been invented in anticipation of modern Las Vegas. Nothing about the city is modest or restrained.

Over on The Strip, Goldman Sachs (NYSE:GS) is buying Carl Icahn’s four casinos…for $1.3 billion. The city had a total of 35,000 hotel rooms in the 1970s, which seemed like more than enough to us. Now, it has five times as many — 151,000. But "too much," as we noted earlier, has dropped from the English vocabulary in Nevada, and perhaps in the rest of the world too. The Venetian alone is adding 3,200 new rooms. And the owners of the old Stardust Casino judged it too small, so they blew the place up last month to build a new development, Echelon Place, with more than 5,000 rooms. Meanwhile, MGM’s new City Center development is supposed to cost $7 billion, making it the most expensive development in Las Vegas history.

Everywhere you look, it is the same. Intrepid investors push deeper and deeper into the jungle…exploring…searching… reaching…for some way to ruin themselves in style.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

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