Investment Biker Read online

  Human beings don’t grasp this intuitively. History has shown over and over that a government doesn’t have to worry about high prices because they bring in supply and eventually drive prices down. The proper concept is certainly taught in economics courses, but it’s so expedient to cap a price that politicians often try to do so. It’s never successful, always diminishing supply and making the situation worse.

  One of the reasons I was bullish on parts of the world was that over and over I saw countries realizing they could not control prices, that it wouldn’t work. Statism was on the run. More and more governments had tried and had such obvious failures with this policy that they’d given up on it. For every Zimbabwe where price controls were still in effect there was a Poland allowing the marketplace to set the price—and the resultant natural increase in supply.

  Once we got to Harare, the capital of Zimbabwe, we tried again to lodge a complaint against the captain and Rayon with the Zairian ambassador, as we had tried to do in Lusaka, the capital of Zambia. Once more we got nowhere. Since the next country we would pass through that had a Zairian embassy was the United States, there was little we could do after this. It would be a long time before we could even hope to pursue this matter again.

  I went to see a government official and told him I thought his country’s prospects were great. Sometime in the future I wanted to invest here.

  “If I invest,” I asked, “can I take my money out when I want?”

  “No, once it’s here, you can’t,” the minister said. “We want to build up our country’s foreign-exchange reserves. It’s in the best interests of everyone, including you as a foreign investor.”

  “But don’t you understand what you’re doing?” I asked, exasperated. “You’re preventing capital from coming in, which you desperately need. Nobody’s going to put his money into a country from which he can’t withdraw it.”

  “No, we must have exchange controls,” he said. “Otherwise, we won’t have any capital. It’ll all flee to Switzerland.”

  “Now, wait a minute,” I said. “I’m here. I want to give you foreign capital. I want to bring money in, but you won’t let me take it back out when I want to.”

  “We must protect our foreign reserves.”

  “Don’t you understand that if you let the money go back and forth freely,” I said, “a lot of money might leave, but eventually a lot more will come in?”

  Mexico was finding that out now, having finally allowed a freely convertible currency. In Latin America over the past fifty years there had been an enormous amount of flight capital precisely because of regulations and exchange controls.

  What these officials never realized was that when the system collapsed and they imposed exchange controls, of course people rushed to get their money out. In their efforts to stop it they actually created currency smuggling. Prosperous citizens would sell their farms and buy stamps, antiques, gold, and diamonds and sneak their wealth out—the ways were unlimited. But no one was ever going to sneak his money into such a country.

  The twenty-first century will not look like the twentieth century.

  One huge difference will be the incredible mobility of people, goods, information, and capital. A major theme of twentieth-century economics has been the limitations on capital through exchange controls.

  In exchange controls’ simplest incarnation, it means if an American went to London, he could take, say, only three thousand dollars out of the country without permission. He could not take more unless he paid a special tax—if at all.

  Now, why would a government care how many zlotys, francs, or dollars a citizen took out?

  If I take my dollars and exchange them for five thousand francs, there are five thousand fewer francs in America’s foreign reserves, in the total of its citizens’ and the government’s franc holdings. When an American importer needs to pay for the wine he’s brought in from France, there will be five thousand fewer francs here for him to purchase.

  To Americans it seems as if there’s an ocean of francs available, with no problem in obtaining them. However, the only way our banking system got those francs in the first place was from our selling something to the French.

  For many years we sold more to the rest of the world than we bought. Therefore, we built up or saved a lot of foreign currency: yen, deutsche marks, francs, and pounds. Whenever an American wanted to buy French wine, in essence he went down to the bank and got some of those saved-up French francs and sent them back to France and said, “Sell me some wine.”

  As I have tried to explain, trying to solve the problem of a lack of foreign reserves with exchange controls doesn’t work. These controls are a Band-Aid. Once again, one person, one entity—the central bank—will decide what’s important for an entire society, even if the product is tractors. Only when the market is free—unleashed, if you will—and the local currency finds its own level, will people then start doing what comes naturally: dig up emeralds, sell them to France, get francs, and sell those francs to somebody who wants to bring in either a case of wine or a tractor. If the holder of francs is reluctant to sell them, then the wine and tractor importers will bid up the price until he can’t resist.

  It’s this kind of vigorous activity that builds up a country’s economy and its foreign reserves.

  Even though a canny investor like John Templeton will invest in a country before the currency becomes freely convertible, I will only go in and get the lay of the land. I won’t put my money into a country until it actually makes its currency convertible.

  In this vein, I urge all my American friends to open a foreign bank account, if only as an insurance policy. Second best is to buy foreign currencies in a brokerage or bank account here. People have life-insurance and automobile-insurance policies and never expect to need them. If you have to use them, however, you’re glad you have them. On that basis, every American should put some money out of the country. I don’t know what’s going to happen to the U.S. dollar over the next twenty-five years, but I know what’s happened in the past twenty-five—it’s lost a lot of value, over a third compared with other major currencies.

  The fiscal situation in the United States is so bad that ultimately—during this decade—I’m sure we’re going to have exchange controls. The dollar will have become so worthless that U.S. citizens will be as desperate for foreign currencies as the Italians are today. Our government will limit how much money we can take out of our country. You won’t be able to go to England for a vacation unless you can do it on, say, twenty-five hundred dollars.

  As of now, it’s patriotic to send your money abroad. The government wants the dollar to go down, to be worth less. It is American government policy for the dollar to sink, because the government thinks then American goods will be more competitive on the world market. American steelworkers will have more jobs. American farmers will sell their wheat and corn more readily. Our government is encouraging its citizens to sell dollars, and I’m right in there with them. But unfortunately the dollar will continue to go down until its fall becomes so out of control that the government will snarl and blame our problems on “evil financiers.” Once controls are put on, the currency will fall farther because everybody will try to smuggle it out.

  A year or two after this, my mother in Alabama will call me and say, “I gotta get some money out of the country.”

  I’ll know then we’re near the bottom. Many of us will be on planes, two suitcases full of money, flying to London or roaring across the Great Lakes. Once again exchange controls won’t have worked. Particularly today, with telecommunications and mobility, they can’t work. But of course, being a government, ours won’t acknowledge it’s a root cause of the problem.

  One of the reasons I’m so bullish on Latin America is that its governments have tried exchange controls for decades and have now eliminated them. Latin Americans have gone through the complete cycle. They know. That’s why they’re ahead of the Africans. The Latin Americans have learned after seventy years th
at exchange controls don’t work. The Africans are just now getting to the stage of, “Okay, we know exchange controls don’t work, so now let’s try something else.”

  Unfortunately, the Africans also have a problem with their colonialist-imposed borders, whereas in Latin America the borders are reasonably stable and a bit more rational.

  We visited the ruins of the Great Zimbabwe with our friend Stan Mudenge, a historian and nationalist who has written the only history of precolonial southern African empires, none of which, unfortunately, had left any written record. Thus by necessity he had to be somewhat more vague about his historical sources than he would have been if writing a Princeton doctoral thesis.

  The ruins of this old stone city were the largest ancient structures south of the Sahara. According to Stan, in terms of importance they were on a par historically with the ruins of the Mayans, the Romans, and the Aztecs. To me, the Great Zimbabwe looked to have been a large fortress with outbuildings, perhaps like that of an extensive medieval castle with a good-sized town at the base of its commanding hill.

  From the Zimbabweans’ point of view, these ruins dated from when they had ruled the world. Obviously, these ruins were of some kind of kingdom that had been considerably developed. This said a lot to Africans, that long ago their ancestors had raised elaborate structures and presumably an intricate civilization.

  This mazelike collection of stone ruins was set on a large, steep hill with various approaches. Every day workers would have had to bring up water, food, wood, and the other necessities of life, which would have required quite an organization of labor. So here was antlike behavior in Africa, maybe as well organized for its time as that of the Japanese or the Germans today. Here was hierarchy and discipline.

  African nationalists use the Great Zimbabwe to make the point that the Africans are as historic as anyone, particularly when they’re castigated for not having more in the way of ancient civilizations.

  They had other such ancient civilizations, they claim. Unlike the stone buildings of Rome and Central America, their forefathers’ structures had been built of wood. As wood rots—and in the jungle it rots fast—nothing of those magnificent civilizations was extant—no buildings, no ruins, no implements, and no historical records.

  I wondered what had happened. Why had the Zimbabweans fallen back into tribe and jungle life? After all, we know Arab traders had come this far south. Zimbabwean gold artifacts had been found in Arabia, and if the Arab traders had taken science and outside exposure to Europe, surely they had been carried south to Zimbabwe.

  In Zimbabwe we needed to get visas for South Africa. The two countries didn’t have a political relationship, but fortunately there was a South African trade office here, which functioned as the local embassy.

  In front of the building, black people were lined up around the block.

  “What’s this all about?” I asked the cab driver.

  “Those are people waiting to get visas to go to South Africa,” he said.

  South Africa? I was shocked. We went in and asked for visas, but we were told there would be a four-week delay.

  “Why?” I asked.

  “Because all these other people want to go to South Africa, too,” I was told.

  Mercifully, we were able to persuade the trade representative that while we didn’t want to jump the queue and give anyone a hard time, we needed to keep moving because of the oncoming South American winter.

  At my side Tabitha, still lugging along her tattered card identifying her as a bleeding-heart liberal, spoke up in a puzzled voice. “Wait a minute. I’m missing something here. Why are all these people trying to leave a black-run workers’ paradise to go live in the racist state of South Africa?”

  The Zimbabweans were voting with their feet, the strongest ballot of all. For them, South Africa was the land of opportunity, and they were in a headlong rush to leave one Africa to get into another Africa that the Western press condemned so roundly.

  We were eager to find out why.

  We had heard that customs officials in Botswana were lackadaisical about travelers’ bringing in money, but as we approached the border I was wary.

  We were asked to fill out a form indicating how much money we were bringing in, as we had in all those wretched countries with exchange controls.

  I asked the border guard, “Do we have to change all our money?”

  “No, bring in and take out anything you want.”

  “When we change money, do we have to get this form stamped?”

  Many countries with exchange controls not only insist on knowing about every penny you bring in, but each time you change money, they want the transaction stamped on your currency-exchange form. When you leave the country you must show the form.

  “Okay,” they’ll say, “let’s see the nineteen hundred dollars you have left.” If you don’t show them you still have nineteen hundred dollars they figure you exchanged it on the black market, and the central bank didn’t get its whack at it. This was the same governmental racket as Zambia’s buying all its citizens’ emeralds and Bolivia their tin, a state monopoly on foreign currencies.

  “Do I have to show this form when I change money?” I asked again.

  “No.”

  “Do I ever have to turn this form in again?”

  “I think when you leave you have to turn it in, but I’m not sure.”

  If nobody knew much about it, this was clearly a form that was archaic, a holdover from the past.

  We drove away on highways even better than those in Zimbabwe, which had been pretty good.

  So I liked Botswana right off the bat.

  One, it was easy to get into. Two, there was no black market in the currency. Guys on little chairs by the side of the road offered to change money for a small commission, a convenience to save a trip to the bank.

  The mere fact that the currency was freely convertible made me think about investing here. You may be a brilliant investor, but if you have to get your money out through the black market, it’s going to be an incredible hassle, particularly if a lot of money is involved. If someone local, like an arm of the government, knows about you, doesn’t like you, and wants your money—no matter how smart you are, you’ve lost it if you can’t get your money out.

  Sometimes I won’t invest in a country because I know it’ll change the rules on me. Kuwait was one of those countries. The Kuwaiti stock market in the late seventies was a gigantic bubble, like the tulip bubble in seventeenth-century Holland. I wanted desperately to sell it short because when it burst, the profits were going to be unbelievable.

  At that time in Kuwait, if you wanted to buy a million dollars’ worth of stock all you had to do was write a check for a million dollars, postdate it for six months, and give it to your broker. Whether or not you had the million in the bank didn’t matter. Naturally, the broker didn’t—couldn’t—cash it till six months later. If the stock went up, you made the profit. Under this system of financing, as you can imagine, stocks went only one way, up, buoyed by an ocean of worthless checks.

  This was so much fun that many buyers decided to buy $10 million’s worth. No problem, said the brokers, just give us a postdated check.

  Government clerks wrote checks for $20 million and $30 million, all postdated. Six months later the investors were supposed to sell the stock and pay the money back.

  But, of course, they didn’t. They wrote another check, this one for $50 million or $100 million.

  It was obvious that this had to explode. The Kuwaiti currency was freely convertible, which meant I should be able to whisk my profits out after the crash. Still, much as I was aching to, I didn’t sell the market short because I knew just as sure as I was sitting there that the government would change the rules on me and I’d never get my money out. I’d probably lose money. It would say I was the evil speculator who had burst the bubble. It would change the rules and nail me. I believe even if I had been Kuwaiti it would have changed the rules on me as a short seller.
It would have decided everybody had to suffer.

  This is one of the big problems with international investing. It’s hard enough playing the game in many countries, but if you go into a place where your money is not freely exchangeable, you’re just asking for problems.

  Kuwait? The inevitable happened. The market crashed. The clerks lost every penny of their tens of millions of postdated profits—and then some.

  When we got to Francistown, I said, “Good God, look at this place!”

  In addition to real shopping centers, the people had nice cars and trucks, new ones. Lots of Toyotas. In Zimbabwe, the cars and buses had been old and there hadn’t been many of them. Here in Francistown, the buses were all new. A lot of construction was going up, with new buildings jutting up right and left.

  Bells started going off: “Hey, something’s happening here, something I ought to know about.” What I had begun to sense, without knowing why or what the process was, was that the farther south we went, the harder the currencies became. It was a little like going through Central Europe: As one went from Bulgaria to Romania to Hungary, the currencies got sounder and harder. When one got to Austria, of course, the schilling was as hard as a rock.

  Not coincidentally, as we moved south we also encountered more and more prosperity.

  Zambia had been more prosperous than Zaire, Zimbabwe had been yet more prosperous. Botswana was even better off than Zimbabwe. At the tip of the continent, South Africa was the economic powerhouse of Africa, its Germany and California all rolled into one.

  I learned there were lots of mines in Botswana: copper, diamond, copper-nickel, and coal. The country had only a little over a million people, yet it was about the size of Texas. Recent economic growth had been about 10 percent a year, four times as much as that of the United States. It was one of the world’s top three producers of diamonds, which provided 75 percent of the foreign exchange and 60 percent of government revenue. The government’s free-enterprise orientation and conservative monetary policies had attracted some foreign capital, although its investors still tended to be wary of the country’s dependence on South Africa.