December 18, 2005

04:32:24 am Wednesday, December 14, 2005 - Aswan and Cairo, Egypt - Hazy, High 70s. Includes comments on the US, UK, and New Zealand.  

Flew on Egypt Air from Aswan to Cairo. Flight delayed about two hours due to haze in Cairo. In Cairo, we toured the Egyptian Museum, home to the full King Tut exhibit and other Egyptian artifacts spanning thousands of years. Spent one night at Four Seasons Nile Plaza, which opened about a year ago and is fabulous. We were upgraded to a suite, which put us in a ridiculously large set of rooms, the largest we've had since our night at Burj al-Arab. Deanna stayed up to 3AM shopping for Christmas presents over the web. We've gotten numerous emails from people surprised that we (and this year that was 100% Deanna) were able to send out Christmas cards. That's the beauty of the internet. We did not buy a single postage stamp, lick an envelope, or print a single card. Yet we were able to custom design a card with multiple pictures from this trip, and send off dozens of cards to people in numerous countries. Go to shutterfly.com and you can probably still get your cards in people's hands before Christmas.

Now for a look at interest and exchange rates (normal readers may tune out here). The US dollar has had a couple of tough days, with the price of a euro increasing to $1.20 today. The dollar is weakening on the thought that the Fed is nearly done raising rates (4.25% after yesterday's increase) while the European Central Bank is just getting started with their increase to 2.25% a few weeks ago (their first increase in five years). I think the Fed is fairly certain to raise to 4.50% at the end of January, but a further increase to 4.75% at the meeting after that in March is only a 50/50 proposition at this point, in my opinion. If US economic growth slows next substantially next year (it is likely to slow, the question is by how much), then rate cuts at some point are possible, more likely in the second half than the first. Nevertheless, the Fed would be less likely to cut rates if inflation does not decrease, and oil prices will influence that. I can't predict oil prices, but my best guess is that they will remain in a $50-$60 range, but neither $30 nor $100 would stun me. My best guess is that Fed rates will end 2006 around where they are now, at 4.25%. That is, the Fed may follow one or two increases with one or two decreases. I expect the present two percentage point gap between the US and Europe to narrow to one percentage point as Europe ends 2006 around 3.25%, intermittently raising rates throughout the year as (and if) the EMU country's economies gradually improve (it is not certain that economic growth in the EMU will improve, though). I'm neutral on the dollar/euro exchange rate now. The dollar remains undervalued to the euro on a purchasing power basis but interest rate parity says the euro is due for a boost. The euro has greater political risk as the strains revealed in Europe in 2005 are not going away any time soon. On the other hand, the dollar has a greater issue with the US trade deficit possibly leading to a dollar decline. Thus, things could go either way. In any event, I no longer have the conviction of my March 20 call that the dollar was due to rise against the euro, so I will close out this prediction with a 12% gain (the dollar rose from 74.6 euro cents to 83.3 euro cents as the euro fell from $1.34 to 1.20). I am not saying that I now expect the dollar to fall; rather, I just don't feel as strongly that it must rise against the euro. My best guess is that the euro will range from $1.15 - $1.25 next year, but then I wouldn't be surprised to see it down to $1 or up over $1.35. About the only thing we can be sure of is now that I've closed out my prediction, the dollar will likely be very strong over the next week, hitting new highs for the year, and making my timing look foolish!

The yen also has also moved sharply up against the dollar this week after months of sliding. It is now 117, up from 121. Japan's central bank has not yet increased rates from near 0, but it sure looks like they will next year.

I still think the dollar is still in good shape versus the British pound. The pound began the year earning 2.50 percentage points more than a dollar (4.75% versus 2.25%) but now the rates have converged (4.50% versus 4.25%). With the UK economy looking weak heading into 2006, I expect it US rates to exceed the UK at some point in the first half. The UK also remains silly expensive on a purchasing power basis. Fair value in terms of purchasing power is probably for the pound to fall to $1.25, a 29% drop from $1.77 presently. I don't think we will see anywhere near that drop, but I do think the $1.40-$1.50 range that the pound traded in for much of the 1990s would be a reasonable target over the next couple of years based on purchasing power if Britain's economy stays weak, and if the US economy remains somewhat stronger than the UK.

Finally, I note that New Zealand's central bank raised rates to 7.25% last week. I continue to think--as I have since March--that New Zealand's economy is so good right now, that things there are far more likely to get worse than to improve or even stay where they are. Their currency is down some since I first said this, but their stock market is not. So I will keep saying it.

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November 17, 2005

11:53:55 am French Diary IV  

Saturday, November 12, 2005 - Bordeaux, Omaha Beach, and Caen, France - Cool, occasional rain, 55.

Drove most of the day to Normandy, arriving in time to visit the American Cemetary at Omaha Beach an hour before it closed. There was a sizable crowd, mainly French, probably due to the weekend marking the end of World War I (although this cemetery was only for World War II). World War I lingers in the European memory (and also the Australian and New Zealand memory) to a greater extent than it does in the American memory. Although I have not done the math, I suspect that if you measure WWI casualties as a percentage of WWII casualties, you will find the WWI percentage for the US to be lower than for the UK, France, Belgium, Germany, Australia, and New Zealand. The US got off lighter, so to speak, due to its late entry. New Zealand, I believe, actually had more WWI casualties than WWII. The US, however, experienced nearly the same number of casualties in Vietnam as WWI, so WWI has lost some significance for us. Armistice Day remains a government holiday, but it is now re-christened as Veteran's Day, and it is not a business holiday. In France, though, November 11 remains a major holiday, and in New Zealand and Australia, the day of their major WWI battle (April 25, Gallipoli) remains a huge holiday, equal in magnitude to our Memorial Day (originally Decoration Day to honor Civil War soldiers), or perhaps even greater.

We stayed one night at the Otelinn in Caen. It is right next to a museum on World War II and the 20th Century that ironically we did not go to due to time constraints. Caen is a small city of just over 100,000, but the town of Bayeux, around 15,000, is closer and more convenient to the D-Day sites. In summer it would be best to stay in one of the small villages of a few hundred or a few thousand people near Omaha Beach--e.g. Colleville, St. Laurent, Vieruille. Once the weather turns colder in October and November and the crowds diminish, many of the small museums, shops, hotels, and restaurants in these villages close for the season.

Sunday, November 13, 2005 - Caen, Utah and Omaha Beaches, and Paris, France - Cool, 50.

Spent the day touring different D-Day sites. The invasion area was 50 miles wide along five beaches: Sword (UK), Juno (Canada), Gold (UK), Omaha (US), and Utah (US). The battle for Normandy, a region in northern France, lasted for several months after June 6, 1944. D-Day is the largest invasion in human history. It was not the turning point of the war--that occurred one to two years earlier (Stalingrad in the Soviet Union, El Alamein in Africa, and Coral Sea, Midway, and Guadalcanal in the Pacific) but it opened a vital third front against Germany, allowing the Allies to push into Germany from the west and end the war.

There are dozens of battle sites and commemorative museums throughout Normandy. The bulk of these are along the five beaches. There is no central museum--instead there are numerous homespun museums full of personal memorabilia and often devoted to a particular aspect of the invasion, such as a specific US army unit. You can visit each site in about an hour.

Internet cafe is closing, so to be continued at a later time.

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October 29, 2005

03:51:28 pm Italian Diary I  

Thursday, October 27, 2005 - Venice, Italy

Foggy until late afternoon, low 60s. Second of two nights at Hotel All'Angelo. Went to Galleria Dell'Accademia (Renassaince art), Collezione Peggy Guggenheim (first half 20th Century art; most interesting of the museums, collection pre-dates the downhill slide of modern art post-World War II), and Museo Correr (Venetian art and city history). Took gondola ride, something you really must do if you come to Venice, but not cheap--80 euros for 40 minutes. Food so far has only been okay. Italian food in other parts of Europe better than what we had in Venice. Heard a couple people I know say they found Venice a disappointment. I find that hard to understand, as it is unique in the world. There are cities with more canals (e.g. Amsterdam, Suzhou), but those are conventional land-based cities to which canals have been added. They are not surrounded and completely dependent on water like Venice. There are no cars here--you park in a huge garage and take a boat into the city. All food and goods arrives are delivered by boat as well. You can walk around narrow passageways and over bridges, but the water is never far away. Because of the extra transport and handling costs and the high costs to purchase and maintain real estate, it is expensive. And it is touristy. But if this is a disappointment, the rest of Italy must be incredible.

Friday, October 28, 2005 - Venice, Italy; San Marino; Florence, Italy

70 degrees. Drove down the Adriatic coast to San Marino, a separate country of 28,000 people that somehow escaped the unification of Italy in the 1860s. Europe has several of these Princess Bride countries: Andorra, Lichtenstein, Monaco, San Marino, and Vatican City. I'm giving Luxembourg legitimate country status by not including it in this list--it is 10-20 times bigger than these Macomb-size city-states. San Marino sits on top of an imposing mountain, so I can see why it was not consolidated initially, but it is still surprising that it remained independent, as it is completely surrounded by Italy. Of course, in important national matters such as foreign trade and defense, it relies on Italy to call the shots. Still, it is politically independent--it even had a communist government from 1978-1986. After spending about an hour driving around the country and seeing all of it, we ventured inland to Florence, driving through the beautiful Tuscan countryside. It was evening when we arrived, so we walked around for an hour and then went back to our hotel to rest up for a big day tomorrow.

Interesting updates in the International Herald Tribune on stories we have commented on throughout the year: 1) New Zealand's central bank raised its interest rate to 7.0% as its economic growth remains strong and inflation is appearing; 2) the UK moves to ban smoking in all indoor establishments (exception: pubs that do not serve food and private clubs)--if enacted, this would bring Great Britain in line with Northern Ireland (its ban effective 2007) and the Republic of Ireland (and New Zealand, Norway, and Sweden); and 3) UK housing prices down again in October according to one survey--for the 15th consecutive month--now 3.5% below one year ago.

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September 18, 2005

05:17:36 am News Roundup  

Tuesday, September 13, 2005 - Galway, Ireland

Mainly a day of to do's. I made forward travel bookings while Deanna did laundry. An experience we've had throughout this trip is that you begin to learn the current event of local culture, but just as you become tuned in to all that is happening--local sports, currency rate movements, interest rate trends, economic growth, politics, ongoing news stories--you leave for another country. Events in the countries we have traveled through continue after we leave, and we do follow them as best we can, but usually I don't have time to comment on them because I'm writing on the issues in our next location. So now, let's catch up some random things from countries we have left behind.

- England won The Ashes over Australia on Monday (that's cricket) in what was regarded as the most exciting Ashes series in history. Now that I understand the sport, I find it much more interesting than I would have ever imagined. Like baseball, it's rich with strategy and statistics. I find it superior to soccer, a sport I have tried my whole life to like, but which never really ignited a passion in me. While I can't deny that it is the world's most popular team sport, I find soccer to be too modest in terms of excitement, strategy, and statistics. It has all of things of course, but in quantities too small for my taste.

- The Australian Rules football season has ended and the playoffs are underway. This is a hard sport to follow outside of Australia and New Zealand. Since leaving, I have seen one match on TV in Indonesia (a popular Australian vacation spot), and I have seen scores printed in an Irish paper (since Aussie rules and Gaelic football are similar).

- I've been meaning to write for months that two Pacific economies--Japan and Australia--that appeared as if they were on the verge of recession early this year are performing much better than I expected. I did not get around to noting this after each released better-than-expected Q1 GDP numbers, so I'll say something now that the Q2 numbers are out. I don't have the number in front of me, but Japan's Q2 GDP growth, announced in the last two days, was much higher than expected, something in the 5% annualized range, similar to their strong Q1 showing. In Q4 of last year, they had a flattish or down (I don't remember which) quarter, leading me and others to think they were heading for recession yet again. Job growth there has been strong this year and it appears their 15-year slumber could be ending, although they have had many false starts before. Their prime minister Koizumi won a landslide election last week and appears to have a mandate for domestic reform. This includes privatizing the post office, which in addition to delivering the mail, also happens to be the world's largest financial institution. Whether he will tackle the country's demographic time bomb remains to be seen. I think Japan's near-term outlook is more promising than I thought at the beginning of this trip, but I think their long-term problems remain, and I am not sure that they will be addressed sufficiently. Again, I don't have the number with me, but Australia's Q2 GDP growth number was quite good, something like 4%-5% annualized. The Q1 number was in the 2%-3% range, so the flattish Q4 result appears to be just a blip. Their central bank has continued to keep rates at the 5.50% level. They last raised in February or March just before we arrived in the country.

- New Zealand's central bank has also kept rates steady at the 6.75% level (I think this is correct--New Zealand is small and remote enough that you don't get much news on it outside of the region) they increased to while we were in New Zealand.

- Germany has a key election on Sunday. If we had a vote, we'd cast it for opposition Christian Democratic Union leader Angela Merkel for prime minister. We wrote on Germany and France's economic woes in one of our New Zealand posts. She has styled herself as a Ronald Reagan agent for change after a decade and a half of economic stagnation. France's next presidential election is not until 2007, but already the leading opposition candidate is casting himself in a similar role, and openly urging German voters to elect Merkel. Notable for Americans, both leaders reject the anti-American tilt of their countries present leaders, Schroder and Chirac. Merkel plainly states that an anti-American Europe cannot remain vibrant and relevant to the world. Germany knows it needs to change, but they are fearful of what the change entails. How well Merkel's party does on Sunday will say a lot about whether the country is ready to take the tough medicine it needs.

- We've written how flat income tax rates have swept through Eastern Europe and Russia, and noted with irony that these former communist countries now have a tax regime that we would prefer to that of the US. Merkel's finance chief advocates a 25% flat income tax rate for Germany and now the Conservative Party in the UK is considering whether they should adopt a flat tax theme after being routed earlier this year in the last parliamentary election. (They need to do something--like the Democrat party in the US they seem completely devoid of ideas. Why, they have so little to offer, that I would have voted for the Tony Blair and the Labour party, and that's saying something.) The integration of the EU tends to encourage economic competition between countries, and that makes it possible that the flat tax will spread to Western Europe. If it does, look for it to receive more serious consideration in the US.

- In an election result I don't really understand, Norway voters, apparently not content with a booming economy, being rated the best place in the world to live, and having one of the world's highest standards of living, have ousted the tax-cutting incumbent party and elected a Red-Green alliance that has pledged to spend part of the country's oil trust fund on welfare. That's like eating the seed corn when you are already full. The kind of thing you might consider if you were in a recession, but not during a boom time. Don't underestimate the ability of foolish politicians to project blue sky and sunshine forever when times are good, as many US state governments did when they spent their windfall in the late 90s and faced huge deficits in the early 2000s. There must be some local issues at play in Norway that we don't understand, but on the surface, this seems quite a bad decision. I'm bearish on Norway until I learn more, although I acknowledge that high oil prices can cover a multitude of management errors.

- I've seen two conflicting stories on housing prices in the UK. One said that prices were down again in the most recent month, and have fallen every month this year. The other showed a slight increase from July to August, but the rate of increase is declining.

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September 01, 2005

02:51:04 pm Most Expensive Places  

Based on gut feel and memory, here is my list of the most expensive places we have been to this trip (some of these are not cities):

1. Bora Bora
2. Reykjavik, Iceland. Clearly to me it is more expensive than the cities listed below, but because of its small size it may not be listed in many of those most expensive cities in the world rankings.
3. Oslo, Norway
4. London, UK
5. Tokyo, Japan. Before this trip, Tokyo was the most expensive place I have been, but it's now not as expensive as it once was. It's hard to distinguish London and Tokyo as each city is clearly more expensive in some areas and less expensive in other areas--I'd have to examine this more systematically to confidently put one ahead of the other. I list London first if for no other reason than to draw attention to Tokyo's deflation.
6. Moscow, Russia. It's much less expensive for locals than for foreigners, but unless you speak Russian, you are going to pay for the foreigner experience.
7. Copenhagen, Denmark

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