March 21, 2005

05:47:06 pm Plane Reading  

March 21, 2005

On the flight from Christchurch, New Zealand to Sydney Australia, Nick caught up on recent newsmagazines. Of note:

- Who would have thought? The two-week old editions of Time (dated March 14), Newsweek (Newsweek content published inside of The Bulletin in Australia, dated March 15), and the Economist (week ending March 11) all had opinion pieces crediting the Bush Doctrine and the invasion of Iraq as the catalyst that has led to democratic openings in Palestine, Egypt, Lebanon, and Saudi Arabia. Best was Charles Krauthammer's piece "Three Cheers for the Bush Doctrine" in Time. To be sure, much is uncertain and much could go wrong, but it is possible that the January 30 elections in Iraq could be the Middle East equivalent of the Berlin Wall falling, as one of these articles put it.

Since we have been gone, a grudging acknowledgement also seems to have crept into the foreign press we've read that maybe some good after all has resulted from US involvement in Iraq. Whatever your view of the war (and we've certainly had mixed views at times), it's hard to dismiss the connection between elections first in Afghanistan and then in Iraq and the sudden willingness of Middle East leaders to lurch toward democracy as their constituents, emboldened by what they see elsewhere, have begun to demand it.

- High housing prices now means it is wiser to rent than to buy in many developed countries, according to a financial and tax analysis in the Economist. In response to this out-of-kilter situation, housing prices have begun falling in Australia and the UK (we read this in another source, not the Economist article). One Australian index showed prices down 7% in the fourth quarter 2004 versus a year prior, with Sydney down 16%. Japanese and German housing prices have dropped two years in a row, although this is due to their slack economies, not to high prices. Notably, Hong Kong, while up recently, is still down over 50% from 1997 when its property market peaked and before the 1997 Asian financial crises hit. Japan is down 25% since 1997.

How about the US? The Economist opines "there is a clear risk prices might fall" and estimates that prices here need to remain flat for 10 years to bring the ratio of house prices to rents back to its long-term norm. They estimate that based on current rents, US housing prices are 32% overvalued. That's better than the UK, Australia, and Spain, all 60% or more overvalued. We would add that we think excesses in the US are present in some markets (Southern California is one example) and not in others.

Think prices can't fall in the US? Think again. In the early 90s, both the Northeast and Southern California experienced drops of around 20%. The Chicago house we now live in sold twice during that period, each time for less than the prior sale. Overall, we think the US is in better shape than other countries, and we think most parts of the country have nothing to worry about (other than a possible future period of stagnant or low levels of appreciation). We do believe that some of the areas which have the highest prices or which have had the highest rate of increases over the past five years or so could see some degree of decline over the next year or two as US interest rates increase.

- Over the last 10 years, the following countries have adopted a flat rate personal income tax: Estonia (26% rate), Latvia, Lithuania (we think these two countries are also at 26% but Economist was not clear on this), Russia (13%), Serbia (14%), Ukraine (13%), Georgia (12%), Slovakia (19%), and Romania (16%). There's a move in Poland and the Czech Republic for a 15% flat tax rate. The ruling party in the Netherlands is considering a 30% flat tax, and other EU countries such as Spain and Germany are studying the idea.

So, totaling up, four of the 25 EU members plus future entrant Romania now have a flat tax. The expansion of the EU to the east, while opening up new markets for the west, is also putting tremendous pressure on the west to reform both business (see our Initial Impressions of New Zealand post which discussed the problems German automakers are having) and government practices. While US business practices have already reformed over the past two decades, government tax policy moved backward under Bush 41 and Clinton. We had moved close to a flat tax in 1986 under the second Reagan tax reform that left just two tax rates in place, at 15% and 28%. But Bush the elder, panicked, reversed course on his "Read My Lips" pledge and burdened us with a new 31% tax bracket in 1990, then Clinton piled on two more brackets at 36% and 39.6% in 1993. Both presidents, but primarily Clinton, added an explosion of new deductions, perverting the tax code away from the simplifications of the 1986 reform.

Bush the younger has partially rolled back the rate creep to 35% and promises now a "simpler, fairer" tax code. Looking to the east and the flat tax policies of the former Communist countries (that, having suffered under communism for so long, at times seem to have learned to appreciate capitalism better than west) would be a good place to start.

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March 19, 2005

10:05:16 pm Our Call on the US Dollar  

Sunday, March 20, 2005

We are making another market call to go along with our March 11 call that the New Zealand stock market has peaked and is headed down. We think the US dollar has bottomed for now. Last night while waiting to see Million Dollar Baby in Christchurch, we were browsing in a bookstore when the current issue of Newsweek caught our eye. Cover story: the falling US dollar. The media has an outstanding record of covering financial stories just as the trend is about to reverse. They are an excellent contrarian indicator. By the time the story is big enough for coverage in the mainstream press, most people who are going to exploit the trend already have, and prices have nowhere left to go but to reverse. So just as tech stock talk dominated the media in March 2000 and just as Business Week famously asked if equities were dead in the late 1970s, we wonder if Newsweek unintentionally has marked the bottom of the dollar.

We are aware of the reasons why the US dollar could continue to decline (US trade and budget deficits are the most cited reasons, along with the euro becoming a second world currency causing some funds invested in dollars to move to euros)--we think these forces are powerful and we still think there is some chance of a 20%-30% further dollar collapse. But with the Newsweek cover bolstering our firsthand observation that on a purchasing power basis the US dollar is already too cheap (everything overseas costs more than it ought to, such as a movie ticket costing more in New Zealand than in the US), we now believe the stronger case is for a higher dollar (also rising US interest rates, especially relative to European rates, should help boost the dollar). We'll track how our prediction does from this point forward in terms of the dollar/euro exchange rate. A dollar currently is worth 0.75 euros; conversely, a euro is worth 1.34 dollars. We are calling for the former number to rise and the latter number to fall.

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10:01:49 pm Final Observations on South America  

March 18, 2005

In our last week in South America, we began a post summarizing our experience there. We never finished it then, but will attempt to do so now as we are about to depart New Zealand.

South America is an unknown continent to most Americans, who never think of going there. We encountered more Europeans than Americans, the former being more adventurous in their choice of travel destinations. We do think as a generalization that South American countries do a poor job of promoting itself as a travel destination to English-speaking Americans. Europe and Asia are more front of mind to Americans desiring a foreign continent vacation. Europe is an understandable destination given the heritage of the US, but Asia is further in distance and history, although closer to us economically. We do think Asia has a slight lead over South America in prevalence of English and availability of tourist facilities that match US expectations. This lead is only slight at most, however, and may be more in our imagination than real. Anyway, this slight lead ought is counterbalanced by the closer location of South America.

Whatever the reason why Americans don't go to South America in large numbers, they should. The array of fantastic natural and archeological sites to see tops North America in our opinion. Most Americans could name the Amazon (which we have not been to) and some are familiar with Machu Picchu, but no one seems to know Iguasu Falls (the best waterfalls in the world, making a mockery of Niagara); the Calafate Glaciers (Alaska and New Zealand's glaciers do not begin to compare); or the beauty of the Lakes Region of Chile and Argentina. (As an aside, we observe that New Zealand, which we consider to be one of the most consistently beautiful and outdoorsy countries, has nothing that matches the beauty of Iguasu, Calafate, and the Lakes Region.) The landscape of Rio is as beautiful as any city in the world, but most Americans will see San Francisco and think they've seen it all. The Galapagos Islands (and to a lesser extent Easter Island) are far away places that many Americans want to go to, but never do, opting instead for more expensive, less interesting, and further away places such as Tahiti and Bora Bora that travel agents push them to (never underestimate the power of exotic sounding name, which, when combined with a personal recommendation, becomes irresistible). To top it all off, South America is cheap, cheap, cheap--one of the most affordable places you can travel to. So go.

One question that intrigued us throughout our travels in South America is why North America has prospered while South America has not, given that both were settled in the 16th Century by European powers. The early advantage was to South America over North America as it had more developed indigenous cultures and was generally settled a bit earlier by the Spanish than was North America by other Europeans, primarily the English. So what went wrong?

We have identified three contributing factors. There are likely other factors we've missed and we will not attempt fully justify the ones we've identified, but in any event, here they are:

- Simply stated, the English were better colonialists than the Spanish were. While each kept colonies for economic gain, the English did more to develop the colonies and make them a better place to live in terms of education, infrastructure, and institution building. The Spanish invested little and took much. The best comparison we can think of is actually not in the Americas or even involving the English, but we think it illustrates the point well. The Philippines were a Spanish colony for roughly 400 years and later an American colony for roughly 40 years (the only colony the US has ever had). If you consider the American colonial period in the first half of the 20th Century a surrogate for how the English would have operated, you have a fair comparison of one nation under two different colonial rulers. The Spanish were there for 400 years, but today few people in the Philippines speak Spanish and there are no significant ties between Spain and the Philippines. The one legacy the Spanish left is Catholicism. The Americans in contrast built roads, established mass education, built democratic institutions, and voluntarily handed over power. Today, English is the unifying language of this island archipelago, even though it was not commonly spoken a century ago.

- The pervasiveness of the Catholic Church in Spanish colonial society and government was so great as to be a negative. It did not have a parallel in England, which broke with Rome in 1534, and in the US, which had a clear vision of separation of church and state based upon firsthand experience of religious persecution in Europe.

- The US had figures like George Washington as a role model. He and our other founding fathers generally put the countries' interests ahead of their own and designed a brilliant system of government that properly checked the natural bad tendencies of men in power. South America had a series of those bad men, unchecked, and in power. Instead of George Washington, they had caudillos like Juan Manuel de Rojas of Argentina who lusted after power for personal gain, not for the patriotic good, and did whatever it took to achieve it, crushing all opposition. Rojas ruled Argentina as a dictator for roughly the first 30 years of its founding and set the example for future generations of leaders.

On the last point, it's worth noting that there is a South American figure, Simon Bolivar, who is called the South American George Washington. Inspired by the American Revolution, Bolivar's vision was the confederation of Gran Columbia, consisting of present day Columbia, Venezuela, Ecuador, Peru, and Bolivia. Bolivar and his right-hand man General Sucre (continuing the analogies to the American Revolution, perhaps Sucre could be called the Alexander Hamilton of South America) fought to achieve independence from the Spanish for these countries in the 1820s and then unified them. Gran Columbia collapsed in 1830, though, as leaders of the respective countries could not put aside personal differences and competing ambitions for the greater good. This failure is a stark reminder that it was never preordained that the US colonies would unite and form one great country instead of 13 minor countries that most people in the world would have trouble placing on the map. We forget that the colonies were not unified at the beginning--they were independent, competing, often squabbling, separate entities. We are so fortunate that the politicians of the 1770s and 1780s were able to reach compromise for the common good. Consider what the US and Gran Columbia each might have become had they taken the path of the other.

The Gran Columbian countries today have a population of nearly 120 million, but we suspect its size would be tens of millions higher had they remained united, as European and Central and South American immigrants would have been attracted to the most dominant Spanish-speaking country in the world. Who knows, maybe Mexican migration would have flowed south to the Gran Columbia juggernaut instead of north to the US. With a large domestic market and its language advantage over Portuguese-speaking Brazil, Gran Columbia would be the giant of South America instead of Brazil. Instead, "we are an insignificant country today," said our Ecuadorian tour guide Ruben, lamenting that the Gran Columbia Revolution did not share a common path with the American Revolution. "And you," he continued, "have become the most powerful country in the world."

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09:59:05 pm New Zealand Question Time  

Below we answer your questions, but first we continue the record of our New Zealand activities.

South Island cities visited: (All populations from Lonely Planet New Zealand Guide. These are probably city populations, not metro area populations, although that is not clear.)

Sunday, March 13, 2005 - Monday, March 14, 2005
We did not really stay anywhere near Nelson (population 52,000) as we listed in our itinerary in the last post. Our B&B was in the middle of nowhere, between Motueka (population 7,000) and Kohatu (population less than 1,000).

Franz Josef Glacier
Monday, March 14, 2005 - Wednesday, March 16, 2005
Most impressive glacier in New Zealand, but a poor cousin to the Argentine glaciers
Village population: less than 1,000

Queenstown
Wednesday, March 16, 2005 - Friday, March 18, 2005
Outdoor activity center of the world--where bungee jumping was invented. We did not partake.
Town population: 7,500

Kairoura
Friday, March 18, 2005 - Saturday, March 19, 2005
Top whale watching site in New Zealand
Town population: 3,900

Christchurch
Saturday, March 19, 2005 - Monday, March 21, 2005
Largest city on the South Island
City population: 331,000

Activities (both islands):
Auckland:
Auckland Museum
Sky Tower
Waitomo:
Waitomo Adventures Tumu Tumu Toobing in underground caves
Waitomo Caves Glowworm Cave
Rotorua area:
Te Whakarewarera thermal reserve: geysers, boiling mud, steam tunnels, discolored landscape
Buried Village
Skyline Gondola and luge
Wai-o-Tapu Thermal Wonderland
Taupo area:
Huka Falls
Craters of the Moon thermal area
Napier:
Marewa Meander self-guided tour of Art Deco homes
Art Deco Walk
Wellington:
National Library and Gallery
Parliament Tour
National Archives
Museum of Wellington City & Sea
Cable Car Museum
West Coast (South Island):
Buller Gorge Swingbridge
Pancake Rocks
The Guiding Company Franz Josef Glacier Walk
Thunder Falls
Fantail Falls
Blue Pools
Queenstown:
Puzzling World (Wanaka)
Real Jouneys' Doubtful Sound Cruise
Kaikoura:
Whale watch cruise

And now for your questions:

A Chicago reader, Darius Vaskelis, wants to know, "How bad is it to call a New Zealander a Kiwi? Will it get the [crap] kicked out of you in a bar? Does it depend what part of the world the bar is in?"

Well Darius, we can report that it is not a bad thing at all. In fact, New Zealanders call themselves Kiwis all of the time, and name many products and services Kiwi this or Kiwi that. For example, Kiwi Explorer is a travel company, the currency is called the Kiwi dollar, and the national sports teams are always referred to as the Kiwis (although depending on the sport they have other nicknames as well such as All Blacks for rugby and Black Caps for cricket). You'll see Kiwi in a newspaper headline a dozen times per day or more, to refer to something or someone from New Zealand.

In a way, Kiwi is analogous to the word Yankee in the US, but it is more ubiquitous, as beyond just being a nickname, it is used in place of the cumbersome word "New Zealander" itself. While we have "Yankee" as a nickname, we still use "American" to refer a US citizen. In New Zealand, Kiwi is used in both contexts. Like any nickname, in context it could be used in a derogatory manner, as in "stupid American," "Yankee go home," or "why do those #*&^% Kiwis have to talk so funny?"

A kiwi is a flightless, featherless bird, indigenous to New Zealand, and its national symbol, just as the eagle is the symbol of the US. The word is used as a nickname for New Zealand citizens because Kiwi is just much less of a mouthful than the four-syllable "New Zealander." While "American" is also four syllables, it can be slurred down to only three or two syllables (Mer-i-can or Mer-can). There is no way to slur New Zealander to fewer syllables, thus the use of the shorter, more efficient designation, Kiwi.

There is another two-syllable designation for New Zealand and New Zealanders, by the way, and that's "Enzed" or "Enzeds." This is simply the pronounciation of the "NZ" acronym; "zed" being how those in the Commonwealth pronounce the letter "z." Americans would say "Enzee" or "Enzees," but no one would know what you were saying.

The prolific Mister Vaskelis pinged us with a second query asking whether water draining from a sink, toilet, or bathtub does indeed swirl in the opposite direction south of the Equator as he has heard. Ever the skeptic, Darius questions whether this is just a load of BS. Well, when we were in Ecuador, we visited the Equator, where conveniently a kitchen sink experiment was set up (for a nominal fee, of course). Exactly on the Equator, water drains straight down--there is no swirling at all. 10 feet south of the Equator, the same water in the same sink swirls clockwise, and 10 feet north of the Equator, the same water in the same sink swirls counter-clockwise. We didn't believe this either when we first heard about it, but we have seen it and can report it is real. We also were able to balance an egg on a nail at the Equator (see Ecuador image gallery).

A certain John Krotzer, formerly from the Northeastern US, but now living in Shanghai, China, inquires, "Have you been able to get your Viagra in all of these countries?" Why thank you John, for your concern about my health! It is good to see that your lack of discretion has not waned as you age. I cannot address your question, for having a hot, young wife, such a product is not on my shopping list. Nevertheless, I know this must be a concern for you now that you are again living overseas. I am sure that you are worried about availability of your necessary meds as you travel throughout Asia. I would advise that you stock up at your local Shanghai open-air market on snake skins, shark fins, peacock feathers, and other symbols of virility before you leave the country.

A better mannered reader, Adrienne Johnson, from Quad Cities USA ("gettin' better every day") wants to know if there are many lambs in Kiwiland. We confess that before arrival, we couldn't have told you the difference between a lamb and a sheep, but we now know that a lamb is simply a baby sheep, age one year or less. Probably everyone else already knew that. What you probably did not know is that the name given to the meat sold from this animal varies according to which set of teeth they are on. Lambs should still have their first set of teeth, but once their second incisors arrive at the 12-18 month mark, the meat is sold as "hogget," and then it becomes "mutton" when the third set of teeth are in.

To Adrienne's question, there are 40 million sheep in New Zealand, 10 for every 1 person. However, that's down from a high of 70 million a few decades ago, as dairy farming is replacing sheep grazing in some areas.

Another Midwestern reader, Mister Bill Johnson of Macomb, Illinois, wants to know what kinds of cars exist in New Zealand and do we see many Land Rovers? Being as oblivious to cars in other countries as he is in the US, Nick will turn to Deanna for this answer. She reports that Toyotas and Nissans are most common, although the model names are sometimes different. For example, on the South Island, we are driving a Toyota Camry, but on the North Island, we had a Nissan Bluebird, which seemed like a cross between an Altima and Maxima. Mitsubishi, Honda, and Subaru are also present. The Japanese luxury brands of Lexus, Infiniti, and Acura are not that common. This may reflect New Zealand's lower income levels than other developed countries. There aren't that many American cars, but Ford seems most common. We saw a handful of Land Rovers, not that many. SUVs are present, but not to the degree as in the US. Small campers you can drive--primarily rented by foreign vacationers--are more common than SUVs for example.

New Zealand has good roads, they are paved and in good repair. An untraveled American might find that the paved comment a bit odd, but we spent hours and hours riding on unpaved roads throughout South America. Most of the roads we were on in South America were paved, but many were not. In New Zealand, all of the roads we were on were paved. But the roads here are not like US interstate highways. Outside of the cities of Auckland, Wellington, and Christchurch, the roads are two lane, and often, especially on the South Island, consist of one curve after another that requires you to slow to 20 or 30 miles per hour. After a while, if you are not driving, you can begin to feel a bit queasy from the constant turning.

Next we have a question from Jan Johnson, also coincidentally from Macomb, Illinois. She asks, "I'd like to know their perceptions of the US and Americans. I know they are Westernized and English-speaking but how different (or alike) are we?" Well, Jan, we must say that the third eyeball of the middle of their forehead does take a bit of getting used to. But other than that, Kiwis are more similar to than different from Americans.

Nick has always viewed Australia as an equal mixture of the UK and the US (a relatively new country in a vast land like the US, but retaining far more culture from the UK than the US has). New Zealand is similar in that it is part UK (culture) and part US (new country), but it seems a bit more British than American. Maybe that's due to its small land mass (unlike the US and Australia), or maybe we are just splitting hairs and Nick is misremembering the degree of Britishness present during his visit to Australia 15 years ago.

Another analogy would be to say that New Zealand is to Australia what Canada is to the US. That is to say New Zealanders view and have to put up with Australia as a kind of big brother to them much like Canadians have the always bigger, always more dominant US as their closest neighbor. By comparison, the population of Australia is five times that of New Zealand while the population of the US is nine times that of Canada.

To the question asked, Kiwis, and this would be true of every country we have been to, are friendly toward Americans. We think people everywhere distinguish between policies of a country's government and people from that country. Witness the February 2002 Olympic Winter Games where the American audience gave its largest cheers during the opening ceremony to the athletes from Afghanistan, the nation that five months earlier housed the command center for the September 11 attacks.

Overall, the similarity of language, culture, and geography make New Zealand an easy country for Americans to visit (getting there is the problem). Much of the country resembles the national beauty of the US Pacific states of Washington, Oregon, and California once you get outside of the major cities of those states. There are many differences, but they are similar to, and probably less than what you would find if you travel to the UK (namely driving on the left, the accent, food, different word usage, and sports--no one's getting an NCAA tournament pool going around here, but the latest women's netball test match with the UK is covered in detail).

You read a lot in the US press about how the whole world has become anti-American. Well we just don't see it. People in every country have been friendly to us, and we've not attempted to hide our identity. When we say we're from Chicago, we usually get a question about what Michael Jordan is up to rather than a critique of US foreign policy. (15 years ago, the word Chicago around the world got an immediate reaction of gangsters and Al Capone, so Chicagoans can thank Michael Jordan not just for six NBA championships but also for changing the city's image from the gangsters of the Roaring 20s to the gangstas of the NBA).

Admittedly, we are not going to the Middle East, other than Dubai, but those who write how the whole world hates America would do well to remember the past--anti-American sentiment has existed for decades, probably as long as the US has been a world power. The leader in any grouping is always a target for criticism and hatred, whether it is a baseball team (the Yankees), a company (Wal*Mart), or a country (the US now, the UK century earlier). For example, European intellectual criticism of Reagan in his time was quite personal and pointed--he's a simple-minded, religious warmonger (sound familiar?). Millions protested the deployment of US Pershing missiles in Europe in the early 1980s. (Why are there no protests today to revive Communism, divide Germany and Europe, and return to the Cold War?) A few years earlier, beginning in 1979, there was the Iranian hostage crisis, spurred on by hatred of the US. In the 1950s on a trip to South America, the US Secret Service nearly opened fire on a crowd of Anti-American protesters because they feared that Vice President Nixon was about to be ripped from his motorcade and torn to bits. In the late 1930s, there were massive protests and a rally in Wembley Stadium in London by the those who feared that the US was going to drag the UK into a world war! So much for the wisdom of public opinion in the heat of the moment.

We think that whatever Anti-Americanism there is today is either a) concentrated in the same kooky left that always has a complaint with us; or, b) where present in the more mainstream population, will dissipate as it has before once the passage of time provides a more balanced perspective.

Next we have a question from a Joe Simpson of Modesto, California. Joe is curious about Kiwi cuisine. Well, Joe, outside of the cities, Enzed food makes us long for the culinary variety of Macomb. If you can deep fry it, they serve it up in rural New Zealand. More sophisticated places also offer the option of pan frying. The food in the cities is quite good, that is if you are at a Thai, Indian, or Malaysian restaurant. We're being a little harsh here, but the food reminds us of English pub fare, which essentially is what a lot of it is. The cities and major tourist destinations naturally offer a much wider choice of dining options. Fortunately, smoking was banned country-wide in all restaurants, bars, hotel rooms and all public places in December 2004.

As we discussed in our first New Zealand post, workers' rights may not be as strong as they were two decades ago but they are still pretty strong here. Waitstaff in a tourist town like Queenstown make around US$13.50 per hour, and get time-and-one-half plus (thanks to a new law passed last year) a compensatory day off if they work on one of the 11 national holidays (as a result many restaurants now plan to close Good Friday and Easter Monday, not a good thing in a resort town). Tipping, however, is not common.

Politically, despite privatization and other reforms discussed in our first post, New Zealand remains more left leaning than the US, but this is true of the UK, Canada, Australia, and every country of Western Europe as well. In general, New Zealanders have a combination American/European work ethic, they work hard but avoid working late. It's much better than it used to be, but often still shops and attractions are closed at 5:30 or 6 PM when you would expect them to be open until 9 or 10 PM. As we said in our first New Zealand post, unemployment is low at 3.6% (we incorrectly said 3.5% earlier), so the labor market is tight and unions are pushing for a 5% across-the-board wage increase. Productivity dropped last year though (worker output per hour), another sign to us that the economic expansion here may be in its final days.

Finally, we end with a question that Cheryl Hays of Plant City, Florida did not ask. She did not say, "I'm sure I speak for many by saying that I'm sick of hearing about interest rates, stock market prices, and politics. Let my daughter have the keyboard for a change and tell us about some of your favorite outdoor activities in New Zealand." Well, we are always responsive to questions our readers do not ask, so here goes.

In Rotoura, the luge and the Te Whakarewarera thermal reserve standout as must-do activities. Nick has fond memories of the luge from his first trip to New Zealand and was very pleased that the ride (where you steer a gravity-powered kart down a cement path on a steep hill--see image gallery) had improved with time with an additional route down the hill side. The thermal activity is quite impressive, so much in such a small area--geysers, boiling mud and steam crevices. The glowworm caves of Waitomo is like a ride at Disney World--just sit back and prepare to be awed. Tumo tumo toobing is not for the faint of heart for it has a Rambo rating of 6, but Deanna made the trek without any issues. Napier is the Carmel of New Zealand. Carmel has it cottages and Napier has its Art Deco. At Puzzling World in Wanaka, Deanna had her revenge and shrunk Nick down to size (see image gallery). Kaikoura was a last-minute addition to our itinerary based upon suggestions from individuals we have met on our journey and we were not disappointed. We saw two whales on our whale watch, not to mention a pod of over 100 dolphins.

Some thoughts for those who might be planning a trip to New Zealand. Look into renting a camper. It is very common and has the big advantage of leaving your schedule flexible to change as you discover other places you would like to visit. It also has the advantage of being able to save a little money by preparing some of your own meals. For those who are fans of the Lord of the Rings Trilogy, there is a book dedicated to traveling to filming locations in New Zealand. We also found a tour company that does flights to filming locations and was the company hired by the producers. Also, for those who like wine, you could do a two-week trip just visiting the wineries of New Zealand.

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March 11, 2005

02:15:11 pm New Zealand Continued  

New Zealand Continued

Country Background:
Population: 4 million
Per capita GDP: $22,000
Size: about the size of Colorado
Currency: New Zealand dollar, 1.35 per US dollar
Independence: 1907 from UK
Language: English (official) and Maori (indigenous language)

Itinerary
Air Tahiti flight from Bora Bora to Papeete, Tahiti
Air New Zealand flight from Papeete to Auckland, New Zealand
(leave March 5 PM, arrive March 7 early AM, having crossed international date line)
Two nights at XBase Hostal, Auckland
Driving tour of North Island using rental car
One night at Waitomo Caves Hotel, Waitomo
One night at Kingsgate Hotel, Rotorua
One night at Scenic Circle Te Pania, Napier
Two nights at Hotel Ibis, Wellington
Return rental car
Ferry from Wellington to Picton, South Island
Driving tour of South Island using rental car
One night at Kahurangi Brown Trout, Nelson area
Two nights at Glow Worm Cottages, Franz Josef Glacier
Two nights at Scenic Circle A-Line Hotel, Queenstown
One night, not yet booked, in Kaikoura
Two nights at Scenic Circle Cotswold Hotel, Christchurch

North Island cities visited listed below. (All populations from Lonely Planet New Zealand Guide. These are probably city populations, not metro area populations, although that is not clear.)

Auckland
Monday, March 7, 2005 - Tuesday, March 8, 2005
Largest city and economic center in New Zealand
City population: 1.2 million

Waitomo
Tuesday, March 8, 2005 - Wednesday, March 9, 2005
Glow worm capital of the world
Population: not really a distinct town, just a tourist village, less than 1,000

Rotorua
Wednesday, March 9, 2005 - Thursday, March 10, 2005
Population: 76,000
Most popular tourist destination on North Island
Center of geothermal tourist sites

Napier
Thursday, March 10, 2005 - Friday, March 11, 2005
Population: 55,000
Challenges Miami as top Art Deco city in the world; earthquake and resultant fires destroyed city in 1931; rebuilt during 1930s, predominantly in Art Deco style

Wellington
Friday, March 11, 2005 - Sunday, March 13, 2005
Population: 206,000 (around 400,000 including metro area)
Political capital of New Zealand

The New Zealand Reserve Bank did raise rates by a quarter-point yesterday to 6.75% (before the announcement, financial market surveys judged the increase to be 45% likely). The newspapers today are quite concerned about the impact of this move, and we think they are right to be worried. We think New Zealand equity markets a bad investment right now, despite the country's recent robust performance, as described in our last post. We expect New Zealand stocks to underperform rather than outperform the markets of other countries over the next 12-24 months.

The reason for this is two-fold. First, New Zealand's fixed income markets are incredibly attractive right now, to the point where money will likely flow out of stocks and into bonds and CDs. If you were a New Zealander, you would be quite tempted by two-year bank rates over 8.5%. (Whether an interest rate is tempting does depend on the level of inflation. You can do better than 8.5% in many places in the world today. But those places all have much higher inflation. Subtract 3% projected inflation from 8.5% and you'll be earning a real after-inflation return of 5.5% in New Zealand that few countries in the world today can beat.) With the New Zealand stock market up 65% over the past two years, why not turn your stock market gains to a guaranteed stream of fixed income with that kind of return?

Second, we think the rate increase, along with the six that preceded it, will slow the economy. The New Zealand dollar, now at a record high, may appreciate further as foreign investors continue to pile in to get those high interest rates. The Kiwi dollar strength hurts exports and the agricultural sector (ag employs 10% of the workforce, compared to 2% in the US). Finally, with mortgage rates already rising, housing demand is likely to slow, with some chance of an actual fall in housing prices. The Reserve Bank has said further rate increases are possible.

So there you have it. When your economy is at the top, as New Zealand's certainly is right now (just like the US in 2000 before the bottom fell out), below average stock returns are likely to follow. Economic trends go in cycles and the stock market moves ahead of those cycles. The economic cycle in New Zealand has not turned yet. But inevitably it will and lower stock returns will proceed that turn. And that's what we expect for the next year or two in New Zealand.

On the subject of the New Zealand dollar, it seems too high to us on a purchasing power basis. Things cost a bit more than they should right now in New Zealand. The currency strength is justified based on the high interest rates, which have a greater near-term effect on exchange rates than comparative price levels. In the long run, purchasing power parity holds, even if takes several years for it to kick in. So long term we expect the Kiwi dollar to weaken even if it strengthens further in the next few weeks and months due to the high interest rates.

In October 2000, a US dollar bought over 2.5 New Zealand dollars. Since then the US dollar has weakened considerably against other currencies and the New Zealand dollar has strengthened against other currencies, so that now a US dollar buys only 1.35 New Zealand dollars. In other words, it's about twice as expensive for an American to visit New Zealand as it was four and a half years ago. Our gut feel is that the correct level on a purchasing power basis is probably somewhere in the 1.60 to 1.80 range.

New Zealand is not an expensive country even at the present exchange rate. At present, costs are roughly the same as the US, with some items being more expensive and other items being less expensive. ("The same as the US" is a statement fraught with difficulty, because there are wide variations in price levels in the US depending on where you are. We are talking about an average for the US. New Zealand is definitely cheaper than Chicago is, but much more expensive than Macomb, and probably a bit more expensive than Tampa, although similar). So why do we find New Zealand expensive if costs are similar to the US? Because income levels are only about 60% of the US level. Anything with significant labor content ought to be cheaper. New Zealand is more prosperous than any country we have been to so far on our journey, but its income levels lag many developed countries that we will visit later. It's generally known as an inexpensive place to visit. When Nick was here in 1990, his foggy recollection is that the exchange rate was around 2 to 1. Naturally, New Zealand seems a bit more dear this time around.

One item that seems consistently expensive in both New Zealand and Australia is food. Being the cost conscious guy he is, Nick does recollect this (about Australia at least) from his 1990 travels. Meals seem to be priced about 50% higher than they should be. While we can explain this as the cost of long distance importing of some items and perhaps each country having too small of a population to spread out the fixed costs of local food production, we are not completely satisfied as to why food prices are what they are. We shall endeavor to solve this puzzle before we leave Australia.

We close with a non-economic observation. One of Nick's most vivid memories of New Zealand is that the countryside is a brilliant stunning green, more green than any other place he's been. But being mid-March, summer is ending here, and no place--not even New Zealand--is as green at the end of summer as it would be at the beginning, in mid-December, when he was here before. So Nick is somewhat disappointed that Deanna will not see New Zealand in all its brilliance as he did. Nevertheless, it is a beautiful country in any season, and our favorite country so far on our trip.

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March 09, 2005

05:26:44 pm Inital New Zealand Impressions  

Initial Impressions of New Zealand

Having learned from our Uruguay experience, we'll be careful to label these comments as initial impressions, recognizing that our observations could change by the time we leave the country. Nick was here before in December 1990, so much of this will be his perspective on how things have changed.

In 1990, New Zealand, while capitalistic, was still very much a country controlled by the state. For example, all of the hotels Nick stayed in then were THC-run, that is owned by a state-owned company (Travel Hospitality Corporation he thinks was what the acronym stood for). Today, there is no THC, their hotels sold off to private companies, and the major international hotel chains are all here. In December 1990, the big story in the news was how the new National party (conservative) government was dismantling social welfare programs. Critics interviewed on TV were talking of how New Zealand was going to be turned into a third world country.

So what did we find upon our arrival? Were we overwhelmed by beggars at the airport? Did the drive from the airport pass long stretches of shantytowns built up over the last 15 years? Of course not. The shrill criticism of 15 years ago, clearly ridiculous at the time, looks even sillier now. New Zealand is modern, prosperous, and efficient. Unemployment is around 3.5% (at or below where the US was in 2000); inflation is below 3%; real GDP has grown over 3% the last several years; housing prices increased at double-digit rates in 2003 and high single digits in 2004; the New Zealand dollar is at a 22-year high; and the stock market is at an all-time high. If there were a way to rank developed countries based on positive economic momentum, New Zealand would perhaps be #1 in the world right now.

Talk in the news now focuses on the level of interest rates, not the level of government handouts. New Zealand's central bank meets Thursday, March 10, and there is debate about whether they will raise rates from an already OECD-high of 6.5%. A narrow consensus expects no change after six quarter-point increases over the past year. The last increase in January, though, was a surprise.

To back up a bit, we have to give equal credit for New Zealand's resurgence to the Labour party, who began the reforms in 1984 and continued them after they regained power in 1999 after nine years of National party rule. The reforms eliminated government subsidies, cut government spending, liberalized imports, deregulated financial markets, reduced tax rates, and deregulated the labor market, largely disempowering labor unions. Over the past two decades, New Zealand has transformed from a protected agrarian society to an open free market expanding economy, competitive with the world.

Around much of the world right now, the economic questions are similar. 2003 and 2004 were solid growth years, better than expected. Cost cuts in 2000-2002 have resulted in high levels of corporate profits now that growth has returned. Stock markets fared well over the past two years, boosted by profits and low interest rates. Unemployment is low and dropping. Jobs are being created. It's not the boom-boom times of the late 90s, but it is more real and more sustainable.

Going forward, though, there is concern that perhaps the best part of this economic cycle is behind us. Inflation, while still low, is reappearing, due to rising commodity prices. The growth rate in profits may have peaked, and after two good years in the stock market, people may find fixed income attractive again as interest rates are now rising from generationally low levels. Housing prices can't go any higher, this thinking goes, and could even fall as rates rise. Do all of these factors--rising commodity prices and inflation, rising interest rates, high housing prices, slowing increases in corporate profits, mean that slower economic growth is ahead? These are the questions being asked in New Zealand as well as the US and many other parts of the world. The answer is likely yes, but slowing from the magnitude of the slowdown is of more concern than the absolute direction. Dropping from 4% growth to 3% would be fine. Falling to 1%-2% growth would not. Like a sports match, though, the outcome can never be known for certain ahead of time no matter what the sentiment is. That's what makes it interesting to follow. That and that the outcome affects everyone's financial situation, for better or worse.

This situation does not pertain to some areas of the world, however. Germany and Japan for example also have a question about future growth, but from a very different perspective. Japan has likely entered its fifth recession since 1990 (the US has had two) following three quarters of declining real GDP. Germany also is teetering on the brink of recession, and even if they are not there, their employment situation is a mess. Unemployment in Germany now is 12.6%, the highest level since the Depression. This is roughly 2.5 times the rate of unemployment in the US and 3.5 times the rate in New Zealand.

Actually, there is a silver lining in these German storm clouds. Over the last few years, Germany is finally restructuring its economy by reducing its uncompetitive labor costs. Western Europe is learning that you cannot work ever fewer hours for ever increasing salaries and exploding benefits. Eventually the system will collapse, as it is economically unsustainable. The US learned this lesson in the early 80s when it went through the worst of its painful restructuring that started with blue-collar workers, moved to middle management, and continues to this day with outsourcing of back office and IT jobs to lower cost countries. New Zealand's own restructuring began in the 80s and really got going in the 90s.

This workforce restructuring is brutal to those affected, wiping out whole categories of jobs and permanently lowering wages in other categories. But its good for the economy as a whole, even if not for every person. The economy in the aggregate gets rid of jobs it can no longer perform competitively and devotes its resources to new jobs where it can be competitive. The pain comes before the gain, and Germany seems at or near its peak pain levels right about now (maybe things will get worse for a while, it's hard to say, but overall they seem to be moving in the right direction). But the hard path is worth it. There simply is no credible argument that the US is worse off today than it was in 1980, or that New Zealand is worse off today than 20 years ago. The restructuring made each country stronger.

The impetus for restructuring can come internally or externally. New Zealand simply could no longer afford the massive government spending to overprotect its companies and its citizens. The US and Germany faced external pressure. For the US, its manufacturing base had become less competitive than Japan, Korea, and other countries. For Germany, its manufacturing sector could no longer compete with Eastern Europe. The large German automakers have begun moving jobs and factories east to Poland, Hungary, the Czech Republic, and other countries where workers work harder, longer, and cheaper with the same quality and where the government regulations are less onerous. The powerful German unions have moved off their no-can-do stance and are becoming more accommodating on work rules and benefits. So the restructuring has begun, but jobs are hemorrhaging during these early stages.

Perhaps in worse shape is France, where unemployment is also in double digits, but the restructuring is not really underway. Unions still have the illusion they can preserve their much-cherished 35-hour workweek, perhaps the final symbol of union overreach. They won't be able to, and the sooner they realize this, the better off they will be.

Japan's biggest long-term problem is its demographic time bomb. Japan is one of the oldest countries in the world; to the point where some projections show that Japan's population could decline from 128 million today to 110 million by 2050 and only 40 million by 2100! The decline began in 2004 as the male population dropped for the first time since World War II, where war fatalities took their toll. Immigration could mitigate this problem as it will in the US, but Japan has traditionally been fiercely anti-outsider. How Japan will deal with this issue is one of the more interesting economic questions that can be foreseen today for the 21st Century. Japan's future declining population is not unique. Here is a sampling of projections for several other countries that face declines:

2004 Population 2050 Population
Russia 142 million 102 million
Ukraine 48 million 32 million
Italy 57 million 45 million
Spain 39 million 33 million
Germany 83 million 79 million

New Zealand faces its own unique demographic issue in the years ahead. The Maori (indigenous population) are about 10% of the total population, but represent 25% of those 15 and under, due to higher birthrates. If the Maori continue to assimilate into the mainstream population as they have begun to do in recent decades, this issue probably will not present many challenges. But if the Maori look to maintain a separate lifestyle and culture, New Zealand could face a divisive future. We think they will assimilate without many serious issues, but we shall see.

Out of time for now, to be continued later.

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05:10:50 pm Tahiti & Bora Bora  

Papeete, Tahiti, French Polynesia
Wednesday, March 2, 2005 - Thursday, March 3, 2005
Largest city in French Polynesia
City population: 25,000

Bora Bora, French Polynesia
Thursday, March 3, 2005 - Saturday, March 5, 2005
Island in French Polynesia
Island Population: 8,000

French Polynesia Background:
Political Status: overseas territory of France
Description: French Polynesia consists of five island groups. Tahiti and Bora Bora are two islands in the best-known group, the Society Islands. The other four island groups are Gambier, Marquesas, Tuamotu, and the Austral Islands.
Population: 266,000
Per capita GDP: $18,000
Size: Slightly less than 1/3 the size of Connecticut
Currency: French Polynesian Francs, 85 per US dollar
Independence: not independent
Language: French

Itinerary
LAN Chile flight from Easter Island to Papeete, Tahiti
One night at Sofitel Maeva Beach Hotel
Air Tahiti flight from Papeete to Bora Bora
Two nights at Le Meriden Bora Bora Hotel

Bora Bora Activities
Resort activities: swimming, snorkeling, ping pong, eating, sleeping
Safari Land Rover Tour of Island

Bora Bora is as beautiful and exotic as its name suggests (see image gallery). Unfortunately, it is even more expensive than it is beautiful. For this reason, we do not think it merits a visit. Everything, no matter how good it is, has a price beyond which value is diminished to the point it is not worthwhile. Bora Bora is beyond that point. The prices are so high as to be offensive. There may be a more expensive place in the world, but we are not aware of it. Think we are exaggerating? Here are a few examples of many we encountered. Internet access in your room? Sure, for $300 per hour you can have low-speed dial-up access. Want the hotel to arrange a romantic picnic lunch for two on an uninhabited island? No problem, just shell out $700. Hey, let's take the hotel water shuttle from the airport to the hotel. Why it's only $100 per round trip per couple (there really is no other practical way to get to the hotel, so this is not an optional cost)! Car rental? A manual transmission, open-air vehicle is around $100…for two hours. In the words of one Japanese tour guide, "I think Bora Bora is worse [more expensive] than Tokyo."

Nevertheless if you are a honeymooner who absolutely must go to Bora Bora, get a deal through a travel agent where as many extras as possible (e.g., transfers, breakfast, excursions) are included in the price you pay. This will limit your I-can't-believe-I'm-paying-this-much moments. Use an agent who was personally been to the resort you will be staying at, so that you have firsthand knowledge of what the extra costs will be and how to mitigate them. Otherwise, you'll suffer repeated sticker shock throughout the day as you consider doing anything other than lying in the sun.

Beyond the emotion of feeling like you are being ripped off continually, as a matter of economics, we had a strong sense that our resort had raised prices beyond the point of profit maximization. If it costs $70 before tax and service for the two of us to eat breakfast, well guess what, we will be quite able to do without breakfast. If it costs $200 to rent a jet ski for an hour, then the jet skis are going to sit on the beach unutilized all day (we never saw anyone using one). Drop the price of optional activities 50% and we believe the hotel's profits would rise, not fall. The high room rates and high food prices (other than breakfast), we could justify. After all, you have to pay to be there and you have to eat at least twice per day. But the pricing of everything else seemed designed to minimize commerce and employee work effort.

We went to Bora Bora because when Deanna was nine years old she had a book bag with a parrot on it and the mythical story of the parrot was that it was from Bora Bora and had the same April 30 birthday as she did. So Bora Bora is a place she wanted to go for most of her life.

The South American continent was relatively unaffected by World War II. But starting with Bora Bora, nearly every place we will visit for the remainder of our tour was touched by this war. Bora Bora never saw any fighting but it was a US base, and Americans left behind the airport, many of the roads, and some rusting hardware (see image gallery).

The Bora Bora airport is too small for large international flights, so Tahiti is the entry point for travelers around the world. We spent one night there as we arrived after the last inter-island flight to Bora Bora. It is cheaper, but still overpriced, pretty, but not as dramatic as Bora Bora.

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March 02, 2005

04:43:30 pm Easter Island, Chile  

Easter Island, Chile
Sunday, February 27, 2005 - Wednesday, March 2, 2005
Population: 3,000 - 4,000
Language: Spanish and Rapa Nui (Polynesian language variant, with similarities to Hawaiian)

Itinerary
LAN Chile flight from Santiago, Chile to Easter Island, Chile
Three nights at Mana Nui Inn

Easter Island Activities
Island tour
Snorkeling
Horseback riding
Rapa Nui movie
Writing for web site

Easter Island is where to go when you want to get away from it all. It's a small, 45-square mile island, whose nearest neighbor, the even smaller Pitcairn Island, is over 1000 miles away. The five-hour flight from Santiago, roughly 2500 miles east, comes four times per week in high season. After a brief stop, the flight continues on to Tahiti, another 2500 miles west. The return flight from Tahiti arrives three times per week in high season. So, altogether, there is one flight per day in high season.

We stayed three nights on Easter Island, continued on the flight west to Tahiti. While tourism is the main interaction of the island with the outside world, only 25,000 visit the island annually, although for perspective that small number seems larger when you consider it is six or seven times the population of the island. This tourist throng did not begin until 1985, when the US funded an airport expansion to allow it to be an alternate landing site for the space shuttle should it need to make an emergency landing in the South Pacific Ocean. Before then there was no regular commercial air traffic.

Everyone knows everyone. When we did not see anyone meeting us at the airport as we had prearranged, we inquired at the information desk. The women working there turned out to be the daughter of the owner of the inn where we stayed and she quickly found her mother in the crowd. We occupied one of the two rooms at our inn, which was an additional two bedroom building constructed in the owner Bicky's backyard. We had a view of the ocean, a few hundred yards away, and it was a short walk into town. The larger hotels have one or two dozen rooms. But these days you cannot be too out of touch. There were internet cafes and our Blackberry constantly streamed e-mails from home. We guess you have to go to Macomb for your Blackberry not to work!

Easter Island of course is where those giant stone heads, called moai, you have seen in National Geographic or the Discover Channel are located (see image gallery). The entire island culture was devoted to honoring their ancestors by carving these heads in stone on the volcanic mountain and then transporting them down to the seaside. The population peaked around 15,000 in the 17th Century before an internal civil war and outside disease brought by the Europeans, reduced the population to less than a thousand in the 19th Century. Civil war between the two island clans, the Long Ears (they wore long earrings) and the Short Ears apparently ended the moai building. Many of the moai were toppled either by natural causes or perhaps by the Short Ears, but most are reconstructed today.

We watched a movie, Rapa Nui, which depicted the culture of moai building and the beginning of the civil war, before the Europeans arrived in 1722 on Easter Sunday. Kevin Costner financed, but does not appear in, the 1994 film, which perhaps results from his Dances with Wolves indigenous people phase. While the film is not historically accurate (think Oliver Stone) in that among other things it combines events that occurred over multiple centuries into a story that unfolds in less than one year, it does a good job we thought of providing one version of how some of the history could have happened. You probably won't find this mediocre-acted, B-movie at your local Blockbuster, but it's worth seeking out if you want to learn more about the native culture of Easter Island.

Despite what the guidebooks say, you really can see everything in one day, which we did on our first full day. We spent the morning of day two horseback riding. Nick has had a traumatic history with horses, but emerged from this experience uninjured. Sometime around age four, he was thrown off a pony at his grandparent's farm. Then around age eight, he fall off a galloping horse and fractured his wrist. His last horse adventure was around age 16 in the Rocky Mountains. Some years later, his uncle Dave confessed that the reason Nick's horse was constantly breaking into an uncontrolled gallop was that Dave and Nick's step-dad Bill kept poking it with a stick. It has taken him over 20 years to get back on a horse and after his latest adventure, he concluded that he was glad to have been born in the age of the automobile.

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04:42:42 pm Lakes Region, Chile & Argentina; Santiago Area, Chile  

Puerto Montt, Chile
Tuesday, February 22, 2005 - Wednesday, February 23, 2005
Largest city in the Chilean Lakes Region
City population: 110,000

Bariloche, Argentina
Wednesday, February 23, 2005 - Friday, February 25, 2005
Largest city in Argentine Lakes Region
City Population: 78,000

Santiago, Chile
Friday, February 25, 2005 - Sunday, February 27, 2005
Capital and largest city in Chile
Metro area population: 6 million

Chile Country Background:
Population: 16 million
Per capita GDP: $10,000
Size: Slightly larger than Texas
Currency: Chilean peso, 585 per US dollar
Independence: 1810 from Spain
Language: Spanish

Itinerary
LAN Chile flight from Guayaquil, Ecuador to Santiago, Chile
LAN Chile flight from Santiago to Puerto Montt
One night at Presidente Hotel
Lake Crossing tour (4 buses and 3 boats) from Puerto Montt to Bariloche, Argentina
Two nights at Llao Llao Hotel
LAN Chile flight from Bariloche to Santiago, stopping in Puerto Montt (no plane change)
Two nights at Best Western Majestic Hotel

Puerto Montt Activities
Walking around town
Movie--National Treasure

Bariloche Activities
Llao Llao painting class (Deanna), spa (Deanna), gym (Nick), and pool (both)
Walking around town
Cerro Campanario (peak overlooking lakes--see image gallery)

Santiago Activities
City tour
Museo Historico Nacional
Soccer match: Colo Colo 2 Everton 1
Excursion to Valparaiso and Vina del Mar

The final leg of our South American tour began as we left Ecuador, flew south overnight to Santiago, then took a morning flight further south to Puerto Montt, the Chilean gateway city to the Lakes Region that spans Chile and Argentina. Puerto Montt itself was a disappointment. Situated on a bay of the Pacific Ocean and adjacent to several lakes, it should have been a charming town, but we found it charmless. It seemed unaware that it was a tourist destination, as there was nothing there for tourists. Add to its plainness the ever-present South American graffiti, on the magnitude that you would expect for a city of several million people, not several hundred thousand. Why a town of this manageable a size, that has large inflows of tourists, would allow all of its public areas to be so defaced is beyond us. At this point, after nearly five weeks in South America, we were mentally finished with the continent and ready to move on. Over the next few days, though, the beauty of the Lakes Region would win us back.

So, with time to kill in Puerto Montt before our next day tour, and with nothing really to do, we heading for the mall and the cinema. National Treasure was the only thing playing that we had not seen over the prior 10 days, a movie we had resisted to date for its farcical premise. If our founding fathers really had been in possession of a great treasure, we think they would have used it to finance the army! Funding problems were the other non-military battle during the Revolutionary War and nearly cost us our independence. It was a constant effort to get the colonies to pay anything for the army. We don't think Benjamin Franklin and others would maintain loyalty to the Free Masons while watching the Revolutionary Army nearly be defeated. Anyway, if you can swallow the premise, the movie was entertaining enough, a sort of Indiana Jones adventure on the eastern seaboard.

The following day, we took a series of four buses and three boats to traverse the Lakes Region from Puerto Montt, Chile to Bariloche Argentina, leaving at 8 AM and arriving just before 10 PM. The scenery was beautiful and we think we can describe it best by referring you to the image gallery rather than trying to use words here. The trip itself did not cover as much distance as you would expect, for there was a total of about four hours of downtime during the day. This is a very South American, and especially Argentine, way of organizing a tour. If dinner is typically not until 10 PM or later, why wouldn't you want to spend all day and the evening until then on the tour? Why spend 10 hours on a tour when you can spend 14?

The answer to this is that we would rather spend those four hours at the Llao Llao Hotel in Bariloche, a great hotel by anyone's standard. (We heard the hotel name pronounced many different ways. The Millers told us it's shao-shao, but we also heard jao-jao, which corresponds to how "ll" is pronounced in Argentina; and yao-yao, which corresponds to how "ll" is pronounced by most non-Argentine Spanish speakers. We're sticking to shao-shao until corrected.) As we will have well over 300 hotel nights this year, we stayed in a mixture of accommodations, ranging to date from a bed-and-breakfast room in someone's home in Buenos Aires for $35 per night to splurging at the Llao Llao, a kind of Four Seasons or Ritz-Carlton type resort. This was a nice reward for our last week in South America. Bariloche was everything Puerto Montt was not, although we confess we spent most of our time at the hotel. Alas, we arrived too late the first night for Nick to enter and win the Llao Llao ping-pong tournament. Undoubtedly, he would have crushed all of the pre-teen boys staying with their parents at the resort, with his table tennis skills, finely honed over the years on the Mason ping-pong table.

From Bariloche, we flew back to Santiago, with the plane stopping briefly in Puerto Montt. During our two days in Santiago, we attended our first South American football (soccer) match, between two local teams, Colo Colo and Everton. Apparently, Colo Colo was such a heavy favorite over hapless Everton that not many fans bothered showing up. There were maybe 5,000 - 7,000 people on hand in the heavily partisan Colo Colo crowd. Still they made as much noise as a crowed of 50,000 at a US sports event, chanting, singing, and cheering throughout the match, that Colo Colo won 2-1.

Buying a ticket was a challenge. We knew from our hotel desk clerk that there were five different ticket prices, from roughly $4 to about $17. Not knowing what to expect, and having heard the worst about boisterous South American crowds, we knew we wanted the most expensive seats to avoid the mosh pit atmosphere of the more excitable fans. The ticket booths were spread around the outside of the stadium, each selling only one type of ticket, with no prices posted, and no one speaking English. The ticket takers themselves were behind a black screen so you couldn't see anyone; you just slid your money through a hole and received a ticket in return. It had the feel of a drug deal. Finally, after we caused quite a commotion by canceling our purchase of the wrong ticket, a helpful stadium official got two teenage stadium workers who spoke some English to escort us around to the other side of the stadium, where we were able to purchase the tickets we wanted.

Santiago has about one-half the population of Buenos Aires, appropriate as Chile has about one-half the population of Argentina. Each city dominates its country as the financial, cultural, transportation, and political center, although the Chilean legislature was relocated to Valparaiso, about 90 minutes away, when it was reconvened in the 1990s after Pinochet's rule. The executive and judicial branches of government remain in Santiago.

We took an excursion to Valparaiso and Vina del Mar, twin cities that have nothing in common. Valparaiso is a faded port town that peaked in the 19th Century and then took one economic body blow after another. First in the late 1860s, the US transcontinental railroad opened. This changed the quickest trade route from the east coast to west coast in the US from shipping around Cape Horn, South America (with a stop in Valparaiso) to rail through Chicago, Omaha, Salt Lake City, and San Francisco. Then in the early 1900s, the Panama Canal opened, so remaining shipping traffic could bypass South America altogether. More recently, a major container port opened just south of Santiago, diverted most of the Chilean container ship traffic away from Valparaiso. Valparaiso is slowly rebounding now, as the relocation of the legislature has helped the city economically, but overall it remains a poor place, and a good example of how trade flows can change suddenly and create new winners and losers. The suburban fools of Chicago who resist O'Hare airport expansion would do well to take note of this lesson, for just as Chicago displaced St. Louis as mid-America's transportation hub in the mid-1800s, so too are Atlanta and Dallas vying to replace Chicago, with its NIMBY suburban mayors.

Vina del Mar is the main Chilean seaside resort. It is somewhat similar to Punta del Este in Uruguay (and probably to Mar del Plata in Argentina, which we did not visit). The differences seem to us to be that 1) Punta del Este is nicer and 2) Vina del Mar and Mar del Plata attract primarily domestic vacationers from their respective countries, while Punta del Este attracts vacationers from throughout South America. Vina del Mar was nice enough, revered in Chile as the place to be, but not outstanding to an American eye, again due in large part to graffiti. The graffiti was not as bad as in Puerto Montt, but still way too much for a supposedly upscale resort town. Societal acceptance of this continues to baffle us, especially as there is money to employ people to sweep the streets. We could tolerate a few more gum wrappers on the sidewalk if those workers were equipped with water blasters instead of brooms.

On our (least) favorite subject, we must point out places in South America where someone has taken the initiative to get rid of the graffiti menace. We previously did mention the cleanliness of the public squares in Lima, Peru, which are a virtual graffiti-free zone, but we neglected to mention that there is hardly any graffiti in Punta del Este, Uruguay, nor is there much, if any, graffiti in downtown Guayaquil, Ecuador. Guayaquil has a noticeable security presence in its central area just like in Lima. The most impressive clean public area to us though was the Santiago subway. Santiago itself is as graffiti plagued as Buenos Aires, but each city is able to keep graffiti out of their subways. Santiago though goes one step further--not only is there no graffiti in the subway, the subway is Singapore clean. We asked one of our tour guides about this, and he explained that it is understood that the subway system is a matter of national pride, not to be defaced. We accept this explanation, but we would add that the omnipresent security and litter removal workers throughout the system are also a key part of the answer. Trust but verify, so to speak.

And now a brief, summarized, and opinionated history of Chile. The history of Chile is more similar than different to the other South American countries we described. Independence from Spain came earlier than the others in 1810, but was part of the series of campaigns that saw all of South America become free in the 1810s and 1820s. Since then, like other countries, Chile has had an alternating series of elected governments and military governments. In 1970, Salvador Allende, backed by a coalition of the socialist and the communist parties, was elected with a plurality of 36% of the vote. The left was joyous that they had finally broken through at the ballot box (Allende ran unsuccessfully in 1958 and 1964), and they envisioned a Cuba-style revolution would follow, but this time the result of a peaceful election, not a military conflict. The US was not pleased with Allende, as you might imagine, and immediately began covert action to undermine him. Remember the time--the Cold War was active (and was in fact a hot war in Vietnam), many worldwide still saw Castro as an inspirational leader, and the US feared a second communist government in the Americas.

The Allende government immediately began nationalizing (a polite word for stealing) businesses, especially foreign owned businesses, with no compensation to owners. ITT and Ford for example, lost their assets. (Castro too took over foreign assets, but he did compensate the owners for what they lost). As seems to accompany socialist governments in South America, the Allende administration completely mismanaged the economy. Prices were set at below-market levels, with these government subsidies resulting in large deficits, high levels of debt, and runaway inflation. Civil unrest was high, with strikes and nationalization takeovers initially encouraged by the administration (workers would occupy foreign company offices, not leaving until the government announced their takeover), and then later with anti-Allende demonstrations rising up in opposition to the government. By 1973, internal forces opposed to Allende and external forces, primarily the US, had enough. The military overthrew Allende on September 11, 1973, with rocket attacks against the Presidential Palace, where ultimately Allende committed suicide.

Enter Augusto Pinochet, the military dictator who ruled from 1973 to 1990, but who is now under house arrest for massive human rights abuses and widespread murder of political opponents. Chile's Dirty War during this period had much in common with Argentina's Dirty War of 1976-1983.

The US association with Pinochet is but one of many examples of be careful of who you associate with. The Batista regime in Cuba and the Somoza regime in Nicaragua are two other hemispheric examples of anti-communist regimes that came back to haunt us. To take the counter point, though, we think some of the common criticism of the US goes too far. To our credit, we do tend to change our tune when the regimes we back change theirs. The US did put a lot of pressure on Pinochet to hold the elections that ultimately removed him from him from power. The US also convinced Marcos in the Philippines to give up without a fight when public sentiment turned against him. To be clear, the US was wrong in our opinion to give tacit approval to the coup that removed the fairly elected Allende from power. But we shed no tears for Allende as he was on the wrong side of history, associated with a since discredited political movement, communism, that has caused great human suffering throughout its short history. His administration provided legal sanction to morally illegal theft of billions of dollars of assets.

We think much criticism of our former alliance partners tends to forget context at the time and has a static view that how someone turns out should have been foreseeable years or decades ahead of time. By this thinking, we should not have allied with the Soviet Union in World War II, because Stalin had and would purge millions of his own people, and would initiate a Cold War against us. Or we should not have funded opposition to the Soviet invasion of Afghanistan because one of the rebels would turn out two decades later to be Osama Bin Laden, who used his skills gained fighting the Soviets against us. A present example might be General Musharraf of Pakistan. We have no doubt this guy has more than a few skeletons in his closet. Some day, by one means or another, he won't be in power, and you may well hear a lot of bad things about him. But today, he has been one of our most beneficial allies in defeating terrorism and we believe the US is a safer place than it would otherwise be if he were not cooperating with us. So whatever comes out later, we are appreciative that he is an ally right now.

Our point is not to give carte blanche to all US action, but rather to illustrate that in present-day context, actions are driven more by what's pragmatic now versus what will look good a few decades hence with present-day context is forgotten. Too frequently foreign criticism of the US and US domestic criticism, primarily from the left, can only see one side, the latter-day side, of an issue. Having said that, there are lines not to be crossed and occasionally we've crossed them, probably fewer times proportionally than other world powers, but nevertheless we've made plenty of mistakes. Working to overthrow Allende through military means rather than through the next election was one of them.

The Pinochet case took an interesting turn in 1998. Although defeated in elections in December 1989, he remained head of the army until 1998, and after that became a senator for life under the constitution. So even as the abuses of his regime were being uncovered in the 1990s, his active presence made the government was reticent to prosecute him. In October 1998, during a routine trip to London, he was arrested unexpectedly in a case that put civil libertarians in an awkward position of defending a man they hated for his human rights abuses. A Spanish magistrate requested that British officials detain him as they sought to prosecute him for murders committed against Spanish citizens. Britain complied with the arrest, but then struggled for what to do next. Clearly, Pinochet was a bad guy, deserving trial and punishment. But to extradite him to Spain would be to establish a precedent of allowing one country to violate another's national sovereignty. To take an event that happened two months before Pinochet's arrest, should the UK comply and arrest Bill Clinton on a future visit if a Sudanese court wanted him extradited for the August 1998 bombing of a Sudanese pharmaceutical factory? Clearly no, once opened, allowing one country to extradite officials from another country could be a never-ending Pandora's box of tit-for-tat politically charged retaliation, with politicians potentially unable to leave their own borders. If you think this is exaggerated, note that Donald Rumsfeld recently held off visiting Germany until the German government gave its assurance he would not be arrested upon arrival.

The ultimate decision was a wise one we think. After 16 months deliberation, Britain decided that Pinochet's declining health made him too sick to stand trail and allowed him to return to Chile in January 2000 provided that he remain under house arrest, and if ever he recovered he must be extradited to Spain.

This fear of losing national sovereignty is why the US opposes the international criminal court. One only has to look at the UN, which at times seems a parody of itself (let's put Libya in charge of the human rights committee!), to see why the US fears a global political body deciding judicial matters affecting US citizens. Again, the US gets a lot of criticism from the world for its position, with little attempt by the criticizers in our view to understand the US position or to address our legitimate concerns. Isolationism today seems to be defined as correctly pointing out flaws in a proposed system that no one else wishes to see.

Despite its terrible human rights record, Pinochet's government generally ran things well economically, and for the last 25 years most of the ink the press has written on positive South American economic policies has been written on Chile.

Most notable, at the beginning of the 1980s, Chile privatized its social security system, one of the first (the first?) of over two dozen countries worldwide with private social security systems, a fact you may not hear from US social security reform opponents. A recent press report we read on Chile's private social security system gives it a mixed review. Investment returns have exceeded projections, but somehow payouts are lagging. At first blush, that does not make sense, and the non-financial press seems content to point out the problem without trying to understand or explain it, so we are in the dark as well. The story hints at high fees, which could be a partial explanation, and one that's fixable for future generations. We would like to know more about this.

One anticipated side benefit of privatization of social security that does appear to have materialized, although we have not seen it quantified, is that the pool of funds has created greater investment capital for Chile, and the economy has advanced beyond what it would otherwise have done. As a purely anecdotal observation, Chile did seem a bit more modern and more vibrant than its closest neighbor Argentina, even if Argentina still has a slight lead in terms of per capita GDP. Chile's more stable economy has spared it from economic collapse over the past few decades and resulted in a stronger currency. Fortunately, our experience in Torres del Paine of extremely high prices was limited to that remote area. Overall, Chile is still definitely less expensive than the US (although an occasional price will approach US levels), but definitely more expensive than the rest of South America. One example, the price of a movie: $9-$10 in Chicago, $5-$6 in Chile, $3-$4 in Ecuador.

There were some limited signs of new real estate development in downtown Santiago, something we generally did not see in the central parts of other South American cities. South American cities are generally old--their 500th birthdays will be occurring in a few decades--so the central areas are crowded with narrow streets. As a result, many (not all) Spanish-founded cities have developed a new business area away from the original city center at some point after World War II, either in 1950s, 1960s, 1970s, or 1980s. The example we know best is in the Philippines (obviously not in South America, but nonetheless a Spanish colonial city), where Nick lived for one year in Makati, part of Metro Manila, but about 30 minutes away from the original city center. All of the foreign banks, the stock exchange, and many of the shopping centers are in Makati, not in downtown Manila. A difference from the US though, is that the new business districts in
Spanish colonial cities cannot quite be called suburbs as they are still dense, and the old central areas even if somewhat run down, have retained their vibrancy in terms of people traffic. Anyway, it is unusual to see much private development in the central areas and Santiago did have some of this, mainly residential.

Nick expected that Chile's pro-growth economic policies over the past few decades would have resulted in greater degree of foreign investment than what he observed. There is foreign investment to be sure, but he expected the American and English presence to be greater. For example, in all of Chile, he only found one foreign language newsstand, and the papers it sold were anywhere from two to seven days old, sold at prices many multiples of the cover prices. For example, you could buy a week-old Miami-edition of the Miami Herald for $US3 in Santiago, whereas in dollarized Quito, Ecuador, you could get the international edition of the Miami Herald on the same day of publication for $US0.75. In Buenos Aires, the daily English language Buenos Aires Herald (no relationship to the Miami Herald) covered world news thoroughly and was available for about $US0.50. Most large foreign cities have a locally edited English language paper like this once they reach a certain level of economic development. Shanghai, China for example has two. However, there appeared to be no way to get same day printed English language news in Santiago, the one exception being the Santiago airport VIP lounges (but not the airport newsstands). This was rather surprising, and indicates that while Chile has come a long way, it still has a long way to go to become integrated more fully in the world economy. Thanks to the airport lounges, though, Nick is now packing The Wall Street Journal, Financial Times, New York Times, and Los Angeles Times. One does long for news from home.

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