Enrico Orlandini -- Dow Theory Analysis SAC
Sept. 6, 2006 -- Have you ever wondered just how bad things could get? Well, I've lived long enough and traveled far and wide enough to know that things can always get worse. As most of you are probably tired of hearing by now, I've lived and worked in Peru for the better part of thirty years. During that time I've seen and experienced just about everything imaginable... inflation, terrorism, attempted coup d'etate [d'état], self-imposed coup d'etate [d'état] 1, riots, strikes, war, and corruption. You name it and Peru has experienced it. Here's an example - from 1988 to 1990 we spent twelve hours a day, everyday, without light and water. Then there was the inflation of the late 80's. It was so bad at one point that if you received a check in Inti's at 11 am, then went to the bank and presented it to the teller by 12 noon, it would be worth 1% to 2% less in dollar terms. You want to talk about a bear market in housing? In 1989 people were selling their house for twenty cents on the dollar and glad to get it. Once desperation sets in, no price is too low.
Human beings adapt though and I know I did. To deal with the water and light issue, I built a large cistern tank and bought a 30 kilowatt generator. I wasn't alone either and over time I came to realize that Latin's are rally quite an ingenious people. When then President Alan Garcia decided to impose a two percent tax on all checks written and cashed, it didn't take long to find a loophole. If someone paid you with a check, you simply endorsed that check and used it to pay your own bills. I saw checks with so many endorsements on the back that they had to staple a piece of paper to the back of it in order to hold them all. I saw some checks with as many as fifty endorsements on them. Eventually the government gave up and repealed the tax.
Just when you think you've seen it all, life surprises you and throws a curve ball. When Alan Garcia handed over the reigns of power to Alberto Fujimori in 1990, he left the country in dire social and economic straights. It was so bad that the Central Bank actually had negative reserves. That's right, I said negative reserves. Never in all of my years of research and analysis have I heard of, or read of, a similar occurrence. It was so bad that cashiers checks from the Bank of the Nation, used to pay the government's bills, would bounce higher than a super ball. As terrible and shocking as all that seemed at the time though, it is nothing compared to what I see going on now. As you've probably gathered by now, the worse President in Peru's history was Alan Garcia. He ruled from 1985 to 1990, and when he left power, he handed over a bankrupt country on the brink of revolution. His principal claim to infamy occurred in 1989-1990 when he posted the highest inflation rate in all of Latin American history. If my memory still serves me, it surpassed one million percent. To top it all off, civil disobedience was everywhere. For my money Alana [Alan] Garcia was not only the worse President in Peruvian history, he was the worse President in Latin American history and that is saying something. How then do you explain the fact that the people of Peru saw fit to vote him back into power just two short months ago? It's beyond me, and he actually ran under the banner which pegged him as "the responsible choice"!
How do you rationalize something like this? It's not easy. I tend to chalk it up to a combination on poor diet, poor education, and a lack of proper medical treatment. When imposed upon a human being from birth, these conditions tend to produce a person with a less than adequate reasoning process. It helps to know that Alan Garcia is the best public speaker this side of Martin Luther King. Also, and this is true everywhere, today's electorate is only capable of choosing someone who tells them precisely what they want to hear. Combine the two and anything is possible. Something like this could only happen in Peru, or could it? Here's some food for thought: what if something similar happens in the United States? The idea that an electorate would sell out to the highest bidder is not particular to Peru. President Bush (Jr.) ran on the premise that he would not raise taxes and would even cut taxes in certain areas. Unlike his father, he has kept his word. The fact that the US currently has over $80 trillion in unfunded liabilities related to Medicare, healthcare, and retirement, or just over US $266,000 for every man, woman, and child in the United States, just doesn't mesh well2 . The last time I checked the average American comes up a bit shy financially, about US $263,000 give or take a few pennies. These unfunded liabilities do not take into account current deficits, trade deficits, the wars in the Middle East, and a host of other items. The fault doesn't rest with Bush, but with the American people. He was smart enough to figure out what they wanted to hear, and he told them.