Crack-up Boom & Cuba

by Jim Willie CB
Jim Willie CB is the editor of the "Hat Trick Letter"
Aug 3, 2006

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A personal story is warranted, too strange, perhaps more typical than we are aware. As the natural gas price experiences a strong reversal recovery from its winter decline, attention has turned during summer heat waves toward air condition cooling, electricity costs, and the draw demand for natural gas. A story hit home, well worth recounting about a sports health club in my area. It focuses on heat, cooling, costs, reaction, and business whiplash as example of the "crackup boom" described by Von Mises. But first, a diversion to update on Cuba. Hurricane Chris is bearing down on Cuba, the island already reeling from murky news accounts of Fidel Castro and his failed health. From Puerto Rica to Cuba and into the Gulf of Mexico, we see finally the first potentially damaging hurricane working its way toward the oil & gas production zone where it wrecked incredible havoc last summer. First stop is Cuba, where the building hurricane pays no heed to business or politics. One might need an update though on Cuban reaction to the energy crunch, whose boom has caused wide cracks spreading from Havana.

CUBA LIBRA !!!
That is actually an alcoholic drink, coca cola with rum and lime twist. The front page item of news focuses upon Castro's intestinal bleeding and dance with the Grim Reaper. Whether this turns out to be a committed full embrace dance, who knows? It is unclear whether accurate news will report on Fidel's health and recovery, if he indeed recovers. If instead he dies, we might not hear about it for another year officially, although the grape vine is 75% reliable oftentimes. My own research has covered much on the business model for this island inhabited by five million, whose length is 1000 miles (much longer than most people might think). The Cuban economy is not diverse. Beyond tourism, it is focused largely upon sugar cane, fruits (melon, mango, pineapple, banana), tobacco, beans, and rice. They are heavily reliant upon imported oil and gasoline. Tourists returning from Cuba tell me that their staple meal, beans and rice, is excellent, tasty, and nourishing, perhaps responsible for blocking any obesity problem. They tell me of seeing no overweight people anywhere, and very attractive men and women, with characteristic striking light brown eyes. While Americans of Cuban descent celebrate in the streets in Little Havana of Miami, they assume that with Fidel out and brother Raul in, the Cuban future might change markedly. They are thinking politically, when they might do well to think in terms of a crime syndicate. The Fidel-led cabal has an extraordinarily lucrative commercial enterprise in progress, one generating multiple million$ per year. Their collective Swiss accounts are rumored to be in the neighborhood of US$6 billion in size. Syndicate vice presidents will be extremely reluctant to let it all go. They control the military and police force, which provides roughly 25% of all jobs on the island. The criterion for a police state is 20% for police jobs. Young poor kids seek the military & police to survive. The biggest question to ask is "Will kids shoot into the crowd, if riots develop over greater freedom and worker opportunity?" My suspicion is, only to a minor extent, enough to spark wider riots.

Cuba is without any dispute an island prison colony caught in the 1960 decade. Cars from vintage USA years and smoke belching Soviet trucks still dot the roads, evidence of the official US embargo date. Pollution from city traffic is worse than horrendous; it is suffocating and makes Mexico City look good. Japanese cars, as well as some VW sedans, make for the bulk of vehicles. The cover of communist government ideology is nothing but a charade front for vast exploitation of mandated absurdly cheap labor. Take for instance their hotel industry, primarily centered in capital Havana and the resorts Veradero and Trinidad. There is plenty of international commerce in Cuba, but it is tightly controlled for the benefit of Fidel, his two brothers, and a cabal of approximately 150 to 200 men syndicate partners. Call this criminal enterprise Fidel Inc here. Focus not on the politics, the absence of liberties, the limited pleasures (outside sports, music, and sex), the cruel draconian punishments for opposing the leaders, and the resulting despair. It is acute and palpable to be sure. Instead, examine the economy and jobs, then profiteering from a veritable slave labor camp entrapped on an island.

The Cuban leaders like to boast that literacy is high, health care is broadly available, hunger is largely overcome, and racial problems are nonexistent. Ok, that all might be true, but the real story is slave wages and monstrous profiteering by leaders. Take a new hotel venture on the lovely Havana coastline as an example. Typically, the financiers are from Spain, but also from Italy, England, and Germany. In order to launch the project, a payoff of several $million goes to Fidel Inc. The Spanish hotel chain pays all of the construction costs. They benefit from low slave wages for the unskilled manual labor (humping concrete and lumber, digging trenches, driving supply trucks) and higher slave wages for skilled labor (concrete finish, stucco finish, carpentry, painting) which is provided by the Havana population. Rumors swirl that Fidel Inc subcontracts the actual construction, at least the lesser tasks, in full exploit of the cheap Havana labor pool. Fidel Inc profits initially with a hefty kickback sweetener, probably from the 18-month construction phase, but the real profit comes from ongoing operations. Bear in mind that rehabilitation of a private apartment building in Havana sometimes takes ten years, perhaps longer, but not for the erection of a hotel. A hotel rises from the sands lickety split, rapidamente.

The ongoing operations describe an incredibly profitable business model. Fidel Inc provides all the labor required to run the hotel, from desk clerks, managers, linen service, restaurant cooks, bartenders, waitresses, gardeners. The vast army of workers in a buzzing hotel earns $20 per month per person. That is "month" and not "day" to be sure, tragically. Fidel Inc takes a sizeable cut of the profits from the hotel business, whose income is derived from the $180 to $250 per night charge to hotel guests. Profits are mammoth. The tourist has sunburn and jellyfish as the main risks, surely not high costs. A wonderful dinner out costs at most $20 with wine. To encourage the brisk tourism one step further, prostitutes linger in the hotel lounge for evening gratification. Again, rumors swirl that the hotel charges the ladies a house fee to work on their grounds. The parallel to a crime syndicate enterprise is one to one and unmistakable.

Anyone expecting instant political systemic change if Fidel dies is misled. If change comes, it will come only after a struggle against slave labor prison camp despots. The camp commandants control the law enforcement and can order any uprising to be quelled. Fidel controls by means of his peculiar charisma, more from fear in my opinion, fear of his heartless ruthlessness. His brother Raul has been in charge of the military & police for years, and is reported to possess blatant severe perversions. Just imagine what a man could do to satisfy his sick urges with a significant group of female prisoners. Now imagine forced sexual services without profit sharing at all, maybe only an improved prison diet or cigarette bonuses. This is the system Little Havana expects to easily be overthrown. NO WAY!!! The untold irony is that Fidel Castro displaced Battista, another dictator. Battista profiteered from the US Mafia gambling and hotel industry, once called "The Jewel of the Caribbean." Fidel learned the business model and refined it. The only difference is that Fidel jails people, executes people, prevents migration, spreads massive fear, corners the hotel tourism market, and fills the media and airwaves with nonsensical propaganda about the proletariat paradise. Locals laugh at such claims. In fact, Fidel Castro's name is not uttered in public much. Instead, he is called "El Caballo" which means "the horse" in mockery of his oversized beard. Worse, hand gestures indicate reference to Castro in public places without spoken name. Its characteristic gesture is an imitated feel of the beard, from the jaw to a spot below the chin. It is a funny spectacle to outsiders, but a common scene to locals. If asked "Why did you have to attend that boring long public speech?" The answer is the gesture for El Caballo, the feel of the long silly beard. Fidel ordered all people to attend, or else lose a month's wage! This, the worker paradise.

The first and obvious sector to open Cuba commercially is tourism. This is precisely the heart of the Fidel Inc profit center, NOT to be forfeited easily. CNBC, Wall Street Journal, other major publications and news networks, they all overlook the challenge to bust up the crime syndicate. Their reports are laughably naïve and short-sighted. A US hotel chain will immediately encounter the payoff requirement and learn of the slave wage structure without middlemen. Then what? The infrastructure is woeful in Cuba, long neglected. It is not profitable for Fidel Inc to fix bridges and roads and water treatment centers, since tourists sip margaritas, apply suntan lotion, and imbibe by night amidst outstanding heavy brass music. Toilet paper faced extinction long ago for locals who improvise, perhaps not necessary in paradise. Tourists are advised to bring TP with them in luggage. Short taxicab rides suffice to the prison colony nation and its guests from abroad. Rented cars by tourists must hire overnight guards to prevent theft of tires and outright stripping, like that known to the Bronx, Bedford Sty, and Watts in large US cities. What incentive will a Western construction firm have to repair bridges and roadways, large and small? How about water treatment facilities to replace the rooftop cisterns I have heard about from friends who visited the island? Banks will enter Cuba only when its citizens can earn income to put in savings accounts, another nobrainer. Telecommunication firms will enter Cuba only when its citizens can earn income to pay for such services. Currently, cellphone service is available, but at prohibitively high cost. Cruise ships might offer easy hit & run jaunts to Havana and other port cities, with little need or concern for infrastructure repair outside the port facilities. However, despite the uphill challenge, US firms pledge $1 billion in radio & television investment, and state plans to build one million homes. Who will pay? The slavers, because surely not the savers!

One should bear in mind that Cancun, Cozamel, and Puerta Vallarta in Mexico also offer a pathetic wage of $12 per day in most hotels. Service workers rely upon tips, but such are not available to many, like to linen and restaurant staff. Cuba can make a giant step in the exploited chain from $20 per month to $250 per month in wage grants, as paid in Mexico. Larger foreign direct investment will flow only after human rights, civil liberties, and general political reform take place in a clear and indisputable manner in widespread scale. For Cuba, the reality of reform on the commercial side will come only after giant steps are made politically. Each will take a lot more time than currently accepted or understood. To complicate matters, old claims by diverse companies from Coca Cola and IBM must be addressed or dropped. And thousands of claims by Miami Cubanos must be addressed, whose property and businesses were stolen by Fidel Inc.

As segue to the energy challenge, Cuba reacted to its imported oil problem by using sour crude and dirty crude oil found on its island in order to generate electricity power. The policy turned into a disaster, as the dirty oil input gummed up the delicate machinery. In the last year, rolling blackouts were ordered across Cuba. The operators were forced to repair the damaged machinery. Cuba lacks hard money with which to purchase crude oil on the open global market. One would think their agriculture industry, governed by Fidel's older brother, would provide hard cash. Not so. Cuba is so badly run that it imports large amounts of poultry products (chicken and eggs), along with turkey and butter. Venezuelan oil was both donated and provided at subsidized prices by comrade Hugo Chavez. The rising energy prices have led to unwise risk taking, shutdowns from inability to carry higher costs, all part of the "crackup boom" scenario. The Cuban Economy is a disaster zone, not easily remedied, not quickly freed from its crime syndicate masters and profiteers. It is no different from any other crime syndicate, except for the incessant banter about socialism and evils of capitalism. Just think about the lack of toilet paper and juxtapose "worker paradise" and try not to laugh or cry.

The political common thread from Cuba to Venezuela is a sham. Castro has become a little folk hero in Caracas, a mentor to Chavez, quite the travesty. Socialism to Castro and Chavez has been a license to steal from the state corporations. Some nasty emails have come to me in opposition to my claim of Venezuelan economic decline from the Chavez rule. I stick with my guns. Chavez has raided the national oil industry, placed hack incompetents in management, brought about serious decline in oil and refined product output. All the while, Venezuelan middle class poverty grows on a rampant scale. Barrios on the serras (hills) grow with each passing year. My source of information is a banker friend locally, who travels frequently to his native Caracas capital and has relatives there still. He compares Chavez to Al Capone, but without the gangland murder on the streets. Both Chavez and Capone give in full ceremony to the dirt poor, but it hides the grand theft from the main enterprise.

A SPORTS HEALTH CLUB
This spring, a new owner took over ownership at a nearby sports club, one of the nicest in my metropolitan area. The new owner has a son who is a tennis pro. Mine eyes have watched his skill, as he teaches old teenagers with skill of their own. He routinely challenges two kids opposite the tennis net and very rarely loses a point with ultra-faced paced tennis on a green clay court. The first act and deed by the new owner group was to embark on an expensive replacement of the surface for all twelve indoor tennis courts. The son loves tennis. Their second act and deed was to promise that the high monthly club membership fees would remain fixed for its 2500 members. Next comes the crunch. Older giant air conditioning equipment is scattered over a few locations on the site. This is a club with an indoor pool with hot tub, an expansive fitness center with an armada of weight and aerobic machines, a dozen suspended viewable 30-inch televisions, multiple racquetball courts, spinning (stationary bicycle) room, large rooms (for pilates, aerobics, dancing lessons, kick boxing), party rooms, offices, therapy offices, massage center, hair salon, day care center, multiple dressing rooms, a shop (sport equipment, clothing), showers, saunas, and an outdoor swimming pool complete with tiki bar cabana. Hey, bring back the diving board! Being a US-based establishment, they are required by law to serve french fries to the overweight on a continuous noxious level. It is a sad sight to see this one kid, no more than 12 years old, who outweighs me easily. He goes to the outer pool area to eat and frolic in the shallow water. He has never been seen actual swimming.

The club electric bill is mentioned at $50,000 per month. With the energy crunch underway, the club managers decided to turn off the air conditioning except in their offices. They rely upon an army of large fans, some of industrial strength in 4-foot radius. The ceiling vents in the huge fitness center are inadequate. Club members are canceling at a noticeable rate, not yet alarming. Prevailing fees amount to $125 per month for individuals, with family discounts offered on annual deals. The jackass benefits from residence in the adjoining apartment building, once co-owned by the club owners. Tenants such as me have a piddly $25 monthly cost for privileges which exclude indoor tennis, a steal to be sure, an artifact from the past. I still work out with the weights on nautilus machines, nothing too crazy, even run in circles (just like real life) around the 1/12-th mile padded tilted ramp indoor track. My repaired knee likes the padded surface. My favorite is riding the large framed bicycle to the library and back for work purposes, and around the parks for fun. My knee likes the zero impact. Gotta keep tight, must keep firm, and keep that jiggle from getting away from me at the ripe age of 54 years. I don't give a hoot about air conditioning, never use it, never liked it. Fans work fine. A little extra sweat on the face and neck don't bother me. All hairy beasts sweat. Discharge of toxins is healthy and essential. If truth be told, A/C is not healthy concerning toxin removal or muscle tightness.

One can easily notice the number of members in the open workout area has gone way down. The usual dedicated throng work out, staying trim and strong. They are the ones the unfit public claim do not need to exercise, but this is precisely why they bear such a healthy look. An occasional neckturner beauty from the younger college age set graces the machines, like last Saturday during my run workout of a mere 2-1/2 miles. She did her circuit of treadmill run and numerous nautilus machines, catching a drink between each set. In summertime, students on college break stand out, in firm shape, with regular impressive routines, both male and female, in clear contrast to the older set with big paunches. After four years of residence here, my small group of friends take opportunity to greet after unpredictable lapses. Some are remarkably well informed. Some run businesses of their own. We exchange ideas and experiences. Once I met a former Cleveland Federal Reserve economist in the hot tub during a slow cold winter day, who reported on Greenspan's lack of technical habits, such as never using email. Last year I met a former Tampa Bay Buccaneer football player, of large frame but well proportioned, nice fellow. Two Steeler football players have come and gone, as most of them prefer a different sports club in the northern suburbs. One club friend is the only Uzbek encountered in my daily life, although the Vancouver gold conferences exposed me to a second (hello to SeanR). Club buddy Safdar is a great guy, shaved head, strong as an ox, scary looking gentle fellow, who encourages my Hat Trick Letter, a sort-of advisor from when it was hatched. He comments on my public articles, which always takes me off guard. I call him Mr Clean, only to be met by his toothy grin. One friend Ron shows up with his wife and two sons for swims and weight workouts. Ron grew up on my street as teenagers, the grandson and nephew of several Nazi death camp victims. That same street from childhood had several such survivors. We were its first family of goyem strain, fully accepted. Israel is a topic nowadays poolside, as is Mel Gibson's moronic statement. A swimmer talked with me last week, as Simone returned from a high school trip to Israel prematurely, disappointed. She saw no rockets, no damage, but was forced out by govt edict as a precaution when numerous young men were recalled for reserve army duty.

Crowds are more noteworthy beside the outdoor pool. Most do not exercise, but rather chat and eat endlessly. A new exercise of mine, to offset doing swim laps, is to tread water in the extreme heat. One can easily forget the high temperature and scorched earth. The truly stunning bikini-clad life guard Lauren entices one to keep a full field of vision while engaged in routine workouts. Ay caramba! Bikinis are no longer standard issue to life guards, but this gal loves the attention. Twenty other guys and I are willing to give it, and do so. The treading routine is taken on her work hour shift. To those who think this is a lame copout, try treading water in place for thirty minutes with no devices like the ubiquitous foam noodles which kids (boys) love to use as assault weapons. Most water treaders will succumb after five minutes. I often mock the older rotund members who float with devices and pretend they are working out with bicycle leg movements. I call them workouts without work in "floating drills" and point out how their legs are not moving. Some women wear makeup intact while floating in workouts, where it does not run at all. Heck, it is a social hour for many in the deep end, a cooling session, with a false workout label. Does flab weigh more than water, does it float? Unsure, need more experimentation research! Just why do little children insist on running at swimming pools? More research needed. For certain, that extra inch of jackass flab must go. Not sure what the male equivalent is for "the bigger the better, the tighter the sweater, the boys are depending on us." Either way, there are way way too many mirrors inside the fitness center.

So a vicious circle has emerged. Costs are rising. Services are being reduced. In fact, the trainer staff has also been reduced, leaving inexperienced members on their own more. Before, the club policy was to encourage heavy turnover, since cheap young staffers are easy to hire, preferable to the alternative of periodic pay hikes to the loyal returning staff. They do get the nice perk of a free membership themselves, something of value. As air conditioning usage is cut, members are openly complaining. Some explicitly complain about showering inside, in the dressing rooms, drying off, getting dressed, only to be covered with sweat immediately, then leaving the club angry and uncomfortable. More are expected to depart and discontinue at the club. Even in autumn, the indoor climate is air conditioned, as no open windows exist on the site. As income declines from exiting members, the pressure to reduce services even more will not relent. Clubf fees cannot rise anymore, as the tolerable limit has been reached, a key point. When will the A/C be turned back on? The outdoor pool closes in the first week of September when kids return to school and young students like Lauren are unavailable for minimum wage work with perks. At that time, indoor activity dominates, and cooler temperatures will arrive. But summer officially ends in late September, plenty of heat left. This vicious circle is likely to continue, canceled fee income to follow. No opportunity to outsource exists here, since a non-importable service company. Many someday physical trainers can help to set up exercise routines from India over the internet, in two-way interactive sessions.

This is a typical microcosm for other companies. Only this one is immediately observable in its detail, right next door. Pressures on the cost side prompt a cutback which hurts customer retention, only to worsen the profit margins and pressure costs further. We see it with General Motors and Ford Motors. They suffer rising costs for materials and staff. Reliability suffers, recalls mount, loyalty is shredded, quality degrades, components are compromised, processes see short cuts. Externally, market share declines, image fades, bad press publicity follows, worry rises over survival, which contribute to hurt sales again in the cycle. We all hear about the "crackup boom" phenomenon. Observing it in ugly unfortunate detail is an eye opening experience. How many more crackup boom stories are out there? From large corporations like DuPont come stories of rising feedstock costs. From Kraft Foods come similar stories on dairy product costs. From farmers come greater challenges to get the summer crop planted at all, given high diesel and seed costs. The summer heat has limited their daily work hours.

On television a story crossed about a pet shop owner. She was overcome by rising costs of electricity, heat, and feed. She cannot raise prices and might go out of business. A dentist swimmer friend Howard at the club complains of rising metal costs for crowns and bridges. He installed a four-tooth bridge for me two years ago, and tells me its cost would be 30% higher now. Teeth are an essential though, and insurance often covers the cost. His business is not suffering. A Seattle friend Scott tells me his landscape design and construction business is under strain from exorbitant rising material costs. Re-rod steel, cement, lumber, plastic pipe, brick & stone, and other materials have tripled or more in cost since 2001. Every time we talk of costs, he mentions fuel surcharges to material shipments. Ditto for Philly friend Tim and his carpentry construction business. They are each witnessing the crackup boom firsthand, and reporting to me as I keep in touch. Scott has been an encouraging cheerleader, while Tim has been a nagging tease eager to bet. We have a bet on. I say gold will not go below $580 on this summer and autumn correction. Tim says it will hit $520 on a painful sweep of the weak hands. Whoever comes closer is treated to dinner out on the next visit. By the look of gold, we might not see the price go under $600 anytime soon, if at all. Too much scary international crisis, too much motivation to prevent a scary housing decline.

HURRICANE CHRIS
The hurricane season officially began in early June. Here, two months later, not a single hurricane has visited the Gulf of Mexico or coastal Louisiana or Texas where refineries are working overtime. Forced maintenance shutdowns and accidental fires have hampered output. Refineries are working at historic highs of 93% capacity, which fosters accidents and equipment failure. With ethanol substitutes, with planned seasonal formulation mix transitions, the normal business has disruptive interruptions. Weather only exacerbates the strain. Few if any gasoline refineries have been built in over 30 years. Refineries in operation tend to run at full tilt around the clock, above acceptable risk duty levels.

A friend from my high school days attended the same graduate school as me. He has a career in chemical engineering, focusing on consulting for petrochemical and other chemical plants. Over lunch last summer, he explained the extreme complexity of chemical plants of all kinds. He fervently believes the real vulnerability in our commercial land comes from chemical factories. He cited just a few key valves, which if shut off, would result in chemical accidents and explosions. The death count he claims would be in the hundreds of thousands, to rival the deadly blast in Bopal India years ago. The USEconomy has perhaps a thousand such vulnerable plants. Risk aside, the crackup of the USEconomy is well underway from higher energy costs. We were given a reprieve with a warm winter. However, global warming forces reflect with extra warm summers. Politicians who deny global warming have not visited the Arctic regions, have not witnessed the struggling polar bears and their incredible shrinking ice habitat, have ignored the Inuit tribes and their struggles to survive, have not noticed the rapidly melting glaciers, and out of expedience, prefer to insert their heads in the sand, if not up an inconvenient dark human orifice.

As the crackup boom continues, we are very likely to see the energy sector rise as far as the eye can see. Energy is essential in recession. As the crackup boom continues, we are very likely to see the precious metals sector rise as far as the eye can see. Real money is essential in crisis. As debts corrode, as housing fades, as money is polluted, the system will undergo much more strain. If war persists, then both material cost inflation will persist also, from unproductive usage and from monetary inflation in reaction. World War II consumed one third of all the known global energy deposits. The Iraq campaign is consuming untold amounts of energy supplies. My personal expectation is that this war will continue, fester, and persist for as long as I remain walking this earth. This is a war tied to misnomer. It is not a war on terrorism. It is a war to secure energy supply. This is the Global Energy War, mislabeled so as to be palatable and acceptable. Gold, silver, copper, crude oil, natural gas, and uranium, these will continue to thrive. The industrial metals such as copper, zinc, nickel, these might see price relief in recession, but don't count on it. Supply replenishment has become harder to come by with each passing year. Disruptions in Indonesia, Australia, Bolivia, and Mexico will likely persist. For personal questions about subscriptions, contact him at "JimWillieCB@aol.com"

THE HAT TRICK LETTER COMBINES MACRO ANALYSIS WITH INVESTMENTS.

Aug 2, 2006
Jim Willie CB

Jim Willie CB is the editor of the "HAT TRICK LETTER"
email: jimwilliecb@aol.com
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