My, How the Mighty Have Fallen

I was in England at the turn of the millenium. It was poised to be a spectacular night in London: A line of fire was supposed to stream down the Thames as Big Ben struck midnight. The Millenium Dome, a world’s fair site costing the Brits over $1 billion and built over two years was going to open its doors. The giant ferris wheel named the Millenium Eye was supposed to start spinning, ushering in the beginning of the 21st century.

Unfortunately, nothing went quite as planned. Few could get into the Dome; subsequent ticket sales plummeted. The Millenium Eye never took a spin. (In fact, it took it’s first passenger only recently, on February 1.) The only fire I saw on the Thames was in the eyes of disappointed people gathered there to witness the disaster.

We visited several UK monuments while we were there including some of the most magnificent cathedrals in the world. Many are in a sad state of repair and all are trying to raise money for restoration and preservation. The money thrown down the drain by the government could have been much better spent if they were indeed looking to the next 1000 years.

That the world is always changing has been brought home to us continuously on this trip. Countries, cultures, structures, etc that were awesome 1000 years ago are in ruins or exist no longer. One can see why when one studies the folly of governments over the centuries.

Then again, nothing is going particularly smoothly these days in the United Kingdom. In all parts of the UK— Wales, Scotland, Northern Ireland, and England—one hand just doesn’t seem to know what the other one is doing.

It’s a shame, too, considering where this once-mighty empire once stood. In the nineteenth century, Britain was the richest and most powerful country in the world; it’s empire stretched over one-fourth of the globe. The British acumen for sailing and navigation made them masters of the seas and helped build their empire beyond the boundaries of the island of Great Britain. Today, depleted and tired, it’s the twenty-fifth richest nation. The country seems to be going through a bit of an identity crisis: Does it want to be a part of Europe? Does it want to be on its own? Or does it want to be the lap dog of the United States? The problem is, I’m not sure they have any idea. And like so many empires around the world, the seams are starting to show.

Paige and I saw evidence of this tension wherever we went. When we arrived in Land’s End, the westernmost point in all of England, a controversy was brewing over pints. No, it wasn’t about beer but rather how they measure it. As part of its slow transition to accommodate the European Community, the British government had recently announced the decision to switch to the metric system. For shopkeepers and store owners, that meant changing to liters as opposed to quarts, ounces and pints. That had created quite an uproar among merchants in and around Land’s End who absolutely refused to adopt the new system. One man said he’d rather go to jail before switching to liters. That’s the kind of “small island” mentality that’s hurt the United Kingdom. It worked when they dominated the globe but today it simply hinders the country’s ability to grow.

Part of what is exacerbating this small island thinking is the UK’s current trend of devolution. Devolution is the process of giving more power to the respective provinces, a vote-buying legacy of the Labour Party Tony Blair inherited when he stepped in as Prime Minister in 1997. For Blair, this meant doling out more power to the other political divisions in Wales, Scotland, and Northern Ireland. Already, a parliament has been established in both in Scotland and Northern Ireland. While England’s parliament still makes laws that affect the entire UK, these smaller governing bodies now have some autonomy in creating law on their own land. Wales will have one soon as well.

Now, I’m not interested in judging whether devolution is good or bad. For the moment, though, it’s clear that devolution combined with growing nationalism is creating more and more tension between the various regions of the UK and mother England. In Wales, for instance, Paige and I discovered that there is a movement afoot to making learning Welsh a requirement for all students. Welsh, along with English, of course, is the native language of Wales. Many of the signs along the roads are written in both English and Welsh, a nod I always imagined to the history and culture of this beautiful place. There are even a few newspapers printed in Welsh as well as a few radio and television programs which play in both English and Welsh. Still less than a fifth of this country’s tiny population—roughly 3 million—speak Welsh. Like the other parts of the United Kingdom, most people speak English.

Making kids learn Welsh may have cultural value, but on an economic level it makes absolutely no sense to me. First of all, it’s going to take a tremendous amount of time and money simply to teach the teachers the language. I’ve always endorsed the idea of teaching our children languages beyond English but these kids would probably do better learning something like Chinese or Spanish. Welsh isn’t going to be an asset in the global economic market.

Second, learning Welsh is going to do nothing to bolster this country’s standing in the common market. In fact, it may only end up alienating Britain, and Wales in particular, even further. If Wales ever wants to be independent—and I’m not sure they have the resources to do so—they’d probably do better in Brussels with English than Welsh .

The same is true in Scotland as well. (In fact, the first primary school teaching only Gaelic opened last Fall). Unlike the Welsh, though, the Scots have a financial asset, albeit a limited one: vast oil reserves off the coast. The price of oil is particularly high right now—it just crossed $30 a barrel—and the Scots know this won’t last forever. Still, the soaring oil prices have given the pound a significant boost. England is certainly happy as it takes a large cut of the oil revenues. But as the Scots gain a certain degree of autonomy from mother England, many citizens—particularly nationalists—have begun to question why they must pay so much to England. That kind of tension can only lead to further problems.

Northern Ireland as we all know is fraught with tension. But there’s a lot of change in the works as well. When Paige and I drove through the country (as well as through Ireland), we were immediately struck by the attitude of the youth. Ireland, after all, is one of the youngest nations in the world. We discovered that despite all the battles between Protestants and Catholics, these young people were far more interested figuring out how to make their own fortunes. 30 or 40 years ago, after all, Ireland was a backwater country with few options. Today, it’s populated by technologically-savvy youth that can see all the prosperity that is taking hold around the world. Rather than think small, these young people want to get involved in this prosperity. Most of the people we talked to, in fact, didn’t consider themselves Protestant or Catholic; they considered themselves Europeans.

In the long run, I imagine the powers-that-be will be able to work out a peace agreement in Northern Ireland, one clearly fraught with setbacks and pitfalls. Call it a jagged peace at best. But that’s going to be motivated as much by the peace process as it is by the growing discontent among the country’s youth who just won’t stand for the old ways much longer.

This small island mentality, though, extends outside its border as well. Britain is, after all, part of the common market. They did not however adopt the Euro along with the rest of the common market on January 1, 2000. Why? I think it’s because the Brits are of two minds when it comes to the common market. On one level, they want to take part in the prosperity of a unified Europe. At the same time, though, they want to keep some independence, some distance from the rest in case things don’t work out.

Of course, I’ve never been wild about the Euro. It’s like dominos; if one country stumbles, they all will suffer. But Britain’s in-between position isn’t doing them any good, either. Already companies that do business with the European community have expressed concern about the UK’s ambiguous position. Just recently, Sony’s president said that he wasn’t planning on opening any more plants in the UK because the Brits had not adopted the Euro. His attitude was that since these factories cater to the EC, there was little motivation to open new factories there and even less to keep the current one’s running. If more companies take the same attitude, England and the United Kingdom will continue to alienate itself in the world economic landscape. It will become more and more irrelevant.

If Britain has a change of heart and decides it would like to be part of the Euro, it’s not going to be so easy to do. In order to participate in the Euro, a country needs to maintain a stable currency relative to the Euro over two years. Right now, though, the Euro is fairly weak while the British pound is quite strong as a result of high oil prices. Given that volatility, I’m not sure it can even become part of the Euro. I can certainly imagine that the Scots would be none-too-pleased to know that they were pumping oil to subsidize French farmers and German factory workers.

Despite all these conflicts, the economy of the UK has been fairly strong. The FTSE 100 Index was up 18 percent for 1999. As I mentioned, strong oil prices have helped the pound greatly. But as I mentioned in my last column, I think there’s more than just prosperity floating the boats. As in my last article, I believe the Central Banks had been printing more money in the UK in anticipation of the millenium. They weren’t alone, either: this kind of increase in currency production was true all over Europe and even in the U.S. The idea was that if by any chance the millennium created some sort of liquidity squeeze, there would be more cash on the market to buffer any problems.

Now that Y2K has passed quietly, the Central Bank of UK like other central banks around the world, are bringing monetary levels back to normal. That action, however, has had a ripple effect and the stock markets are starting to feel the tremors. Already, the FTSE 100 was down 12 percent by mid-February. Hopefully, it won’t take too long to adjust to normal money supplies again but until they do, the Brits could see rough waters for the next few months.

So does that mean investments in the UK are off limits? Truth be told, if you don’t believe in the big picture of an economy, any investment ideas you may have always seem to be followed by a black cloud. Still, I think the best way to invest in the UK is to find companies that are doing exactly what the country itself is failing to do: look beyond it’s borders to the burgeoning economies around the world. I own, for instance, oil conglomerates Shell Transport and Trading (London: SHEL) and BP-Amoco (London: BP), both of which trade on the New York Stock Exchange as American Depository Receipts. I can’t say I’d recommend buying any oil companies with prices around $30 a barrel, but these are two of the biggest and best in the business. Shell, in particular, hadn’t been going through the major restructuring that the other big oil companies have underwent. A new chairman has come in and is in the process of doing just that.

As always, I am a big fan of companies that deal with natural resources. It’s logical: as the world population grows, the demand for natural resources will continue to spike. These resources, like oil, are limited in quantity. That means the prices of these resources will only increase in the long run. One company I’ve owned for a while is Rio Tinto (London: RTZ) a British exploration and production company focused on mining mineral resources such as copper, gold, iron ore, aluminum, lead, and zinc. The company has operations in Europe, South America, Africa and Indonesia as well as North America.

Tea is another great way to play the global economy through the UK. Particularly as the economies in Asia continue to recover, I’ve become more and more bullish on tea companies that do business around the world. Right now, I own shares of Camellia (London: CAML), as well as Williamson Tea, and the Lawrie Group and Tea Plantations.

There are, however, ways to invest in UK companies that solely do business in Britain. The best way to do so right now is to find special situations that should prosper no matter what the economy of England or the overall UK does. One good example is Viridian (London: NTC), the utility company formerly known as Northern Ireland Electricity. Since I believe the peace process will ultimately work, I think the electric company for this region is sure to benefit from increase in usage and demand. There are few ways to invest in Northern Ireland—other than going there and buying land—and electricity is something everyone will need. Similarly, in England, the utility industry is far less regulated than the U.S. industry. I like water company United Utilities (London: NWW) which has an Internet play as well, giving it added firepower.

There are even ways to invest in the history of England and its former colonies. Many English countries still do a tremendous amount of business in Africa. One is a company called Patterson Zochonis (London: PATZ), a sort of mini-version of Proctor and Gamble. This company manufactures soaps, toiletries, pharmaceuticals and household products for the domestic and export markets. Another is a company called African Lakes (London: AFLK). Smart new management is redirecting the company’s interests in Africa.

Another special situation I’ve been looking into is the fallout from mad cow disease. Mad cow disease as we all know was a major nightmare in the UK, particularly for the meat distributors who saw their profits go up in smoke. That put many companies out of business. Those that survived were reduced to penny stocks. Historically, though, these kind of events do eventually pass over. There was a time when no one would eat sugar and sugar prices collapsed and sugar companies went out of business. Eventually people came around and those companies that survived were able to succeed. The same is true for mad cow disease. Recently, the common market sent through its approval of all English meat. That should give people the needed confidence and help the meat processing companies get back on their feet. I’ve bought shares of P.I.C, a meat processor in England whose stock price was reduced to just a few pence. Once the panic passes, I think this company will see its stock price return to normal levels.

Having said all this, though, I confess that I am not simply buying without regard for a potential downturn. Just the opposite. In fact, I have hedged my investments in the UK by shorting positions of the English Indices. There are many ways to do this but I did it by selling short world economic baskets for the UK, otherwise known as WEBs, which are sold by Morgan Stanley Dean Witter. Particularly in light of the central bank slowdown in the money supply, I believe investors here should be very cautious.

What the future holds for the United Kingdom is tough to say. Ultimately, England may actually benefit from not having to worry about taking care of Scotland, Wales or Northern Ireland. As we have learned from watching Russia and Yugoslavia, the days of empires have long passed. More and more, I see that the local instinct to be self-sufficient and self-governing is growing around the world. But that’s a unwinding process that will take decades to occur. Until then, the once mighty empire may descend further into the mire, becoming more and more irrelevant on the world economic and political landscape.