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My, How the Mighty Have Fallen


I was in England at the turn of the millennium. London was poised for a spectacular night: A line of fire was supposed to stream down the Thames as Big Ben struck midnight. The Millennium Dome, a world's fair site costing that cost the Brits over $1 billion and took two years to build, was going to open its doors. The giant ferris wheel named the Millennium 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 Millennium Eye never took a spin. (In fact, it didn't take its first spin until recently, on Feb. 1.) The only fire I saw on the Thames was in the eyes of disappointed people gathered to witness the disaster.

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 is doing.

It's a shame, too, considering this once was a mighty empire. In the 19th century, Britain was the richest and most powerful country in the world. The British acumen for sailing and navigation helped them masters the seas and stretch their empire across 25 percent of the globe. Today, depleted and tired, Britain has fallen to the world's 25th richest nation and is facing an identity crisis that could determine where it goes from here. 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? I'm not sure the British have any idea. And like so many empires around the world, the seams are starting to show.

Paige and I saw evidence of the 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 it was measured. As part of its slow transition to accommodate the European Community, the British government had recently decided to switch to the metric system. For shopkeepers and store owners, that meant using liters instead of quarts, ounces and pints. Merchants in and around Land's End were in an uproar and absolutely refused to adopt the new system. One man said he'd rather go to jail than switch to liters. That 'small-island' mentality worked when the U.K. dominated the globe but today, it simply hinders the country's ability to grow.

The current trend of devolution, the process of giving more power to the respective provinces, is only exacerbating the small-island thinking. For Tony Blair, who inherited the system when he stepped in as prime minister in 1997, this meant doling out more power to the political divisions in Wales, Scotland, and Northern Ireland. Already, parliaments have been established in Scotland and Northern Ireland. Wales will have one soon. While England's parliament still makes laws that affect the entire U.K., these smaller governing bodies have some autonomy in creating law on their own land.

I'm not interested in judging whether devolution is good or bad. For the moment, though, it, 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 found a movement to make learning Welsh a requirement for all students. Welsh, along with English, of course, is the native language of Wales. Many road signs are written in both English and Welsh, a nod I always imagined to the history and culture of this beautiful place. Even a few newspapers are printed in Welsh and a few radio and television programs play in both languages. But 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 it has the resources to do so -- it would 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 a lot of change is in the works. 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. After all, 30 or 40 years ago, Ireland was a back-water country with few options. Today, it’s populated by technologically-savvy youth who can see all the prosperity taking hold around the world. Rather than think small, these young people want their piece of 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. Britain is, after all, part of the common market. British leaders did not, however, adopt the Euro along with the rest of the common market on Jan. 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, 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 it any good, either. Already companies that do business with the European community have expressed concern about the U.K.'s ambiguous position. Just recently, Sony's president said the company didn't plan to open any more plants in the U.K. because the Brits had not adopted the Euro. His attitude was that since these factories cater to the EC, the company had little motivation to open new factories in the U.K. and even less to keep the current ones running. If more companies take the same attitude, England and the United Kingdom will continue to alienate itself from the world economic landscape, becoming 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 easy. In order to participate, 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. That volatility may be a roadblock to becoming part of the Euro. Furthermore, I can certainly imagine the Scots would be none to 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 and as I said, 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. I believe the Central Bank had been printing more money in the UK in anticipation of the millennium, a practice that was true all over Europe and even in the U.S. The idea was that if by some chance the millennium created any kind of liquidity squeeze, more cash would be 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, is 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 its 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, has not undergone the kind of restructuring done by other big oil companies. A new chairman is doing that now.

As always, I am a big fan of companies that deal with natural resources. As the world population grows, the demand for natural resources will continue to spike. These resources, like oil, are limited in quantity, which means prices 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), aWilliamson Tea, and the Lawrie Group and Tea Plantations.

To invest in UK companies that do business solely in Britain, 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, the electric company for this region is sure to benefit from increased usage and demand. Northern Ireland has few ways to invest -- other than going there and buying land -- but electricity is something everyone will need. Similarly, in England, the utility industry is far less regulated than in U.S.. 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 companies still do a tremendous amount of business in Africa. For instance, Patterson Zochonis (London: PATZ), a mini version of Proctor and Gamble, manufactures soaps, toiletries, pharmaceuticals and household products for the domestic and export markets. At Africa Lakes (London: AFLK), another such company, 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 meat distributors who saw their profits go up in smoke. Many companies went out of business and those that survived were reduced to penny stocks. Historically, though, these kinds of events eventually pass over. For example, at one time, no one would eat sugar and sugar prices collapsed, forcing some sugar companies out of business. Eventually people came around and the surviving companies succeeded. The same is true for mad cow disease. Recently, the common market sent through its approval of all English meat, which should restore public 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 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 the instinct to be self-sufficient and self-governing growing around the world. But that unwinding process will take decades. Until then, the once mighty empire may descend further into the mire, becoming more and more irrelevant on the world economic and political landscape.


Updates are available at www.jimrogers.com.


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