Ulysses de la Torre

Ulysses de la Torre
Contributor since: 2012
Any thoughts on PAAS?
Erik, I'm more inclined to agree with you than disagree with you, but I have to say that your closing pivot, "Now that it is fairly clear that Mexico may eventually overtake China as the world leader in growth" is the sort of subjective wishy-washy hedging that usually drives me to stop listening. You could have just deleted this clause and gone straight to the question, "what specific trades should be undertaken to benefit from this?" and not distracted so much attention from your main thesis, which I believe is a worthy one.
That aside, I agree there is a China-MX gap, but the very big open question that remains, as always, concerns timing. There are a lot of variables at play here, some of which may result in Mexico's advancement delaying longer than we might expect or like. As Keynes famously said, "markets can remain irrational longer than you can remain solvent."
I'm definitely not the authority on 1982 vs. today, but based on the limited conversations I've had with people who would be the authority on that (i.e., typical Mexicans), there seems to be a begrudging acceptance that at least under the old system of PRI 1.0, things "worked." The thing is, for things to "work" in the 1982 sense of the phrase (a year during which, lest we forget, the Mexican government devalued the peso THREE times and defaulted on its external debt), there was a lot of ugliness going on behind the scenes. And while things may have "worked" better under the old system, there seems to be a similarly begrudging acceptance that there is no going back to that old system, for better or worse. The big question mark is whether PRI 2.0 actually understands that for things to "work" in the modern sense, different inputs are now required. The new government has been paying lip service to this differentiation, saying all the things it knows Americans want to hear it say, but there is as yet absolutely zero evidence that it can and/or will back up its words with actions. All this go-go-Mexico bullishness implicitly assumes that PRI 2.0 will indeed back up its words with actions. I'm not so trusting of this government for too many reasons to list here. Hopefully I'm wrong about them.
Thank you again Chris, this is a prime example of what I'm talking about. The article is behind a paywall I do not have access to, but already in the opening excerpt we're seeing exactly the mindless optimism I'm talking about: "Hidden behind the troubling headlines, however, is another, more hopeful Mexico..." -- "hopeful" -- this is important, no doubt. But "hope" doesn't achieve results.
Also in that opening excerpt: "a growing middle class" -- without a doubt one of the most meaningless phrases being thrown around in the discourse about Mexico right now. This is a phrase that has come about to make Americans more comfortable with investing in Mexico by putting the turbulence Mexico is undergoing into some sort of terms Americans can understand (since beheading people as an intimidation tactic is something Americans plainly do not understand, particularly in their own backyard). And again, it's important to make Americans comfortable with investing in Mexico. But that doesn't make the phrase "middle class" in the Mexican context any more meaningful.
Ian I completely agree. But this is easier said than done and there seem to be a lot of people overlooking how difficult this is going to be to achieve. Put another way, optimism seems to be trumping realism in a very big way.
Chris, agreed. What I find striking though is that expectations for Mexico right now could hardly be any higher. But look closely at some of these bullish stories hyping the Mexican miracle and there are a lot of ifs, coulds, shoulds...basically, forecasts that give the benefit of the doubt at every possible opportunity, when there is actually no real reason to do so. It's almost as if people are wishing the growth story to come true and throwing themselves at the flimsiest of evidence as proof.
Thank you for this Jon. The only point I would add for now is to reiterate that there is a massive difference between long-term versus short-term outlooks. What Keitel and the rest of us here are addressing is a longer-term view. But I believe we are in the minority and understanding how the majority (as I perceive it, at least) approaches things is a necessary part of formulating how we communicate our ideas about emerging and frontier markets investing.
The amount of global capital looking for a new home cannot be overstated. One of the big obstacles I have found in interactions with my clients is that the ease with which they are accustomed to moving in and out of positions -- even among the least liquid of assets -- in, say, G8 countries, and now even certain other situations in Mexico, Brazil or South Korea, has acclimated them to a certain level of ease of doing business.
Put another way, the most common conversation I have (still!) with clients has to do with what's happening inside of the current year. Impatient capital like this obviously is not suited for investigating what's happening in less developed markets, even though there are many opportunities in such markets screaming for capital investment. Unfortunately, as I said, I believe this short-term outlook is the majority line, and it is perpetuated every day by a lot of the mainstream financial news outlets, not just on TV, but also online, Seeking Alpha's general content approach being a prime example.
The conundrum here obviously is balancing what customers (readers, investors) say they want versus giving them what we think they should want.
I could go on about this topic, but I think I've said enough for now. Anyway thanks again for getting Seeking Alpha to publish this. I guess it's up to our persistence to build enough of an argument for the majority to consider an alternative course.
I'm passing this interview along right now to everyone I know who should read it, regardless of what they've told me they want.
Abegaz, thanks for your insightful remarks here. I always welcome the opportunity to get more detailed, so let’s get more detailed. My on-the-ground experience in Africa is limited to Ghana and Nigeria. Some of what I’ve seen in both countries echoes what you are seeing outside your home. But other things I’ve seen are not so positive, and stories my clients in those countries have told me (more Nigeria than Ghana), are never exclusively bullish or bearish. There are no doubt opportunities in Nigeria and Ghana, but the least risky way of accessing them, as you rightly point out, is to be physically there, face to face.
Investing in an ETF is not a physically there, face-to-face activity.
Furthermore, many conversations I receive with Western-based players reveal to me serious mismatches in what I see on the ground—not just in Africa, but in many countries considered emerging and frontier markets—and how Western investors formulate their expectations. A simple recent example of this came up in a phone call with an American fund manager I know who was looking at a private equity deal in Mexico (where I am based). A week before he was meant to close on the transaction, one of the assets in question sustained irreparable physical damage as a result of armed violence. Needless to say, this fund manager reneged on the deal, and I suspect he may now unfortunately consider the entire country of Mexico to be off bounds, which it obviously is not. What he did wrong, in a nutshell, was that he looked at the numbers on paper and interpreted them with American risk management standards. He also didn’t have the right people vetting the deal for him on the ground and as a result was asking all the wrong questions when he was conducting his due diligence. Also unfortunate for him was that he didn’t get in touch with me until long after this fiasco had come and gone, or else I could have advised him ahead of time on how to snuff out that something might be amiss.
That’s just one example, and I have many more similar stories in other countries, some African, some not.

To the extent that I have an overwhelming focus on the negative downside risks in this article (which was not what I was trying to communicate by the way, so the fact that that’s all you picked up tells me that I failed on some level), it is merely a reaction to interacting with way too many people who only focus on the upside positive risks without fully understanding what they are getting into. To use your phrase, I seem to attract a lot of Westerners who think it is indeed “all sunshine and roses”, for better or worse.
So it seems that you and I are facing opposite crowds. Without a venue like Seeking Alpha, I cannot imagine how we ever would have been able to share this with each other. But as Jon Springer has very accurately pointed out (here: http://seekingalpha.co...), Seeking Alpha is still quite limited in how it receives submissions regarding the realities of developing economies. So in the meantime we are forced to conform our articles to an editorial format that actually isn’t appropriate at all.
Given your vantage point of living in Africa, Abegaz, I would also recommend you get in touch Nick Pardini, who is running emergingmarketinsider.com and I know would definitely be interested in the perspective of someone who can speak cogently from the standpoint of being physically based somewhere in Africa. Which country are you writing from by the way?
Randy, I was trying to keep the headline from becoming too wordy. But otherwise I totally agree with you.
Abegaz, although you sound like a spambot, I'm going to give you the benefit of the doubt for the moment and assume there is indeed a human behind this comment. I'm not sure where you got the idea that I've never been to Africa. I have been there on a number of occasions advising clients in a variety of capacities. Admittedly my experience there is not widespread nor as long as my experience in Latin America or Asia. I also have never invested my own money directly in Africa. You can take these facts as a liability in my Africa knowledge in that I cannot speak from the experience of having profited or lost on a direct investment there; or you can consider it an asset that my lack of skin in the game informs better objectivity. The choice is entirely yours and I do not care which view you take.
As for generalities versus specifics, I certainly can get far more specific, but as I make a point to say above, I'm not using this article for digging into local minutiae of specific economies right now. I will do that at a later date. I do it this way because we all are vulnerable to information overload so there has to be a limit to how we apportion information in each successive dissemination. And to get specific later we need to agree on a few overview points first. If you're one of the people already ahead of the game, congratulations on that and I'm sure I speak for everyone when I say we look forward to learning from your experience and your own articles advancing the knowledge on the themes covered here as well as whatever other expertise you have to offer to the rest of us.
Chris, actually I looked at exchange rates while putting this article together and have another chart showing relative performance of the above FX rates but ultimately decided not to include it here for two primary reasons. One, there are already a lot of charts here and I was trying to keep the graphic element a bit under control. Two, many of the FX regimes here are pegged in some form or another; but regardless of FX regime, the currency performance wasn't enough to have a material impact on any of my observations. For example, in some cases, the local currency appreciated against the US dollar in 2012, which actually results in a real growth rate further divergent from USD. In other cases where the local currency depreciated against the USD, it wasn't enough to make a significant enough impact on local stock market performance to take up more space commenting on here.
rcpatrick5443, thanks for your thoughts. If there's anything you can think of that I missed or might consider including in any subsequent discussions on this topic, please do not hesitate to let me know.
In your opening paragraph, you mention "the drug war and over 25,000 dead come to mind" -- where are you getting this statistic of 25,000 dead?
Also, note to Qineqt and the editors, if you want any of us to take your FDI chart seriously, try annotating the axes properly and correcting the information source. As of this writing, the source of the chart info says "Word Bank."
Sorry, I just realized that it's SA itself that automatically transforms links placed in comments into bitly's. Anyway, I was able to find each of the articles you refer to by searching for their titles with no problem. And if for some reason my bitly doesn't work out, McKinsey Global Institute published a report last month entitled, "The archipelago economy: Unleashing Indonesia's potential", which goes into the upside to Indonesia in much more detail.
Jakarta expat, thank you very much for filling in the blind spots here but note that your bit.ly links aren't working properly. However, searching for the article titles seems to work out. Also note that the articles you have pointed us to are similarly missing from this recent McKinsey Report: http://bit.ly/SBKh7d
Sir or madam, given that inflation is privately estimated to be closer to 25-30%, rather than the 8-9% the Kirchner government economists are claiming, I thought food and energy prices would be rather more volatile than what my sources were indicating. So I thank you for the correction and clarification and I sympathize with your need for anonymity.
For the more developed markets, you might try this: http://bit.ly/sfVNpk
For the non-member countries, you may have to solicit them or their websites one by one.
Another thing that comes to mind is that given certain peculiarities of the extractive industries, it may make sense to formulate a modified approach to countries that overwhelmingly derive their income from those sorts of exports. Just a thought.
Michael, I am definitely interested in where you take this next and if there is somewhere outside Seeking Alpha where you are publicly housing your work on this topic, please let me know.
As far as methodology, given what we already acknowledge as the limited data sample of the ETF universe, the countries most likely to have a demonstrable relationship between corruption and investment returns I would think are going to be countries that don't have their own ETF and in some cases are not even included -- even at single digit allocations -- in the sector and region ETFs currently available. Furthermore, this is far too urgent an issue to wait for the ETF universe to catch up on this front. So if I may, I would suggest adding another variable to this effort that will better capture those excluded countries, particularly the ones with disproportionately outsized capital inflows. I don't know the extent of your researching resources, but off the top of my head, perhaps it might be interesting to correlate local stock market index returns or the annual World Bank doing business report?
There are probably other better ideas, but that's what strikes me at the moment.
juano, it seems that my final edit didn’t come through the submission for some reason. I changed the focus ticker to be AFK and the conclusion had an extra bit about how many of Zambia’s neighbors are watching Zambia’s policy turns closely, so to the extent that any of them are seriously considering similar measures, this would obviously have a direct effect on AFK, certainly more so than COPX or CU.
madav1138, this sort of investment certainly isn’t for everyone.
I would very strongly caution against expecting too much from the PRI. It is one thing to be "optimistic" about the PRI being back in power; it is quite another for "expected" reforms to actually happen. Let's not kid ourselves: now that Peña Nieto has won, his next big priority is ensuring that his party can remain in power once his six years are over. This aim is not necessarily congruent with the reforms that everyone is so "optimistic" about. What the PRI has demonstrated so far is that in the past 12 years they've gone and studied just what it is that foreign investors want to hear the Mexican government say and now Peña Nieto and his consiglieri are saying it loud and clear. I'm not saying that EWW or other Mexican exposure is a bad investment; all I'm saying is that just because a high government official says something is so doesn't always mean that it is indeed so.
Mike, I've got material on that. Stay tuned.
Hi there, just curious where on the calendar you're drawing a line between near/medium/long term?
Tao Jaxx, what's keeping you from shorting BRLMXN?
Thank you Caiman, I was wondering how long it would take you to show up!
The overarching issue to me here is still about relativity. Many of the issues you raise have their localized counterparts in other frontier market countries, and even from where I sit in Mexico City, I find myself answering foreign investors in a manner eerily similar to your statement above as it regards Mexican rule of law, sovereign risk, narcotrafficking, variable regional security that doesn't always make news beyond the borders, among other items.
One of the biggest challenges I've found is effectively communicating the difference between answering the question, "If I buy this government bond, will I get my money back plus sufficient interest for the risk taken?" versus answering the potentially quite different question, "is the government issuing this bond stable?" Foreign investors (at least the ones I deal with) know both of these questions are important, but don't always know how to reconcile answers to these questions that may be quite divergent from each other.
Regarding the closing comment about Colombia being far beyond the point at which we can expect the sort of high economic growth that results from a relatively low starting point...perhaps "far" is overstating it a bit and I should clarify my frame of reference on this. Relative to the countries featured in the chart above, Colombia's starting point is significantly more advanced by any intuitively appropriate metric I can think of, including those you outline above. But apparently the folks behind the index don't agree with me, hence the entire basis for this discussion. "Growth" is a very amorphous concept I think, but if you accept that Colombia's state of affairs, broadly speaking, is more advanced than Nigeria or Lebanon, to choose two examples, then this would imply Colombia has less room for growth and therefore its growth potential is necessarily lower. Ergo, "high economic growth" may still be in the offing for Colombia, but I'm willing to bet it'll be even higher in most if not all of the other countries of its 'failed state' cohort.
Thank you both for your insights. The Venezuela question is indeed an odd one. I've had a few conversations about this with different clients of mine and so far there seems to be broad, if begrudging, agreement on a few points:
1. The Failed States index is as much about a country’s economic, social and political state of affairs domestically as it is about its state of affairs relative to other countries elsewhere around the world. So in the past eight years, while Venezuela’s risk of collapse today may not be appreciably different from where it stood in 2005, other states, mostly in Africa, have worsened.
2. Aside from an obvious talent for survival, two other things Hugo Chávez has proven to be quite adept at are controlling Venezuela's media environment and dividing his political opposition. International watchdog groups may not like this reality, and I am by no means an advocate of it, but stifling dissent does seem to have a stabilizing effect on a people when done effectively, at least in the short term.
3. The fact that Colombia's perceived risk profile today is as dissonant as it is with street-level reality speaks to just how deep and persistent the country's dark years remain in the mainstream global consciousness (if there is such a thing).
Emergente Capital, as far as your point on deleveraging, I agree, but it seems that the index is about more (perhaps too much more) than sovereign balance sheets. Someone here isn't seeing the forest for the trees. Obviously I'm going to contend that that someone isn't us, but only time will tell.
I don't disagree with you, but my sense is that the extent to which this is about telecom monopolies is more of a sidebar. I admittedly haven't tested this statistically yet, but based on observations and conversations I've had within the Mexican investment community, the MXN-AMX relationship is mostly a guilt by association situation. That doesn't mean it's rational, just that it seems to be how it's playing out so far. The MXN-EUR relationship is more about collateral damage, which is likewise not rational, yet here we are. When global capital markets are in bullish/confident/risk-on mode, everything everywhere is fair game; when global capital markets retreat into bearish/defensive crouch/risk-off mode, everyone unwinds back into US Treasuries or something like them. And Mexico, despite NAFTA, still doesn't seem to reach the level of "something like them" when crunchtime hits. There's a rising chorus of voices on both sides of the border trying to persuade the world otherwise, and you can hardly swing a cat without hitting one of them, but the reality in the FX market so far belies this.
For what it's worth, the dollar is stronger than the euro in Argentina's parallel market...http://bit.ly/JprwAX
SBDrive, Bloomberg reported last week that gold demand from China is on track to surpass India's: http://bit.ly/KLE2uN
The falling rupee is not mentioned as a principal driver, but these things are not unconnected. A declining rupee is by definition going to make gold more expensive to Indian individuals, as well as silver, oil and anything else whose price is denominated in dollars.
Approaching this rationally, I totally agree. But my sense is that there are two not-so-rational but nevertheless formidable realities to devaluation that rightfully make governments hesitate before devaluing:
1. From a political standpoint, devaluing your currency can never be perceived as a demonstration of strength, no matter how you spin it. Local businesses who depend on exports will obviously disagree, but then there's a reason those local business leaders are not politicians. To the general populace--and I think I can state this as a rule that transcends culture-specific considerations--making your currency "weaker" implies that you as a people, as a sovereign, as an economy, are weaker. What's more is that devaluing your currency is a tacit admission that somewhere along the line you made a mistake. Leaders in a position of crafting policy and running governments--and again, I think I can generalize this--do not tend to be known for publicly owning up to past mistakes.
2. From a fiscal management standpoint, if you owe debt denominated in a currency other than your own, which many of the above-listed countries have and still do to varying degrees, devaluing your currency can have a dramatic effect on the cost of paying back that debt. Of course, you can always pull an Argentina and decide not to pay back the debt, but then that gets us into a different sort of conversation.