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William Gamble  

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  • Default: Local Government Debt In The United States And China [View article]

    Xinhua: Nine Cities' Assets Not Enough to Pay All Their Debts Print E-mail
    Written by RWZ and AEF

    Xinhua recently reported on the comments that a high ranking official of the National Audit Office made anonymously regarding local government debts. The official suggested that nine provinces’ capital cities suffered a debt level that exceeded 100 percent of their assets, which indicated a technical bankruptcy. However there has been no word from the National Audit Office on the names of these cities. Starting August 1, the Office conducted a sudden nationwide audit campaign on local governments' debts. It has been a long term challenge for the central government to understand the size of the local governments' debts due to the significant lack of transparency about local loans. Some professional firms identified the top 10 most likely cities based on available data: Nanjing, Chengdu, Guangzhou, Hefei, Kunming, Changsha, Wuhan, Haerbin, Xi’an, and Lanzhou. However the State Council Information Office stated, “China will never have the kind of bankruptcy Detroit just had.”

    Source: Xinhua, August 6, 2013
    Last Updated ( Monday, 12 August 2013 )
    Aug 13, 2013. 03:31 PM | 1 Like Like |Link to Comment
  • Frontier Markets: 7 Warnings [View article]
    The problem with stock picking is that it suffers from one major issue, asymmetry of information. In the US and most developed countries, the problem is lessened by specific generally well enforced laws that require accurate, timely and complete disclosure.

    In Emerging and definitely in Frontier these limitations are not available, so it is difficult for analysts to accurately assess the quality of the investment. This could lead to some major surprises.

    These are relationship based systems. To get the proper information requires a relationship. While that may be possible for a few businesses, it is not possible for a larger portfolio.
    Aug 1, 2013. 10:24 AM | 1 Like Like |Link to Comment
  • Frontier Markets: 7 Warnings [View article]
    As to the Japanese the numbers are as follows:
    "Agriculture. In 2010, farmers added 4.6 trillion yen ($45 billion) in value and consumed 4.6 trillion yen in subsidies, meaning the industry netted out to zero. The average Japanese farmer is 66 years old and tills 1.9 hectares of land."

    Every government distorts food in one way or another. It is almost impossible to determine the real price without the massive distortions
    Aug 1, 2013. 10:13 AM | Likes Like |Link to Comment
  • Frontier Markets: 7 Warnings [View article]
    Thank you about the ETFs. Sorry I wasn't able to find them.

    My view is that the only way to achieve sustainable growth is to have an economically efficient legal infrastructure. By this I mean a legal system that limits the power of distributional coalitions (aka power groups). For example in Japan a notorious power group are aging farmers that have managed to artificially distort the price of rice. Abe is supposed to try to reform this system to limit their power but I doubt if he can. The simple reason is that the farmers are one of the main supporters of his party.

    Politicians have little incentive to reform. The best way to get elected is to provide a larger slice of the economic pie to their supporters, their distributional coalitions. This makes their supporters happy, buts slows economic growth. A good example are American cities. It is easier to depend on the largess of central banks, but that only provides an excuse to avoid reform, as we see in Europe's failure to centralize bank insurance.

    Most emerging markets function as relationship rather than rule based. The distributional coalition is based on party, religion, caste, tribe and centrally family. Until the country develops sufficiently strong institutions to limit the power of these coalitions and releases the citizens from dependence upon them, there cannot be sustainable economic growth.

    In some countries, like Eastern Europe, the reforms are imposed by a higher authority and so you have a better chance of growth. So I would bet on places like Poland rather than Brazil.

    But it is a fluid assessment. Some countries get lucky and get an honest politician capable of inducing real reform and real growth. The other inducement to real change is sadly a catastrophe.

    Rahm Emanuel was correct that crises cannot be wasted. Solving problem in a crisis can make a politician, so there is an incentive to actually make changes that will have a lasting effect. Manmohan Singh made his name dismantling the license Raj and introduced a period of spectacular growth. Deng did the same for China. Their successors have reverted to mean.

    So over the long term look for countries that go through the furnace and make the painful reforms. Spain maybe, but they have a long way to go.

    Jul 30, 2013. 09:52 AM | Likes Like |Link to Comment
  • Impact Of Tapering On Emerging Markets [View article]
    Now it is my turn to confess ignorance. I assume that tapering will drain reserves by lowering the value of currencies, which has already happened with a vengeance. Why would that increase demand? Please explain.
    Jul 29, 2013. 09:15 AM | Likes Like |Link to Comment
  • Impact Of Tapering On Emerging Markets [View article]
    How do you short China? The market their is barely higher than it was in 2008. It might be better to short something that is overvalued but dependent on Chinese trade, like Japan.

    I don't know about gold. Gold would theoretically be hurt by higher interest rates, but if there is a major dislocation in EMs, then money will flock to the US and lower interest rates whatever the Fed does. It could go either way.
    Jul 28, 2013. 10:55 AM | Likes Like |Link to Comment
  • Emerging Market Consumer Debt Risks: Dark Side Of Tightening [View article]
    Spaceba! Totally agree. A slight down turn could have a much larger impact.
    Jul 10, 2013. 10:23 AM | Likes Like |Link to Comment
  • Emerging Market Consumer Debt Risks: Dark Side Of Tightening [View article]
    I am sure that financial wizards would securitize debt if they thought there was money in it. I am sure someone somewhere did, but not to my knowledge.

    However you cannot create $1.6 trillion in credit debt without it seeping into the global financial system. I can think of three ways.

    1) Emerging market bond funds. Many of these bonds are corporate. They are going to be crushed by the fall of local consumer demand, local currencies v the dollar and the outflow of money
    2) International banks especially banks like HSBC with exposure in Asia and Citi with exposure in Latin America. This list is a long one.
    3) Almost every analyst report I read forecast good growth based on EM demand. This is going to hurt US companies profits especially when they don't have sufficient cheap funds to manipulate their earnings with share buybacks

    I would be careful of any investments in EMs right now. Relationship based emerging markets have economically inefficient legal infrastructures that lead to asymmetries of information and distort allocations of capital. This is a recipe for boom and busts. Investors in Brazil had to wait more than 20 years after its bust for it to regain respectable growth. We think of China as constantly growing, but that has only been in the past 15 years. It may take another generation to sort out the misallocations.
    Jul 9, 2013. 09:36 AM | Likes Like |Link to Comment
  • Can China Experience A Financial Panic? [View article]
    First, I agree that the major impact of China's problems will be on its major trading partners. I would add to your list Germany and Canada.

    Central governments and central banks cannot manage economies for three obvious reasons. The first is asymmetry of information. Assuming that their theories are correct, their information isn't. Information has value. There are enormous economic incentives not to provide accurate, complete or timely data.

    The second reason is that both the data and the theories are all based on historical references. So like generals they are always fighting the last war. The assumption that a given theory is valid at all times in all economies is simply absurd. The probability of unintended consequences is 100%.

    Finally, distributional coalitions in all economies make even good policy unlikely. Perhaps China would prefer to rebalance. Perhaps Europe should have regulatory and labor reform. Perhaps the US should come up with a more efficient method of dealing with its budget, but they won't. There is too much invested in these legal infrastructures by powerful forces to change easily.

    So no, there will not be any happy ending. but that is the only time when real change occurs.
    May 13, 2013. 11:43 AM | 1 Like Like |Link to Comment
  • Can China Experience A Financial Panic? [View article]
    First let me say that I totally agree with both comments and have since I finished my book Investing in China in 2002. I do not believe that I implied that there was cooperation between the local entities, since I have written extensively about their independence. The question is whether the central government would step in to bailout a local state owned bank? My guess is that they would at least try, but if the problem is massive and wide spread, it would drain the shadow banking system and set up a systemic collapse.

    As to the foreign exchange reserves, Tom Friedman wrote an article implying that these could be used. Professor Pettis wrote a very good reply on this site. A I remember his point was that the sterilization process was a asset debt process. The central bank or (SAFE?) purchases the foreign currency in exchange for bonds. If China were to liquidate the foreign reserves it would probably strengthen the yuan and weaken the dollar which would make the export sector worse.

    I believe that they have the wolf by the ears and there are no good solutions that will ultimately avoid a collapse. The only question is when.
    May 10, 2013. 10:42 AM | 3 Likes Like |Link to Comment
  • Emerging Markets: Disappointing Dream [View article]
    I thought that was a quote from John Templeton and I would agree with it. Just buy ETFs and keep your time horizons short.
    Apr 22, 2013. 12:15 PM | Likes Like |Link to Comment
  • Emerging Markets: Disappointing Dream [View article]
    It is interesting that US debt hasn't been downgraded. The US is cursed with being a reserve currency. I can't think of anything more helpful to the problems in Washington specifically and the US economy generally than another downgrade. It would be great.

    As to best asset class in the past 15 years, just based on probabilities one would suspect that it would not be the best asset class in the near future. Feel free to disregard my advice. Its probably wrong.
    Apr 18, 2013. 09:28 PM | Likes Like |Link to Comment
  • Emerging Markets: Disappointing Dream [View article]
    No just old. Seen it all before:

    Just this morning's headlines

    China local authority debt ‘out of control’

    China's LDK Solar Defaults on Bond Payment

    Moody's lowers China outlook after Fitch downgrade

    What goes up also goes down. Investors expect the protections
    of developed markets. They aren't there.

    The concept of "emerging markets" is quite short. Maybe 12 years. I remember the '80s when there was unstoppable Japan. This is a debt fueled mess create by Ben Bernanke.
    Apr 17, 2013. 12:17 PM | Likes Like |Link to Comment
  • Emerging Markets: Disappointing Dream [View article]
    As I pointed out in my book and many articles acronyms such as BRIC, Frontier, Lynx, or anything else are just plain stupid at best dangerous at worst. These are very, very different countries. They have different governments, different systems, different markets, and different risks. Each should be looked at separately. They are also very volatile and there is little if any corporate governance.

    If you must invest in these things use ETFs and do not buy any market anywhere that has hit a new high.

    All the Asian countries are going to be affected on what occurs in China, which is not a safe bet. Business cycles exist everywhere. In my view this one has been exacerbated by free money in China as well as in the west. Improper capital allocation without the proper concern for risk will always end in tears.
    Apr 10, 2013. 10:08 AM | Likes Like |Link to Comment
  • Emerging Markets: Disappointing Dream [View article]
    One hedge fund manager put it best regarding emerging market debt. He called it return-free risk.
    Apr 9, 2013. 09:53 AM | Likes Like |Link to Comment