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William Gamble

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  • Fragile 5: Will Rising Interest Rates Impact These Emerging Markets? [View article]
    Government manipulation

    From the FT

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    But financial analysts warned that perceptions of Turkey’s political risks remained despite the rebound, and emphasised that the central bank had sold large amounts of foreign exchange in its bid to bolster the currency.

    Ozgur Altug, an economist at BGC Partners in Istanbul, noted that the central bank had sold $2.4bn since December 24, including $600m on Monday, with another $600m due to be sold on Tuesday. He estimated the bank’s net reserves at $38.5bn – significantly lower than other emerging markets.

    Also I wrote a piece a while ago about emerging market ETFs. Emerging markets are all highly concentrated in financials and state owed companies. Fewer than five companies can make up over 50% of a market. So it difficult often for an ETF necessarily to track a market or a market to represent at least over the short term the actual economics of the country.
    Dec 31, 2013. 09:15 AM | Likes Like |Link to Comment
  • Chinese Interest Rate Reform: Progress Or Progress Toward Disaster [View article]
    I totally agree. Reform always has negative short term side effects. However as we see in Europe and Japan the failure to reform can be much worse. And yes, the US desperately needs massive reform. An absurd tax system, bloated military, massive entitlements, stifling regulatory system and an out of control central bank. I don't dislike the Chinese government. I dislike all governments. The more they do the more unintended consequences they create. So when they try to solve one problem it creates another.
    Nov 26, 2013. 09:54 AM | Likes Like |Link to Comment
  • Default: Local Government Debt In The United States And China [View article]
    The answer to both questions is oddly enough the same. Mancur Olson in his books The Rise and Decline of Nations and Power and Prosperity pointed out that the only restrictions on distributional coalitions (i.e. power groups including families, CCP, US political parties, unions etc) are higher authorities with more expansive interests. In short the law. The narrow economic interests of the distributional coalitions to take as much of the economic pie as possible must be limited by law. Not just any law. Law can be both economically efficient or inefficient. It is efficient when it limits power, but often it is used to expand power. (see my books)

    In my first published article 13 years ago for Foreign Affairs, I wrote about the Chinese tax system. The article like my first book Investing in China's predictions are still accurate.

    The problem in China is that the central government is no more efficient at collecting taxes than the local governments. The main reason is that the CCP to achieve greater power never put into place a system of laws, including tax laws, that they themselves had to obey. Since they are receiving the majority of the national income (China has one of the highest GINI coefficients in the world), they have no reason to give it back to be shared by everyone else.

    Until now growth was able to absorb or hide most of the problems, but bad debts that are not dealt with do not go away. Eventually they slow or collapse an economy. Hopefully this will induce change and put China on a better financial system with real estate taxes and a national income tax that will be enforced. But until that happens the problems will continue.

    Yesterday another source in China reported that 53% of the local government debt would come due this year. Many loans will be rolled over but the revenue isn't there. Whether the LGFVs will roll over remains to be seen. Even China's central government will be hard pressed to come up with up to 20% of GDP (a guess - the number is pretty high) necessary to repair the damage.
    Aug 15, 2013. 10:00 AM | Likes 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
  • 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
  • Fed Governor Stein's Doubts: Junk ETFs And Chinese WMPs [View article]
    Good insight. Thanks. It applies double to emerging market high yield. I find the Suntech 'bankruptcy' very interesting. First one that I know of since the collapse of GITIC 13 years ago. Could be the start of an interesting trend. The assumption has always been that the Chinese would bail these firms out. Should be a wake up call, but was apparently ignored.
    Mar 21, 2013. 06:54 PM | Likes Like |Link to Comment