Emerging Markets: 30 Years of Crisis. Part 3: The 2000s and beyond

The 2000s

Dollarization

After several failed attempts of convertibility and currency pegging in Latin America and Asia, a new attempt at FX stability was taking place in Ecuador, out of all places.

The main reason that convertibility had failed in Mexico, Brazil, and several times over in Argentina was that while the currency was pegged to the US dollar, the central banks had not lost their ability to print money, and the international reserves could get depleted faster than the authorities could suck dollars out of the economy.  Central banks often gave into the temptation to print out more money creating implicit devaluations to a point where they could not cope and were forced to devaluate. Continue reading

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Emerging Markets: 30 Years of Crisis. Part 2: The 1990s

The 1990s

Hyperinflation and Mega-Devaluations of the Early 90s

The first years of the 90s saw several center or right-of-center Social Democratic and Christian Democratic parties take power (Carlos Salinas de Gortari in Mexico, Cesar Gaviria in Colombia, Carlos Andres Perez in Venezuela, Alberto Fujimori in Peru, Sixto Duran-Ballen in Ecuador, Patricio Aylwin in Chile, and Fernando Collor de Mello in Brazil), the exceptions were Argentina, where Carlos Menem was part of the populist Peronist party; and Bolivia, whose president Jaime Paz was part of the Revolutionary Leftist Movement.

Despite this political shift to the right the economic problems dragged on from the 80s were still hurting the economy: empty treasury coffers, hyperinflation, negative trade balances, fiscal deficits and collapsing GDPs, which resulted once again in mega-devaluations seeing Peru devaluate its currency by 1 million, Argentina by a further 10,000 and Brazil by an eye-watering 2.75 million in two different devaluations. Continue reading

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Emerging Markets: 30 Years of Crisis. Part 1: The 1980s

The recent news of Argentina’s deal with holdout hedge funds has prompted me to put together a three-part series on Emerging Markets, and analyze this crises struck asset class.  Enjoy!

Sovereign Debt

In the 70s, international organization such as the International Monetary Fund (IMF), World Bank (WM), International Development Banks (IDB), and other bilateral or multilateral development organization began lending money to third world countries in order to develop infrastructure projects, and thus began the Sovereign Debt Market for developing economies.  Of course, sovereign debt didn’t quite start in the 70s; war bonds were issued by countries like Britain and the US to finance conflicts in their own soils or abroad, as well as allowing Britain, France, Portugal, and Spain to finance purchases of new territories during the colonial expansions of the XVI to XIX centuries.  But the sovereign debt market brought with it a new type of investment: local market risk on hard currency.  In one swift motion, the sovereign debt market had disposed of the foreign exchange risk while keeping the regional risk on the books.  This worked fine until it stopped working Continue reading

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A Submerging Economy

I attended an Emerging Markets conference in London in 2011, and one of the topics was the Greek crisis du jour.  During the presentation, the speaker (whose name I can’t remember to save my life), wondered why Greece was being discussed at an emerging markets conference, since it wasn’t an emerging economy at all, but a submerging economy.

Fast forward 5 years from that conference, and 7 years since the first Greek crisis struck, and we haven’t moved an inch in either direction.


Countries and multilateral organizations keep pouring money over to Greece in the hope that they might eventually pay back their debt. Continue reading

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May the Fourth be With You!

First of all, Happy Star Wars Day to everybody out there, and May the Fourth be with you.

Having said that, I’ve been wondering for a while what value has the Star Wars franchise brought to Disney (NYSE: DIS) since it was purchased in 2012.  Off the bat one would argue that the purchases of Star Wars and Marvel were brilliant moves by Disney from a business strategy perspective, although many Star Wars fans doubted the “purity” of the movies to come, and were worried that the quality would decrease, and movies would be commercialized (even more than by George Lucas, if that is even remotely possible).

After Episode VII was released last December, the stock tanked 25%.  Of course, most of that was driven by a whole market contraction during the first couple of months of 2016; however, the S&P 500 dropped 11%, and the Dow Industrials 11.5% during the same period.  So Disney under-performed the two major indices by nearly 15% on the months following the release of the seventh installment of Star Wars.  Why? Continue reading

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Making the Most of the Earnings Season

Unlike Christmas, it comes 4 times a year, and doesn’t make all people happy.  It’s the busiest time of the year for fund managers and equity traders around the world.  It’s earnings season.

In the old days, if you beat expectations the price of your stock would shoot up, if you just meet them it would generally stay flat, and if you missed them the market would sell the stock.  Today it’s a bit harder to figure it out.  Companies may report profits, beat estimates, but stocks would drop on weak guidance, or vice-versa.

This leaves the average investor with two options, buy a stock based on solid fundamentals and keep it despite short term volatility, or take blind bets (no different to what they would do on a casino) before the reports, and hope for the best. There is however a third option… options: Continue reading

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Are Principal Protected Notes a Good Investment?

In the current investment climate, where deposits are yielding zero (or negative), fixed income returns are negligible, and equities have been booming for the last 7 years – bringing them closer to a correction by the day, finding a safe investment that might outperform your average bond or deposit might be a bit of a nightmare.  Enter the Principal Protected Note.

A Principal Protected Note is a structured product; which, in its most basic form consists of a zero coupon bond and a call option on an equity or index, or pretty much any other asset class with variable return.

formulaeThis is how it works: Once the investment has been made, the issuer will take an
important part of the investment and purchase a zero coupon bond to match the life of the investment.  This is the part that provides the principal protection, since the zero coupon bond will mature at par.  Whatever is remaining of the investment minus the market price of the zero coupon will generate the manager fees, plus it will allow the purchase of a call option or a leap on the underlying for a notional value matching that of the initial purchase.  Some principal protected notes feature capped returns, meaning that should the returns be above a certain level, then the manager would pocket the excess returns.  Let’s look at an example: Continue reading

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The Future of Steel in the UK


In recent days, Tata Steel (NS: TISC) announced it would shut down its UK steel plants unless it found a suitable buyer.  Members of the UK government are running like chicken without heads trying to find a market solution, the opposition demands full nationalization (they would nationalize the whole country if it was left to them), the unions are yelling foul play, and the taxpayer looks like its about to get duped again.  So, what are the options for the steel industry in the post-1960s free market?  First let’s explore the causes, then we’ll check the potential solutions, and drawbacks. Continue reading

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Cornering Tracks and Markets

A couple of weeks ago, a court in Stuttgart acquitted Porsche’s (Xetra:PSHG_p) former CEO Wendelin Wiedeking and ex-CFO Holger Härter on the charges of attempted market manipulation regarding the unsuccessful takeover of Volkswagn AG (Xetra:VOWG_p).

This story made me remember the remarkable short squeeze Porsche managed to pull, and what is even more amazing, is that nobody has decided to make a movie out of it.

Let’s go back in time to relive one of the most amazing short squeezes ever.   Continue reading

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Happy Easter

easter-day-images-hd-2015

The Barker Report will be back next week.  Have a very happy Easter.

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