Emerging Market Strategies

William Gamble

Asian Bonds

As I predicted in my March newsletter, the purchaser of Asia Aluminum bonds will get nothing. My predictions were quoted in an extensive article in The Asset Magazine of Hong Kong. According to the Financial Times: Holders of $535m of payment-in-kind notes will get less than a cent in the dollar. Mainland Chinese banks were made as good as whole. If you don’t understand the rules, don’t play the game. I have proved that I know the rules.

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Posted by William Gamble at 6/30/2009 9:18 AM | View Comments (0) | Add Comment | Trackbacks (0)
Emerging Market Toxic Assets
Today it was announced that the Russian government was considering bailing out its banks, which are covered in red ink. Some analysts think that the toxic asset problem is limited to western banks. Its not. As the Russian experience shows, they are everywhere, its just that we don't know about them.

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Posted by William Gamble at 6/25/2009 4:41 PM | View Comments (0) | Add Comment | Trackbacks (0)
Reasons and Solutions for US problems in Afghanistant and Iraq

However I have been studying this problem since I wrote a paper about the Mau Mau uprising in Kenya in 1972 and I have seen exactly the same problem all over the world. I know exactly what the problem is and I have an excellent idea how to solve it.

 

The difference between several tribes and a country is a legal infrastructure. There are two ways to create this. You can use ruthless force or give the population an incentive to buy into to the legal system. In Afghanistan you do not have overwhelming force and you can’t be as ruthless as the Taliban. So you are going to have to get the tribes to buy in.

 

The major obstacle is what a game theorist would call relationship capital in a relationship based system. (See professor Dixit, Lawlessness and Economics, 2004). A relationship based system, sort of a prelaw system, unlike a rule based system, is based only on trust. In these countries, trust is fostered by networks of family, clan, religion, party affiliation mostly in that order. These relationships have what is called relationship capital. In other words your relationships have enormous value for both economic and preservation reasons.

 

To actually change this system you have to replace relationship system with a rule based system. This process is exceptionally difficult but might be accomplished gradually. As the experience in Iraq showed, the first rule is to function with what exists. The ‘Sons of Iraq’ was created with the help of the local leaders, because they saw it to their advantage.

 

One way to increase the probability that the local leaders see the advantage is to ‘nudge’ them. (see the book Nudge). You have to use behavioral economics to get the local leaders to make choices that are appropriate to your overall strategy.

 

Once you get the local leaders to opt in, because they see it in their best interests to do so, you have to enlarge the process by showing leaders of different tribes that they gain mutual benefit by cooperating on projects together. The process is the same whether you are dealing with blacks and white in the US or Tajiks and Pashtuns in Afghanistan.

 

Law can play a very important role in this. In the 12th century, Henry II offered circuit judges in competition with local manorial courts. The people preferred the circuit judges because the results were better and fairer. Federal diversity jurisdiction has the same effect in the US. If you want Afghanis to trust the law more than their relationships, you have to offer them law that works. It has to be fast, fair, simple and cheap.

 

The easiest place to start is with commercial law. The World Bank in their doing business report has identified numerous areas like bankruptcy and corporate formation that make the economy more efficient. Usually you can start with these areas because they affect a small number of people and are not politically or culturally sensitive.

 

The next important step is contract enforcement. Protecting private property rights especially in contract enforcement gives people a powerful economic incentive to use law rather than relationships. It is also an area where you need cooperation across ethnic, racial or religious lines. People don’t have to like each other to do business. Once the economic incentives are in place, then the probability of people using the law will increase. Using small incremental methods like this will eventually build a state.

 

US policy has failed because the locals in most of Afghanistan and especially in the Pashtun areas have no incentives to cooperate and plenty of disincentives not to. On the contrary. The US has framed the issue as us (Christian, westerners, Kabul elites, Tajiks) against them (Muslims, Asians, locals, Pashtuns). Ideas and law are like everything else. You have to market them. Show the benefits of your product, a stable central government and intertribal cooperation, and the problems with your competitors, an unstable anarchy.

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Posted by William Gamble at 6/24/2009 7:06 PM | View Comments (0) | Add Comment | Trackbacks (0)
Confirmation of Problems with the Chinese Economy. Short term bubble then slow

For once it is not just me complaining about China. See the following from a former Columbia professor of economics now teaching in Beijing. I did not make this one up, but it is great to see an occasional confirmation.

 

William Gamble

 

The comparisons with China are, and of course are meant to be, a little worrying. This is not to say that China must repeat Japan’s spectacular 1990 crash and subsequent lost decade (or two). It is simply to point out that none of what we are seeing in China is particularly new and far from being a source of great strength, the intense manipulation of monetary and fiscal policies and the financial markets can actually make the necessary adjustment for China much more difficult. Just as Japan failed to come to terms with the sudden collapse of the US trade deficit and tried to export and monetize its way out, China may be doing something very similar.

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Posted by William Gamble at 6/23/2009 10:09 AM | View Comments (0) | Add Comment | Trackbacks (0)
Why the Rinminbi Will Not be a Reserve Currency

Many economists and other commentators have warmed to the idea of replacing the dollar as an international reserve currency. While it would undoubtedly help the US by enforcing more fiscal discipline, it ain’t going to happen especially regarding the Renminbi. There is no way that the Renminbi will become a reserve currency.

To be an international reserve currency the currency must meet several conditions. The country must have open capital markets; deep, liquid foreign-exchange markets; well developed bond markets; and a more or less flexible exchange rate.

The foreign exchange policy in China is harnessed to an export driven economic policy which would be almost impossible to change with the present political leadership. Although it appears that this policy might no longer be viable, its past success is such that it will be followed for the foreseeable future, because much of the party has so much invested in its success. So its foreign exchange markets and rate will not be opened.

As to the bond market for historical reasons and given the US’s present situation, the Chinese government will never even dream of putting much of its debt in the hands of foreigners who could potentially threaten the party’s leadership. So the policies will not change and the Renminbi will stay at home.

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Posted by William Gamble at 6/19/2009 4:22 PM | View Comments (0) | Add Comment |