The importance of the emerging markets

The moment for emerging markets has arrived, as I quoted in my article ''A little bit of everything''. We should not be surprised when we read the press in the morning and on the cover of the newspaper it appears that the currency of an emerging country plunges to historical low levels. Do not take it as a breaking new please, because it is a situation that is going to continue for a long period of time and it is something that I can assure with certainty since the European Central Bank has not yet begun to normalize its monetary policy (those who read me often already know that I disagree with extending the QE to where the ECB has done it).

Countries like Argentina and Turkey will continue to suffer, and I am afraid that the measures proposed by Turkish Treasury and Finance Minister Berat Albayrak in İstanbul, August 10, 2018 will NOT be enough to recover the Turkish economy and the confidence of the financial markets. Because the problem of the Turkish economy is not external, as some say, the problem of the Turkish economy, as in Argentina or Brazil, is INTERNAL. Many of these emerging countries are not doing their homework and the solution to their problems lies WITHIN these countries.

We can not wait for someone from outside to tell us how we have to organize our house, but in the last case that may be our only solution if we want to get out of this chaos. Let’s see how it works between Argentina and the International Monetary Fund. However, the real solution lies in generating internal economic stimulus, but why economic stimulus?

Emerging markets have always served as refuge for investors in times when interest rates are very low or even negative in developed markets (like in the last financial crisis). This is due to the fact that in emerging markets investors are able to extract juicy profits that in more developed markets would not be able to have due to low rates. So what happens is that when interest rates rise again in developed markets, investors again have incentives to repatriate capital to developed markets.

What is happening now in emerging markets is a flight of capital that is not being ordered due to political and financial instability. That is why I said earlier that what emerging markets such as Turkey or Argentina need is to create incentives to stop the flight of capital. They need stability in order to recover market confidence.

However, nowadays they do not have the necessary conditions to compete against the more developed ones such as the American economy where interest rates are finally beginning to be normalized by the Fed. The first symptoms of crisis in the Turkish economy: deficit by current account and, of course, and excess of indebtedness with foreign currencies (in this case Dollars and Euros). We must be aware that so far this year the Turkish lira has already depreciated more than 70% against the Euro and I do not think the currency will stop depreciating there unless the previously mentioned problems are solved. By the way, better not to dedicate this article to talk about the countries that are more exposed to this debt (Spain, Italy or France).

Do not laugh when I tell you that Turkey's credit bubble may pop sooner than expected, so I encourage you to look if you do not believe me, take the data and have a quick look. Later I invite you to take a tour around Turkey and open your eyes, visit buildings, see the immense amount of houses that are being built, ask for prices, think about how many of those average people are going to be able to pay for their house within the established deadlines in these economic conditions and finally, ~you~ value the situation yourselves. It is about the simple law of supply and demand my friends.

Everything is going to depend on the geopolitical direction of emerging markets. In this case Turkey is a strategic country for Europe, but in recent years relations have been deteriorated because of what we all know. It has never happened that a NATO country goes bankrupt (and no Greece did not bankrupt in the end because the EU was there...), and I sincerely think that this will not happen to Turkey. What I'm trying to say is that Turkey must decide which direction wants to take, west or east. Turkey is not Argentina, the Turkish economy has enough potential to face the crisis, but what the country does not have right now is political will.

As a wise man said:

‘’Our aim is not to die. It is to carry out the revolution, to make a reality of our ideas. We must live, to get them accepted by the people’’ – Mustafa Kemal Atatürk

Many thought that in the meeting of the Fed in Jackson Hole, the president Jerome Powell was going to stop normalizing monetary policy to bailout bad investments in emerging markets. But of course NO, the American economy needs to continue raising rates so as not to jeopardize its own stability in the case of a new crisis, since macro data supports rate increase.

So imagine what could happen in emerging markets when the Fed and the ECB begin to normalize their policies together. I assure you that things are going to get a lot worse before they get better, but there are still many investment opportunities in emerging markets, especially in Turkey. You just need to be careful, know how to analyze the data and ask the right questions.

A little bit of everything

I’ve been trying to write this article since November of 2017; at that time stocks were rising to all-time highs. Don’t misunderstand me I have no problem with all-time high stocks, I like them the most but I can not see the value in so many stocks, which are rising for NO fundamental reasons. That’s very dangerous for many economies.

I really believe that we are heading into a recession before 2020, or at least we can NOT deny that the chances of sinking into a new recession before 2020 have significantly increased since political demagogies play an essential role in decision making (almost as much as in the 30s). Whenever this type of behavior takes on greater importance than macroeconomic fundamentals, RUN!

Even though many economies are booming right now I wouldn’t be so optimistic. It is true that technology together with innovation, globalization and the market economy bring progress and prosperity: History proves it. We have also globalized the risks, which is obvious and normal. Nowadays there are so many fears about the increasing globalization of the world economy. The most important ones are the geopolitical risks such as trade wars, which will increase the stress in the financial system, infecting emerging markets that at the same time will cause very high volatility in currencies (removing the effects on the interest rates that should imminently begin to rise, so it will be much worse for emerging markets because they will be financed by borrowing with foreign currency).

I do not want to pay special attention to trade wars because I think there are enough studies that explain their negative effects on economies; these trade wars damage the final consumer along with many other consequences. Now we do not know exactly whether in the 21st century advanced countries are going to really use these tools or they will merely be used to renegotiate contracts. Because if it were the second one I wouldn’t be worried at all but if it is the first one, well, we have all failed. I really hope no one takes it too far and other countries strike back because it will send the global trade community down a spiraling path out of control of retaliation (like “The Smoot-Hawley Tariff Act” in the 30s in USA). 

Nowadays we can appreciate the rise of nationalist, countries blaming each other for their struggles, and as usual at the end of the day average people are going to be the ones who will have to pay for all of this ignorance. The last time it happened the trade war became into a real war, and I think we all know the impacts besides deaths and destruction: When economies tank people always blame poor people and immigrants. It's nothing new, right?

We are living very unstable moments for the world economy, we live not only in a populist era as we said, but also an era of fraud. That’s why making investment decisions by looking at the fundamentals of isolated companies is NOT a viable investment philosophy right now for some individuals who don’t know how to apply it in these kind of conditions (many investors who call themselves as value investors just because they expect everything to rise in the long term|| Don’t call yourself a value investor, that’s not value investing ||), we must analyze beyond the fundamentals. It is necessary to aim and study the companies in depth, the environment in which they find themselves and, above all, we must be flexible. We have to know how to use the information that is given to us and find out if it is true or not. Tasks that are harder in the phase of the cycle known as "peak", phase in which I think we are, as long as we are not entering into a recession. What is clear is that we will continue to see important corrections in the market due to the lack of security and SOLVENCY. Confirmation depends on the macroeconomic data, which for now show signs of deceleration but still remain stable.

Perhaps the extreme nationalisms, protectionism or the loss of international competitiveness are not the reasons for the next recession, but they could be the triggers that make it blow up. We don’t know exactly when it will happen and it is very difficult to know when everything will break down again but I believe it shouldn’t take more than 2 years, as long as the central banks do not continue injecting capital into the markets, which could prolong the rise somehow but with much worse consequences in the end.

I may be early but I believe I am right, the problems are still the same as in July 2016, when I wrote my article called “¿En qué entrada estamos?” in English “Where are we?” Debt is still increasing in numerous economies; its management has been disastrous. Those in charge of fiscal policies have NOT been able to clean up the debt in times of boom and economic growth. Now it is time to normalize monetary policies and many governments have not done their homework. Do not misunderstand me; I do not believe that the debt is bad as long as it can be paid in the agreed periods. Once we lose confidence in certain economies, it is very difficult for them to earn it back that’s why the global economy has recovered with much uncertainty.

As I said, many economic agents haven’t done their homework, from governments to companies and the time has come for the central banks. The quantitative easing of the European Central Bank will stop very soon, and interest rates must be normalized if we do not want the next crisis to catch us off guard and become the next Japan. Actually Europe couldn’t be the next Japan, the truth is that Japan and Europe are culturally incomparable, Europe would perform below the standards, which would lead us to a higher internal devaluation, and the European periphery would need a tougher restructuring. It is obvious that European citizens can’t compete through internal devaluation and they would not tolerate it, even China can’t continue anymore competing at that rate of internal devaluation. What I mean is that if the responsible of the monetary policy together with the responsible of the fiscal policy don’t act fast to eradicate the debt problem, Europe may be in a similar situation as Japan, with problems to reactivate the economy.

I hope it doesn’t end as usual, bailing out inefficient companies that are not managed properly. I do not want this to be an article in which I criticize companies, because the article would never end and it is not its purpose. I just want to dedicate a few words to Deutsche Bank (Germany's biggest bank), a bank run by managers without strategy and without vision of the future for the banking business. Managers who have not been able to reduce their toxic assets to ensure the survival of the bank, without the need for rising capital or even a bail out from the government (taxpayers). I could speak also about the situation in BNP or BPCE, as we can see these days German and French banks still hold the most-hard-to-value assets, toxic assets that they aren’t ready to handle and that in situations of extreme instability could cause the collapse of these entities. Now the “extreme instability” may arrive soon and someone hasn’t done its homework after all this years of growth. So what will it be next time: Bail out, capital increase or merger? Extend the inevitable fall or launch the necessary restructuring to guarantee the autonomous survival of the company? We will see what happens, but maybe new managers are hired to do their job in a clean and concise way.

People know that inflation erodes the real value of government debt and, therefore, it is in the government's interest to create a minimum of inflation, in some cases even force it badly. Debt is going to continue to suffer; I doubt that those responsible of the fiscal policies do their job together with those in charge with the monetary policies. Government debt yields are going to reach dangerous levels and I am afraid that they will damage numerous stocks along with other financial products like corporate bonds. For all of these reasons I’m bearish on many financial products, specially overvalued companies, which hold strong debt, those most exposed to world trade, and punctually to pro-cyclical sectors that can turn around very quickly. Not everyone can invest in these conditions, whether it is a long position or a short position.

However, the situation shouldn’t be an obstacle to invest and still be profitable. To my clients and my friends I advise them to invest in the same way that I operate to find value, I have also advised many to change managers (because there is a lot of trash in the market) or NOT invest. There are many people who deposit their money in products/assets that they do not know anything about and they do it simply because their bank/fund advises them, that isn’t right. You have to know where your manager is investing or at least have references to avoid surprises and big losses. You have to have the peace of mind that your manager is doing his job as "manager of your money" as if it were his.

A good investment

I wanted to post this “article” for a long time ago. People ask economists for answers that they don’t really have, this is the truth. People need trust, people want us to tell them what to do, and we don’t know it always. Properly combining limited knowledge and the need for public policy together with common sense is the key.

I think we should talk about the main cause of poverty. In a democratic environment you must believe and feel that you have opportunities and access to a fair portion of the pie. I do not think anyone believes that everyone should be successful but at least they should feel they have the opportunity to do so, for example if someone has good ideas or work for it, then they may be successful and feel it. It is essential to start from the base that opportunities are there for everyone and not just for a few. If we lose that feeling, as it is the case of Spain among with many other countries, the political consequences are disastrous. But how did we start it? We have disregarded education, the pillar of our society. We have left education in the hands of the politicians who change the model very periodically with worse and worse results. Spain has done very little to make teaching attractive, the main problem is the lack of relevance that students see in teaching. 

For example, in Spain we have 25 textbooks for a single subject, the culpable of this as well as in many other fields the Spanish autonomies, as usual. We have a very decentralized system that causes a deterioration of the Spanish educational system and polarizes it by regions. The ANELE denounced that the disparate requirements of the Spaniard autonomous governments, lead a publisher to publish each year an average of up to 25 different textbooks for the same subject of the same mandatory course. It provokes an increase of the prices in these manuals, which deteriorates the coherence of the educative system; it is more than proved that nowadays there is too much diversity in these manuals. It is hard to believe that a student from Galicia, a region from Spain, studies the history of Spain with different content than a student from Andalucia another region of Spain, and this is just an example.

This is very sad because those who do not have a good educational base stay in the margins of society. Students are not offered more options to learn differently. In Japan, the language teacher works with the mathematics teacher. Finland has also begun to deliver these multidisciplinary courses, hoping that students will act as historians, philosophers or scientists. We must teach fewer things but in more depth, Spaniard students are good at memorizing, but they have trouble solving complex problems. Teachers have to leave the classroom and look at what other teachers do, do not divide the contents so much by subject and we must bet on the integration of the subjects and the diversity of itineraries. –Tell me and I’ll forget, show me and I may remember. Involve me and I learn- Benjamin Franklin.

In order not to blame just the state and independently of the country, parents must rethink what they are teaching wrong to their children because this is not just a school problem; manners and bases are taught in home. It is enough fail parenting strategies please! Stop telling your children they are special all the time, stop telling them that they have everything they want in life just because they want it, stop giving medals for being last because devalues the reward of the ones who really work hard. In an instant they will realize they are not as special as their parents make them believe, in the real world they will find out that their mom can not help them to achieve the promotion in that job they want just because they want it.

So in the end we have an entire generation that it is growing up with lower self-esteem than previous generations. Most of them are growing up in a Facebook, Instagram world where they are good at putting filters on things and showing everyone that life is awesome even if they are depressed. They believe they are so tough but the reality is that there is not toughness on it and most of people have not figured it out yet. Many “kids” don’t know how to form deep meaningful relationships, most of their friendships are superficial, they would not rely on their friends they just have fun with them and for sure they know that their friends will cancel out them if something better comes along. So they do not have the skills to deal with the stress of the harsh reality, they are turning to a social media device, which offers temporary relief. Science proves that people who spend more time in social media suffers high rates of depression. There is nothing wrong with social media and cellphones it is the imbalance. For example, if you are siting at lunch with the ones you want or a meeting and you are texting at the same time to someone who is not there and you are supposed to be listening and speaking, that is a problem, bad education, an addiction. Like every addiction in time it will destroy relationships, it will cost time, it will cost money and at the end it will make your life worse. Another problem of this generation is impatience, because they are growing up in a world of instant gratification. One day if it is not too late they will realize they can not have job satisfaction and strength of relationships with an app. They have to learn confidence, learn patience, learn the social skills, find a better balance between life and technology because it is the RIGHT thing to do.

In conclusion, the more advanced countries have not politicized education the way Spain has done for almost 41 years, the advanced countries have reached a consensus because they know that education is an investment with long-term guarantees. It is a shame for a developed country like Spain that 35% of the young Spaniards between 25 and 34 years old does not have the high school, double that in the OECD. If people do not participate in the reforms and do not help, nothing is going to be achieved. We must depoliticize education through consensus. This causes ignorance in the population and instability for future generations. We live in a world full of radicalism in which it is easy to fall if we do not take action and we must eradicate it on time before it is too late. As well as the independence movements in Galicia, Basque Country and Catalonia, the islamophobia or hate to any ethnic group we are human beings with the gift of reason, let’s use it because the best weapon against radicalism is education as Nelson Mandela said -Education is the most powerful weapon which you can use to change the world-, and our job is to change this world we live in a better place.

Let's save Europe!

Since the crises began in 2007, in Europe we believed that if we kept deficits below 3% of GDP, debt below 60% of GDP, and inflation below 2% per annum, the market would ensure growth and stability. However this is not enough. We need an overwhelming fiscal and monetary discipline if we want the European Union to fulfill its dream of “the United States of Europe, a lobby for the integration cause” as Jean Monnet "the father of the EU" the “l’Inspirateur” said.

It is not because of the single market, many people suggest that the Single European Act was made to set the objective of establishing a single market in order to made it easy for money to leave the banks of the weaker countries, forcing these banks to contract lending, weakening the weak further, but of course this is not true. The austerity has not worked yet because it has been implanted in a horrible way, and without any conviction. Citizens in Greece, Spain or Portugal have all voted in large numbers for parties opposed to austerity and more favorable to demagogy. Luckily there are still politicians who give hope to the European dream as is the case of the recently chosen Macron in France.

Many European citizens believed that when they joined the euro, they would give up their economic sovereignty. This is not true at all because the European Central Bank represents all the economies that are part of the eurozone, and each country has its group of banking professionals, they are the supervisors of the banking system of each country together with the European Central Bank. So that the ECB has a social capital, in which each country owns a part of it. The ECB is in charge of maintaining a stable monetary policy and not of making the poor more poor and the rich richer than before, it is obvious.

The ambition of the euro is to bring prosperity to Europe. This would promote economic and political integration. The euro is a project based on integration, in order to create the institutions that would ensure success. We have made many reforms, and many more are coming to make of the European Union a machine of prosperity and not of divergence like many enlightened they are divulging.

To prove what I said before, I would like to explain my experience as a student of economics, in the Erasmus Mobility Program of the European Union. For almost ten months away from home (Galicia, Spain) I have traveled around 13 countries, countries like Romania, Moldova, Ukraine, Germany, Turkey, Croatia or Macedonia among many others. The experience that I have lived as a European student is priceless. As you can perceive, not all of these countries are part of the EU completely, but ALL of them are either in the process of dialogue, waiting or taking the appropriate steps to announce their candidacy being part of the Council of Europe.

In these countries I always wondered “What do people think about the European Union?” or “Do you live better or worse in this country since the arrival of the European Union?” and the conclusions were always the same, people are tired of corruption and clientelistic politics, which have led many countries to the brink of bankruptcy. However in general the European Union has provided more benefits than problems for them.

We should not let bad politicians, demagogues, or extremists claim to be about stability and sustained growth. We should ignore these characters and focus on improving our fiscal policies, because even “the best of the monetary policy” that we have implemented, it will not work if we do not implement a good fiscal policy. It is certain that fiscal policy is one of the most important tools of development, clear example of this are Ireland, Germany or Finland. Because it is not about not exerting fiscal pressure, or exercising it excessively. It is about knowing how to manage the proceeds.

Me as a Spaniard and European, I am proud and very happy for the French people, who elected a new president Emmanuel Macron with common sense and a great European spirit, in order to defeat the extremist Le Pen.

However as the great “father of the European Union” once said

- People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them -

Let’s work together to make Europe more united, and a visionary EU, not a dream broken by politicians with no perception of the future and extremist policies inappropriate for a democracy.

Cantos de sirena

   Como decía el periodista alemán Henry Louis Mencken:

   "Un demagogo es aquél que predica doctrinas que sabe que son falsas, a personas que sabe que son idiotas"

   Es evidente que los británicos han perdido, porque han sacado a relucir una división profunda sobre el futuro de su sociedad y su economía, y sobre el grado de relación que quieren con el exterior, ya que en los tiempos en los que vivimos la globalización de la economía y el cosmopolitismo de la gente son señas de una sociedad avanzada.

   Está claro que tanto la Unión Europea como Reino Unido perderán si los ingleses deciden salirse de la Unión. Pero está aún más claro que la Unión Europea perderá el impulso liberal que siempre ha abanderado Londres en la Unión, y creo que es fundamental para equilibrar al socialismo de la economía y la sociedad que inspiró la UE desde su creación y que hoy en día alimenta sus iniciativas.

   Bien es sabido, que las empresas de todos los rincones del mundo siempre han buscado el mercado británico porque ofrece plena garantía de seguridad jurídica, propia de un país con raíces liberales, siendo un mercado abierto y una sociedad madura con altos niveles de renta. Por lo que no perderá estas condiciones aún saliendo de la UE, pero en caso de producirse un Brexit, Londres y Bruselas deberán buscar una solución que respete lo mejor de nuestras relaciones económicas y que ha beneficiado durante años tanto a Reino Unido como a la Unión Europea.

   No hay duda de que el papel de Reino Unido en la Unión Europea es bastante más importante de lo que se piensa. La salida de los ingleses provocará fuertes turbulencias financieras, incrementándose la volatilidad en los mercados. Debo concluir diciendo que no es una coincidencia que el partido UKIP en Inglaterra, Donald Trump en Estados Unidos o sin ir más lejos Pablo Iglesias en España, hayan reconocido sus raíces peronistas y la conexión que les une al Frente Nacional, en Francia. Que los populismos hayan brotado en ciertos países a la izquierda y a la derecha, responde a unos odios, enemigos comunes y los miedos de cada sociedad, ya sean los inmigrantes, los musulmanes o la denominada casta. El riesgo más grave de la demagogia es que se haga realidad, haciendo un daño terrible a la confianza de los ciudadanos en las instituciones.