Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy all Away. So Tracy
Speaker 1: um obviously, twenty nineteen for sort of mainstream risky assets
Speaker 1: like stocks in uh developed markets has been uh, it's
Speaker 1: been a pretty good one. Uh. Yeah. I think we're
Speaker 1: ending uh solidly up on the year. It looks like. Yeah.
Speaker 1: One of the weird things, though, I would say, is
Speaker 1: that despite the you know, on the surface, everything looks
Speaker 1: good or growth I guess is Okay, stocks are up
Speaker 1: a lot. There are a lot of things around the
Speaker 1: world this year that maybe in another year would be
Speaker 1: seen as more systemic or troubling. All kinds of hotspots
Speaker 1: and arabs and protests basically everywhere you look. Yeah. So,
Speaker 1: as someone who's in Hong Kong and has been for
Speaker 1: the past six months, one of the really remarkable things
Speaker 1: about this year is just how fast we've seen social
Speaker 1: unrest basically spread around the world. I think Hong Kong
Speaker 1: was the first place where it really cropped up this year,
Speaker 1: but then we saw lots of protests in South American countries,
Speaker 1: we saw them in the Middle East yet again, and
Speaker 1: a lot of these are still taking place, of course,
Speaker 1: and it takes a while to sort of get through
Speaker 1: the impass with protesters. Yes, and there there's all these protests.
Speaker 1: You know, they have multiple causes, but each is in
Speaker 1: some level inextricably tied to something in the economy. Maybe
Speaker 1: the economy or some economic decision is a spark. Of course,
Speaker 1: everything is very complex, but all kinds of things related
Speaker 1: to public subsidies and pension systems and cutting of government
Speaker 1: support for various domestic programs, they seem to frequently, uh
Speaker 1: play a part in the unrest, and of course that
Speaker 1: feeds into the perception of economic and financial stability everywhere
Speaker 1: that you see these things flare up. Yeah, I totally agree.
Speaker 1: There's always an underlying economic trend in a lot of
Speaker 1: the dissatisfaction that we're seeing around the world. Absolutely so
Speaker 1: Today on the podcast, we're going to be speaking to
Speaker 1: an investor who has been looking at world markets emerging
Speaker 1: markets for a long time, knows a lot about how
Speaker 1: these types of things play out or how they don't
Speaker 1: play out. Maybe learn something about the connection between unrest,
Speaker 1: fiscal problems, financial stress, bond markets, and how investors can
Speaker 1: think about these situations. Yes, I like this one, and
Speaker 1: before we start, we should just throw out there that
Speaker 1: one of the really interesting things about all this social
Speaker 1: unrest and how it affects the fiscal situation of countries
Speaker 1: is that when it comes to debt sustainability, we don't
Speaker 1: really have an overarching bankruptcy regime for the world. Right,
Speaker 1: every country is sort of different, so you never quite
Speaker 1: can be sure how these things are going to play out,
Speaker 1: and each country might experience a very very different outcome,
Speaker 1: exactly right. So with that, uh, with that intro, I
Speaker 1: want to bring back Paul McNamara. He's a portfolio manager
Speaker 1: at GAM Investments. He's been on the show before, one
Speaker 1: of our favorite people to talk to here. So Paul,
Speaker 1: thank you very much for joining us. Thanks very much
Speaker 1: for having me so interesting year in your line of work, huh,
Speaker 1: certainly has been. I mean, you know, apart from I mean,
Speaker 1: I think Lebanon is probably the one in terms of
Speaker 1: social unrest, but international investors always I think, you know,
Speaker 1: make good good villains um in the know for for
Speaker 1: evil capitalism, and I think, you know, in terms of
Speaker 1: sovereign debt. There was a thing in the in the
Speaker 1: New York Times recently when a bunch of hedge funds
Speaker 1: tried to stop Puerto Rico from spending money on sort
Speaker 1: of protecting the population from storm damage so that they
Speaker 1: could repay in full the debt that the hedge funds
Speaker 1: had bought in the forties. So, yeah, it's an interesting
Speaker 1: place to be. Um, well, why don't we start with Lebanon.
Speaker 1: We're going to sort of bounce around from place to place,
Speaker 1: I think, given that we are talking about emerging in
Speaker 1: frontier markets. But I'm particularly interested in Lebanon because I
Speaker 1: remember when I was out in the Middle East. You know,
Speaker 1: every once in a while, when you were talking about
Speaker 1: debt sustainability with an analyst, or when a piece of
Speaker 1: research cross my desk, it would say something like, Lebanon
Speaker 1: has a public debt to GDP ratio of something like
Speaker 1: a hundred fifty percent, which is really really eye catching
Speaker 1: and probably worse than the majority of even emerging market countries.
Speaker 1: And yet every analyst, every research note would kind of
Speaker 1: swat that away as not really relevant for the time being.
Speaker 1: And yet something has changed this year and suddenly everyone
Speaker 1: is very, very worried about Lebanon situation. What was the
Speaker 1: catalyst for the current crisis yeah, I mean it's hard,
Speaker 1: it's hard to put your finger on. I think once
Speaker 1: the government really realized that push was coming to shove.
Speaker 1: I mean, like you say, Lebanon's ratios have been absolutely horrific.
Speaker 1: We usually look at, for example, of current count deficit
Speaker 1: or a budget deficit of six percent seven percent of
Speaker 1: GDP as being unsustainable. Lebanon's current count deficit is around
Speaker 1: twenty of GDP. I mean, most of these ratios are
Speaker 1: completely off the charts. The reason why I think people
Speaker 1: have kind of said, oh, well, Lebanon's different is they've
Speaker 1: been in the wrong place for a long time. I mean,
Speaker 1: as as Joe kind of noted, I've been doing this
Speaker 1: job for a long time, and even in the late
Speaker 1: nineties when I started out doing this, Lebanon was already
Speaker 1: running some very peculiar numbers. But what's happening, I think
Speaker 1: with with rising rates. I mean Lebanon is the one country.
Speaker 1: I mean Ponzi scheme or pyramid scheme are terms which
Speaker 1: get thrown around a lot, you know, and and often
Speaker 1: very unfairly. But I think Lebanon is one country where
Speaker 1: that accusation really begins to stick because what happens is
Speaker 1: that Lebanese, either nonresidents or of non residents claiming to
Speaker 1: be residents, or you know that there's not a huge
Speaker 1: transparency where the money comes from. Bring their money into
Speaker 1: Lebanon and and you know, and instead of running, you know,
Speaker 1: sort of yield getting to say one percent one and
Speaker 1: a half percent on the dollar deposit in a bank
Speaker 1: anywhere else, you're getting nin on dollar deposits in the
Speaker 1: Lebanese banking systems. And people thought that was a great trade.
Speaker 1: They brought their they brought their money back. Basically, the
Speaker 1: government spent the money. The central bank used the money
Speaker 1: to prop up the peg of the of the Lebanese
Speaker 1: pounds at a touch over a thousand, five hundred to
Speaker 1: the US DO and it was it was the classic situation.
Speaker 1: The currency became uncompetitive, huge trade deficits as huge amounts
Speaker 1: were imported. But every year, you know, the country needed
Speaker 1: not just to finance the current account deficit, but also
Speaker 1: very significant redemp redemptions of of foreign debt. And what's
Speaker 1: happened this year is that foreigners stopped being willing to
Speaker 1: roll over the debts, or the Lebanese or whoever it was,
Speaker 1: it was the end user of these debts, So the
Speaker 1: banks became absolutely desperate for those foreign dollars, and at
Speaker 1: that time the supply of those dollars also dried up.
Speaker 1: Now that could be associated with some fairly unpopular kind
Speaker 1: of austerity measures, including I think attacks on WhatsApp conversations.
Speaker 1: You know that it's easy to kind of to point
Speaker 1: to a hundred different things. But finally a situation which
Speaker 1: had always looked unsustainable actually became unsustainable, and you've got
Speaker 1: some very strange situations happening at the moment. There are
Speaker 1: no formal capital controls on the Lebanese economy, but there
Speaker 1: are de facto controls that you know that if you
Speaker 1: want to take a large cash deposit, you'll find that
Speaker 1: you're restricted to maybe a couple of hundred dollars per
Speaker 1: day to take out of a bank. It's very difficult
Speaker 1: to make transfers abroad. That you know that a dollar
Speaker 1: in a Lebanese bank is absolutely not worth a dollar
Speaker 1: in any other bank. That although the official rate for
Speaker 1: the Lebanese pound is in one place, there's a there's
Speaker 1: a gray market where the delirious we've heard around thirty cheaper.
Speaker 1: So it's all the signs that you quite often associate
Speaker 1: with countries going wrong. You know, these the official rate
Speaker 1: deviating from from the practical rate. Theoretically you can move
Speaker 1: money around, in practice you can't. So but yeah, I
Speaker 1: mean what it's the old thing, you know, what can't
Speaker 1: go on in the end won't go on, And Lebanon
Speaker 1: looks to be moving much close to that moment of truth.
Speaker 1: This dynamic that you mentioned in which Lebanese banks were
Speaker 1: offering extremely high rates of interest, so that are foreign
Speaker 1: holders of dollars would bring their money back into the country.
Speaker 1: Is that unusual or is that something that you see
Speaker 1: from time to time in countries that have very high
Speaker 1: demand for hard currency. It's a bit retro really, I
Speaker 1: mean it used to be much more common because it's
Speaker 1: it's something that you typically associate with pegs. So, you know,
Speaker 1: go back twenty years and nearly every country, I mean
Speaker 1: that's effectively all the countries in Asia, most Latin America
Speaker 1: had pegs to the dollars or mixed pegs to the
Speaker 1: dollar and the end and the the Deutsche mark as
Speaker 1: it was then. But you know, as all the you know,
Speaker 1: as peg after peg broke, with I think Russia being
Speaker 1: the most glaring example. Of this thing of paying up
Speaker 1: massively for something linked to a dollar. It's really it's
Speaker 1: it's a very unusual thing to see these days. There
Speaker 1: are very few, very few pegs left in the world.
Speaker 1: But yeah, it's something that we've seen in many places before,
Speaker 1: and it doesn't you know. And once you get to
Speaker 1: that point where X number of Lebanese pounds or or
Speaker 1: a dollar in Lebanon aren't the same as a dollar
Speaker 1: off shore, that's when things start to spin out of
Speaker 1: control quite quickly. So the implication here, I guess is
Speaker 1: that the Lebanese Central Bank was basically underwriting the country's
Speaker 1: banks and sort of encouraging them to suck in foreign
Speaker 1: influence so that it could maintain the peg exactly. So
Speaker 1: does that mean that banking or a financial crisis is
Speaker 1: now basically inevitable in Webinon? Inevitable to words us very
Speaker 1: carefully about Lebanon, it's certainly left to itself. I'd say
Speaker 1: it's absolutely inevitable. What we find a lot of place
Speaker 1: people are placing their hopes on. Are the Lebanese looking
Speaker 1: for a sponsor, you know, either the Saudias or the Iranians.
Speaker 1: I mean domestic politics in Lebanon is really is really
Speaker 1: very complicated. But the various richer energy exporting states are
Speaker 1: often seen as maybe a sort of a magic well.
Speaker 1: I suppose a sovereign sugar daddy, which could be which
Speaker 1: because these some Lebanon is a small country, that seems
Speaker 1: the only plausible way out. Certainly, the I m F
Speaker 1: or any of the at any of the other global
Speaker 1: lenders would be most unlikely to allow that to go ahead,
Speaker 1: you know, to pump money into the economy without seeing
Speaker 1: something to address the underlying imbalances. You mentioned the uncompetitiveness
Speaker 1: of the currency. What is the I mean if in theory,
Speaker 1: when you hear about uncompetitive currencies, you think about, okay,
Speaker 1: that choking off some sort of domestic sector, some domestic
Speaker 1: say export sector. What if in a sort of more
Speaker 1: properly managed or more flexible currency, what does leban What
Speaker 1: is the main potential for Lebanon to improve its terms
Speaker 1: of trade? I mean, I think it's got great potential
Speaker 1: as a service center for the Middle East. I mean
Speaker 1: sort of Historically, you know, before the rise of Dubai,
Speaker 1: Lebanon was was a big trading center. You know, in
Speaker 1: trading centers like Hong Kong everywhere else have gone on
Speaker 1: to be the financial capital of their regions. I think
Speaker 1: the civil war and various other things in leban and
Speaker 1: other reasons. You know why why that didn't happen there,
Speaker 1: You know, it's it's a very attractive tourist destination, is
Speaker 1: very well educated population. I mean that there are plenty
Speaker 1: of areas where where the country could maybe be more competitive.
Speaker 1: And also there's a very very large diaspora, and in
Speaker 1: many other countries around the world, just you know, of
Speaker 1: foreign remittances are enough to keep to keep an economy going.
Speaker 1: But you know, looking at looking at Lebanon now, and
Speaker 1: even allowing the fact that you know, a substantial recession
Speaker 1: is pretty much guaranteed in the event of the of
Speaker 1: the peg breaking, a devaluation of something, you know, over effectively, say,
Speaker 1: harving the value of the currency really doesn't look like
Speaker 1: much of a stretch here. So a devaluation is essentially
Speaker 1: a debt restructuring in this context. And I did promise
Speaker 1: that we were going to talk a little bit about
Speaker 1: international bankruptcy regimes or the lack thereof mechanism by which
Speaker 1: these actually get results. And one of the interesting things
Speaker 1: about Lebanon is that it has issued debt to international investors,
Speaker 1: and I think some of those bonds do have collective
Speaker 1: action clauses in them. So are we going to get
Speaker 1: a sort of repeat of the Elliott Argentina situation here?
Speaker 1: It looks it's very likely that they're going to try.
Speaker 1: I mean, the stuff that's that's at risk of the
Speaker 1: the Elliott Argentina situation is really the older debt because
Speaker 1: most collective action clauses. You know, if you get about
Speaker 1: three quarters of the debts together, and most of this
Speaker 1: debt is held by or a very large proportion of
Speaker 1: this debt is held by Lebanese banks or Lebanese residents,
Speaker 1: especially the older bonds which don't have these collective action clauses,
Speaker 1: because what you tend to find is that vulture investors
Speaker 1: choose one or two specific issues and try and own
Speaker 1: a blocking stake in those bonds, rather than hoovering up
Speaker 1: sort of odd odd bits of the bonds at a
Speaker 1: few cents in the dollar, I mean at the moment,
Speaker 1: and the Lebanese debt is generally sort of trading, you know,
Speaker 1: high thirties and forties, not really down at the level
Speaker 1: where distressed investors would find it interesting. I mean, a
Speaker 1: lot of the debt that Elliott brought in Argentina, we
Speaker 1: think was trading twenty cents in the in the dollar
Speaker 1: or below. But absolutely it's vulnerable, you know, especially, I mean,
Speaker 1: if you've got a cap it's fine sev the investors agree,
Speaker 1: and then the remaining twenty five have no choice. They're
Speaker 1: automatically sort of bailed in. But it's the older bonds
Speaker 1: which don't have these clauses, which I think are particularly vulnerable.
Speaker 1: And you know, we've seen it in Greece as well.
Speaker 1: You know that there have been other cases where foreign
Speaker 1: law bonds are effectively senior and that the investors get
Speaker 1: get paid, get paid in full. Paul, you mentioned there
Speaker 1: that even though we've seen a pretty dramatic drop in
Speaker 1: the price of Lebanese debt, it's not yet trading at
Speaker 1: distress levels. Why is that, because again, when you look
Speaker 1: at the actual metrics for the country, it's really really
Speaker 1: hard to see how it will get itself out of
Speaker 1: this situation. So why isn't the debt being valued as such?
Speaker 1: It's very hard to say. I think there's you know
Speaker 1: that there's there's a certain residual belief in you know,
Speaker 1: sort of the sugar daddy from from the Gulf. The
Speaker 1: yields are sort of high, high teens now, although twenties.
Speaker 1: It's quite an expensive thing not to be invested in,
Speaker 1: and a very expensive thing to be short. They have
Speaker 1: got significant reserves, so you know, there's every chance that
Speaker 1: even if things do ultimately go wrong, they could certainly
Speaker 1: postpone default for for a year or more. And I
Speaker 1: think it's a combination of those uncertainties, but certainly, you know,
Speaker 1: given these prices, I'd rather be a seller than a
Speaker 1: buyer of Levanese debt. I have a weird question, and
Speaker 1: it's it's gonna be kind of a curveball, and it's
Speaker 1: something that I wonder about from time to time. But
Speaker 1: it's just something on my mind just now. You know,
Speaker 1: every once in a while, you get you read about
Speaker 1: some country that's in some sort of extreme distress, the
Speaker 1: running out of money, the banking system is running out
Speaker 1: of dollars. We're talking about that with Turkey. A couple
Speaker 1: of years ago, things quieted down. Why is it so
Speaker 1: rare for countries to just completely collapse Alla Venezuela, like
Speaker 1: we all know and have Venezuela in our head is
Speaker 1: just a country in which everything has gone. But that's
Speaker 1: pretty rare in the grand scheme of things, and so
Speaker 1: you know, you might get some extreme recessions from time
Speaker 1: to time, but you rarely get all out economic armageddon.
Speaker 1: Even when the math looks horrible. I can only agree.
Speaker 1: I mean, you get degrees. I mean Argentina in two
Speaker 1: thousand and one was another thing, you know, where where
Speaker 1: you know, there were fears of people going hungry. Uh,
Speaker 1: Fortunately the country is a huge food export, as they
Speaker 1: had surplus food. I think in Iceland we came very
Speaker 1: close to the edge there. They were lucky in that,
Speaker 1: you know, they have ample power use of hydro and geothermal.
Speaker 1: But yeah, I know, countries, countries in the wrong place
Speaker 1: where things go absolutely wrong. I mean Venezuela. It took
Speaker 1: years of work, It took over a decade, first first
Speaker 1: Shavez and then Maduro, until you've got the country completely
Speaker 1: reliant on the oil price being kind of north of
Speaker 1: a hundred dollars, so once it dropped much below there,
Speaker 1: the situation was completely unsustainable. I mean, these countries are
Speaker 1: very unpleasant places to be, you know, and very very
Speaker 1: unpleasant places to be poor. I mean, even though Turkey
Speaker 1: has gone quiet, there's a lot of people living very
Speaker 1: miserable lives. But I think, you know, just the political
Speaker 1: pushback that once the country gets gets right close to
Speaker 1: the edge, you do need effectively a secret police, which
Speaker 1: is what you've got in Venezuela, to prevent the governing
Speaker 1: overthrown and replaced by something more rational. So I think
Speaker 1: politics is probably the only answer I can really come
Speaker 1: up with their So, Paul, uh, We've done Lebanon and
Speaker 1: a little bit of Venezuela. But of course the other
Speaker 1: country we wanted to ask you about is of course Argentina,
Speaker 1: which is in the midst of it seems like they're
Speaker 1: talking about yet another debt restructuring. What's the most likely
Speaker 1: outcome there? And I guess my biggest, biggest question for
Speaker 1: the Argentina situation is why do international investors continue to
Speaker 1: buy Argentina in debt even though it's defaulted several times?
Speaker 1: I think the greater full theory that's you know, a
Speaker 1: lot of international data, I mean, the vast majority of
Speaker 1: international debt investors. The key question is, you know, will
Speaker 1: this be more expensive or will I make money over
Speaker 1: the next month, regardless of whether this is sustainable in
Speaker 1: the long term. I mean, if you look at the
Speaker 1: Argentine Century Bond, which you know, even that people who
Speaker 1: bought it an issue if they, if they were fairly nimble,
Speaker 1: managed to manage to make a little money at least,
Speaker 1: I think that you're just not paid to punish a
Speaker 1: country for past sins. I mean absolutely, I think sovereign
Speaker 1: date investors are chronically optimistic. Um, you know, the last
Speaker 1: time around in Argentina they borrow an absolutely phenomenal amount
Speaker 1: of money and sort of drove Argentina's ratios off the wall.
Speaker 1: But I think just the the incentive horizon for your
Speaker 1: average debt investor is a lot shorter than it takes
Speaker 1: a country to go bust. So, Paul, we've seen this
Speaker 1: return of trouble in Argentina, obviously you mentioned Lebanon. We're
Speaker 1: also seeing it elsewhere in South America right now, similar issues.
Speaker 1: You see issues in Chile, Colombia and elsewhere. And I'm
Speaker 1: curious so in the developed world, and we've been talking
Speaker 1: a lot about it on this podcast lately. In fact,
Speaker 1: in the developed world, there's no doubt that there is
Speaker 1: a lot of debating in rethinking sort of conventional macro
Speaker 1: wisdom and this idea about how best to stabilize the economy.
Speaker 1: They're roll of monetary policy versus fiscal policy and so forth.
Speaker 1: The sluggish growth post crisis has caused a sort of rethink,
Speaker 1: are we do for something like that when in the
Speaker 1: developed world, because you see these sort of tried to
Speaker 1: true efforts that i M. F comes in and has
Speaker 1: some package, it fails inevitably, or it fails frequently because
Speaker 1: the terms of the package run up against domestic politics,
Speaker 1: or you see some country in Vain trying to hold
Speaker 1: onto some peg, and this idea that I'm not sure
Speaker 1: what is e M. Macro stability in need of a
Speaker 1: broader rethink. That's a very good question. You know, I
Speaker 1: don't have a good answer. I mean, clearly political tolerance
Speaker 1: is being stretched, you know, by this long period. I think,
Speaker 1: especially in the Anglo Saxon economies, we haven't seen wages rising,
Speaker 1: We've seen massive inequality. It's you know, it's but it's
Speaker 1: worked very well for the wealthy. It's worked much less
Speaker 1: for everybody else. And you know, and clearly the cracks
Speaker 1: are beginning to show, you know, things like Brexit in particular,
Speaker 1: which is a hobby horse of mine. Oh, I haven't
Speaker 1: noticed that the triumph of the triumph of populism, I
Speaker 1: think owes a lot to that. I think, you know,
Speaker 1: the big question for the Western countries is, you know,
Speaker 1: is what the impact of the next recession where you know,
Speaker 1: instead of people sort of seeing, you know, all the
Speaker 1: wealth accreasing to a few people are suddenly sort of
Speaker 1: struggling to meet their mortgage payments and stuff like that.
Speaker 1: I think that's when, you know, some very serious questions
Speaker 1: are going to be asked about, you know, whether you
Speaker 1: can have and this is the question, you know, whether
Speaker 1: you can have political stability when the economy isn't working
Speaker 1: for the majority of people. I mean, this was I
Speaker 1: think Chile is the best example of that, you know,
Speaker 1: because it is the one which is most purely economic.
Speaker 1: Is that the Chilean economy at a macro level has
Speaker 1: been doing very very well, certainly better than almost any
Speaker 1: other economy in South America over that period. But the
Speaker 1: gains have all overwhelmingly accrued to a few people. And
Speaker 1: I think, yes, I think there are definitely questions M
Speaker 1: and E M about how long that's sustainable for And
Speaker 1: I think a period of macro stress, you know, it's
Speaker 1: going to make those questions much more glaring. But the differences,
Speaker 1: and you know, I think this is why Chili you
Speaker 1: get a lot of demonstrations which I think may may
Speaker 1: may eventually quietened down. Unlike Argentina, unlike Lebanon, you know,
Speaker 1: unlike Venezuela. Countries with with monetary sovereignty can hang on
Speaker 1: a lot longer. You know that they can print the
Speaker 1: money without completely debasing their currencies, you know, and all
Speaker 1: the countries that we're talking about are really countries which
Speaker 1: which don't conform to I'm not a huge believer in
Speaker 1: m MT, but the idea is that it only applies
Speaker 1: to monetary sovereigns. And you know, none of those countries are,
Speaker 1: by anybody's definition, monetary sovereign. So I think monetary sovereigns
Speaker 1: can probably hold out a lot longer. Paul Joe very
Speaker 1: diplomatically said you were an experienced emerging market investor in
Speaker 1: our intro, So I'm just curious, is there is there
Speaker 1: anything about this year or the past year twenty nine
Speaker 1: teen that has actually surprised you in your emerging market experience,
Speaker 1: something that you weren't expecting. The thing is that we've
Speaker 1: we've got this far without more serious problems in other places.
Speaker 1: You know that that you know that we've had a
Speaker 1: long period of stability, and I think the same with
Speaker 1: everybody else. It's been the longest period since god knows
Speaker 1: when without a recession that kind of Lebanon and Argentina
Speaker 1: they're very significant for the people who are there, but
Speaker 1: in the context of global markets they're tiny, you know,
Speaker 1: sort of you know, and even as debt markets, they're
Speaker 1: much smaller than Brazil or Russia or Turkey. So I
Speaker 1: think the fact that you know that it's all been
Speaker 1: in very small, marginal countries, you know, all countries with
Speaker 1: very specific problems like Venezuela, has been the surprise. I think,
Speaker 1: you know, the fact that Turkey was able to pull
Speaker 1: itself back from the brink very quickly, that Brazil has
Speaker 1: been able to cut interest rate, you know, to an
Speaker 1: unprecedented degree. Markets are really pretty relaxed, and I'm you know,
Speaker 1: that's what I think we've been struggling with a bit.
Speaker 1: You know, you mentioned what we were talking about Lebanon,
Speaker 1: and of course it absolutely applies to Argentina and the
Speaker 1: whole saga with Paul Singer. How important is having good
Speaker 1: legal expertise to investing in these markets to understand exactly
Speaker 1: what you're buying? I mean it helps. I mean I think,
Speaker 1: you know, most people in my position would know how
Speaker 1: to how to read a or not how to read,
Speaker 1: but you know, would have a grasp of some of
Speaker 1: the concepts. And you know, if we didn't, we've been
Speaker 1: educated over the last few years. You know. I think
Speaker 1: a number i'd throw out there is that, you know,
Speaker 1: having been sued for ten years by Elliott, that that
Speaker 1: Singer's vulture funds. The Argentine government actually ended up paying
Speaker 1: his legal fees, which were, as if I remember right,
Speaker 1: about two hundred and thirty five million dollars. So yes,
Speaker 1: good legal advice is worth It is worth an awful lot.
Speaker 1: I mean, just just as a note, I think Singer
Speaker 1: bought debt with a face value of other round four
Speaker 1: hundred million dollars. They paid less than twenty cents on
Speaker 1: the dollar, and they took back we think it's sort
Speaker 1: of over two billion dollars was what article ultimately ended
Speaker 1: up paying them. So yeah, getting your legal advice straight
Speaker 1: is really worth quite a lot. Paul. One last thing
Speaker 1: I remember, you know, I think the last time we
Speaker 1: had you on, I think we're discussing the crisis and
Speaker 1: Turkey and your timing about when that would turn. I mean,
Speaker 1: you just mentioned they brought themselves back from the brink,
Speaker 1: was very good, And I want to just sort of
Speaker 1: go back to this idea that for people who are
Speaker 1: in the weeds on this stuff, but who are interested,
Speaker 1: what are the things that you look for. Specifically, Let's say,
Speaker 1: even though the headlines may look awful in a country
Speaker 1: this the some sort of corner has been turned such
Speaker 1: that they can return to some sort of stability or sustainability.
Speaker 1: The awkward truth is that, you know, for a bounce
Speaker 1: of payments crisis, specifically a big recession, and to be honest,
Speaker 1: a recognition that the recession is inevitable is usually what
Speaker 1: fixes these things, because you fix a big external deficit
Speaker 1: by imports collapsing, not by growing exports. I mean, people
Speaker 1: love to say restoring competitiveness, but it's not. It's just
Speaker 1: people not having the money to buy imported goods. Usually,
Speaker 1: plus of the improvement comes from a collapse in imports,
Speaker 1: which means a domestic recession. So once we see things
Speaker 1: beginning to adjust a big drop in property prices, we
Speaker 1: see activity slowing down, we see interest rates going up.
Speaker 1: You know that this recognition that you know that that
Speaker 1: that there is a reckoning is usually a sign that
Speaker 1: that that leads the problem is being addressed and that
Speaker 1: the worst will soon be over. Is a corollary to that,
Speaker 1: is it a warning sign of who might be the
Speaker 1: next in the line of crisis? If economic expansion is
Speaker 1: associated with a dramatic widening of the trade deficit exactly
Speaker 1: that that that combination of very high domestic credit growth
Speaker 1: and external deficit, that's definitely something that we look for
Speaker 1: as a country where things are going wrong. Paul McNamara,
Speaker 1: great to get your perspective, and we'll have you again
Speaker 1: on in another year to talk about all the new
Speaker 1: crises that will inevitably pop up in the latest emerging
Speaker 1: market crisis. Yeah, there's there's gonna be something new, So
Speaker 1: looking forward to get your perspective. Thanks PAULA, Thanks pretty much.
Speaker 1: Thanks Paul, so Joe, I always love talking to Paul,
Speaker 1: partly because he brings, you know, decades of experience to
Speaker 1: any discussion of emerging markets. But I think decade decades,
Speaker 1: but I think it's also really important to get like
Speaker 1: the actual investors side of things to explain some of
Speaker 1: the dynamics. So his point about how investors aren't actually
Speaker 1: paid to punish a country for past mistakes and that
Speaker 1: it's actually very expensive to avoid investing in some of
Speaker 1: these markets, I think is a really important one. Yeah.
Speaker 1: I think so too. I mean, because it's easy enough
Speaker 1: to look at a country like Argentina and say, oh,
Speaker 1: how many I don't know how many dozens of times
Speaker 1: they've defaulted over the last century or whatever. But you know,
Speaker 1: this idea that maybe investors aren't all complete idiots and
Speaker 1: still have reasons to invest in a country despite that
Speaker 1: trek record, I think is makes a lot of sense. Yeah,
Speaker 1: And the other thing, A lot of this reminded me of,
Speaker 1: well A, I think your question about whether or not
Speaker 1: there needs to be a new paradigm for emerging markets
Speaker 1: is a good one, and it definitely brought a lot
Speaker 1: of flashbacks from my like international witical economy classes in university.
Speaker 1: But be uh, the notion of you know, large parts
Speaker 1: of the world actually being tied very closely to the
Speaker 1: US dollar and there by the Federal Reserve. So you know,
Speaker 1: Paul mentioned at the very beginning that part of what
Speaker 1: sparked Lebanon's crisis was just the rise and interest rates
Speaker 1: in the US, which kind of caused its problems because
Speaker 1: it of course has a pecked currency. Well, exactly right.
Speaker 1: You remember we had our episode with a Fuddel Koboo
Speaker 1: and um Paul was saying, you're not really a big
Speaker 1: fan of MMT. That's fine. Nonetheless, this idea that the
Speaker 1: sort of paradigm view which we think emerging markets must grow,
Speaker 1: which is export competitiveness, currency stability and so forth. You know,
Speaker 1: it continues to get tested and this idea that you know,
Speaker 1: we do, I do think we have this macro rethink
Speaker 1: in the West. A recent episode where we talked with
Speaker 1: Robert Skidelski was very much about that. It does feel that,
Speaker 1: you know, you look at these situations like again Argentina,
Speaker 1: and however much the I m F sunk into that
Speaker 1: program and you wonder whether a much deeper discussion needs
Speaker 1: to be had about how macro stability and emerging markets. Yeah. Absolutely,
Speaker 1: And the interesting thing is, I think there have been
Speaker 1: some noises coming out of the I m F and
Speaker 1: certain policymakers in Washington about rethinking some of these programs
Speaker 1: and some of the approaches to debt sustainability. So interesting
Speaker 1: stuff going on, interesting to have, interesting times, great to
Speaker 1: talk to Paul. Yes, indeed, all right, this has been
Speaker 1: another episode of the All Thoughts podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe Why Isn't All? You can follow me on
Speaker 1: Twitter at the Stalwart And you should definitely follow our
Speaker 1: guests Paul mcnum era. He's on Twitter at m Underscore.
Speaker 1: Paul McNamara. I think many people agree, one of the
Speaker 1: most interesting and insightful people around on the space end.
Speaker 1: Be sure to follow our producer Laura Carlson at Laura M.
Speaker 1: Carlson as well as this week's substitute producer to for Foreheads.
Speaker 1: He's at foreheads T. Be sure to follow the Bloomberg
Speaker 1: head of podcast, Francesca Levy at Francesca Today, and check
Speaker 1: out all of Bloomberg's podcasts. There's so many good ones.
Speaker 1: Onto the handle at podcasts. Thanks for listening.