WEBVTT - Why So Many Emerging Markets Are Blowing Up Right Now 0:00:10.920 --> 0:00:15.200 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:15.280 --> 0:00:19.400 I'm Joe Wisenthal and I'm Tracy all Away. So Tracy 0:00:19.800 --> 0:00:27.120 um obviously, twenty nineteen for sort of mainstream risky assets 0:00:27.200 --> 0:00:30.680 like stocks in uh developed markets has been uh, it's 0:00:30.680 --> 0:00:33.840 been a pretty good one. Uh. Yeah. I think we're 0:00:33.960 --> 0:00:38.959 ending uh solidly up on the year. It looks like. Yeah. 0:00:39.000 --> 0:00:41.479 One of the weird things, though, I would say, is 0:00:41.560 --> 0:00:45.360 that despite the you know, on the surface, everything looks 0:00:45.400 --> 0:00:48.919 good or growth I guess is Okay, stocks are up 0:00:48.920 --> 0:00:51.760 a lot. There are a lot of things around the 0:00:51.840 --> 0:00:55.120 world this year that maybe in another year would be 0:00:55.160 --> 0:00:59.560 seen as more systemic or troubling. All kinds of hotspots 0:00:59.600 --> 0:01:04.440 and arabs and protests basically everywhere you look. Yeah. So, 0:01:04.560 --> 0:01:07.640 as someone who's in Hong Kong and has been for 0:01:07.680 --> 0:01:10.360 the past six months, one of the really remarkable things 0:01:10.400 --> 0:01:13.880 about this year is just how fast we've seen social 0:01:14.000 --> 0:01:17.360 unrest basically spread around the world. I think Hong Kong 0:01:17.920 --> 0:01:20.360 was the first place where it really cropped up this year, 0:01:20.400 --> 0:01:24.360 but then we saw lots of protests in South American countries, 0:01:24.560 --> 0:01:27.600 we saw them in the Middle East yet again, and 0:01:27.760 --> 0:01:30.760 a lot of these are still taking place, of course, 0:01:30.800 --> 0:01:33.560 and it takes a while to sort of get through 0:01:33.560 --> 0:01:39.480 the impass with protesters. Yes, and there there's all these protests. 0:01:39.520 --> 0:01:42.679 You know, they have multiple causes, but each is in 0:01:42.880 --> 0:01:48.840 some level inextricably tied to something in the economy. Maybe 0:01:48.920 --> 0:01:52.320 the economy or some economic decision is a spark. Of course, 0:01:52.680 --> 0:01:56.200 everything is very complex, but all kinds of things related 0:01:56.280 --> 0:02:02.040 to public subsidies and pension systems and cutting of government 0:02:02.120 --> 0:02:07.520 support for various domestic programs, they seem to frequently, uh 0:02:07.560 --> 0:02:10.040 play a part in the unrest, and of course that 0:02:10.240 --> 0:02:15.280 feeds into the perception of economic and financial stability everywhere 0:02:15.360 --> 0:02:18.640 that you see these things flare up. Yeah, I totally agree. 0:02:18.680 --> 0:02:21.880 There's always an underlying economic trend in a lot of 0:02:21.919 --> 0:02:27.760 the dissatisfaction that we're seeing around the world. Absolutely so 0:02:27.960 --> 0:02:31.600 Today on the podcast, we're going to be speaking to 0:02:32.280 --> 0:02:35.799 an investor who has been looking at world markets emerging 0:02:35.880 --> 0:02:38.880 markets for a long time, knows a lot about how 0:02:38.919 --> 0:02:41.680 these types of things play out or how they don't 0:02:41.720 --> 0:02:47.120 play out. Maybe learn something about the connection between unrest, 0:02:47.560 --> 0:02:52.840 fiscal problems, financial stress, bond markets, and how investors can 0:02:53.040 --> 0:02:56.160 think about these situations. Yes, I like this one, and 0:02:56.240 --> 0:02:58.280 before we start, we should just throw out there that 0:02:58.400 --> 0:03:01.880 one of the really interesting things about all this social 0:03:01.960 --> 0:03:05.920 unrest and how it affects the fiscal situation of countries 0:03:06.320 --> 0:03:10.320 is that when it comes to debt sustainability, we don't 0:03:10.360 --> 0:03:14.639 really have an overarching bankruptcy regime for the world. Right, 0:03:14.760 --> 0:03:18.519 every country is sort of different, so you never quite 0:03:18.800 --> 0:03:22.160 can be sure how these things are going to play out, 0:03:22.200 --> 0:03:25.480 and each country might experience a very very different outcome, 0:03:26.639 --> 0:03:29.760 exactly right. So with that, uh, with that intro, I 0:03:29.800 --> 0:03:33.919 want to bring back Paul McNamara. He's a portfolio manager 0:03:33.960 --> 0:03:38.640 at GAM Investments. He's been on the show before, one 0:03:38.640 --> 0:03:41.640 of our favorite people to talk to here. So Paul, 0:03:41.720 --> 0:03:44.440 thank you very much for joining us. Thanks very much 0:03:44.440 --> 0:03:48.560 for having me so interesting year in your line of work, huh, 0:03:49.200 --> 0:03:51.840 certainly has been. I mean, you know, apart from I mean, 0:03:51.920 --> 0:03:54.960 I think Lebanon is probably the one in terms of 0:03:55.120 --> 0:03:59.280 social unrest, but international investors always I think, you know, 0:03:59.400 --> 0:04:03.680 make good good villains um in the know for for 0:04:03.760 --> 0:04:06.400 evil capitalism, and I think, you know, in terms of 0:04:06.400 --> 0:04:08.680 sovereign debt. There was a thing in the in the 0:04:08.720 --> 0:04:11.040 New York Times recently when a bunch of hedge funds 0:04:11.640 --> 0:04:16.000 tried to stop Puerto Rico from spending money on sort 0:04:16.000 --> 0:04:19.040 of protecting the population from storm damage so that they 0:04:19.040 --> 0:04:22.039 could repay in full the debt that the hedge funds 0:04:22.040 --> 0:04:25.000 had bought in the forties. So, yeah, it's an interesting 0:04:25.040 --> 0:04:28.600 place to be. Um, well, why don't we start with Lebanon. 0:04:28.640 --> 0:04:31.719 We're going to sort of bounce around from place to place, 0:04:31.800 --> 0:04:34.080 I think, given that we are talking about emerging in 0:04:34.120 --> 0:04:38.120 frontier markets. But I'm particularly interested in Lebanon because I 0:04:38.160 --> 0:04:40.560 remember when I was out in the Middle East. You know, 0:04:40.680 --> 0:04:43.000 every once in a while, when you were talking about 0:04:43.240 --> 0:04:46.479 debt sustainability with an analyst, or when a piece of 0:04:46.520 --> 0:04:50.240 research cross my desk, it would say something like, Lebanon 0:04:50.440 --> 0:04:53.680 has a public debt to GDP ratio of something like 0:04:53.720 --> 0:04:57.200 a hundred fifty percent, which is really really eye catching 0:04:57.800 --> 0:05:03.320 and probably worse than the majority of even emerging market countries. 0:05:03.680 --> 0:05:06.960 And yet every analyst, every research note would kind of 0:05:07.000 --> 0:05:11.440 swat that away as not really relevant for the time being. 0:05:12.120 --> 0:05:15.839 And yet something has changed this year and suddenly everyone 0:05:15.960 --> 0:05:19.279 is very, very worried about Lebanon situation. What was the 0:05:19.360 --> 0:05:23.680 catalyst for the current crisis yeah, I mean it's hard, 0:05:23.720 --> 0:05:27.000 it's hard to put your finger on. I think once 0:05:27.120 --> 0:05:29.960 the government really realized that push was coming to shove. 0:05:30.040 --> 0:05:33.640 I mean, like you say, Lebanon's ratios have been absolutely horrific. 0:05:33.839 --> 0:05:36.200 We usually look at, for example, of current count deficit 0:05:36.400 --> 0:05:39.440 or a budget deficit of six percent seven percent of 0:05:39.480 --> 0:05:43.880 GDP as being unsustainable. Lebanon's current count deficit is around 0:05:43.880 --> 0:05:47.480 twenty of GDP. I mean, most of these ratios are 0:05:47.480 --> 0:05:51.240 completely off the charts. The reason why I think people 0:05:51.279 --> 0:05:53.920 have kind of said, oh, well, Lebanon's different is they've 0:05:53.920 --> 0:05:55.600 been in the wrong place for a long time. I mean, 0:05:55.839 --> 0:05:57.919 as as Joe kind of noted, I've been doing this 0:05:58.000 --> 0:06:00.240 job for a long time, and even in the late 0:06:00.320 --> 0:06:03.080 nineties when I started out doing this, Lebanon was already 0:06:03.520 --> 0:06:07.400 running some very peculiar numbers. But what's happening, I think 0:06:07.440 --> 0:06:10.520 with with rising rates. I mean Lebanon is the one country. 0:06:10.560 --> 0:06:13.599 I mean Ponzi scheme or pyramid scheme are terms which 0:06:13.640 --> 0:06:16.200 get thrown around a lot, you know, and and often 0:06:16.320 --> 0:06:18.680 very unfairly. But I think Lebanon is one country where 0:06:18.680 --> 0:06:22.040 that accusation really begins to stick because what happens is 0:06:22.400 --> 0:06:27.039 that Lebanese, either nonresidents or of non residents claiming to 0:06:27.080 --> 0:06:30.040 be residents, or you know that there's not a huge 0:06:30.320 --> 0:06:33.200 transparency where the money comes from. Bring their money into 0:06:33.279 --> 0:06:35.240 Lebanon and and you know, and instead of running, you know, 0:06:35.279 --> 0:06:37.320 sort of yield getting to say one percent one and 0:06:37.320 --> 0:06:40.680 a half percent on the dollar deposit in a bank 0:06:40.800 --> 0:06:45.800 anywhere else, you're getting nin on dollar deposits in the 0:06:45.880 --> 0:06:48.279 Lebanese banking systems. And people thought that was a great trade. 0:06:48.279 --> 0:06:50.839 They brought their they brought their money back. Basically, the 0:06:50.839 --> 0:06:53.160 government spent the money. The central bank used the money 0:06:53.160 --> 0:06:56.400 to prop up the peg of the of the Lebanese 0:06:56.400 --> 0:06:59.279 pounds at a touch over a thousand, five hundred to 0:06:59.360 --> 0:07:02.160 the US DO and it was it was the classic situation. 0:07:02.200 --> 0:07:06.840 The currency became uncompetitive, huge trade deficits as huge amounts 0:07:06.839 --> 0:07:09.800 were imported. But every year, you know, the country needed 0:07:09.840 --> 0:07:12.760 not just to finance the current account deficit, but also 0:07:13.400 --> 0:07:16.960 very significant redemp redemptions of of foreign debt. And what's 0:07:17.000 --> 0:07:19.840 happened this year is that foreigners stopped being willing to 0:07:19.960 --> 0:07:22.240 roll over the debts, or the Lebanese or whoever it was, 0:07:22.280 --> 0:07:25.080 it was the end user of these debts, So the 0:07:25.120 --> 0:07:29.080 banks became absolutely desperate for those foreign dollars, and at 0:07:29.160 --> 0:07:31.880 that time the supply of those dollars also dried up. 0:07:32.040 --> 0:07:36.280 Now that could be associated with some fairly unpopular kind 0:07:36.280 --> 0:07:40.840 of austerity measures, including I think attacks on WhatsApp conversations. 0:07:41.280 --> 0:07:43.640 You know that it's easy to kind of to point 0:07:43.640 --> 0:07:47.160 to a hundred different things. But finally a situation which 0:07:47.160 --> 0:07:51.280 had always looked unsustainable actually became unsustainable, and you've got 0:07:51.320 --> 0:07:53.960 some very strange situations happening at the moment. There are 0:07:54.440 --> 0:07:57.400 no formal capital controls on the Lebanese economy, but there 0:07:57.440 --> 0:07:59.560 are de facto controls that you know that if you 0:07:59.560 --> 0:08:02.080 want to take a large cash deposit, you'll find that 0:08:02.120 --> 0:08:04.520 you're restricted to maybe a couple of hundred dollars per 0:08:04.640 --> 0:08:07.640 day to take out of a bank. It's very difficult 0:08:07.640 --> 0:08:10.560 to make transfers abroad. That you know that a dollar 0:08:10.760 --> 0:08:14.120 in a Lebanese bank is absolutely not worth a dollar 0:08:14.200 --> 0:08:16.640 in any other bank. That although the official rate for 0:08:16.640 --> 0:08:19.160 the Lebanese pound is in one place, there's a there's 0:08:19.160 --> 0:08:23.920 a gray market where the delirious we've heard around thirty cheaper. 0:08:24.280 --> 0:08:27.360 So it's all the signs that you quite often associate 0:08:27.400 --> 0:08:30.240 with countries going wrong. You know, these the official rate 0:08:30.680 --> 0:08:34.800 deviating from from the practical rate. Theoretically you can move 0:08:34.840 --> 0:08:37.880 money around, in practice you can't. So but yeah, I 0:08:37.880 --> 0:08:41.760 mean what it's the old thing, you know, what can't 0:08:41.800 --> 0:08:44.720 go on in the end won't go on, And Lebanon 0:08:44.760 --> 0:08:47.080 looks to be moving much close to that moment of truth. 0:08:47.600 --> 0:08:52.720 This dynamic that you mentioned in which Lebanese banks were 0:08:52.840 --> 0:08:56.920 offering extremely high rates of interest, so that are foreign 0:08:56.920 --> 0:09:01.120 holders of dollars would bring their money back into the country. 0:09:01.280 --> 0:09:04.200 Is that unusual or is that something that you see 0:09:04.280 --> 0:09:09.480 from time to time in countries that have very high 0:09:09.559 --> 0:09:13.360 demand for hard currency. It's a bit retro really, I 0:09:13.360 --> 0:09:15.559 mean it used to be much more common because it's 0:09:15.600 --> 0:09:19.000 it's something that you typically associate with pegs. So, you know, 0:09:19.040 --> 0:09:21.200 go back twenty years and nearly every country, I mean 0:09:21.240 --> 0:09:24.280 that's effectively all the countries in Asia, most Latin America 0:09:24.600 --> 0:09:26.840 had pegs to the dollars or mixed pegs to the 0:09:26.840 --> 0:09:29.000 dollar and the end and the the Deutsche mark as 0:09:29.000 --> 0:09:31.560 it was then. But you know, as all the you know, 0:09:31.600 --> 0:09:36.080 as peg after peg broke, with I think Russia being 0:09:36.120 --> 0:09:39.880 the most glaring example. Of this thing of paying up 0:09:39.920 --> 0:09:43.839 massively for something linked to a dollar. It's really it's 0:09:43.880 --> 0:09:47.000 it's a very unusual thing to see these days. There 0:09:47.000 --> 0:09:49.520 are very few, very few pegs left in the world. 0:09:49.920 --> 0:09:52.840 But yeah, it's something that we've seen in many places before, 0:09:53.320 --> 0:09:54.920 and it doesn't you know. And once you get to 0:09:54.960 --> 0:09:59.600 that point where X number of Lebanese pounds or or 0:09:59.640 --> 0:10:01.840 a dollar in Lebanon aren't the same as a dollar 0:10:01.880 --> 0:10:04.079 off shore, that's when things start to spin out of 0:10:04.120 --> 0:10:07.320 control quite quickly. So the implication here, I guess is 0:10:07.360 --> 0:10:12.240 that the Lebanese Central Bank was basically underwriting the country's 0:10:12.760 --> 0:10:16.000 banks and sort of encouraging them to suck in foreign 0:10:16.080 --> 0:10:19.720 influence so that it could maintain the peg exactly. So 0:10:19.800 --> 0:10:23.360 does that mean that banking or a financial crisis is 0:10:23.400 --> 0:10:28.319 now basically inevitable in Webinon? Inevitable to words us very 0:10:28.320 --> 0:10:32.319 carefully about Lebanon, it's certainly left to itself. I'd say 0:10:32.320 --> 0:10:35.560 it's absolutely inevitable. What we find a lot of place 0:10:35.640 --> 0:10:38.840 people are placing their hopes on. Are the Lebanese looking 0:10:38.880 --> 0:10:43.080 for a sponsor, you know, either the Saudias or the Iranians. 0:10:43.720 --> 0:10:49.120 I mean domestic politics in Lebanon is really is really 0:10:49.200 --> 0:10:54.080 very complicated. But the various richer energy exporting states are 0:10:54.080 --> 0:10:57.240 often seen as maybe a sort of a magic well. 0:10:57.280 --> 0:11:00.480 I suppose a sovereign sugar daddy, which could be which 0:11:00.640 --> 0:11:04.439 because these some Lebanon is a small country, that seems 0:11:04.480 --> 0:11:07.360 the only plausible way out. Certainly, the I m F 0:11:07.559 --> 0:11:09.640 or any of the at any of the other global 0:11:09.720 --> 0:11:13.640 lenders would be most unlikely to allow that to go ahead, 0:11:14.080 --> 0:11:16.440 you know, to pump money into the economy without seeing 0:11:16.480 --> 0:11:23.000 something to address the underlying imbalances. You mentioned the uncompetitiveness 0:11:23.480 --> 0:11:28.959 of the currency. What is the I mean if in theory, 0:11:29.000 --> 0:11:32.320 when you hear about uncompetitive currencies, you think about, okay, 0:11:32.320 --> 0:11:36.040 that choking off some sort of domestic sector, some domestic 0:11:36.320 --> 0:11:39.760 say export sector. What if in a sort of more 0:11:39.800 --> 0:11:44.480 properly managed or more flexible currency, what does leban What 0:11:44.679 --> 0:11:49.320 is the main potential for Lebanon to improve its terms 0:11:49.320 --> 0:11:52.360 of trade? I mean, I think it's got great potential 0:11:52.360 --> 0:11:54.160 as a service center for the Middle East. I mean 0:11:54.320 --> 0:11:57.080 sort of Historically, you know, before the rise of Dubai, 0:11:57.880 --> 0:12:00.439 Lebanon was was a big trading center. You know, in 0:12:00.480 --> 0:12:03.360 trading centers like Hong Kong everywhere else have gone on 0:12:03.400 --> 0:12:06.400 to be the financial capital of their regions. I think 0:12:06.440 --> 0:12:08.679 the civil war and various other things in leban and 0:12:08.760 --> 0:12:11.520 other reasons. You know why why that didn't happen there, 0:12:11.800 --> 0:12:14.079 You know, it's it's a very attractive tourist destination, is 0:12:14.160 --> 0:12:16.480 very well educated population. I mean that there are plenty 0:12:16.480 --> 0:12:19.800 of areas where where the country could maybe be more competitive. 0:12:19.800 --> 0:12:23.360 And also there's a very very large diaspora, and in 0:12:23.440 --> 0:12:25.520 many other countries around the world, just you know, of 0:12:25.520 --> 0:12:28.600 foreign remittances are enough to keep to keep an economy going. 0:12:29.080 --> 0:12:32.280 But you know, looking at looking at Lebanon now, and 0:12:32.320 --> 0:12:35.559 even allowing the fact that you know, a substantial recession 0:12:36.200 --> 0:12:38.599 is pretty much guaranteed in the event of the of 0:12:38.760 --> 0:12:42.760 the peg breaking, a devaluation of something, you know, over effectively, say, 0:12:42.800 --> 0:12:45.920 harving the value of the currency really doesn't look like 0:12:46.000 --> 0:12:50.480 much of a stretch here. So a devaluation is essentially 0:12:50.840 --> 0:12:53.720 a debt restructuring in this context. And I did promise 0:12:53.800 --> 0:12:55.640 that we were going to talk a little bit about 0:12:55.960 --> 0:13:01.120 international bankruptcy regimes or the lack thereof mechanism by which 0:13:01.160 --> 0:13:03.760 these actually get results. And one of the interesting things 0:13:03.760 --> 0:13:09.320 about Lebanon is that it has issued debt to international investors, 0:13:09.360 --> 0:13:13.280 and I think some of those bonds do have collective 0:13:13.320 --> 0:13:17.199 action clauses in them. So are we going to get 0:13:17.240 --> 0:13:21.600 a sort of repeat of the Elliott Argentina situation here? 0:13:22.160 --> 0:13:24.240 It looks it's very likely that they're going to try. 0:13:24.640 --> 0:13:27.200 I mean, the stuff that's that's at risk of the 0:13:27.200 --> 0:13:30.520 the Elliott Argentina situation is really the older debt because 0:13:30.520 --> 0:13:33.280 most collective action clauses. You know, if you get about 0:13:33.280 --> 0:13:35.960 three quarters of the debts together, and most of this 0:13:36.040 --> 0:13:38.719 debt is held by or a very large proportion of 0:13:38.760 --> 0:13:42.400 this debt is held by Lebanese banks or Lebanese residents, 0:13:42.520 --> 0:13:45.560 especially the older bonds which don't have these collective action clauses, 0:13:45.800 --> 0:13:48.520 because what you tend to find is that vulture investors 0:13:49.120 --> 0:13:52.319 choose one or two specific issues and try and own 0:13:52.320 --> 0:13:55.240 a blocking stake in those bonds, rather than hoovering up 0:13:55.520 --> 0:13:57.720 sort of odd odd bits of the bonds at a 0:13:57.720 --> 0:14:00.000 few cents in the dollar, I mean at the moment, 0:14:00.040 --> 0:14:03.200 and the Lebanese debt is generally sort of trading, you know, 0:14:03.280 --> 0:14:06.319 high thirties and forties, not really down at the level 0:14:06.400 --> 0:14:09.120 where distressed investors would find it interesting. I mean, a 0:14:09.120 --> 0:14:11.760 lot of the debt that Elliott brought in Argentina, we 0:14:11.840 --> 0:14:14.880 think was trading twenty cents in the in the dollar 0:14:15.280 --> 0:14:18.839 or below. But absolutely it's vulnerable, you know, especially, I mean, 0:14:18.880 --> 0:14:22.200 if you've got a cap it's fine sev the investors agree, 0:14:22.520 --> 0:14:24.760 and then the remaining twenty five have no choice. They're 0:14:24.760 --> 0:14:28.680 automatically sort of bailed in. But it's the older bonds 0:14:28.680 --> 0:14:31.720 which don't have these clauses, which I think are particularly vulnerable. 0:14:31.960 --> 0:14:34.560 And you know, we've seen it in Greece as well. 0:14:34.800 --> 0:14:37.880 You know that there have been other cases where foreign 0:14:38.400 --> 0:14:41.760 law bonds are effectively senior and that the investors get 0:14:41.800 --> 0:14:45.800 get paid, get paid in full. Paul, you mentioned there 0:14:45.800 --> 0:14:48.960 that even though we've seen a pretty dramatic drop in 0:14:49.000 --> 0:14:51.880 the price of Lebanese debt, it's not yet trading at 0:14:51.920 --> 0:14:55.320 distress levels. Why is that, because again, when you look 0:14:55.360 --> 0:14:59.200 at the actual metrics for the country, it's really really 0:14:59.200 --> 0:15:01.640 hard to see how it will get itself out of 0:15:01.640 --> 0:15:05.560 this situation. So why isn't the debt being valued as such? 0:15:06.880 --> 0:15:09.120 It's very hard to say. I think there's you know 0:15:09.200 --> 0:15:12.160 that there's there's a certain residual belief in you know, 0:15:12.200 --> 0:15:14.560 sort of the sugar daddy from from the Gulf. The 0:15:14.640 --> 0:15:18.760 yields are sort of high, high teens now, although twenties. 0:15:18.760 --> 0:15:20.840 It's quite an expensive thing not to be invested in, 0:15:20.840 --> 0:15:23.680 and a very expensive thing to be short. They have 0:15:23.880 --> 0:15:27.040 got significant reserves, so you know, there's every chance that 0:15:27.080 --> 0:15:29.880 even if things do ultimately go wrong, they could certainly 0:15:29.920 --> 0:15:33.400 postpone default for for a year or more. And I 0:15:33.480 --> 0:15:37.040 think it's a combination of those uncertainties, but certainly, you know, 0:15:37.160 --> 0:15:39.400 given these prices, I'd rather be a seller than a 0:15:39.400 --> 0:15:59.200 buyer of Levanese debt. I have a weird question, and 0:15:59.320 --> 0:16:02.560 it's it's gonna be kind of a curveball, and it's 0:16:02.600 --> 0:16:05.200 something that I wonder about from time to time. But 0:16:05.280 --> 0:16:08.000 it's just something on my mind just now. You know, 0:16:08.080 --> 0:16:10.040 every once in a while, you get you read about 0:16:10.080 --> 0:16:14.120 some country that's in some sort of extreme distress, the 0:16:14.200 --> 0:16:16.600 running out of money, the banking system is running out 0:16:16.600 --> 0:16:20.320 of dollars. We're talking about that with Turkey. A couple 0:16:20.360 --> 0:16:24.120 of years ago, things quieted down. Why is it so 0:16:24.280 --> 0:16:29.760 rare for countries to just completely collapse Alla Venezuela, like 0:16:29.840 --> 0:16:32.080 we all know and have Venezuela in our head is 0:16:32.120 --> 0:16:35.000 just a country in which everything has gone. But that's 0:16:35.080 --> 0:16:37.680 pretty rare in the grand scheme of things, and so 0:16:38.080 --> 0:16:41.520 you know, you might get some extreme recessions from time 0:16:41.560 --> 0:16:45.920 to time, but you rarely get all out economic armageddon. 0:16:46.000 --> 0:16:50.040 Even when the math looks horrible. I can only agree. 0:16:50.320 --> 0:16:52.280 I mean, you get degrees. I mean Argentina in two 0:16:52.320 --> 0:16:55.160 thousand and one was another thing, you know, where where 0:16:55.160 --> 0:16:57.880 you know, there were fears of people going hungry. Uh, 0:16:58.160 --> 0:17:00.280 Fortunately the country is a huge food export, as they 0:17:00.280 --> 0:17:03.120 had surplus food. I think in Iceland we came very 0:17:03.120 --> 0:17:05.080 close to the edge there. They were lucky in that, 0:17:05.200 --> 0:17:10.600 you know, they have ample power use of hydro and geothermal. 0:17:10.680 --> 0:17:13.200 But yeah, I know, countries, countries in the wrong place 0:17:13.200 --> 0:17:16.600 where things go absolutely wrong. I mean Venezuela. It took 0:17:16.720 --> 0:17:19.879 years of work, It took over a decade, first first 0:17:19.920 --> 0:17:23.879 Shavez and then Maduro, until you've got the country completely 0:17:23.920 --> 0:17:26.399 reliant on the oil price being kind of north of 0:17:26.440 --> 0:17:29.320 a hundred dollars, so once it dropped much below there, 0:17:29.560 --> 0:17:32.800 the situation was completely unsustainable. I mean, these countries are 0:17:32.880 --> 0:17:35.960 very unpleasant places to be, you know, and very very 0:17:36.040 --> 0:17:39.040 unpleasant places to be poor. I mean, even though Turkey 0:17:39.040 --> 0:17:41.080 has gone quiet, there's a lot of people living very 0:17:41.119 --> 0:17:43.920 miserable lives. But I think, you know, just the political 0:17:44.000 --> 0:17:46.560 pushback that once the country gets gets right close to 0:17:46.560 --> 0:17:50.400 the edge, you do need effectively a secret police, which 0:17:50.440 --> 0:17:53.120 is what you've got in Venezuela, to prevent the governing 0:17:53.200 --> 0:17:55.879 overthrown and replaced by something more rational. So I think 0:17:55.960 --> 0:17:59.360 politics is probably the only answer I can really come 0:17:59.440 --> 0:18:03.280 up with their So, Paul, uh, We've done Lebanon and 0:18:03.359 --> 0:18:06.000 a little bit of Venezuela. But of course the other 0:18:06.040 --> 0:18:09.199 country we wanted to ask you about is of course Argentina, 0:18:09.760 --> 0:18:12.720 which is in the midst of it seems like they're 0:18:12.720 --> 0:18:16.919 talking about yet another debt restructuring. What's the most likely 0:18:17.040 --> 0:18:20.320 outcome there? And I guess my biggest, biggest question for 0:18:20.359 --> 0:18:25.560 the Argentina situation is why do international investors continue to 0:18:25.800 --> 0:18:30.320 buy Argentina in debt even though it's defaulted several times? 0:18:31.640 --> 0:18:34.199 I think the greater full theory that's you know, a 0:18:34.240 --> 0:18:37.720 lot of international data, I mean, the vast majority of 0:18:38.280 --> 0:18:41.400 international debt investors. The key question is, you know, will 0:18:41.480 --> 0:18:43.880 this be more expensive or will I make money over 0:18:43.920 --> 0:18:46.800 the next month, regardless of whether this is sustainable in 0:18:46.840 --> 0:18:48.520 the long term. I mean, if you look at the 0:18:48.600 --> 0:18:52.080 Argentine Century Bond, which you know, even that people who 0:18:52.080 --> 0:18:54.399 bought it an issue if they, if they were fairly nimble, 0:18:54.440 --> 0:18:57.040 managed to manage to make a little money at least, 0:18:57.560 --> 0:19:01.359 I think that you're just not paid to punish a 0:19:01.480 --> 0:19:05.600 country for past sins. I mean absolutely, I think sovereign 0:19:05.640 --> 0:19:09.600 date investors are chronically optimistic. Um, you know, the last 0:19:09.600 --> 0:19:13.320 time around in Argentina they borrow an absolutely phenomenal amount 0:19:13.359 --> 0:19:16.879 of money and sort of drove Argentina's ratios off the wall. 0:19:17.119 --> 0:19:20.440 But I think just the the incentive horizon for your 0:19:20.480 --> 0:19:23.520 average debt investor is a lot shorter than it takes 0:19:23.520 --> 0:19:26.679 a country to go bust. So, Paul, we've seen this 0:19:26.840 --> 0:19:31.520 return of trouble in Argentina, obviously you mentioned Lebanon. We're 0:19:31.520 --> 0:19:36.360 also seeing it elsewhere in South America right now, similar issues. 0:19:36.440 --> 0:19:40.560 You see issues in Chile, Colombia and elsewhere. And I'm 0:19:40.600 --> 0:19:44.520 curious so in the developed world, and we've been talking 0:19:44.560 --> 0:19:47.320 a lot about it on this podcast lately. In fact, 0:19:47.359 --> 0:19:51.000 in the developed world, there's no doubt that there is 0:19:51.119 --> 0:19:56.160 a lot of debating in rethinking sort of conventional macro 0:19:56.400 --> 0:20:00.560 wisdom and this idea about how best to stabilize the economy. 0:20:00.640 --> 0:20:04.159 They're roll of monetary policy versus fiscal policy and so forth. 0:20:04.560 --> 0:20:09.440 The sluggish growth post crisis has caused a sort of rethink, 0:20:10.160 --> 0:20:13.719 are we do for something like that when in the 0:20:13.760 --> 0:20:16.320 developed world, because you see these sort of tried to 0:20:16.400 --> 0:20:19.120 true efforts that i M. F comes in and has 0:20:19.200 --> 0:20:23.960 some package, it fails inevitably, or it fails frequently because 0:20:24.000 --> 0:20:26.879 the terms of the package run up against domestic politics, 0:20:27.280 --> 0:20:31.000 or you see some country in Vain trying to hold 0:20:31.040 --> 0:20:34.240 onto some peg, and this idea that I'm not sure 0:20:34.280 --> 0:20:40.639 what is e M. Macro stability in need of a 0:20:40.840 --> 0:20:44.639 broader rethink. That's a very good question. You know, I 0:20:44.640 --> 0:20:47.520 don't have a good answer. I mean, clearly political tolerance 0:20:47.600 --> 0:20:50.040 is being stretched, you know, by this long period. I think, 0:20:50.119 --> 0:20:53.359 especially in the Anglo Saxon economies, we haven't seen wages rising, 0:20:53.680 --> 0:20:56.000 We've seen massive inequality. It's you know, it's but it's 0:20:56.000 --> 0:20:58.560 worked very well for the wealthy. It's worked much less 0:20:58.560 --> 0:21:01.240 for everybody else. And you know, and clearly the cracks 0:21:01.240 --> 0:21:04.520 are beginning to show, you know, things like Brexit in particular, 0:21:04.560 --> 0:21:07.040 which is a hobby horse of mine. Oh, I haven't 0:21:07.040 --> 0:21:10.480 noticed that the triumph of the triumph of populism, I 0:21:10.480 --> 0:21:13.119 think owes a lot to that. I think, you know, 0:21:13.200 --> 0:21:15.639 the big question for the Western countries is, you know, 0:21:15.760 --> 0:21:18.040 is what the impact of the next recession where you know, 0:21:18.119 --> 0:21:20.399 instead of people sort of seeing, you know, all the 0:21:20.400 --> 0:21:22.800 wealth accreasing to a few people are suddenly sort of 0:21:22.840 --> 0:21:25.240 struggling to meet their mortgage payments and stuff like that. 0:21:25.600 --> 0:21:28.520 I think that's when, you know, some very serious questions 0:21:28.560 --> 0:21:30.679 are going to be asked about, you know, whether you 0:21:30.720 --> 0:21:33.600 can have and this is the question, you know, whether 0:21:33.640 --> 0:21:36.840 you can have political stability when the economy isn't working 0:21:36.880 --> 0:21:39.359 for the majority of people. I mean, this was I 0:21:39.359 --> 0:21:41.800 think Chile is the best example of that, you know, 0:21:41.840 --> 0:21:44.680 because it is the one which is most purely economic. 0:21:44.760 --> 0:21:47.120 Is that the Chilean economy at a macro level has 0:21:47.119 --> 0:21:50.080 been doing very very well, certainly better than almost any 0:21:50.119 --> 0:21:53.280 other economy in South America over that period. But the 0:21:53.320 --> 0:21:56.800 gains have all overwhelmingly accrued to a few people. And 0:21:56.840 --> 0:22:00.240 I think, yes, I think there are definitely questions M 0:22:00.240 --> 0:22:02.919 and E M about how long that's sustainable for And 0:22:02.960 --> 0:22:05.720 I think a period of macro stress, you know, it's 0:22:05.720 --> 0:22:09.480 going to make those questions much more glaring. But the differences, 0:22:09.760 --> 0:22:11.399 and you know, I think this is why Chili you 0:22:11.400 --> 0:22:13.640 get a lot of demonstrations which I think may may 0:22:13.760 --> 0:22:18.399 may eventually quietened down. Unlike Argentina, unlike Lebanon, you know, 0:22:18.520 --> 0:22:22.800 unlike Venezuela. Countries with with monetary sovereignty can hang on 0:22:22.840 --> 0:22:24.399 a lot longer. You know that they can print the 0:22:24.440 --> 0:22:28.160 money without completely debasing their currencies, you know, and all 0:22:28.200 --> 0:22:31.080 the countries that we're talking about are really countries which 0:22:31.440 --> 0:22:33.919 which don't conform to I'm not a huge believer in 0:22:34.040 --> 0:22:36.600 m MT, but the idea is that it only applies 0:22:36.640 --> 0:22:40.000 to monetary sovereigns. And you know, none of those countries are, 0:22:40.040 --> 0:22:43.399 by anybody's definition, monetary sovereign. So I think monetary sovereigns 0:22:43.400 --> 0:22:47.760 can probably hold out a lot longer. Paul Joe very 0:22:47.800 --> 0:22:53.000 diplomatically said you were an experienced emerging market investor in 0:22:53.040 --> 0:22:56.520 our intro, So I'm just curious, is there is there 0:22:56.560 --> 0:23:00.200 anything about this year or the past year twenty nine 0:23:00.280 --> 0:23:05.080 teen that has actually surprised you in your emerging market experience, 0:23:05.119 --> 0:23:08.600 something that you weren't expecting. The thing is that we've 0:23:08.600 --> 0:23:11.840 we've got this far without more serious problems in other places. 0:23:12.040 --> 0:23:13.760 You know that that you know that we've had a 0:23:13.760 --> 0:23:15.439 long period of stability, and I think the same with 0:23:15.480 --> 0:23:17.800