Excellent paper from CEPAL

Click here to get your download copy of a 36 page English language macroeconomics report from CEPAL (the LatAm economics people) that shows how the present financial crisis is affecting the region. Here's the abstract to give you a taste:

This paper addresses a fundamental question regarding the current crisis
and its effects on Latin America, namely, will the effects of the crisis be
different or of the same type that the region has witnessed in past?
The answer provided in the paper, on the basis of past crises episodes and
currently available information, is that this crisis is a ‘repeat.’ That is, it is
“Old wine in New Goatskins.” This conclusion is underpinned by two
fundamental ideas. First, the evidence shows that the impact of financial
crises on the region is closely related to the degree to which external
finance becomes scarce and costly, and to the magnitude of the disruption
in international trade channels. Second, financial crises have had deep and
protracted effects on the economies of the region, independently of
idiosyncratic features and initial conditions. The available evidence and
the unprecedented magnitude of the current shock do not warrant the
belief that the effects of this crisis will be any different from those that
have whiplashed the region in the past.

It's a really good job of work done and a boon for a dude like me. From now on I can just reference this work for its great comparative charts and data instead of crunching it myself. A readable, factual and well researched paper. Highly recommended and a great source material, too.

Bear

Danger, soul-bearing pretentiousness coming your way.
Please tune out if investor navel-gazing annoys you.

I've been reflecting on my negativity about the market and its potential for trading/investment recently, and how that blue funk has seen me miss decent trading opportunities. I feel I've been pretty much in a negative mindset recently when it comes to investments. As far as can be seen by the myopic Otto, there are several factors in play:

One of the main problems, and it is a problem, is my natural contrarian attitude to investment and trading (and life, but that's another story). When I see the whole world get excited about fluffy, superficial announcements be they large (Geithner's plan compared to the months in store), medium (García and his lapdog media) and small (miners that rocket up due to people with questionable knowledge buying on questionable advice of people that should know better...see previous post) I'm one of those guys that automatically goes "hey!! wait a cotton pickin' minute!". This is a true weakness in my investment make-up and one that I have tried and failed to improve over the years. Put basically, why not run with the sheep for a while if it makes you money? Very true in the case of Exeter (XRC.v) (XRA) in the last few weeks, as the whole hype was clearly setting itself up. But me being me, I just can't bring myself to buy these things even though there was money there, sitting up and begging. I'd rather rant on the stock and watch it go higher. Put simply, I recognize my masochistic weakness.

Part of this (in mitigation) is that I'm not a good trader (never pretended to be, either) and I'm a better long-term investor. I've always made better coin by searching for value and holding through the beta-bumps (such as the current CZZ position) or holding through the slack periods when nothing seems to happen to my stock while all around is action and adventure (such as the current TRY.to position). Basically, being boring works for me. I play with my spreadsheets, find something undervalued, try to work out what is a fair value, buy it low and sell it when it hits the target. Sounds easy, huh? Well it's not and there are safety checks and seat-of-pants rules I've developed over the years, too, but all in all that's the basic philosophy behind my calls.

Another point about being negative on this market is that in my preferred sector, LatAm junior mining companies, even in the good bullish times the number of bad companies outweighs the number of good companies by 10:1...probably more, in fact. By way of a topical for instance, an e-mail pal sent me a mail today asking about Oroco (OCO.v). To his credit he wasn't looking for a positive on the thing because all he wanted was to get a colleague that has been boring him about the stock off his back and just asked me where to look. This is part of the mail I wrote back (including the 43-101 resource table from the OCO.v website):

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There's more metals grading in my back garden than there is in this Oroco return

-------------------------------------------------------
                        Au      Ag      Pb      Zn
Category         Tonnes    (g/t)   (g/t)     (%)     (%)

-------------------------------------------------------
Indicated    25,250,000    0.52     8.6    0.34    1.02
-------------------------------------------------------
Inferred      4,690,000    0.17    19.4    0.53    1.69

-------------------------------------------------------

Let's use gold at U$29/g (900/oz)
Silver at U$0.40g (13/oz)
lead at 55c/lb
zinc at 55c/lb

AND THOSE ARE GENEROUS FOR FEASIBILITY. At 100% recoveries that Oroco indicated rock is worth $15.08 + 3.44 + 1.87 + 5.61 = U$26 per metric tonne. With likely recoveries you'd have a mine that was unprofitable with gold at 1500/oz, frankly. This dog has so many fleas it would have a problem in standing up cos of the weight involved.

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Trust me, the bits of the mail I missed out weren't any more positive.

It gets boring being negative all the time. My scam alert is set permanently on red as I search junior miners (elseways I'd be bankrupt by now), I'm bearish on short-term copper, mildly bearish on short-term gold (maybe $880 if you're asking, but WTFDIK anyway?), I'm bearish on nine out of ten miners I look at, I'm bearish on LatAm's macro compared to present forecasts, etc etc.

But that's the way it is right now. In fact, that's the way it's been ever since I started this blog, as the overriding message that I'd like to get across is that of preservation of capital. We're not in a situation where you can go looking for tons of alpha. Right now it makes the most sense, boring, tedious common sense, to stay majority in cash, hold bullion with a long term view and just play the odd splash'n'dash on opportunities as they arise. In my opinion, anyway. I too look forward to the day I can write my "YES! I'm bullish!" post and go 90% bought on stocks instead of the current 40% or so (I think..need to check), but that day simply isn't here yet.

Self-absorbed post with overdose of first person now complete. Thank you for bearing with me. DYODD.

Remittances in LatAm, 2008 (the chart of the day)

There has been ink spilled already on the slowdown on LatAm remittances (i.e. money sent back from industrialized nations by LatAm citizens living over there) that the financial crisis is causing, but so far the analysis has been stuck at the amounts of money being sent over and hasn't really examined which countries are more likely to feel the pinch.

This chart shows the percentage of GDP made up by incoming remittances for the major LatAm countries (with all due respect places like Belize are left out as their tiny GDPs skew the results out of shape and don't provide a fair comparative sample). The remittances data used comes from the Interamerican Development bank and the country GDP figures are from the CIA using the purchasing power parity (PPP) figures.

Click to enlarge

Top of the pops on this poll is El Salvador, a country that relies on cash sent home for 8.35% of its country GDP; that's an enormous figure and is comparable to the direct effect copper has on the GDP of Chile. Next up are three other Central American states, Guatemala (6.15%), Nicaragua (5.76%) and the Dominican Republic (3.73%). Only then does South America appear, with Ecuador (2.64%), Bolivia (2.51%) and Paraguay (2.4%).

Mexico is next at 1.59% but deserves a special mention due to the absolute size of its remittances trade. At U$25.145Bn it is by far the largest destination for remittances (second is Brazil at U$7.2Bn) and Mexico in fact accounts for 38.44% of all remittances received in LatAm in 2008.

Finally, the trio of Costa Rica (1.25%), Peru (1.24%) and Colombia (1.19%) are the other three countries that beat the regionwide average of Remittances/GDP of 1.09%. It's safe to say that all of the above countries will feel the effects of a slowdown in remittances in 2009 and beyond, with the first tranche of Central American states, Mexico, Ecuador, Bolivia and Paraguay feeling the worst effects.

A loosely connected rant about LatAm currencies

Every now and again, even a dyed-in-the-wool, professional politician will say something that's actually the truth. I was struck by this line spoken by Argentina's Eduardo Duhalde yesterday (as reported in this post).

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"This crisis was born in the USA, it hurts all of us and they have the chance to print money and save their own people. We don't have that opportunity."

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It makes sense on plenty of levels, not least of which the context of Duhalde's argument yesterday, that of "sauve qu'il peut". A couple of mental connections later, and here are two charts that show the evolution of local currencies against the greenback. This one has a 12 month timescale......

.......and we see the Argentine Peso and the Peruvian Sol as having held up the best...so far. But looking at the shorter-term movements.....


.....it's the Chilean Peso that has kicked back strongest in the three month period chosen by default, care of Yahoo Charts. That would be the moment when Bachelet&Co stopped the free-floating rot and due to direct, Keynesian government intervention policies and self-protection, dontcha know....

(Glossary: COP = Colombia Peso, MXN = Mexico Peso, ARS = Argentina Peso, PEN = Peru Nuevo Sol, BRL = Brazil Real, CLP = Chile Peso)

As just one example of the consequences here, the relatively strong dollar helps LatAm exports, of course. However you would expect a strong dollar in a time of strong US economy, not right now in the biggest financial and economic crisis to have hit the industrialized nations (led by the US) in modern times. What's the use of a strong dollar and its ensuing export market advantage when there's no market, except of course to make breathing space and prepare the way for the next round of helicopter flights from Bennyboy?

I could go on and on and on with this particular post, as the angles and tangents are manifold. I could talk about that post way back when I said that the US was keeping its dollar as strong as possible to make sure it doesn't lose its place at the head of the world table. I could talk about inflation risk of weak currencies. There's the whole issue of how soft pegged currencies like the Nuevo Sol and the Argentine Peso have performed much better than the more freely floated regional currencies such as the Mexican Peso or Brazil's Real. The case of the Chilean Peso and its dependence on copper is a particularly fascinating one for a wonk like me.

All those and more. But no, let's stop here. What I really want to say is that Duhalde made a great point yesterday, whether or not he was looking at it in a wider context. The bottom line is that if the USA has decided to protect itself at all costs and let others like us guys down here drown in the muck of its making, then why the **** should we keep playing ball with you guys?

Seriously. What have you guys done for us lately? Your economic policies suck and you still try and tell us how to runs things. You screw up the whole financial world and now you're getting the innocent victims to carry the can.

It's taken me a while but I'm beginning to see that Rafael Correa is absolutely right, basically because I'm not as smart as he is. Take your sovereign bonds, gringos, and stuff them where the sun doesn't shine. We have an abundance of water, farmland, power supply, region-wide democratic governments and importantly a population of caring, kind, willing and hard-working people, from Tijuana to Tierra del Fuego who are evermore pissed at the way the USA and the wider world community has been treating them all this time.

Quid pro quo, dudes. Quid pro quo.

Why bother

I don't accept anonymous comments. Said it before and I say it again. So when they come (more often than you'd imagine) I just hit the reject button. But the one that just came in this morning is so annoying, just so asinine that it's not getting away that easily. Here it is, in its glorious entirety:

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Anonymous has left a new comment on your post "Another thought on Peru's "growth" in 2009":

You guys follow the usual USA campaign trying to highlight all the negative you can about Latin America, so you make investments run away from our countries, keeping them poor and trying to ruin them so they can control them.

For instance, there was absolutely no coverage about the visit of George Bush to Peru during the APEC meeting on CNN; following the policy of not showing that good or important things can happen in this side of the world as well, and if they do, just ignore them or highlight the negative side.

Nice try, but we don't buy your stuff.

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I mean, where do you start with this? I live in South America. I've lived here for well over a decade. My wife is from here. My kids have single nationality. I'm an equities analyst. I put food on the plates of my family by talking LatAm business. Why on earth do you think that I don't want this region to develop and improve?

Anyone who bothers to read this blog for more than a day will know that I cheerlead the good guys. But why should we down here accept the samo samo gringo attitude of "they should be thankful for our investments"? If you think this blog is the 'usual USA campaign' you need to get out more.

We (yeah, "we", and no apologies for being born somewhere else) down here want Chinese investment in mining. We want the US investment in agriculture. We want the Russian investment in hydrocarbons. But we've also proved conclusively that we don't want the Bechtel style of usury water privatization in Bolivia. We don't want the Siemen's corruption and bribery techniques. We don't want the Chinese investment in mining that leads to slave labour. We don't want Texaco/Chevron deliberately spilling oil into a jungle region as it's the easiest way of making roads passable to trucks.

Regional investment should look to make a profit. Goes without saying. But the days of coming here, bribing politicos for the lucrative contract, extracting oil and giving local governments $3/bbl are now over. Or at least they will be if anonymous and others like him ever get an education. Nowadays words like justice, transparency, equity, fairness, win-win etc should be an integral part of doing business in Latin America.

If this blog has one thing to say about doing business in the region, it's all this. Nobody from gringo origins can have more respect for Latin America than this humble correspondent, though I'm glad to say that many come equal on this score. But the bottom line is simple; the world is welcome to do deals and invest in Latin America, and all you need to do to prove this is ask any reasonable Latino. But not at any price. Not any more. Come and play fair and you're welcome. Come to screw us over and you can crawl back to the sewer you came from right now.

You, anonymous, are a prize dumbass.

Mmmmm, stimulate my package, baby

With a post title like that, discretion
is the greater part of valour

All fun down here, as the likelihood of the Obama stimulating the world is reflected in trading all over the region. Brazil's Bovespa is up 4%, Argentina's Merval up 3% and copper is zooming and dragging PCU, Peru and Chile out of da funk. A special mention is needed for the banks, as fun is being had all over the region in that sector. Here are a few US-traded ADRs as examples:

• Peru's Credicorp (BAP) up 4%, even though it announced a crappy quarter (it was Madoffed to the tune of $45m) after the bell yesterday.

• Brazil's Itau (ITU) up 9%

• Argentina's Grupo Galicia (GGAL) up 12%

• etc (pick your own fave...plenty to choose from)
  

The general effect of the soon-to-be stimulated States on trading has even been strong enough to see Peru's Nuevo Sol currency (PEN) strengthen against the greenback after its surprise (for some at least, hahaha) rate cut last night. Proof, if needed, that the US economy still calls the LatAm tune bigtime.

Chart of the day is............

....International Currency Reserves per Capita for the nine major South American states plus Mexico.

Click to enlarge

The idea behind this chart is simple; we've heard often enough how LatAm is protected from the financial storm by having accumulated currency reserves in its various central banks. The amount in each country varies considerably (Brazil over $200Bn, Uruguay $6Bn etc), so by showing the reserves as a ratio of each country's population it gives a better idea as to the amoount of protection afforded by each pile of money.

Of course it isn't as cut'n'dried easy at that, as each country has different demands on that reserve (debt servicing, capital outflows, pressures on its currency that depend on copper (Chile) or soya (Argentina) or ten thousand other variables). But the chart does give a general idea of strength.

The strongest country by far is Chile; this because as well as the $26.49Bn in official reserves used in the chart, it also has around $23Bn tucked away in overseas accounts to call on...add these together and Chile enjoys the backup of over $3,000 per capita. Next comes the quiet achiever Uruguay, once again showing itself in excellent position for the turbulence to come. Argentina and Venezuela are relatively rich at the moment, but both of those are more likely to tap reserves heavily in the near future.

Surprises include Bolivia, as the Evo Morales gov't has been fiscally prudent over the last two years (but don't spread that around...we don't need no stupid facts, right?). Also surprising but for the wrong reasons is the relatively low level of reserves that Colombia can call upon.

In general, the question to ask here is "Is $1,000 per head enough to protect a country?". That's one of those subjective, piece-of-string questions I suppose. But it does give us an idea of the numbers involved.

Make sure you're sitting down for this one: Tourists Get Charged More Than Locals In LatAm

Argentina's daily "Clarin" today picked up on an old chestnut in this story. They pointed out dual pricing was against the law but even so tourists get ripped for a few dollars more while tripping in Argentina. It tried to sound all shocked and indignant, but really the surprise level is zero. So as a tall, white-skinned gringo with over a decade in the region and wide and varied travel history, here are a few I've had the pleasure of coming up against:

Taxi drivers. This one is close-on universal, from the innocent and totally payable 1 Boliviano extra I'm charged in La Paz, to the dollar or so they'll add on in Colombia (no worries) to licenced bandits on wheels. "Ah, pero Meester, the meter is in dollars, not Pesos" in Buenos Aires. "Ah, pero Meester, the meter charge is per person and you are two people" in Montevideo. I think my favourite is Lima airport, though. Just for the laugh nowadays I put on my bad "cuantow cuestarrr to Mirarrflouresh?" act just outside the door on leaving the main terminal, and get told something between U$40 and U$60 in reply. I then walk three minutes to outside the airport gate and get a S/20 (U$7) ride to the same place. Bless 'em!

Police officers. I was a biker while living in Argentina. There you put a 20 peso note in the left side of the leatherette licence-holder. If a policeman stops you, just hand the thing over and wait. He'll walk to his car, walk back, say "thank you, everything's in order" even if the licence has a picture of Che Guevara instead of you, and return your licence with smile and sans banknote. It's not a bribe, it's just the way it is when you're a foreigner.

Restaurants.
"Waiter! This check says the meal was 10 pesos! On the door it says 5 pesos!"
"Yes sir, it's 5 for the meal and 5 for the cover charge."
"Yeah right."
"Tips aren't included, by the way." (smiles)

Hotels. Trying to explain to a tourist that you can (in fact 'should' is a better word) bargain the ticket price for a room in any grade of hotel in any part of the continent is difficult. That price on the wall behind reception is there for just two reasons:
1) To make locals feel like they're getting a bargain for 30 when it says 50.
2) To charge gringos.
I guarantee that nobody in a hotel will ever get annoyed if you say "got anything cheaper?".

Shoeshine boys. Look, I don't mind paying a coin extra, I really don't. But when they tell me that black shoe polish is U$3 a tin it just gets on my nerves. Every single freakin' time.

Beach vendors. On a two week vacation in Buzios, Brazil, every day at the same time the guy came round with hammocks for sale. Day one was U$50. Day eight was Rs11 (about U$5) and a sale and we shared a beer to celebrate.

Lan Airlines. I like the service and the planes, but I hate hate hate the way I cannot pay the local prices while sitting in the local country just because I have a gringo credit card. For your information, foreigners unwittingly pay up to double for their ticket on Lan's internet booking service. So I don't bother anymore; as I live close to an airport I just take a taxi down there and pay cash at counter.

An ex-neighbour once asked me if he could 'pinchar mi luz' (i.e. tap into our house's electricity line and get free juice from us). When I said no, he comes out with "but you're a gringo, you must have money." Bless him!

There are plenty more. The plain fact is that I do pay more than a local local, and if it's a coin here and a coin there it never bothers me. But when you flag down a taxi with a small kid in school uniform and ask to go to an out of the way barrio (i.e. our house) and the dude looks you up'n'down and promptly doubles the normal asking price, it does kinda get a bit too much. Whatever the good or service, large or small, there's a 'fair price'. My idea of a fair price to pay is a 10% gringo premium, not 100%.

PS: If you're offended in any way by the word 'gringo', get a life.

BREAKING NEWS: LatAm economists make stupid predictions again

The 2007-2008 version of the CEPAL "Estudio económico de América Latina y el Caribe" was published this week. This report is one of the most complete annual economics studies of the region and over the years has become required reading (for wonky guys like me, that is).

You can get your own copy, free gratis and for nothing, by clicking on this link right here (I'm good to you, am I not?). I'm quite sure this 200 page PDF in dense, financial Spanish is bound to brighten anyone's weekend.

It really is an excellent source of reference, but the word "stupid" crept into the title line because these CEPAL dudes insist on trying to predict (read 'guess') how the regional economies will pan out in the next couple of years. I'm going to use the example of Venezuela, and shock horror you'll be surprised to find out that CEPAL consistently underestimates its economic growth rates. You need to check previous publications for the figures and I've only got them on file in the PC, but I've managed to find some website links that prove the point. Here are the CEPAL prediction numbers in the chart below from 2004, from 2005, from 2006 and 2007.

We see that CEPAL has at least been consistent, as apart from 2004 when they totally miscalculated how quickly Venezuela would rebound from the PdVSA strike and the recall referendum shenanigans, they've missed by about 2% each year, though always to the downside. By simple extrapolation therefore, we can get closer to the suited guys by adding 2% on their FY08 and FY09 guesses. Hey, this prediction game is fun! Let's play more often!

Moral of this story: Dismal scientists' reports are good places to find out about what happened in LatAm, not what will happen. Feel free to pass this post on to the next person who tells you Venezuela will only grow 4% in FY09. Fact is, the only thing that affects GDP growth in Venezuela to any great extent is the price of crude oil, so you get a better idea of its growth prospects from the CBOT than you do from economists.

UPDATE: I immediately got a mail about this post from a friend who says "Big deal, they got Vennie wrong". Fact is that they suck regionwide, and here's another chart I've just thrown together from the CEPAL yearly publications showing their predictions for pan-regional growth and how the reality has bitten.

You see? They still suck.