Tag Archives: capital controls

Markets irrational longer than you remain solvent, exhibit #274

2013.12.Irrational markets

Source: Russell Investments

There’s an article out on Seeking Alpha yesterday, called “Manufacturing Growth and Capital are Moving from China to Mexico“, nominally about the Mexico-China relationship to the US, but also more broadly (in my interpretation) about how we react to and measure growth in developing economies.

The key thesis here has to do with the spillover effects of China’s decelerating growth and who will pick up the slack. This may not necessarily be an exact zero-sum game, but it is to a certain extent, at least as long as Americans are still gaming, eating, drinking, driving and whatever else they demand to do, and as long as China and Mexico remain the second and third biggest trading partners of the US.

That Mexico will pick up some of this slack is a foregone conclusion. But just how much it benefits is what remains to be seen, and at least among its boosters, is what drives all this excitement we’ve been seeing about Mexico ever since the current administration was elected. Specific to this article, which was written by an equity analyst out of California called Erik Gholtoghian, the currency deficit between Mexico and China is particularly telling:

“…the Mexican peso has weakened dramatically against the dollar since 1990, almost 80%, and the peso is down 2.44% against the dollar over the past year. In other words, the Chinese yuan has strengthened 34% against the dollar since the revaluation began in 2006, but over the same time, the peso has weakened 20% against the dollar. This means the yuan is 54% stronger against the peso just over the past seven years. The result will be greatly decreasing exports from China to Mexico and increased exports from Mexico to China.”

All fine and good, but there’s something missing here and after discussing this with some folks I know around Mexico City, it strikes me that this is partly about Mexico but also about how to approach investment prospects for many emerging and frontier market countries.

I’ll begin with a basic metaphor to illustrate what I’m thinking of here. When you jump up in the air, how can you remain airborne as long as you do? Gravity should theoretically pull you back to earth, and in fact it eventually does. But there is a brief moment when you can defy the theory of gravity, due to the relationship between your body’s mass, your muscle strength and the actual gravitational force of the earth.

In the case of Mexico, economic reality has been suspended in this theory-defying space for a few years now and it’s a matter of time before indicators on the ground (no pun intended) reflect a closing of this gap. Think of it as the reverse situation of the dotcom bubble or the real estate bubble. This is the basis for value investing (as opposed to speculative investing) and at a bird’s eye level is no different from the approach Warren Buffet uses in evaluating stocks. Company ABC has low costs, stable contracts with a diversified customer base, competitive quality products and whatever, they should be making X profits per year but they’re only making a fraction of that…therefore, buy.

Here’s another comparable situation: Billy Beane, he of Moneyball fame, used the same approach when he was managing the Oakland A’s baseball team in the early 2000s. He saw underpaid players who may not hit home runs and may even have crappy batting averages, but also never seem to strike out and wind up finding their way across home plate one way or another. He exploited this for as long as he could, until the rest of baseball caught on, copied it, and eliminated his advantage. By this metaphor, Mexico’s economy is slowly being recognized by the Billy Beanes of the investing world. The difference is that Billy Beane kept his mouth shut because he knew he was on to something. Meanwhile, these investing gurus can’t stop praising Mexico as the next big thing, partly because everyone else jumping on the bandwagon makes it a self-fulfilling prophecy (which is where the baseball comparison stops) and partly because the nature of today’s evolving media universe sort of demands everyone to stake his claim as an “expert” in something.

Another difference with the Mexico situation is that there are a lot more variables that could prevent the benefits of this growth from reaching ordinary Mexicans (corruption, red tape, narco, etc) and the persistent failure of commentators on Mexico to recognize the unpredictability and range of these other variables can appear very misleading. Sometimes this failure seems to be because the commentator in question is clueless/stupid/ignorant/etc. Sometimes it’s because they have a vested interest in a positive outcome and are therefore disinclined to (publicly) focus on downside risks (here’s one recent example of this).

There is also the perennial issue of timing, which is the great bugbear of economics and investing in general. Going back to the gravity metaphor, we can predict with decent accuracy how long you can stay airborne as a result of the very specific estimate of Earth’s gravitational force being 9.81 meters per second squared. One of the main reasons for this specificity is that Earth’s gravitational force is independent of human behavior. Mexico’s economy does not enjoy the same luxury for all of the previously mentioned reasons and more.

As John Keynes is supposed to have said, “Markets can remain irrational longer than you and I can remain solvent.”

Personally, I don’t believe anything – good or bad – until I see it.

Irrational exuberance continues plaguing Bitcoin

2013.12.IgnoranceBank of America has now initiated coverage of bitcoin and puts a fair value price target at US$1,300, which depending on your view, either validates or discredits the digital currency. Personally, I have no skin in this game, I appreciate and am fascinated by the theoretical construct, but am put off by the breathlessly brainless hype surrounding it and one doesn’t have to look far to see bitcoin’s limitations.

With that said now, the BoA report link is here, and as far as I’m concerned, the most important stuff comes in at page 6, in the section entitled, “How to assess Bitcoin’s fair value?”

I admit up front I have yet to come up with a viable answer to this question, but if I may say so, I am expert at recognizing bullshit when I see it. And BoA analysts make what even they concede are very big assumptions here, but if you know the assumptions are “big” (read: unrealistic), then why bother going on about it in the first place?

Anyway, taking this piece by piece, some of the outlandish assumptions that lead to a “fair value” price of $1,300, as far as bitcoin’s value as a medium of exchange:

Given the assumption that Bitcoin will grow to account for the payment of 10% of all on-line shopping, this would suggest that US households would want to have a balance of $1bn worth of Bitcoins.

…given bitcoin’s famous finite supply cap at 21 million units, the math here isn’t quite doing it for me.

What about for the whole world? US GDP is about 20% of World GDP. If we were to assume the same degrees of penetration of e-commerce for the rest of the world and that spending by households outside the US has the same velocity, we get to $5bn worth of Bitcoins for the total desired cash/noncash balance of global on-line shopping.

…sure, but both of those assumptions are not just wrong but shockingly ignorant about how the world outside the United States operates. I don’t need to spell this one out further, do I?

In addition to its role as a mean for payment for on-line commerce, Bitcoin can be used for transfer of money (e.g. immigrant worker in the US sending remittances back home).

…the average immigrant worker in the US sending remittances back home is a) Latin American, and b) traditionally very distrustful of all financial mechanisms or intermediaries that are not cash; further, this average immigrant worker would require a level of facility with the internet that various studies simply do not bear out.

Western Union, MoneyGram, and Euronet are the three top players in the money transfer industry (with about 20% of the total market share). Let’s assume that Bitcoin becomes one of the top three players in this industry.

…actually, let’s not, for all kinds of practical reasons. See previous two rebuttals to begin with.

A thought just occurred to me: maybe this is a practical joke — like the Onion!

As far as bitcoin somehow serving as a store of value, the entire discussion here appears LSD-induced, with the following statement perhaps being the biggest whopper:

If we were to assume that Bitcoin were to eventually acquire the reputation of silver (which is an extremely ambitious assumption), this suggests that Bitcoin market capitalization for its role as a store of value could reach $5bn.

WHAT?

This is the metaphorical equivalent of saying that assuming gravity were one-tenth its current force, I could leap tall buildings in a single bound…and then going on to design a workout routine that does indeed involve me leaping tall buildings in a single bound.

Someone’s living in unreality and I’m pretty sure it’s not me. 

More evidence of a Bitcoin bubble

If this isn’t proof enough of a Bitcoin bubble, I don’t know what is:

2013 December Bitcoin

Actually you know what? I think there is better proof: THIS.

What Central Bank FX Reserves Really Tell Us

The New York Fed has just published what is absolutely mandatory reading for anyone with a stake in the foreign exchange market. It’s a 10-page pdf entitled, “Do Industrialized Countries Hold the Right Foreign Exchange Reserves?” and is one of those rare documents whose entire text is quotable, making excerpting rather difficult, but I’ll try to keep it short. The abstract provides a pretty good summary:

That central banks should hold foreign currency reserves is a key tenet of the post–Bretton Woods international financial order. But recent growth in the reserve balances of industrialized countries raises questions about what level and composition of reserves are “right” for these countries. A look at the rationale for reserves and the reserve practices of select countries suggests that large balances may not be needed to maintain an effective exchange rate policy over the medium and long term. Moreover, countries may incur an opportunity cost by holding funds in currency and asset portfolios that, while highly liquid, produce relatively low rates of return.

And this, from the opening paragraph, is also worth drawing attention to:

To date, the foreign exchange reserves of major industrialized economies have received relatively little attention in public policy circles, with few questions posed regarding their optimal size, composition, and use. Instead, discussion of foreign exchange reserves tends to center on the large holdings of emerging market countries—including China, whose reserves reached about $3 trillion in mid-2012. Foreign currency reserves are also overshadowed in public discussion by the much larger external imbalances that countries amass in the form of trade deficits and surpluses.

The key element here is that this paper only looks at the US, the UK, Switzerland, Japan, Canada, and the euro area, and rightly so as these are the big fish of the global FX market. The brief mention of emerging market countries’ holdings highlights what’s implied in the debate but rarely stated explicitly, so allow me to do so now:

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Plain English: Some Thoughts On Bernanke’s LSE Speech

2013.03.26.Bernanke Plain English-helicopter benBernanke gave a speech at the London School of Economics yesterday which is grabbing a lot of attention. Those who have heard or read some of his other non-Fed public lectures over the past few years will recognize that he spent about half of it reviewing some of his favorite historical lessons, mostly sourced from his pre-Fed academic work. But there were some new statements to add to this mix. My interpretation of some of the key themes:

  • The current financial crisis is in fact a classic panic: a systemwide run of “hot money” away from assets whose values suddenly became uncertain.
  • That said, there were some different bells and whistles this time, notably the introduction of new financial instruments, more varied actors beyond just banks and (in my opinion) most vitally, a scale and complexity altogether new.
  • Currency war, which Bernanke chooses to refer to as, “competitive depreciation of exchange rates”, is similarly not new.
  • The accommodative monetary policies central banks around the world have been implementing (read: zero interest rate policy) to support growth do not constitute competitive devaluations, currency wars or whatever term you prefer. The primary reason for this is that domestic demand counts for a lot more than exchange rate meddling and in any event when competitive economies both devalue their currencies, whatever effects result from these devaluations effectively cancel each other out.

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How Oil Divides The Economies Of Africa Into Winners And Losers

I can’t get this article from the FT’s William Wallis out of my head. The headline is “Currencies pressed by trade imbalances” but this really only captures a small slice of the picture. Check it out:

With import demand outstripping export growth in some of the continent’s fastest expanding economies, rising trade imbalances are putting pressure on currencies. African and international investors hedge against this by spreading risk – one factor that is driving African banks and businesses across borders.

But even an expansive footprint is not always enough. MTN, the continent’s leading telecoms provider with a presence in 21 African countries, announced that currency swings had weighed heavily on its earnings.

More broadly says Razia Khan, head of Africa research at Standard Chartered Bank, widening current account deficits are the result of an investment and consumption boom, new resource exploration activity and “the scaling up of output”. Ghana fits into this category. It is also on the risk radar this year as heavy investment in oil and gas infrastructure continues, with only modest increases forecast for oil output.

A weak currency does not help those African countries with limited capacity to ramp up exports in response. Kenya cannot for example suddenly double tea production. So, it is forced to defend its currency to avert importing inflation.

Loose monetary policy in major developed economies has driven a rush of short-term funds into African markets. David Cowan, Africa economist at Citibank, says the way in which central banks defend their currencies and the margins that foreign investors earn will be one determining factor in how long the appetite endures.

I don’t disagree with any of this but would point out that this is all just the tip of the iceberg and there are a lot of ways to slice this.

One is that just six of Africa’s 53 countries account for two-thirds of the entirety of Africa’s $2.0 trillion economy. In descending order of nominal GDP: South Africa, Nigeria, Egypt, Algeria, Angola and Morocco. I think a pie chart best demonstrates this relationship:

2013.03.20.Africa 2013 GDP composition

Another is to think about how much of Africa’s total economy is driven by oil exports. Let’s try the following table to demonstrate this:

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Che Misterio On Argentina’s Summer Of Discontent

2012.10.18.Che MisterioLadies and Gentlemen, Che Misterio:

Argentina Lumbers On

By Che Misterio

Evidence mounts that Argentines will do whatever possible to leave the country and earn in hard-currency – even head the Catholic Church, if necessary.

As is customary when a financial crisis looms in this country, the government ups the rhetoric regarding the Falklands. The day before Bergoglio was elected Pope, a referendum on the Falklands could hardly have been clearer: of 1,518 votes cast, 1,513 voted in favor of remaining British, 2 were unable to successfully fill out what could not have been a particularly complex voting slip, and 3 voted in favor of becoming Argentine. Who were those three? I’d love to meet them. I barely follow British politics and the entire EU seems to be in a mess currently, but really – would anyone actually choose to be governed by the Kirchner government if they had a choice?

Argentina’s problems would apparently vanish if only they had those scraps of land some 500km off the coast, despite most of Patagonia remaining a vast unexploited expanse of nothingness. Sure, the islands are financially self-sufficient and they boast an enviably high GDP per capita which exceeds even that of Norway, with full-employment. But would this continue under Argentine management? The rest of the country’s economic performance does is not reassuring.

If a referendum were to be conducted today in Argentina asking voters to choose between being governed by the current Kirchner government or the British, I wonder if it would be quite as overwhelming as the 99.8% seen on the Islands?

Meanwhile, the US dollar hit a new landmark – 8 to 1 on the black market. In fact, I am not sure it can really be called the black market, as barely anyone is using the other market, which still doggedly insists the rate is a smidge more than 5 to 1. Admittedly almost no one is allowed to buy dollars at this rate, and no one remotely astute is selling at this rate, so there’s little harm fabricating the rate for a non-existent market.

The state petrol supplier, YPF, seems to prefer cash, as the debit and credit card machines seem perpetually “out of order”. Even the airlines now accept cash. Flights are actually quite cheap for those with dollars able to pay in pesos via a quick visit to the money-changer. A recent article suggests US$1 million a day is fleeing across the border to Uruguay, and there are no more safety deposit boxes left in Colonia, just across the river from Buenos Aires.

Rumors of an imminent devaluation appear unfounded. Kirchner’s new BFF, Deputy Economy Minister Axel Kicillof, is said to be flirting with the idea of multiple exchange rates, another tried, tested and doomed strategy to manage (or manipulate) a currency. Inflation continues its relentless erosion of value for all local currency assets, with the exception of four supermarkets who have been enjoying price controls, a privilege which will end in April. Watch for a surge in purchases on April 30th and a spike in prices on May 1st.

Supermarket trolley-arbitrage: only in Argentina.

[Ed. note: You’ll notice a new tag, entitled, “Guest Writing.” Here is where you’ll find all guest articles.]

Is Asia’s Foreign Exchange NDF Market The Next Domino To Fall?

2013.03.15.ASEAN mapThat’s the basic question I take away from this recent article from the FT’s Jeremy Grant, which uses a wrongful dismissal lawsuit ex-UBS traders are bringing against their former employer as a gateway to discussing price transparency in the Asian non-deliverable FX market.

The important bit doesn’t come until the second half of the article:

“Quite how this “shadow” fixing system has emerged in Singapore, alongside the official rates set by southeast Asian central banks, is a bit of a mystery. Bankers say it was because traders didn’t historically trust the onshore fixing. It is easy to forget the depth of anti-market feeling in Malaysia during the Asian crisis.”

Actually, how it emerged in Singapore was rather straightforward. Continue reading

Chart Of The Day: Emerging Markets Currency Wars Landscape

This is interesting:

2013.03.06.Swan FX Diagram

2013.03.06.Swan FX Table

And here’s an explanation of what we’re looking at:

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Market Lemmings Finally Wake Up To Original Sin

“The definition of insanity is doing the same thing over and over again and expecting different results.” — Albert Einstein

The FT’s beyondbrics has a chart of the week discussing “Original Sin” in the African context, which in econo-speak, refers to a country which issues debt in a currency other than its own (usually dollars or euros):

2013.03.04.Sub-Sahara-Africa-bond-yields original sin

This should not be a new concern, but somehow in all the hype over EM debt issues last year, the financial news media seemed to overlook this very real downside risk. For those of you unaccustomed to thinking about this stuff, the problem here is pretty basic: if a country–Zambia last September, for example–borrows US$750 million, this means it’s on the hook to pay that back in US dollars. If its own currency, the Zambian kwacha in this case, declines against the dollar throughout the duration of the debt, this increases the cost of borrowing in local terms since it will require more local currency to pay back the US$750 million principal.

In the particular case of Zambia, its capital controls ensure some level of kwacha stability against the dollar, but only so long as those controls hold. How likely they are to hold remains an open question, but we don’t have to look too far back in history to find situations elsewhere in the world when this sort of scenario caused major structural problems. Argentina in 2001 and Thailand in 1997 are two of the most glaringly obvious that come to mind, but there are countless other smaller examples over the years.

Equally worrisome is how beyondbrics closes this revelation:

There remains a slight chicken-and-egg problem: investors are wary as African sovereigns don’t have a great track record, which makes it harder to borrow and for countries to show to agencies and investors that they are worthy of higher ratings and lower yields.

But with more borrowing used to finance infrastructure spending, and developed bond markets offering near-zero returns, bond issues should still find buyers – just perhaps not with as low as the low yield that Zambia enjoyed. As Exotix points out: “fundamentals have not really changed”.

Actually, fundamentals have not really changed in many parts of the world; and yet somehow this higher litmus test is being applied to Africa whereas investors seem perfectly willing to let it ride from Europe to Mexico to US banking stocks.

By the way, this is hardly the first time I’ve pointed out the problems of hard currency debt and original sin. You can go to here, here, here or here for more. 

I hate to say I told you so but…I told you so.

Central Banking Today: Game Theory Now More Than Ever

Take a look at this recent column from PIMCO’s Mohamed El-Erian and try to tell me otherwise:

With many other policy makers essentially missing in action, central banks find themselves in leadership roles not out of choice but necessity. Given imperfect tools, their involvement entails, to use the US Federal Reserve chairman Ben Bernanke’s phrase, “benefits, costs and risks”. They believe that macroeconomic benefits will outweigh the collateral damage; and they hope that they will buy sufficient time for others to respond properly and for economies to heal endogenously.

The dilemma of modern central banking was captured well last week by incoming BoE governor Mark Carney in his testimony to the UK House of Commons Treasury committee. While recognising the risks of further QE, the current Bank of Canada chief argued that central banks should act to avoid sluggish growth raising the natural unemployment rate via hysteresis.

The fundamental problem is that central banks are pursuing too many objectives with too few instruments. That is why outcomes consistently fall short of their expectations; and also why talk of exit is repeatedly shelved.

Absent better support from other policy makers, central banks will be dragged deeper into policy experimentation. Meanwhile, with incentive structures failing to align properly, perverse reactions are clear – from persistent (and, in Europe’s case, increasing) policy complacency elsewhere to distorted market functioning leading to potentially harmful resource allocations.

Then there is the biggest issue of all: the effects of unconventional monetary measures are likely to become volatile and highly binary if a growing number of central banks around the world feel they have no choice but to join the current western policy stance.

A larger global shift to expansionary monetary policy would enhance the probability of triggering “wealth effects” and “animal spirits”: the two channels through which policy-bolstered asset prices translate into better economic fundamentals. With that, the greater the likelihood of a pivot from “supported growth” to “genuine growth”.

However, relative pricing channels, including currency relationship, would be crippled if too many central banks were to opt for the same policy. Harmful beggar-thy-neighbour effects would amplify damage from artificial surges in asset prices that encourage irresponsible risk taking, fuel “bad inflation” and worsen the risk of disorderly economic and financial deleveraging.

Street Markets 101: Che Misterio Navigates Argentina’s Black Market for Dollars

2012.10.18.Che MisterioI am humbled, honored, grateful and excited to once again present Che Misterio in Argentina, who continues endangering his life for the purpose of shining a light on one of the blindest of economic blind spots in the world today: Argentina’s black market in foreign exchange. Che previously enlightened us in this space on the topics of Big Mac inflation and street level economics. The following was first published on Seeking Alpha under my name in a version suited to that publication’s editorial format, entitled, “How to Navigate Argentina’s Black Market in Foreign Exchange”. Below is the original as submitted by Che Misterio.

Ladies and gentlemen, Che Misterio:

Where Next for Argentina?

By Che Misterio

It is no secret that Argentina is now a two-tiered society. There are those with hard currency for whom the standard of living is quite cheap, and who are therefore immune to chronic inflation as their dollars and euros appreciate even quicker than prices. And then there are those without hard currency, and they live a precarious existence, to say the least: they cannot save their pesos, and even if they could it would be pointless as inflation rages on despite government insistence to the contrary; flagging confidence in the national currency and ever tighter regulations on foreign exchange means the only way to acquire a meaningful amount of hard currency is to pay an expensive premium on the black market.

I am grateful to belong in the first tier. I exchanged some euros recently on the black market, despite the terms being rather nebulous. For those unfamiliar with the street level workings of Argentina’s informal economy, this does not involve some suspicious character in dark sunglasses manning a backstreet stall flanked by security guards with black ear pieces protecting the stash. This was in an otherwise regulated bureau de change on a busy street, staffed by a man of average height, weight, complexion—what those in show business refer to as “the everyman look.”

The opening conversation went something like this:

“Hi, I’d like to change euros please”
“Where are you from?”
“Here.”
“We don’t change euros.”
“But Roberto changes euros, no?”
“Please wait here.”

“Roberto” was the code word a friend of mine had given me for signaling to this bureau de change that I wanted to transact at the black market rate. The man turned his back to me and knocked on the tinted glass of the door behind him. The door made a slight clicking sound as the magnetic lock loosened and the door opened. The man disappeared through the doorway and the door closed and locked, leaving me alone to wait. Two minutes later, the door re-opened, and he beckoned me to enter.

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Chart of the Day: Frontier Markets Fixed Income Yields

We would be wise remind ourselves first of the definition of the impossible trinity: it is impossible to have (a) a fixed exchange rate, (b) absence of capital controls and (c) an independent monetary policy.

Remember that. I’m going to come back to that.

So Silk Invest has this going on:

“The chart on the right hand side compares currencies in terms of Purchasing Power Parity. What the graph tells us is that the adjusted value of the Brazilian Real is similar to the US$, while most frontier market currencies are systematically undervalued.”

2013.01.23.Frontier Markets yields

The problem I’ve always had with Purchasing Power Parity is that it assumes equivalent standards of living across markets when in fact that is very rarely the case. Put another way, a dollar may buy more in Brazil than in Vietnam, but this says nothing about what the average citizen in either of those countries needs to sustain a living.

But that’s an argument for another time and another context. Otherwise, this is a very compelling chart. A couple things off the top of my head:

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Miami restaurant accepts Argentine pesos as payment

Oh my. This is brilliant:

The IMF finally considers nuance in capital controls policy

After a three-year review of its policy on capital controls, the IMF is reversing its stance, effectively connoting a status for the institution that brings to mind a certain Kent ‘Flounder’ Dorfman:

Sure, the IMF has said it favors macro prudential policies and sure, it gave limp support for austerity due in part to the screamingly obvious distortions near-zero interests rates are causing. But a couple of these big-pic takeaways from the IMF’s recently issued report are worth noting and indicate a very different tune than the usual liberalize-at-all-expense advice the IMF has become famous for (emphasis mine):

Liberalization needs to be well planned, timed, and sequenced in order to ensure that its benefits outweigh the costs, as it could have significant domestic and multilateral effects. Countries with extensive and long-standing measures to limit capital flows are likely to benefit from further liberalization in an orderly manner. There is, however, no presumption that full liberalization is an appropriate goal for all countries at all times.

Rapid capital inflow surges or disruptive outflows can create policy challenges. Appropriate policy responses comprise a range of measures, and involve both countries that are recipients of capital flows and those from which flows originate. For countries that have to manage the macroeconomic and financial stability risks associated with inflow surges or disruptive outflows, a key role needs to be played by macroeconomic policies, including monetary, fiscal, and exchange rate management, as well as by sound financial supervision and regulation and strong institutions. In certain circumstances, capital flow management measures can be useful. They should not, however, substitute for warranted macroeconomic adjustment.

While it’s nice to have the IMF join a party that has been underway for a few years now, I would remind everyone of a couple of things. One, there are many variables that influence capital flows into developing countries, and while monetary policy in the US and Europe is a major factor, it is far from the only one. Macro environment matters, relative yields matter, “currency wars” and just plain wars, to name a few, also matter.

I also should note that I have not yet read the full paper but I suspect that when I do I will have more to say about this. In the meantime, new readers looking for more on cap controls might try the following:

Previously related reading:
A non-ideological defense of capital controls here.

A non-ideological rebuttal of capital controls here.

FT coverage here and here.

Che Misterio asks: Could Argentina be manipulating Big Mac prices? A preliminary investigation.

I am pleased to once again present Che Misterio, who previously enlightened us with the realities of Argentina’s economy at the street level. Today, he takes on the very provocative question of whether that time-tested bulwark of American soft power, the Big Mac, might be the latest commodity to fall victim to Argentine price-fixing. Ladies and gentlemen, a preliminary investigation:

Big Mac Fraud

by Che Misterio

Could the Kirchner Administration be obsessive enough to fix the price of a Big Mac?

In Argentina everything is possible.

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Street Markets 101: Ground Zero in Argentina

I’m very excited to introduce the second installment of Street Markets 101 today (go here for the first installment), submitted by a guest writer in Argentina who for professional and security reasons is unable to use a real name. I modified this to suit a different editorial format for publishing last week on Seeking Alpha under my name with the headline, “A Street Level View Of Argentina’s Economy, The Peso And ARGT” (see here for the Seeking Alpha version) , but I could not have done it without the help of the source. Today, I present the original unabridged version. Without further adieu:

Ground Zero in Argentina

By Che Misterio

The nationalization of YPF, the falsification of economic data, inflation, mounting street protests and the volatile commodity prices…. these are all fascinating points for the international community to examine in any assessment of the unfolding crisis in Argentina. What has failed to reach the general audience is the impact of the CFK government upon the layman, particularly beyond the confines of Buenos Aires.

I am an economist and live in the “provinces”. I am not Argentine, but am intrigued by the ability of the Argentines to adapt to economic mis-management effectively and creatively. I assume this is simply due to a century of practice. Consider the following impacts on the layman:
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Street Markets 101: How to fly from point A to point B in Nigeria

Welcome to what I hope to be an ongoing segment on this blog, called “Street Markets 101”. The idea behind this is to document the practical considerations of conducting business on the street level in underdeveloped countries. I’ve been thinking about this for a while now but the general inspiration behind it is reading a few too many research reports hyping [insert country, market, region or economy here] as the next big thing while completely ignoring the details of what it actually takes to make something happen when physically in certain countries. I could go on at length about transparency, rule of law, bureaucracy, unemployment, petty corruption and many more things, but I will stop this introduction here in the interest of keeping it succinct and hopefully forthcoming entries under this tag over time will speak for themselves. I’m working on sourcing other contributors to this effort, so if you live in or have plans to visit somewhere you think would be appropriate for this column, please contact me. In the meantime I thought I’d kick off the inaugural piece here myself.

I was in Nigeria for a project last month and on my third day there landed in the undesired but not unforeseen position of having to arrange a domestic flight from Lagos to Abuja for myself and my colleague, a white American man I shall henceforth refer to as Tommy Big Game. Following is the full play-by-play of what was required to successfully book passage for the two of us on a Monday morning flight in August following Ramadan: Continue reading

Hype vs. growth: China’s Yuan Renminbi in international payments

I’m VERY skeptical about the race to declare dollar extinction/renminbi dominance, but two items have been brought to my attention in the past few days that I thought would look rather nice when mashed up together. The first is this chart, from SWIFT:

How alarmed you are as a result looking at this chart I suppose depends on some combination of what your biases are, how unplugged you are and how alarmed you tend to become at things that contradict your expectations. Let’s consider the observations to make from this chart and some other things and then we’ll come back to what our response should be.
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What Silk Road’s narcotics trading says about the FX market and capital controls

If you haven’t heard of Silk Road, the anonymous eBay-style marketplace that has quickly become a hub for controlled substances, read up on it herehere or here first. Otherwise, Nicholas Christin’s recent working paper, “Traveling the Silk Road: A measurement analysis of a large anonymous online marketplace”, opens no end of questions for just about any discipline under the sun. My concern is more foreign exchange related, so let’s get right to it. The table to the right shows the top 20 best-selling items available. I’m not too surprised that weed is the top seller here, but I am surprised that it doesn’t constitute a greater share of trade. Next up, still bird’s eye view, the top shipping origins and destinations:

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