Submitted by Russel Napier of ERI-C
Bringing Up The Bodies in Emerging Markets
'The order goes to The Tower, “Bring up the bodies.”'
-- Bring Up The Bodies, Hilary Mantell (The Forth Estate, Jan 2015)
For many investors the meltdown in emerging market exchange rates is just some temporary contagion from Turkey; it will go away. The reasoning goes that it is a myopic liquidation of perfectly good assets, just because Turkey happens to be classified as an emerging market. Your analyst has long disagreed with that and late last year outlined the consequences for emerging markets from the bankruptcy of Turkey.
Of course the greatest surprise for investors is not that this is a problem for emerging markets but that it is, much more importantly, the beginning of a European crisis. However, it is not just the negative impacts from the broad financial forces outlined in these reports that are depressing emerging market exchange rates. There is something much more important and insidious undermining these exchange rates: the rise of the rule of man and the decline of the rule of law.
Professional investors have become entirely distracted from the structural decline in the rule of law in emerging markets, as they beat themselves up about Brexit and the Trump Presidency. Given the backgrounds of the average investment manager, it is not surprising that their attention should be diverted to these local issues that challenge not just their portfolio values, but also their personal values. Whatever these two political shifts represent, however, they do not represent a decline in the rule of law. If the US does have a President, whether Republican or Democrat, who breaches the law then it is highly likely that they will be held to account by the legal process.
Similarly, with Brexit the UK’s exit from the EU represents no threat to the rule of law, simply a different and more directly accountable legislature that will enact those laws. Whether you like the impacts that Brexit and Trump are having on your belief system or your way of life they are not a threat to the legal systems that protect your clients’ savings. Sadly, in emerging markets the rise of the strong man and the decline of the rule of law are indeed undermining savers’ legal title to their assets and the cash-flows from those assets.
Investors simply refuse to see it, so intent are they on traducing what they see as the failings of their own political systems. It is time to refocus on what really counts for investors and above all else, above who runs the country and even how they run it, investors must worry first about whether the return of their capital is protected by law. Crucially, even if foreign investors refuse to acknowledge the decline in property rights in key emerging markets, the local investor, being much more fully exposed in his person as well as his property, acts to remove his property. Across key emerging markets we are not just witnessing a contagion from Turkey, but the outflow of local capital that follows when the rule of man rises and the rule of law declines.
Now I fully expect to get a flood of emails from distressed investors questioning such a pessimistic outlook for emerging markets. After all, they don’t have Trump and they don’t have Brexit, so they must be OK. However, they do have Duterte, Erodgan, Xi, Orban, Amlo, Maduro, Putin, Kaczyniksi, and Manangagwa - amongst others. Few if any strong men can ultimately strengthen the rule of law that is ultimately the only protection for investors. In strengthening the law, they weaken themselves.
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http://www.zerohedge.com/news/2018-09-03/russell-napier-imf-about-send-profound-shudder-through-generation-investors?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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