Gold & Euros: Is Russia's Central Banker Really That Dumb?

♠ Posted by Emmanuel in ,, at 7/31/2015 01:30:00 AM
For everything there is a season, a time for every activity under heaven - Ecclesiastes 3:1.
If you had loaded up on gold and euros during, say, the pre-global financial crisis time frame, I suppose you'd have done well as both increased significantly in value. China's voracious demand buoyed gold and the euro as well as the commodity supercycle approached its peak. However, in the run-up to a Federal Reserve rate hike--the first in a long time since rates were slashed to zero during the aforementioned financial crisis--you'd be a fool to go long on gold and euros. Unfortunately for Russia, that's exactly what its central bank governor Elvira Nabuillina has done:
Bank of Russia Governor Elvira Nabiullina picked the wrong time to load up on gold and the euro. The miscalculation means Russia is now down $200 million in its quest to raise international reserves, an effort it suspended Tuesday amid a rout in the ruble, after it spent about $10 billion on foreign currency since mid-May.

What the 51-year-old central banker was up against is this year’s slide of 9.5 percent in the euro against the dollar and gold’s 8.4 percent tumble in 2015. Both declines hurt because Russian reserves last year contained more euros than dollars for the first time since 2008 and its bullion hoard has tripled since 2005.

“It’s very strange for me that no one has yet put a question to the central bank over the results of its reserves management,” Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow, said by e-mail.
Losev, in a democracy in name only, no one dares question the actions of Putin acolytes like Nabiullina.
Ravaged by a crash in oil prices and almost $90 billion in interventions to rescue the ruble last year, Russia’s reserves were at $358.3 billion on July 24, down almost 30 percent from last year’s peak. The central bank shifted to a free-floating exchange rate ahead of schedule in November as Putin said the country won’t “mindlessly burn up” reserves to defend its currency.
However, Leonid Bershidsky suggests that Russia's actions are not as stupid as they may seem if these actions are seen from a political rather than an economic lens:
The dramatic drop in the price of gold makes Russia look like a classic sucker: As the price went down, it expanded its gold reserves. The Russian central bank is getting punished for betting on gold rather than U.S. assets as the Cold War seemed to restart last year. But it's not that simple -- the gold that Russia's buying is domestically produced and paid for with devalued rubles...

One reason Russia's otherwise highly competent central bankers did this was political. Last year, after the Crimea invasion, the fear of Western financial sanctions made them dump U.S. treasuries, reducing holdings to $86 billion in December from $126.2 billion in February, and seek a safe haven in neutral, albeit unfashionable gold. It bought 171 metric tons, or 5.5 million ounces, in 2014.
The gold lobby has been particularly strong in pushing their cause wit h the central bank:
The reason for this strange behavior lies in the dependency of Russia's gold industry on central bank purchases. Last year, according to the Moscow-based Gold Mining Union, Russia became the world's second-biggest producer of the precious metal, extracting 288 tons. Producers are not allowed to export their output directly. Instead, they have to sell it to banks, which are authorized to deal with foreign buyers and the Russian central bank.

Last year, European banks bought 76 tons -- they have long-standing trading arrangements with state-owned Russian banks, the biggest buyers on the domestic market -- but the central bank dwarfed that, snapping up 59 percent of all output.

At the end of February, the Gold Mining Union, worried that its members' biggest customer was showing no interest, wrote a letter to the central bank, asking it to expand purchases by 30 percent this year compared with 2014 as compensation for sharply increased interest rates (the key rate had gone up to 17 percent in December to prop up the free-falling ruble) and to balance the domestic market. In response, deputy governor Dmitri Tulin promised to keep buying but said the central bank "considers it impossible to replace all domestic market buyers including domestic industries."
So, there may be an element of the central bank being held hostage by special interests, i.e., the gold lobby. That said, Bershidsky's version does not fully explain why the Russians have swapped large amounts of dollar- for (depreciating) euro-denominated assets. I think it's partly both behind Russia loading up on assets of diminishing value: special interests making themselves known and plain old wishful thinking.

Besides, I do not fully understand why Russia would consider holding euros rather than dollars "safer" from a security standpoint when the Europeans have been as keen on hitting Russia with sanctions as the Americans. Go figure.

Financial Adventure Time...and Now for Iran Bonds

♠ Posted by Emmanuel in at 7/30/2015 01:30:00 AM
Isfahan, one of the potential beneficiaries of international bond issuance.

First Kurdistan bonds, now Iran bonds! What's the world coming to? With yields so low for developed (especially reserve currency-issuing) countries' official debt, bond investors are looking at some fairly exotic places for higher returns. With normalization of Iranian relations with the rest of the world on the cards, relaxation of sanctions will mean its banks will again be able to conduct SWIFT transfers. More exciting though is the prospect of Iran offering bonds to global investors, which is not as far off as you think should relations indeed normalize:
As Iranian officials were in Vienna hammering out terms of the nuclear accord, [Hans] Humes, a New York-based hedge fund manager, traveled to Tehran to do scouting work of his own. During a 10-day trip, he liked much of what he saw -- a well-educated population, low homelessness, signs of a modernized economy -- and said he’d be a buyer when the nation starts selling debt to finance projects that weren’t viable under the sanctions.

“The bond market appetite for everything Iranian will be pretty high,” Humes, founder of hedge fund Greylock Capital Management, said in a telephone interview from New York. He estimated it may take government officials a while before they’re ready, perhaps a year or so, “but they’re going to start tapping international markets.”

Before Iran can access overseas markets, the U.S. and European Union will need to lift a complex web of sanctions, which mainly include a ban on its lenders from dealing with Iran and Iranian banks’ access to the leading global financial-messaging system known as Swift.
Actually, currently low oil prices aside, Iran's macroeconomic fundamentals don't look all that bad. Being locked out of global capital markets for decades and decades, for instance, means that it's national debt is 11% [!] of GDP:
The bulk of Iran’s outstanding debt -- about $6.5 billion - - is from bilateral loans it received from Asian countries, according to Dina Ennab, an analyst at Capital Intelligence. The country also borrows domestically and has never defaulted on a commercial obligation, she said.

Zada, who used to trade Iranian debt while working in Exotix’s London office, said he expects there’d be investor demand “from all over the world” when the country decides to sell bonds. “Fiscally, Iran is very prudent and in good stead,” said Zada, the son of an Iranian mother. “They currently have no external debt. I’m sure once sanctions are lifted, there would be substantial demand for their hard currency debt.”

Iran’s total government debt was just 11.4 percent of gross domestic product last year, according to estimates from the CIA’s World Factbook. That’s lower than 91 percent of the countries tracked by the CIA.
It's remarkable how the Bloomberg story excerpted above fails to mention Iran's funding activities elsewhere in the region, but hey, on a purely financial basis, it doesn't look as long a shot as you would immediately be led to believe.

China Buying America: From Tech to Flicks

♠ Posted by Emmanuel in , at 7/27/2015 01:30:00 AM
China funding Hollywood...what's the deal?
Two new articles in the WSJ illustrate China's ambitions in terms of acquiring Western technology--we've always known about this, but they've frequently been frustrated over trumped-up national security concerns--and bankrolling entertainment. Let's start with a new venture capital firm formed by technology entrepreneurs in China with blessings from the Communist Party:
The quest by Chinese firms to acquire global technology is about to get $5 billion boost.
Chinese venture-capital firm GSR Ventures is raising a $5 billion fund to buy overseas assets, according to people familiar with the situation. The fund, which is expected to be announced Monday, will target deals to acquire companies in technology, Internet, and biotechnology industries for which the Chinese market is key to growth prospects, they said.

GSR Ventures, a firm set up by Chinese tech entrepreneurs in 2004, raised its profile outside the country in March when it joined U.S. venture-capital firm Oak Investment Partners in the purchase of 80% of Philips NV’s lighting components and automotive-lighting operations in a $2.8 billion deal.
GSR Ventures’ latest fundraising comes as Chinese firms, encouraged by policy makers in Beijing, are pushing abroad to snap up technologies that China imports from abroad. Many of these, such as semiconductors and advanced automotive technology, are markets in which China is the world’s largest consumer of the end products, for example mobile phones and cars.
From this perspective, acquisitions of Western concerns would make sense since China is becoming the largest consumer market for electronics. That said, those so-called security concerns always rear their ugly head:
In the most ambitious of those efforts so far, China’s state-owned Tsinghua Unigroup Ltd. made a $23 billion approach to chip maker Micron Technology Inc. this month. Tsinghua Unigroup, an arm of the country’s top science university, faces hurdles in bringing Micron to the negotiating table given the potential scrutiny such a deal would bring from the U.S. government.  
If tech is the stronghold of Northern California (NorCal), entertainment is that of Southern California (SoCal). As it so happens, the Chinese are also keen on acquiring the expertise of those in Hollywood by helping raise money for various productions:
The boxing drama “Southpaw” released over the weekend has a seemingly unlikely partner in its corner: Chinese conglomerate Dalian Wanda Corp. Wanda financed the approximately $30 million production budget for the Jake Gyllenhaal movie. It was produced and is being released by Weinstein Co., which is paying for about $35 million of marketing expenses. The two companies will split any profits.

“They were on the set and involved in production, postproduction, marketing, everything,” said Weinstein President David Glasser. “They wanted to learn how we do what we do.” In exchange, Weinstein is hoping Wanda will help the movie gain a favorable distribution arrangement in China, which the government grants to just 34 foreign films a year. “Southpaw” represents one of several ways Chinese companies lately have been trying to tap Hollywood moviemaking know-how.
As with Chinese buying foreign tech, the goal in financing films is partly to acquire knowledge--both hard and tacit--useful for industrial purposes.
Four former heads of major studios and studio divisions have in the past year launched or taken jobs atop startups backed by Chinese investors. Together, the four new companies have commitments of more than $660 million from China.

They are launching amid a wave of Chinese investment in the entertainment business, technology and other U.S. industries. The Chinese companies aren't only looking to make money, people involved in the moves say, but to gain expertise in areas where they are currently not global leaders. “China is the fastest-growing movie marketplace in the world and the source of a tremendous amount of capital,” said Sheri Jeffrey, a partner at law firm Hogan Lovells who focuses on entertainment finance. “That’s why these are such perfect partnerships.” what are the Chinese interested in again?
China gets its own benefit from the deals: the advice of some of Hollywood’s most experienced hands at a time when its government is pushing entertainment as a source of “soft power.” Though it has become the world’s second-largest movie market, China has yet to produce a globally popular movie of the type regularly churned out by Hollywood. Allying with former studio chiefs is seen as a tool to change that.
Can China acquire foreign expertise by buying US tech and bankrolling US entertainment? They can surely try, but there are residual concerns over American protectionism over purchasing tech masquerading as "national security." Moreover, can US film production techniques be directly applied to "Made in China" storylines? Somehow, I doubt it.

The West: Punishing PRC for '$483B' Stock Market Intervention

♠ Posted by Emmanuel in , at 7/24/2015 01:42:00 PM
Shenzen, where the finest stocks state funds can buy are traded.
Nobody knows for certain how much the PRC has sunk into propping up its faltering stock markets. The FT totted up the figures and said that state-owned banks have been forced to cough up $209B to provide brokerages for buying up A shares:
According to the latest revelations, the big state-owned banks have lent a combined Rmb1.3tn ($209bn) in recent weeks to the China Securities Finance Corp, for lending on to brokerages to finance their investment in shares and to purchase mutual funds directly. 
Meanwhile, Bloomberg said that, actually, it's more like the $483B quoted in the title after you include the contributions of the People's Bank of China (PBoC):
China has created what amounts to a state-run margin trader with $483 billion of firepower, its latest effort to end a stock-market rout that threatens to drag down economic growth and erode confidence in President Xi Jinping’s government.

China Securities Finance Corp. can access as much as 3 trillion yuan of borrowed funds from sources including the central bank and commercial lenders, according to people familiar with the matter. The money may be used to buy shares and provide liquidity to brokerages, the people said, asking not to be named because the information wasn’t public.
Whatever the true amount is, let's just say that Western market observers--especially existing and potential investors--have not taken well to massive state intervention. By frustrating the workings of the price mechanism, supply and demand are not left to work themselves out. That is, these stock markets are not 'serious' enough to be considered alongside those of more developed nations. Literally, they are Party playthings:
“We know that China wants to open its capital markets to foreigners, and that will require an improvement in standards.” said Nigel Green, chief executive of deVere Group. Chris Konstantinos, director of international portfolio management at RiverFront Investment Group, also noted that the Chinese government’s “carte blanche” on market action could offend “democratic societies’ sensibilities. I don’t believe it bodes well for China’s recent overtures toward greater transparency and the prospects for attracting a more global shareholder base for Chinese shares,” he said.

Earlier this week, Bridgewater Associates LP, the world’s largest hedge fund, warned its investors that China’s market turmoil will have broad repercussions, a dramatic reversal from its usual bullish stance on the country, The Wall Street Journal reported. Bridgewater joins a growing list of hedge-fund mangers who have turned more bearish on China in recent weeks, including Elliott Management Corp.’s Paul Singer and Pershing Square Capital Management LP’s Bill Ackman.

“The rise and fall of the market over the past year may well have convinced many investors that the market is simply not a reliable investment vehicle,” said analyst Michael Spencer at Deutsche Bank in a report. “Quite clearly, the reform objective of allowing the market to play a decisive role in allocating capital has suffered a setback.” The state-sponsored buying of stocks is also creating an overhang, which the government will eventually have to tackle.
China's stock markets are off-kilter. As a result, they say, the PRC still does not represent a true market economy--a status China is seeking. Go ask former Goldman Sachs head and Treasury Secretary John Paulson:
No advanced economy has achieved high-income status — something to which China aspires — with a closed financial system that misallocates and misprices capital. Chinese reformers undoubtedly understand how to create a modern financial system; policymakers have studied this inside out. They have the blueprint in hand, but need to act on it boldly and quickly. If China is to have a well functioning and stable capital market — which can also help to protect investors, particularly unsophisticated individuals — it needs to allow best-in-class financial institutions and professionals, irrespective of national origin, to serve Chinese investors. In my experience, joint ventures simply do not work for global financial institutions.

China would do well to allow a wide range of participants, including top-notch foreign institutional investors, investment banks and brokers, to compete on equal footing. Exposing companies to serious competition will sort out the best institutions from underperforming ones. Beijing can further protect investors by establishing a well enforced regulatory regime designed to minimise accounting fraud and market manipulation, ensure high quality investment products, set appropriate margin requirements, and mandate high standards for the sales practices of brokers that sell to individuals.
What, then, are the implications for all this Chinese tomfoolery with financial markets? There are likely two. First, the inclusion of the world's second-largest economy into the Morgan Stanley International Capital (MSCI) world indices will be further delayed. This is important since many fund managers with an index replication strategy would be obliged to hold PRC stocks had they been included in MSCI indices:
Now, many institutional players believe otherwise and say Beijing’s mass suspension of stocks from trading and a ban on short selling in the wake of a savage market downturn has damaged its credibility, setting back the inclusion of stocks denominated in renminbi and listed in Shanghai and Shenzhen in MSCI’s global benchmark indices.

Michael Lai, investment director at GAM, says the actions taken by the authorities mean that domestic Chinese equities, known as A-shares, effectively became an un-investable market. “Many investors have been starkly reminded over the past weeks that China is a policy-driven market,” he adds.
Second, designation of China as a market-based economy by its developed trading partners may similarly be delayed, leaving it still-vulnerable to frequent anti-dumping complaints. The European Union, it is said, is reluctant to give China such recognition:
The question of whether China is given market-economy treatment at the end of 2016 will be hotly debated by governments around the world in the coming months. Beijing and its allies argue that China’s 2001 agreement to join the World Trade Organization requires countries to give China market-economy treatment 15 years later, in December 2016.

If the EU recognizes China as a market economy, it would make it more difficult for Europe to impose steep tariffs on Chinese goods, at a time when European industries still complain that China uses a vast array of government subsidies to boost exports and undercut overseas competition.

The European Commission’s legal service circulated its confidential opinion within the institution in recent weeks, officials familiar with the opinion said. “The legal service is of the opinion that it would be unwise not to grant market-economy treatment to China,” a senior EU official said.
Through its interventions, China simply confirms other's suspicions that it is not a mature economy. You can be the world's second-biggest economy for all the rest care; but you're still not one of the big boys in the world economy. The lack of respect accorded China riles it, but hey, maybe it should be more careful in thinking how the rest of the world perceives its actions. They don't call it a globalized economy for nothing. 

When in Buenos Aires, See 'Museum of Foreign Debt'

♠ Posted by Emmanuel in , at 7/23/2015 01:30:00 AM
Vultures, the foreign debt board game and other Argentinian jollity.
Argentina has a wealth of attractions: The awesome natural grandeur of Perito Moreno Glacier. Ushuaia, the "end of the world" on its southern tip (next stop: the Arctic).  Tango, the dance of sultry romance. Call me weird but, as an IPE scholar, my first port of call would instead be the Museum of Foreign Debt at the University of Buenos Aires' School of Economics. I was peripherally aware that there was such a place, but a recent Bloomberg article jogged my memory:
Argentina’s fight with foreign banks and bondholders is more than just business. It’s part of the national psyche, enshrined in a special museum at the business school at the University of Buenos Aires. The Museum of Foreign Debt is nothing fancy. There are a few flimsy panels plastered with grainy photos, dates, text, and graphs.

Oh, but the saga portrayed on those panels! Banks, bond investors, and the International Monetary Fund flood crooked regimes with overpriced credit. The Argentine economy collapses, and the people suffer. International markets are roiled. It happens time and time again. The story has all the emotions of a good tango.

Argentina has reneged on foreign debt obligations at least seven times, starting in 1827. The latest was in July 2014, when Argentina defaulted rather than give in to pressure from Paul Singer of Elliott Management. The fight with Singer has been going on for a dozen years, and the term vulture investor—rather esoteric in much of the world—is now pretty much universally known in Argentina. It’s so much on people’s minds that Buenos Aires toy stores carry a homegrown board game called Vultures, packaged in a box depicting a pair of the birds picking at a pile of dollars.
The anti-foreigner attitude is well-entrenched in Argentina as demonstrated by those manning the museum:
One May morning at the debt museum, guide Antonella Fagnano, a 21-year-old business major, describes Argentines’ attitude toward default. She pauses by a black-and-white photo of the late General Jorge Videla, who led a 1976 coup that ushered in a seven-year dictatorship. Successive presidents in that period loaded up on foreign debt to finance, among other things, the 1982 Falklands War with the U.K.

Today’s Argentina, Fagnano says, has no moral obligation to make good on debts like those. In fact, it would be wrong to pay. “Foreigners financed a lot of leaders, like these dictators. They didn’t do what they were supposed to do with the money, and left future generations the debt,” she says, shaking her head. “So, of course, you cannot allow that.”
My belief remains the same: If foreigners are so evil, then why does Argentina put itself in the same position of having to borrow from abroad time and again? Therein lies my fundamental problem with structuralist theories: it is defeatist and fatalistic to assume that your inevitable fate has to be abject misery at the hands of foreigners. Why not get your economy sorted once and for all so that you won't be in a position to be "exploited" by international creditors you always resort to out of desperation?

The victim mentality--that it's never your own fault--is always easier to adopt. Foreigners may not have your best interests in mind, so continually putting yourselves at their mercy through your oafishness isn't well-advised.

Chaebol Family Governance: Samsung 1, Hedge Funds 0

♠ Posted by Emmanuel in at 7/21/2015 01:30:00 AM
To the Lees, control of Samsung is their birthright. To Westerners, the Lees are not a corporate royal family.
The intricate web of cross-shareholdings characterizing Japanese and Korean multinationals has long befuddled and annoyed Westerners. In Japan, the keiretsu (cross-shareholding) system based on conglomerates' various companies owning each other's shares is deliberately meant to keep longstanding and closely-linked structures intact for the likes of Mitsui, Sumitomo, etc. In Korea, the chaebol perform a similar function. In more recent times, especially after liberalizations demanded of Korea in exchange for IMF emergency lending, these cross-shareholdings have been meant to keep minority (read: foreign) shareholders at bay.

As of late, the most pesky of these have been US hedge funds. Recently, there was a showdown for the very soul of Samsung over the succession of its ailing leader Lee Kun-hee. Samsung insiders wanted familial succession, whereas minority Western shareholders agitated for a more "democratic" selection process for the succession:
The Lee family that controls the Samsung conglomerate won its showdown with minority shareholders on Friday, but the vote still represents a watershed for corporate governance in the world’s 14th-largest economy. Though Samsung won, the bell is tolling for South Korea’s chaebol system of corporate control.

After weeks of pleading and foreigner-bashing by Samsung executives, shareholders narrowly approved the sale of Samsung’s construction arm to its de facto holding company, Cheil Industries. The transaction won 69.5% of the votes, barely more than the necessary two-thirds. The deal will help heir apparent Lee Jae-yong keep control of Samsung Group upon the death of his ailing father, Chairman Lee Kun-hee.
From the Western perspective, they are treated by Samsung the same way Argentina treats its creditors (more on the Southern American nation in a little while):
Opposition to the deal was led initially by the U.S. hedge fund Elliott Associates, which rightly argued that the transaction undervalued the purchase by as much as $7 billion. But the insider self-dealing also mobilized thousands of mom-and-pop shareholders and exposed the cronyism and political favoritism that have made the giant chaebol firms increasingly unpopular in Korea. Samsung’s more than 70 affiliates, linked through a complex network of cross-shareholdings, account for a huge chunk of South Korean gross domestic product, and Samsung Electronics is the world’s second largest tech company by sales after Apple.

But that high profile is all the more reason for Samsung to abide by modern rules of corporate transparency and respect for minority shareholders. Instead Samsung played on nationalist sentiment and drew on its political influence to prevail. In echoes of Argentina, Samsung claimed to be defending itself against “an attack by a foreign hedge fund seeking short-term trading gains.” But Elliott and the Canada Pension Plan Investment Board, another opponent of the insider deal, bought their shares on the open market. If Samsung wants only South Korean shareholders, it ought to say so and return to being a nonpublic company.
I am of two minds about this. While shareholders large and small should be treated well, Western shareholders have a much shorter-term orientation--as in the current quarter. Although it is difficult to construct a counterfactual argument, would Samsung have become the globe-spanning conglomerate that it is now if activist minority shareholders from the West were agitating for these sorts of things in the 60s or 70s?

My belief is that it's not merely a fight over "bad" Asian corporate governance against "good" American corporate governance. There is a cultural gap that demands more scrutiny than simply dismissing Korean practices as continuations of favoritism, crony capitalism, ignorance of shareholders rights and so forth. They really do things differently elsewhere, and the world is not merely America writ large.

Egads, a WTO Deal...on Expanding IT Goods

♠ Posted by Emmanuel in , at 7/20/2015 01:30:00 AM
Coming soon to your country: duty-free PlayStations.
OK, so it isn't the completion of the Doha Round (in progress from 2001 to, well, never evermore it seems). I suppose that it's still an achievement that the Information Technology Agreement (ITA) has been moved expanded to include more kinds of electronics--including game consoles [!]--and more tariff reductions. In this day and age where skepticism about the benefits of trade are evident around the world, any sort of multilateral deal is worth mentioning:
Trade negotiators on Saturday tentatively agreed to eliminate tariffs on an array of technology products valued at US$1 trillion worth of global commerce. The breakthrough toward the WTO’s Information Technology Agreement (ITA) took place at an ambassadors’ meeting at the EU embassy in Geneva.

“Very optimistic that we’ll have a final successful deal by the end of next week,” WTO Director-General Roberto Azevedo said on Twitter. “We have the basis for an agreement.”

US Trade Representative Michael Froman hailed a “major breakthrough” in what would be the first significant tariff-cutting deal at the WTO in 18 years. “This will open overseas markets for some of America’s most competitive companies and workers,” he said in an e-mailed statement. “We are confident that all parties will now give formal approval to their participation.”
And of course, what would this news be without mentioning cutting tariffs on game consoles to zero along with optimistic trade creation figures being bandied about:
Tariffs on semiconductors, magnetic resonance imaging machines, global positioning system devices, printer ink cartridges, video game consoles and other products would be cut to zero under the deal, according to the US Trade Representative office.

The expanded product list will now undergo consideration from trade ministers at their various capitals. “We have the basis for an understanding,” Azevedo told reporters in Geneva after the meeting. “The list is out, members are going to consult their capitals, and we will know by Friday whether we have final approval on the list of products and the declaration itself.”

The product list could pave the way for a finalized deal that would contribute as much as $US190 billion to global GDP and support 60,000 US jobs...The 80 WTO countries that participate in the ITA talks account for about 97 percent of global trade in IT products.
Hope springs eternal for the WTO.

Japan's Cure for Juvenile Delinquency: No Juveniles

♠ Posted by Emmanuel in at 7/18/2015 01:30:00 AM
Meet the, er, "new" generation of Japanese criminality.
Here's another post on the strange relationship between aging and criminality in Japan: a few weeks ago, we had elderly committing minor crimes since they preferred a life of incarceration to homelessness. Still, it appears the ultimate cure for juvenile delinquency has been found in Japan: have no juveniles. Given its graying demographic, this may be an extreme unintended measure, but hey, that it's working is undeniable. With fewer young people with tendencies towards--how do we call it--exuberance, the staid and old are actually the more criminal elements in society due to their sheer numbers:
In a reflection of Japan’s graying society, police took action against more elderly people than juveniles in criminal cases for the first time in the six months to June this year, new figures show. The National Police Agency said Thursday the number of people aged 65 or older subject to police action reached 23,656 between January and June, compared to 19,670 for those aged 14-19. It marked the first time the elderly exceeded teens in crime statistics since the agency began compiling data by age group in 1989.
So watch out for that guy with the walking stick. 

Be Merkel: D-I-Y Austerity Measures on Greece

♠ Posted by Emmanuel in , at 7/17/2015 12:47:00 PM
Austerity may cause the Greek speaker of parliament to literally lose the shirt off her back according to this site.
From MarketWatch we receive word of the "Random Austerity Measure Generator" that spits out additional, somewhat amusing, austerity measures for various hapless EU peripheral economies. But seriously, there is certainly a worthwhile debate to be had about the economic consequences of these Eurozone slackers being subject to austerity measures. There is even a reasonable case for removing Germany from the Eurozone to improve the competitiveness of the ne'er-do-wells. That said, constant mediocrity inevitably has its price, which is mostly German-imposed austerity here.

Once more, if you were sensible enough to begin with, you would not put yourself in this position--at the mercy of more prosperous Eurozone economies that treat you with utter contempt. That you are also made a laughingstock only adds insult to injury.

Absolutely Banzai Stock Picks in Japan's Remilitarization

♠ Posted by Emmanuel in ,, at 7/16/2015 01:30:00 AM
Rock you like a hurricane: Japan's defense stocks are soaring with the nation's security ambitions.
Aside from easy money policies, Shinzo Abe's second time around as Japan's prime minister has been characterized by a drive to remilitarize the nation. In a word, the cause is "China"; its allies, the North Korean crazies, certainly don't help matters. After Japan's World War II atrocities, let's just say it's neighbors haven't been particularly keen on this policy change from a pacifist constitution. Japan's "Self-Defense Force"? Give me a break. Then again, some in the region may be actually glad about Japan's change of heart since they stand to benefit from a more assertive Nippon. The Philippines, for instance, welcomes further military cooperation to rein in a China hellbent on reclaiming nearby islands in the so-called South China Sea.

Tomorrow, Japan is expected to loosen previous prohibitions on security-related activities, much to the dismay of those who believe that things should just be left alone after years of relative postwar peace and prosperity:
Japanese Prime Minister Shinzo Abe’s bills to expand the role of the military will go to a lower house vote Thursday, after weeks of debate that has eroded his support and sparked opposition protests that echo those that toppled his grandfather more than half a century ago.

The bills were approved Wednesday in a special security committee session marked by jostling, shouting and even tears from placard-holding opposition lawmakers that almost drowned out the chairman’s voice. They are all but certain to pass due to the ruling coalition’s two-thirds majority. If the upper house refuses to take up the bills, a second vote in the lower house can pass them into law with a two-thirds majority.

The legislation enshrines in law Abe’s 2014 reinterpretation of the pacifist constitution and would allow Japan to defend other countries as part of a strategy to balance a rising China. Media polls show the majority of voters are opposed to the changes and disapproval of the cabinet now surpasses approval.
Since it's possible to see every sort of geopolitical event as an investment bonanza, Barrons has a feature on buying stocks that should benefit from a remilitarized Japan. To no one's surprise, the list is dominated by arms contractors for Nippon:
  • Kawasaki Heavy Industries ( 7012.JP): Kawasaki Heavy makes transport aircraft for Japan’s military, which looks like it’s going to be headed places. Kawasaki Heavy’s shares have climbed about 12% in the past three months, but it still offers one of the sector’s most attractive dividends, paying almost 2%. Nomura see its stock rising another 30% to 790 yen.
  • Fujitsu ( 6702.JP ) : Fujitsu’s information systems serve as the nerve center for many militaries, particularly in logistics. It stock has fallen roughly 4% in the past three months, which has left it trading at a relative bargain of 11 times projected earnings. Morgan Stanley sees the stock climbing 31% to 890 yen.
  • Fuji Heavy Industries ( 7270.JP ): Fuji Heavy, maker of Subaru cars, also builds helicopters for Japan’s defense forces and recently won a 35 billion yen ($293 million) settlement from Japan’s Ministry of Defense after a contract to build attack helicopters was pared down. Its shares have climbed almost 10% in the past three months, yet it still trades at just 9.8 times projected earnings. It’s hard to find an analyst who doesn’t like the stock. J.P. Morgan believes it will climb as much as 21% to 5,300 yen.
  • Mitsubishi Electric ( 6503.JP ): This appliance-maker’s stock has soared like the missiles it builds, rising 22% in the past three months. Yet its shares are trading at only 16 times projected earnings and offer a dividend yield of roughly 1.7%, according to Bloomberg data. Morgan Stanley still sees 17% upside to this stock, with a target price of 1,900 yen.
Just as Chinese cars are often just cheap knock-offs of Western designs, those interested in buying military hardware would be hard-pressed to choose Chinese wares of unknown provenance and quality over those Made in Japan. Aside from domestic demand, there would be many buyers of Japan-made arms in Asia caused by Chinese gestures towards expansionism.

UPDATE: As expected, Japan's parliament easily approved of Abe's changes to the interpretation of the Japanese constitution today. 

Did World Bank Wimp Out on PRC Financial Interference?

♠ Posted by Emmanuel in , at 7/14/2015 01:30:00 AM

I almost forgot to post about this recent event that does not seem to have attracted much attention from IPE scholars, but should. As I've mentioned several times now, China isn't exactly an exemplar of a market-based economy as the state has repeatedly stepped in to interfere in its operations. Witness its current desperation to prop up its stock markets to mixed effect. In particular, the allocation of capital is hardly determined by market forces as the state often dictates when, where and how the galaxy of state-owned firms should generate capital.

Recently, a World Bank called China out on this level of intervention in a regularly scheduled China report. A whodunit has recently emerged as the presumably offensive report has subsequently been withdrawn from the World Bank website with little explanation. Naturally, the suspicion is that the PRC made its displeasure known and had the report removed. The World Bank, however, denies that it was pressured to recall the report:
The section of a World Bank report that calls on China to reduce government interference in the nation’s financial system starting “at the highest level” has been removed from the bank’s website two days after it was released. A note on the website said the section was taken out because it “had not gone through the World Bank’s usual internal review and clearance procedures...”

The now-removed section of the bank’s semiannual “China Economic Update,” released Wednesday, urged Beijing to reduce the government’s ownership stake in the nation’s commercial banks and shield regulators from political interference. The government’s direct and extensive involvement in allocating resources has “no parallel in modern market economies,” the report said, impeding competition and fostering local-debt increases that threaten to undercut long-term growth.  
Even if China did not pressure the World Bank to remove the sharply-worded report, it does raise questions about the internal controls at the organization. If this section was not meant for public consumption, then how did it end up being released anyway (for at least a few days)?
The World Bank’s decision to remove the finance section doesn’t reflect well on the global development institution, some observers said. “If the stated reason is correct, it would seem to point to a pretty serious deficiency in the World Bank’s internal controls,” said Guy de Jonquières, a senior fellow at the Brussels-based European Center for International Political Economy. “If it’s not, it suggests the World Bank had sudden second thoughts or faced possible external pressure from China. Either way, this doesn’t inspire huge confidence in the integrity and independence of the bank’s economic research and analysis,” Mr. de Jonquières said...

This isn’t the first time questions involving possible Chinese pressure on international organizations have surfaced. In 2010, the International Monetary Fund opted to issue a summary instead of a full report on the Chinese economy that included a discussion over whether China’s currency was undervalued. IMF directors disagreed over the issue. 
So much trouble the World Bank is encountering for...being honest about China's activities.  

Grecian Style [sic]: The ECB Haircut Guide

♠ Posted by Emmanuel in , at 7/11/2015 01:30:00 AM
From Patrick Chovanec, it's the barbershop special for Greece. I doubt whether its creditors will reduce the amount of debt they're owed by Greece this time around, but it's likely inevitable if they decide to keep the country in the Eurozone. That is, a reduction or haircut on the face value of Greece's debts can hardly be avoided. At the moment it looks like "extend and pretend" that Greece will be able to pay. Until the day of reckoning comes, enjoy the stylistic decisions that have to be made before then...

Nothing Works: Top 10 Stupid Tricks to 'Save' PRC Stocks

♠ Posted by Emmanuel in , at 7/09/2015 01:30:00 AM
Dontcha worry; more official "help" is on the way. Or maybe you should worry a lot more because of it.
The recent retirement of comedian David Letterman has deprived humanity of two outstanding recurring gags of his: the "Top 10 Lists" and "Stupid Human Tricks." Unfortunately for so-called investors in Chinese stocks, I am afraid that the PRC Communist leadership has turned their activities into a financially worrisome joke as their stock markets plunge day in and day out despite all sorts of interventions being introduced to stem the rout. Is China a market-based economy? If you needed any more proof that isn't, then you mustn't be following the financial news.

With some ungodly number of stocks halted for trading in the past day after falling 10%, China has introduced yet another round of desperate measures. Smacking of gross interference, corporate executives and shareholders holding more than 5% of a listing will not be able to sell shares for 6 months. Even dumber-sounding, government agencies including the market regulator [!...!!...!!!] are being ordered to buy small cap shares. 

It's all quite idiotic, but they may not be done yet. To sustain the comedy, here are what I suggest...


10. Convert its $3.7 trillion in foreign exchange reserves to yuan to buy small cap and tech stock A-shares.
9.  Make the official Xinhua news agency hire James "Dow Jones 36,000" Glassman as its stock commentator.
8. Sweeten the deal for domestic investors by including plots of land reclaimed by dumping waste material on ecologically sensitive coral reefs in the South China Sea.
7. Include a stock link in Macau casinos to drum up business in the world's largest casino.
6. Bundle "minions" as freebies with a minimum $100 equivalent stock purchase.
5. Give away a photo montage of Chinese tourists desecrating holy sites in Thailand signed by the Thai tourism minister with a minimum $1,000 equivalent stock purchase.
4. Allow unlimited Internet usage without censorship for a minimum $100,000 equivalent stock purchase.
3. Include US residential real-estate with a minimum $1,000,000 equivalent stock purchase.
2. Order China's 30,000 Internet censors buy stocks when not busy snooping on other peoples' lives.

And, the top intervention you are doubtlessly expecting...

1. Replace the China Securities Regulatory Commission head with Greek pinko Yanis Varoufakis to halt stock trading indefinitely.

When dealing with stupid human tricks, Mediterranean commies transferring their leadership skills to an officially styled socialist nation had to be mentioned. But of course.

Yanis Varoufakis' Next Gig Should be...ISIS Finance Minister

♠ Posted by Emmanuel in , at 7/07/2015 01:30:00 AM
Like a bat out of hell: Next stop ought to be Raqqa, Syria.
The vainglorious econocomedian, [now ex-]Greek Finance Minister Yanis Varoufakis, said he would resign if Greek voters said "yes" to the bailout program offered by its creditors a week ago (which means the joke of a referendum wasn't valid since the country has since defaulted on its IMF loans and terms would be different anyway). As it turned out, the masochists in Greece turned out in greater number and the "no" vote won...and still Varoufakis quit.

While I will certainly miss his amateurish Marxist comic stylings, I think he has the perfect next job lined up as the finance minister of the Islamic State of Iraq and Syria. The obviously moronic titling--how can you have a state within two other, internationally recognized states--should appeal to the media-hungry joker. It's a match made in hell since the ISIS folks are cut from exactly the same cloth. Their attitudes and behaviors are certainly similar:

1. Thumb your nose at Western capitalist scum;
2. Run a post-nation "state" united by radical ideology;
3. Use social media in all sorts of lurid ways;
4. Fund operations by raising money through creative means; and
5. Have total conviction that you are right and everyone else is wrong.

Varoufakis, ISIS is your dream job. Book a ticket for Turkey pronto and cross its southern border. From failed state to rogue state, his trail of destruction will run deep and wide.

Malaysia, Middle-Income Trap, Failed SWF & Kickbacks

♠ Posted by Emmanuel in , at 7/06/2015 01:30:00 AM
The media's new poster boy for Asian corruption and mismanagement: 1MDB.
Despite being the next-most advanced nation in Southeast Asia after Singapore, Malaysia has never quite made it to "developed" status. It is usually cited as an example of a country stuck in a "middle-income trap": Its labor costs are no longer rock-bottom having achieved a certain level of development and thus cannot compete with lowest-cost labor locations. Yet, it is not sophisticated enough to compete with the sophisticated goods and services offered by the developed countries.

One of the initiatives to address this situation was the creation of the 1MDB government investment corporation which was intended to fund knowledge- or technology-intensive industries that would help the country escape the middle-income trap. As the years roll by, we have learned that its investments are not bearing fruit. In fact, 1MDB has accumulated substantial debts that may necessitate a government bailout. Hence the current controversies over 1MDB: how did it get so much money, and where did the money go?

The accusation that the money went into the pockets of Malaysian PM Najib Razak has been made, most notably in the international press by the Wall Street Journal:
Malaysian investigators scrutinizing a controversial government investment fund have traced nearly $700 million of deposits into what they believe are the personal bank accounts of Malaysia’s prime minister, Najib Razak, according to documents from a government probe. The investigation documents mark the first time Mr. Najib has been directly connected to the probes into state investment fund 1Malaysia Development Bhd., or 1MDB. Mr. Najib, who founded 1MDB and heads its board of advisors, has been under growing political pressure over the fund, which amassed $11 billion in debt it is struggling to repay.
1MDB is said to be a slush fund for Razak:
By far the largest transactions were two deposits of $620 million and $61 million in March 2013, during a heated election campaign in Malaysia, the documents show. The cash came from a company registered in the British Virgin Islands via a Swiss bank owned by an Abu Dhabi state fund. The fund, International Petroleum Investment Co., or IPIC, has guaranteed billions of dollars of 1MDB’s bonds and in May injected $1 billion in capital into the fund to help meet looming debt repayments. A spokeswoman for IPIC couldn’t be reached for comment. The British Virgin Islands company, Tanore Finance Corp., couldn’t be reached.
Feeling inspired by the Lees in Singapore, perhaps, Razak is planning to sue the WSJ:
Datuk Seri Najib Tun Razak is expected to file a suit against The Wall Street Journal on Tuesday over its report implicating him in an alleged RM2.6bil money trail. Sources close to the Prime Minister told The Star that he would make the announcement during an event in Semenyih on Sunday. 

“He would file the suit through his lawyers in Kuala Lumpur,” the sources said. Najib was scheduled to have a press conference at Masjid Bandar Rinching in Semenyih at 6.15pm.  
That said, investigators have more recently said that Razak has indeed done dirty deeds done dirt cheap, so he may not even have the opportunity to do so while in office:
Malaysia’s attorney general said an official investigation into a troubled state investment fund has uncovered documents related to allegations that money was transferred into the personal bank accounts of Prime Minister Najib Razak.
A task force comprising the central bank, the national police and the nation’s anticorruption agency uncovered the documents during a probe of 1Malaysia Development Bhd., or 1MDB, Abdul Gani Patail, the attorney general, said Saturday. Mr. Abdul Gani said that on Friday the task force had raided the offices of three Malaysian companies linked to 1MDB that allegedly were involved in the transfer of funds to Mr. Najib’s accounts.
It's fun to read through all the self-defenses on the 1MDB site--most penned by Razak himself. What does it say though about a corporation that spends more time fending off accusations of wrongdoing than highlighting profitable activities? I fear this will not end well at all.

PRC Stock Plunge as Western Conspiracy + Bet Yer House

♠ Posted by Emmanuel in , at 7/04/2015 01:30:00 AM
Easy come, easy go: Welcome to the Shanghai bourse, world's biggest casino.
The death spiral in Chinese stocks continues, with the Shanghai Composite whose chart is above dropping another 5.77% on Friday. Since peaking in mid-June, an astronomical $3.7 trillion has been wiped out in stock market capitalization, with the index falling 30% in the space of a few days. Continuing from the theme in the post below, PRC authorities have, in sheer desperation, tried everything to no effect:
Beijing seems to be doing everything it can to support the bull market. The People’s Bank of China cut interest rates last weekend. The Ministry of Finance said China’s massive $500 billion pension fund would march into the stock markets. The securities regulator CSRC repeatedly came out – during market hours – to assure us that margin financing was still healthy and there were few margin calls. Even the sovereign fund Huijin was buying everything from blue-chip A-share ETFs to big banks and oil to prop up the market. Oh, and the government said it would start criminal investigations into market manipulation – Short sellers, how about going to jail instead?! None of the measures have worked. Where is the Beijing put? And what’s next?
Well, I'll tell you what's next: The Communists can't seem to put Humpty Dumpty back together again, they blame the @#$^ing Westerners. I just love conspiracies with dark, evil and shady white people involved:
And now, some segments of Chinese society are now raising the possibility that “evil” market forces going short to ruin the economy, and even suspecting investment “predators” of lurking behind the turmoil, with Morgan Stanley among the names mentioned...At the same time, China’s stock regulators said Friday they would look into possible “market manipulation” helping fuel the move lower.

Against this backdrop, the Financial News, a newspaper run by the People’s Bank of China, said in an editorial Friday that predatory forces were playing up the risks for the Chinese markets, specifically mentioning Morgan Stanley for having withdrawn a previously bullish forecast for the Shanghai Composite Index after a sharp drop for the benchmark on June 26.

The newspaper cited Morgan Stanley as suggesting that the Shanghai Composite may have topped out at the beginning of June, and it accused the U.S. investment bank or either making “a malicious remark carelessly” or harboring “ulterior motives.” The editorial also said other banks which had similarly soured on Chinese equities were seeking to “go short on China on purpose and disturb China’s economic reforms.”
With Morgan Stanley having joint venture operations on the mainland, it is certainly possible for the company's employees to be thrown in jail by the authorities on some trumped-up pretense like "market manipulation." In China, the rule of law is a relative concept. Shoot the messenger and all that about China's artificially juiced stock market.

But wait, there's more: In the absolute zaniest move by PRC officials yet, you can now use your home as collateral for margin trading on Chinese equities:
In China, you can now literally bet the house on the nation’s tumultuous stock market. Under new rules announced Wednesday by the country’s securities regulator, real estate has become an acceptable form of collateral for Chinese margin traders, who borrow money from securities firms to amplify their wagers on equities. That means if share prices fall enough, individual investors who pledge their homes could be at risk of losing them to a broker.

While the rule change was intended to help revive confidence in China’s $7.3 trillion stock market, down almost 30 percent in less than three weeks, analysts say securities firms may be reluctant to follow through. Accepting real estate as collateral would tether brokerages to another troubled sector of the economy, adding to risk-management challenges as they try to navigate the world’s most-volatile stock market.
Common sense suggests the following:
  • It seems to the rest of the world--not just Morgan Stanley--that China's stock market is massively overheated. 
  • Hocking the house to invest in a stock market falling 5% day in and day out nowadays is utter folly. 
Who the hell needs casinos when you have Chinese stock markets?

UPDATE: Now the government is forcing securities firms to buy $25.7B worth of blue chip stocks. Aside from the amount of the forced investment being far below daily exchange turnover, this smacks of further desperation. Once more, what kind of rational investor would use "government intervention" as the main basis for making an investment decision? If you lose your shirt on Chinese stocks, I don't think you have anyone but yourself to blame.

America & China: Flipsides of Economic Desperation

♠ Posted by Emmanuel in , at 7/03/2015 01:30:00 AM
America: Where Nobody Wants to Work (What, Me Get a Job?)
If there is an even better metaphor for subprime globalization's follies, I have yet to find them. So we are led to believe that the US and China are the world's largest economies. However, recent news paints both in a negative light in terms of being able to do something about their desperate situations.

Let us start with the US. Because of the Fourth of July holiday weekend, the jobs report which usually comes out on the first Friday of the month containing data on the prior month was released today. Lo and behold, the glorious Bushbama years have bombed America's labor situation back to 1977, with MarketWatch featuring Star Wars to reinforce this point as a 62.6% labor force participation rate has not been seen since October 1977. Such progress America has made ever since:
The last time there was such a small percentage of Americans in the work force, “Star Wars” was in the theaters and Reggie Jackson was breaking home-run records in the World Series. The labor force participation rate declined by 0.3 percentage point in June to 62.6%, the lowest rate since October 1977...

But the bigger story in participation, the drop from Clinton-era participation in the 67% range, is a combination of baby boomers hitting retirement (the bigger factor) and other people who have given up trying to get a job.

The resident working-age population, those between 18 and 64, is growing at a rate of about 0.5% per year, according to Census data. That’s down from 1% in 2007, and 1.5% in 1999. So even though today’s 65-plus segment is more likely to have a job than previously, the sheer numbers of those who are choosing to retire offset that impact.  
And, mind you, this happened during a month when there are typically several more labor force entrants:
The decline was made all the more surprising by the fact that June tends to be a month where the U.S. sees loads of people moving into the labor force — think teenagers snagging lifeguard gigs, recent college graduates scouring the internet for job postings and teachers taking up summer work.  That "just did not happen," said Karen Kosanovich, an economist at the Bureau of Labor Statistics in Washington.

In the last decade, an average 1.35 million workers have entered the labor force every June on a not seasonally adjusted basis. This year, the gain was 564,000. That translates into a decline for the seasonally adjusted data, since the monthly increase was much less than it usually is.
America, Where a Life of Leisure Awaits 62.6%. Betting that worse is yet to come is a no-brainer.

OTOH, things are no better in China. A few days back I featured a story on the Communist Party throwing the kitchen sink at the PRC's cratering stock markets to little positive effect. Using every monetary intervention on top of moral suasion and state media cheerleading has not had the desired effect of extending a state-engineered bull run. Having run it up against an endless stream of negative economic data, the Communists are unable to arrest its stunning fall as reality set in:
The benchmark stock index slumped 3.5 percent to 3,912.77 at the close. The gauge has tumbled 24 percent from its June 12 peak, helping wipe out at least $2.4 trillion of value. Fifteen stocks dropped for each one that rose Thursday, with industrial, power and commodity shares leading losses.

The drop below 4,000 is a blow to investors who had speculated authorities would intervene to support shares, a strategy employed near closely watched levels in the past. While China’s securities regulator eased margin-trading rules and the nation’s exchanges announced fee cuts overnight, the moves failed to revive confidence in a market that has wiped out the equivalent of France’s entire equity capitalization in three weeks.

“Four thousand is the psychologically critical level that should not have been broken,” said Castor Pang, head of research at Core Pacific Yamaichi in Hong Kong. “The government will have to and need to come up with more measures otherwise the market is poised to drop further.”
Let's be honest: Both economies are rather crap. One has a steadily "improving" unemployment rate because, well, so few people bother to actively seek work, reducing the labor pool significantly. With the Fed practically giving money away, the US has run out of monetary policy tools. Leisure time is all the time for an ever-growing number of Americans. Meanwhile, the Chinese rely on a state-engineered stock market frenzy to show the world all is well in China when things are quite awful.

Neither is fit to be emulated by developed or developing economies, IMHO. They are big, yes, but you know what they say about how big they are priming them for a harder fall. They are mirror images of imbalances that exemplify subprime globalization.

BRICs Illusion: Western Banks' Exodus from Brazil

♠ Posted by Emmanuel in at 7/02/2015 01:30:00 AM
Adios HSBC in Brazil; we hardly knew ye.
There was a time when Brazil, Russia, India and China or the BRICS were all the rage, and MNCs felt they had to have a presence in these countries. Unfortunately, we all know what's happened since. Consider China and Brazil in particular: China has slowed down tremendously as its export-driven economy has reached its limits and saturation of the world market with PRC-made goods has set in. As a result, Brazil's resource-dominated exports have found fewer and fewer Chinese takers. Being a fairly undiversified economy, Brazil has slown down and even gone into reverse.

Recent news that HSBC--which once had an ad campaign styling itself as "The World's Local Bank"--was essentially giving up retail banking in Brazil means that nearly all the Johnny-Come-Lately Western banks have fled Brazil. With sky-high interest rates in Brazil, this should not be the case on first glance:
Making money through lending should not be a problem for banks operating in Brazil. The country's interest rates are currently at an eye-watering 13.75% and expected to rise even higher this year. So it comes as something of a surprise that HSBC has announced this week it will practically end its operation in Latin America's largest economy - retaining only a few large corporate clients.
However, operating conditions are difficult in as geographically vast a market as Brazil. With thin activities concentrated in major cities not being enough to achieve profitability on a sustained basis, most have fled...including HSBC now:
HSBC Holdings Plc this week became the third foreign retail bank to abandon or scale back in Brazil in the past two years, leaving the South American nation with just two still doing business there. Citigroup Inc. agreed to sell its credit-card and consumer-finance unit two years ago and Societe General SA decided to close its consumer-finance operation in February. Also giving up on the South American nation: Bank of America Corp., Spain’s Banco Bilbao Vizcaya Argentaria SA, Italy’s Intesa Sanpaolo SA and France’s Credit Lyonnais SA, which shuttered their Brazil retail banks in the past two decades.

Brazil, geographically the world’s fifth-biggest country, is a punishing place for retail banks trying to break in or expand, and is already home to Latin America’s biggest lender by market value, Itau Unibanco Holding SA, and its largest by assets, Banco do Brasil SA. As opportunities to purchase smaller rivals passed it by in recent years, London-based HSBC also fell victim to new regulatory capital requirements after the 2008 global financial crisis.

“To grow in an economy like Brazil, given the size of its territory, banks need to expand geographically,” Henrique Kleine, head equity analyst at brokerage Magliano SA in Sao Paulo, said in a telephone interview Tuesday. “HSBC lost the opportunity to gain scale. The conditions don’t exist to grow in Brazil anymore.”
The political-economic conditions in Brazil are, to be frank, dire. It is in a recession and has a corruption scandal engulfing its government. Having ditched the internationalization strategy, money losers had to go first for HSBC, and none was losing more money than its Brazil operations.

It's another sad story on the BRICs Boulevard of Broken Dreams.

UPDATE: It probably didn't help that the Brazilian real is the year's worst-performing currency among major developing economies.