Thursday, November 5, 2009

Crisis in Colombia Brings Opportunity

I often talk about generational cycles having major impacts over long-term trajectories in markets, and societies in general. To most, it sounds like a very fatalistic way of looking at things: no matter how hard we try, we're destined to repeat our failures. This was proven true again in 2008 as markets tumbled after debt levels rose uncontrollably for decades, securities fraud was rampant and corrupt politicians and regulators did their best to cover up these problems - and in many cases perpetuated them themselves. It was like a carbon copy of what led to the Great Depression.

But generational cycles are not always bad. Like all cycles of their sort, they have expansionary and contractionary periods - very much like the seasons. So while all signs point to much of the western world (more accurately, any nation that participated in WWII) being in the thick of a generational crisis era, there are other parts of the world, that are in different points in their own respective cycles. This may prove to be important for investors, looking for growth around the world as their own asset markets experience much needed corrections.

Many South American nations fit this description. Specifically, Argentina, Brazil, Chile, Colombia, Peru and Uruguay.

Whenever I am in conversation with other investment managers and economists, bringing up these countries as ideal areas for investment results in scrunched noses and shaking heads. After all, they have recent histories of hyperinflation, corruption, drug lords and brutal dictatorships.

"Precisely," I answer.

The recent histories of these nations are awful. Just 20 years ago, nearly all were controlled by corrupt dictators. Senseless killing was a way of life. Political opponents would simply disappear or fight guerilla wars with government armies. Socialist price fixing schemes left food and medical care in short supply.

In 1985, the military dictatorship was overthrown in Brazil. In 1988, democracy was restored in Chile. Pablo Escobar was killed in 1993 and the drug cartels that terrorized Colombia were nearly completely destroyed a few short years after. Argentina's "Dirty War" ended in the early 80's and democracy was restored. Unfortunately, continually poor economic policy has led to recurrent crises. Regardless, the standard of living has continually risen since 1990.

The recent memory of these issues provides the perception that South American countries were always this way and always will be. But this is not the case. Argentina and Chile in the early part of the 20th century were some of the wealthiest and most advanced nations in the world. European wars led to an influx of educated immigrants that embraced the resource rich lands and prosperity abounded. "He's as rich as an Argentine" was a popular expression.

After spending 5 months during '06-'07, primarily in Chile, I feel like I can offer some insight into how they have definitely changed their ways. The Chilean people are incredibly well educated. And they are consistently ranked as having the most economic freedom of any country in the developing world. One particular observation stuck: the Chilean's commitment to higher education. Riding on the subway in Santiago was the best way to experience this. In much of North America, the banner ads in the station and train cars are full of chewing gum, television shows, deoderant and other useless gimmicks. In Santiago, most are occupied by post-secondary schools. And if one were to ride the subway in the evening, many of the commuters are not going home from work, they're on their way to night classes. Chileans are intently focused on the future. And when one talks about the future there, one talks about 10 years, not 10 months.

The reason behind this can easily be found in demographics. In conjunction with the end of major crises and the beginning of new freedoms, people tend to be fairly jubilant, resulting in baby booms. And in the late 80's/early 90's most of these nations I've mentioned experienced enormous baby booms. Today, they have some of the youngest populations in the developing world with - according to the CIA world factbook - between 23-29% of their populations 14 years old and younger. China, in contrast, has only 19% (and enormous issues with male/female disparity). Germany and Japan sit around 13.5%. Other nations with higher ratios of young populations are typically marred by high infant mortality rates, famine and/or HIV.

With such a burgeoning young population and the recent memory of brutal dictatorships still ingrained in the memories of their parents, these societies are naturally disinclined to extremism, protectionism, violence and corruption. The best analogy for this is America in the decades following WWII. The generational High and generational Awakening eras are typically favourable eras for investment due to the natural increasing demand from younger generations. They are also characterized by something else: utter paranoia of the bad times returning. Again, think of America in the 50's and early 60's. Nuclear war with the Soviets was thought of as an inevitability. And every recession was met with fears of a depressionary repeat of the 30's. Each bout of this pessimism was met with large stock market declines, only to be followed with breathtaking rallies, innovation booms and a rising standards of living.

With that in mind, I came across an article yesterday about Colombia that typifies this mentality. The content of the article is not all that important (the Colombians are having continuous issues with neighbouring Venezuela and their lunatic dictator Hugo Chavez). But the fact that so many are fearful of this escalating into a broader conflict is typical of a generational Awakening era. These are the types of events that dampen positive social mood, creating huge selloffs in asset markets and allowing for low-risk entries into burgeoning markets.

South American stock markets have indeed come under the same allure as other emerging markets from the US Dollar carry trade. And they will likely succumb to similar panics when this inevitably unwinds. But the favourable demographic positions of many of these nations will have me buying dips in anticipation of continued future prosperity, stability and an eventual leadership role in world affairs.

South America is often lumped in with other emerging markets as part of the same US consumer dependent globalization trade. I have reason to believe their growth is based on firmer foundations.

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Willy2 said...

Yes. Hugo Chavez is a lunatic. But it's the US who is stoking more unrest in Columbia and Venezuela. Don't you remember that in april 2002 there was a attempt supported by the US to overthrow the current government ?

mike.montchalin said...

Great Post!
Paraguay is my special interest. But realistically Columbia, Peru, and Uruguay have to be better choices.

I know Doug Casey has invested in Argentina and is talking it up. But every time I read some economic news from Argentina, it sounds like they're nuts.

Can there be opportunity in Brazil when everybody has been talking about it for so long?

Very interesting; what you said about Columbia. A year and a half ago I met a farmer with a Columbian wife. I assumed his wife was a sort of refugee from a druglord torn country. Wrong! They thought Columbia offered more opportunity than any other Latin American Country.

On a recent econtalk podcast Jamaica was compared with Barbados. Government policy can really screw up a country. Barbados progressed while Jamaica languished. Now Jamaica is getting with the program. But they have lost so much time.

Thanks for such an interesting post.

Roger J said...

I don't exactly know how "free" the mind of South Americans are. If we look at past great growers (the US in 19th century, Japan in mid 20th century), freedom & liberty are pre-requisites. If the people are of the free mind type, then they will be future great prospects.

This is the very thing that makes me a bit pessimistic about Asians. Some evidences suggest they are mainly worshipping de facto dictators & conspirational minds. Chinese people worship Mao Zedong like a god. In Indonesia, the first president (Sukarno) was also worshipped like he was a god that brought prosperity & dignity to the country. All these were despite the fact that during his rule people lined up for food and hyperinflation. In this respect, perhaps the Asians need to have some profound change.

The Chinese always worshipped their emperors like a god, despite dynasties falling and rising every 1-2 centuries. They pointed out the Great Wall of China as proof of their past greatness, although it had been breached numerous times. Mongols, Manchurians, the British, they breached those "protective walls". Perhaps if anything, the Great Wall ironically symbolizes the great barrier that Asians must overcome to really have their days in the sun... by their own, not by US/western bubbles.

Anonymous said...

The US MUST stop meddling in those countries before South America has a chance of regaining its footing. then and only then there's a possibility the situation could return to normalcy. A lot of dictatorships were supported by the US and that has led to a very instable situation in the last 40 to 50 years. In that sense it's very good the US is about to bankrupt. Good riddance of the parasite called USA !!!

Anonymous said...

Robert Prechter is on Yahoo Tech Ticker again ! "Bear Market Rally is over".


khalid said...

Re Prechter:
A nice rally to 1200 is on the cards then.

khalid said...

S n P 500, of course.

Occdude said...

Great points Matt, and believe me, along with Thailand and Panama, S. America is a place whose time has come. I would add however, Ecuador AND believe it or not Cuba (for a REAL contrarian play).

You failed to add though that these markets are undeveloped credit-wise and therefore are less levered and more reasonably priced. But I do agree, I personally am chaffing at the bit to go down south and get my foot in the door, just waiting for the next dollar surge.

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