No edge, no bet
A few weeks ago, we told you we were cleaning up our book. We decided to sell Brazil ahead of the Presidential elections. Our Brazilian shares had run up a bit as Bolsonaro gained in the polls, but we figured we had no edge in calling the outcome of this binary event.
Besides, the Brazilian businesses we owned weren’t doing that hot either, and the Iran war wasn’t exactly helping inflation expectations.
Naturally, after the first voting round, little Bolso came out well ahead, and some of the names we’d just sold rallied up to 50% (looking at you, XP). As F1’s Guenther Steiner would say: we could have looked like Rock Stars…
Only 3 weeks later, the Brazilian bull market came tumbling down when Lula found himself with an extra 10 million votes and won the election.
Was there voter fraud? Who knows. But if you thought that presidential elections in EM are handled fair and square, you shouldn’t be playing in EM.
Roughly 10 years ago we were involved in a company called Mongolian Mining Corp (975 HK), a metallurgical coal producer on the doorstep of China, the world’s largest consumer of coal. We figured that if MMC could move that coal a few hundred kilometers over the border, they would have a tremendous cost advantage over Australian coal that needed to be shipped across various seas and whose miners needed to be paid a living wage.
To move all that Mongolian coal cost-effectively, they needed a railway. And while it seemed in everyone’s interest to build that railway, it never happened. Either the bribes that needed to be paid were paid to the previous politicians, and the new powers-in-charge wanted their own cut. Or Mongolia pissed off China by inviting the Dalai Lama over, or by negotiating a military alliance with Taiwan. Whatever it was, no railway.
So instead of building a railway, they trucked coal over the border, and now and then, when China needed to show who’s boss, they’d close the border. This created what was known as the world’s longest traffic jam.
Luckily, Kuppy found a shepherd on the Mongolian steppes willing to count trucks for $500 per month. Call it the first systematic data gathering for KEDM. By knowing how many trucks left the mine each day, and by calling our trader friends on the Chinese-Mongolian border to get that day’s settlement price for coal, we had a pretty accurate number of that quarter’s earnings.
Naturally, our shepherd friend made use of this traffic jam by only counting trucks once a week – he’d simply ride his horse to the front of the queue and continue where he left off the week before. He’d spend the rest of the week getting drunk on some Chinggis vodka, living the life he’d always wanted. $500 per month goes a long way on the Mongolian steppes.
Why are we mentioning this?
At some point we found ourselves rooting for the Mongolian People’s Party in the 2017 Mongolian presidential elections. Why the MPP instead of the Democratic Party? Because the MPP was the right kind of corrupt, or so we thought. They were aligned with our mine, and they were the most likely to get our railroad approved. They had already won over the parliament the year before, and all we needed was ‘our guy’ as president to print money on our MMC long.
But after weeks of watching movies on Twitter that laid bare all the ongoing corruption (on both sides), the DP president walked away with the victory. This meant no railway for another couple of years, a continued bear market, and dozens of other interesting stories which are best told by Kuppy himself.
So what did we learn?
When it comes to calling elections in EM, we have absolutely no edge. And unless you are the one bribing the vote counters, intimidating your opponent’s voters, or adding some last-minute votes yourself, neither do you.
So, while we could have looked like rockstars by playing the Brazilian elections, and then (hopefully) selling before the second round, we are no gamblers. We play the odds. We track close to 100 pages of ED monitors to find situations where the odds favor us. But if we have no edge, we are happy to sit on the sidelines.
Where does that leave us for Brazil today?
A -26% 1-day move in EWZ does seem to get all the value guys involved. But if they like Brazil today, why didn’t they buy it 2 months ago at roughly similar prices?
Brazilian stocks are roughly back to where they were 2 months ago. But Foreign Direct Investment is likely to remain negative – no investments by the US in Brazil’s mineral wealth. That will keep both the FX and the rates pressured. And with real rates around 10%, and no indication that this will improve any time soon, we are simply not interested.