Gekko

THOSE of us who have followed emerging market debt over the years, either out of greed or a taste for the bizarre, long ago identified a useful indicator about the future direction of markets. That is, are the locals buying or selling their own paper? Back in the days when Mexico was in the soup line at the IMF, you could tell the financial health of the country was about to turn when the offshore Mexican money started to put the country’s paper in their Caribbean or Swiss accounts. At the same time Russia was in a chaotic transition from the old Soviet system, market operators noticed members of the old nomenklatura elite buying the Soviet Eurobonds. They knew that those bonds would continue to be paid, since some of them were the ones making the decision about what would be paid. Then of course there are the Nigerian promissory notes and the military chiefs there, etc., etc.

On the other hand, when the locals are taking their money out, you might want to consider whether they know something that you don’t. Take South Africa for example. In the past month the republic has raised $1.5 billion in a revolving credit facility from the banks, as well as a $500 million bond issue floated in the U.S. by Merrill Lynch. South Africa is in the middle of a gradual process of easing controls on capital movements out of the country. The most recent liberalization was for small investors who want to take up to 160,000 rand, about $35,000, out of the country.

THOSE of us who have followed emerging market debt over the years, either out of greed or a taste for the bizarre, long ago identified a useful indicator about the future direction of markets. That is, are the locals buying or selling their own paper? Back in the days when Mexico was in the soup line at the IMF, you could tell the financial health of the country was about to turn when the offshore Mexican money started to put the country’s paper in their Caribbean or Swiss accounts. At the same time Russia was in a chaotic transition from the old Soviet system, market operators noticed members of the old nomenklatura elite buying the Soviet Eurobonds. They knew that those bonds would continue to be paid, since some of them were the ones making the decision about what would be paid. Then of course there are the Nigerian promissory notes and the military chiefs there, etc., etc.

On the other hand, when the locals are taking their money out, you might want to consider whether they know something that you don’t. Take South Africa for example. In the past month the republic has raised $1.5 billion in a revolving credit facility from the banks, as well as a $500 million bond issue floated in the U.S. by Merrill Lynch. South Africa is in the middle of a gradual process of easing controls on capital movements out of the country. The most recent liberalization was for small investors who want to take up to 160,000 rand, about $35,000, out of the country.