Brazil: “Goldman Abandons Ship as the Crisis Arrives”

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Goldman Sachs: How thick with BRIC?

Tempo é dinheiro. Vamos, então, fazer a experiência de pagar as nossas dívidas com o tempo. –Saying

Goldman alert over emerging markets: the U.K. Telegraph and Veja magazine (Brazil) are reporting on this today.

UPDATE, November 15:

The Telegraph citing “recent client letters” from Goldman that it has read.

Veja citing no sources at all.

A 4.3% decline in the IBOVESPA yesterday was almost universally attributed to an earning disappointment from Petrobras in local press reports I read.

But might a general unwinding of big institutional positions of the kind described here have been a more significant factor?

Reporting on the story exhibits the usual Rashomon effect.

Which piques my idle curiosity. Goldman just finished participating in the IPO of the BOVESPA stock market here, after all. I am reading that 78% of the shares in that IPO were acquired by foreign investors. The CME has taken a 10% stake in the BOVESPA’s sister market, the BM&F.

But then I am not really very well-informed about these things. The last person you want to seek investment advice from is me. My wealth, such as it is, is mostly all in New York and São Paulo real estate.

In the statements to investors quoted by the Telegraph, however, Goldman described the shift as “a prudent moment for profit-taking” in a market about which it remains “long-term bullish.”

Meanwhile, CNN Money pumps against the notion of a coming slump:

Veja, in turn, cites an anonymous source who takes it as an ominous sign that “the subprime mortgage crisis is arriving in Brazil.”

I tend to pick stories like this more or less at random as a sort of random “prognostication quality” (PQ) check.

Some people do crosswords, or knit. I tinker with this sort of thing.

Because I tend to think that there is a correlation between anonymous-coward (AC) sourcing and low PQ. I have not rigorously tested the theory, but I am trying to field-collect some cases toward that end.

Call it “the PQ-AC negative correlation.” Hypothesis to test: Prognostication quality (PQ) tends to vary in inverse proportion to the density of “anonymous cowardice” (AC) in its sourcing.

File, therefore, under “prognostications to evaluate with the benefit of hindsight.” The Telegraph:

In a series of client notes over recent days, the US investment bank [Goldman] has advised cashing in profits as a precautionary “near-term” measure. The MSCI emerging markets index has risen 28pc since the credit crunch in mid-August.

Veja‘s brief prognostication:

A semana no mercado financeiro será agitada. A Goldman Sachs vendeu todas as suas posições de Brasil e México e alertou para uma forte correção em outros mercados emergentes. “A crise vai começar a nos atingir”, previu agora há pouco um experimentado banqueiro de investimentos. Ou seja, aguarda-se uma subida do dólar e uma queda nas bolsas. Outros bancos podem seguir a trilha aberta pela Goldman.

This will be an eventful week in the financial markets. Goldman Sachs has sold all its positions in Brazil and Mexico and warned of a major correction in other emerging markets. “The crisis is going to start to affect us,” an experienced investment banker predicted just now. That is, expect the dollar to rise against the real and the stock market to fall. Other banks might go down the trail blazed by Goldman.

Affect “us” who?

“Experienced” is a rather weak bid to pump the credentials of the anonymous-coward source here.

Chuck Prince, after all, is an experienced banker. And just look at the mess he presided over. Some people have lots of experience, but learn nothing from it, as G.W.F. Hegel famously observed.

Tiempos del Mundo (Mexico), a UPI news service, on yesterday’s 4.3% decline in the IBOVESPA index:

El banco Goldman Sachs entregó un informe diciendo que Brasil y México están siendo plazas muy caras y eso hizo que mucho inversionista ordenara vender, dijo el analista José Costa Gonzalves. En la Bolsa brasileña, también cayó el precio de las acciones de Petrobras, después del anuncio de reservas gigantescas en el campo de Tupi, en Bacia de Santos.

Goldman Sachs issued a report saying that the stock markets of Brazil and Mexico are overvalued, which made many small investors sell, says analyst José Costa Gonzalves. In the Brazilian stock market, the price of shares in Petrobras also fell after the announcement of gigantic [petroleum and gas] reserves in the Tupi field, in the Santos Basin.

Actually, what I read was that Petrobras shares surged 10% on news of the discovery in the Santos Basin, then retreated by some lesser amount the following day on profit-taking and the aforesaid “earnings disappointment.”

At least TDM’s pundit on this question has a name, if not an institutional affiliation. (He googles up as working for a Brazilian brokerage house and investment bank, Indusval. An interview with the guy on the subtle art of subequatorial Fed-watching.)

In this version of the story, it seems, it was investors heeding Goldman’s advice, not Goldman’s unwinding of its own position, that drove the sell-off.

I have not really read up sufficiently on the subject, though.

The Telegraph:

The warnings are likely to raise eyebrows in banking circles since Goldman Sachs has led the charge into the frontier economies, coining the terms “BRICS” to describe the quartet of Brazil, Russia, India and China. The bank has closed its positions on Brazilian and Mexican stocks after reaping fat rewards in the latest rally, hoping to buy back later.

Goldman published a “Web tour” called The BRICS Dream in May 2006.

“We see ongoing vulnerability. As the August pullbacks showed, the market could easily begin to worry more about the transmission of the latest financial problems to US and global growth. While contamination to emerging market equities in that episode proved short-lived, it was painful. We think it is prudent to book a gain,” it said.

In this version of the story, other market observers apparently already have “followed the trail blazed by Goldman” — which is an odd metaphor to use, given that they apparently did so, by some accounts, before Goldman even took its axe out.

A growing number of analysts fear that emerging markets have succumbed to a dangerous bubble, replacing US property and structured credit as the new locus of systemic risk. Credit rating agency Standard & Poor’s warned investors last week to cut the portfolio share of emerging markets from 6pc to 4pc.

I really dislike expressions like a “a growing number of analysts,” especially when only one example is cited to back the claim — the “one-sparrow spring” fallacy.

“Is likely to raise eyebrows in banking circles” — which furthermore indicates that the reporter is too lazy to go out and take candid snapshots of a goodly statistical sample of eyebrow behavior as the news is received by actual bankers — is another instance.

Brazil’s Último Segundo, borrowing from the 1990 style manual produced for the Estado de S. Paulo, recently introduced this point as solemn doctrine for its business and economics reporting as well:

Segundo os analistas – Evitar a generalização. Prefira escrever segundo alguns analistas, sempre se restringido à amostra do mercado que foi consultada. O mesmo vale para segundo especialistas, técnicos, economistas ou empresários.

“According to analysts”: Avoid this generalization. Prefer “according to some analysts,” always restricting the generalization to the sample of the market that was consulted. The same goes for specialists, technicians, economists or business executives.”

This is essentially a corollary of “thou shalt maximize the information provided to the reader about sources of information, analysis and opinion,” aka “consider the source.”

Combined with US doctrine on sourcing, the preferred practice is to cite the opinion of a representative sample of analysts who are willing to speak on the record, without anonymous cowardice.

The opposite of which is the trademark Larry Rohter sourcing statement: “Local press sources say.”

In Brazil, local press sources say a lot of amazing things.

A fair amount of which make no sense at all.

MarketWatch gists the Telegraph’s report:

The U.S. investment bank said Brazil’s real is 28% overvalued against the U.S. dollar, as are the currencies of India, at 22%; South Korea, 32%; Hungary 42%; Poland, 60%; and Turkey, 74%, according to the report. Goldman added, however, it was still “very bullish” on the emerging markets in the longer term, but warned that investors need to pick and choose at this stage, the Telegraph reported.

If the real fell 28% against the dollar, we would personally be pleased as punch. More buying power might mean more buying power left over for travel after the rice, beans and cachaça are paid for, among other things. When the dollar was well above R$3, we lived like damn hell ass kings down here, let me tell you.

Anyhow, just another idle observation on the Rashomon effect in Brazilian financial journalism, a subject I am going to try to study a little more systematically this year.

It seems as though Veja has basically parroted the Telegraph story, omitting all the sourcing and backing.

The logic of prediction used here is curious as well. “Expect the dollar to rise and the market index to fall.”


“Because other investment banks might follow suit.”

But then again, they might not.

Or then again, they might already have.

It all depends on facts not in evidence at this point.

So anyway, there seem to be at least two narratives at work here: (1) this is a watershed moment signaling the arrival of a crisis (rats deserting a sinking ship), and (2) this a new data point that tends to confirm the existence of an emerging consensus among risk managers.

  1. Goldman has blazed a trail in pulling out of Brazilian capital markets, and other banks may follow suit.
  2. A number of analysts, including Standard & Poor’s (and Goldman, and others unnamed) have already advised reducing exposure to emerging markets such as Brazil — and are following their own advice.

Profit-taking and strategic repositioning become the first stirrings of a hysterical run on the bank.

Somewhere here I have clipped an astonishing article by a distinguished Globo econopundit that in the direst of terms warned the reader that the market might well suffer a sharp correction at that moment — unless it did not.

It did not.

I predict that the world will end tomorrow, unless it does not.

In either event, I can claim to be a visionary with a track record of successful prognostication.

Another bit of advice from the US style manual:

Sobe e desce – O jornalista de economia do Último Segundo sempre procura saber o que representa a queda ou a subida de um mercado, seja de ações, seja cambial, seja de petróleo, ou de qualquer indicador em movimento para cima ou para baixo. Na Bolsa de Valores, por exemplo, os índices refletem sempre uma média de uma parte da amostra. Mesmo com o índice geral em queda, muitas ações podem ter subido; mesmo com o índice em alta, muitas ações podem ter caído. Recomenda-se aprofundar e analisar o comportamento das ações por setores. A bolsa pode ter caído, mas certo conjunto de ações de empresas de grande porte, por exemplo, pode ter subido e isto deve ser explicado ao leitor. A queda do dólar pode ser ruim para o setor exportador, mas é boa para os preços, porque retira a pressão sobre os seus índices; e ainda é um redutor do estoque da dívida pública indexada à moeda estrangeira. Atenção: O mercado sobe quando alguém compra e cai quando alguém vende.

Rising and falling: Our economics reporters always seek to learn what a rise or decline in an index represents, whether the index in question is the exchange rate, stock prices, or any other indicator that fluctuates higher and lower. In the stock market, for example, the index always represents the average of a partial sample. Even when the general index is down, many stocks may have risen, or vice versa. It is recommended to analyze the behavior of stocks by sector. The market may have fallen, but a certain set of stocks of big companies may have risen. This should be explained to the reader. The decline of the dollar may be bad for exporters but good for prices, because it takes presure off the index, and also helps reduce the public debt denominated in foreign currencies. Nota bene: The market rises when someone buys and falls when someone sells.

The kindergarten-level reminder is actually much needed around here, I tend to find.


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