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How to Invest Inside Frontier Markets


There are certainly risks involved in investing inside frontier markets, but if you think you live in a risk-free environment now, think again.

MINYANVILLE ORIGINAL In my last commentary at Minyanville, I discussed a redefinition of three related terms: the First, Second, and Third Worlds. The old definitions reflected a reality of the 20th century, but fail to reflect the reality of the second decade of the 21st century. If, as so many agree, we need "outside the box" thinking to deal successfully with today's world, then we must begin by re-examining the terminology we employ when it remains in common use, but is no longer useful.

I want to expand on that theme today. However, terminology again needs redefinition. In this case, I am concerned with three newer terms: Developed Markets (DMs), Emerging Markets (EMs), and Frontier Markets (FMs). At first glance, these may appear to be simply replacements for the three "Worlds." To the extent they are used in this fashion, they are simply a new coat of paint on an old shack. They have one value however: They allow people in North America and Europe to continue to think of themselves as superior.

The term Developed Market is certainly misleading. Like its predecessor, "developed nation," it implies finality. There is nothing more to do. The nation is developed. What more can it be? The hubris is obvious. At least in one respect, the DMs are indeed developed. They have developed huge debts. They have combined these huge debts with a lack of domestic consensus, a failure to forthrightly confront their debt recessions, a dependency on central banks for anything approaching real action, a failure to identify a common goal allowing for a common DM response, and the resulting weak domestic and international leadership.

Seen from outside, they are sad at best, pathetic at worst. We are now entering our sixth year since public awareness of another term, "sub-prime," and the beginning of a crisis first felt in the US mortgage sector that spread to engulf the North Atlantic. As the years pass with one promise of near- or mid-term recovery after another failing to be realized, their embarrassment becomes humiliation, whether they have the good sense to realize that or not.

Europe has taken this to an extreme that would have bordered on pulp fiction a decade ago. It is painful to watch. It is beyond melodrama. It is a tragedy unfolding before us today. There is nothing any of us outside Europe can do about it, with one possible exception for investors. Trading stocks and the euro on the basis of this week's official announcement of progress is no way to earn a living if you want to sleep at night. I think it is best to simply step aside and wait for whatever results are delivered. Until then, it is a gambling den for those foolish enough to think they can predict an unpredictable future and who, as a result, serve Lady Luck.

The US, as many have noted, looks good only in comparison to Europe. It also has a big plus in the exploitation of shale oil that is already having a substantial positive economic impact, one that will likely grow throughout this decade. But Americans have one problem very much in common with the European Union and the eurozone. The nation is divided and has been for at least a decade. I believe the similarities between George W. Bush's policies and those of Barack Obama are several, but there is one similarity that is especially striking and based on hard fact.

Both presidents were in serious trouble when they ran for reelection and their oppositions launched something skin to a "holy crusade " in an attempt to defeat them. Both were reelected. But the really striking similarity is seen in the popular vote. George W. Bush received 50.74% of the popular vote. Barack Obama received 50.85% of the popular vote. Both presidents overcame serious obstacles to win reelection and both succeeded, but neither received a mandate for change. They were simply given permission to try again, and barely so at that. Lady Luck has her hands full.
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