Black Tuesday and contagious behavior

[jpatokal]

It appeared efforts by the central bank to curb currency appreciation had backfired wildly, and miserably....

The baht weakened from 35.51 to the US dollar Monday to 36.05 late Tuesday.

Actually, it looks to me like they did achieve that particular goal :cool:

This issue of "contagion" is interesting. At first sight, the stock exchanges of Thailand and (say) Mumbai have virtually nothing to do with each other, and you'd think that money flowing out of Thailand would go into India instead. But no: what triggered the 1997 meltdown was Western speculators getting antsy and pulling out all "Asian" investments. The Economist had an interesting article a few weeks back where it argues that while there may be another bubble in the making now, this time it's mostly propelled by local investors, and thus "contagion" on a similar scale is unlikely.

[Scuba22]

They used a sledgehammer to swat a fly - they got the fly, but created a hole in the wall!

What you say makes sense, but realize that from the perspective of a lot of international fund managers, there's not that much difference between Asian markets. We like to think that people managing billions of dollars actually know things, but you can see from the talking heads on CNBC etc. that's really knowledgable people are few and far between.

On top of that, I firmly believe that all fundamental equity analysis in Thailand is built on sand. I know some very smart equity analysts in Thailand (and quite a few dumb ones), but they're relying on company reported data. Having seen how that data is compiled at the company level, I can tell you that it's a pile of fiction. There are all sorts of accounting shenanigans going on to make numbers look like whatever they want to look like, and a fair number of company owners and managers actively manage their share prices to make capital gains for themselves - I've seen where the operations of the company are purely secondary to the market gains from share trading.

I won't even get into my opinions on technical analysis.

The stockmarket in Thailand really IS a casino. 80% of trades are still retail - go to any trading house and watch to the old Chinese gradmas buy and sell, it's like mah jongg, very scary. I suspect that other regional stockmarkets are similar.

Scuba22

[ncr]

Ooops...! Here's something that could be an idea for a Stephff cartoon:

Just imagine MR Pridiyathorn coming home from work, and his wife welcomes him at the door, asking: "How was your day, darling?"

"Hmmmm... not that good... I think I crashed the Thai stockmarket, honey....." :D :( :p

[jpatokal]

On top of that, I firmly believe that all fundamental equity analysis in Thailand is built on sand. I know some very smart equity analysts in Thailand (and quite a few dumb ones), but they're relying on company reported data. Having seen how that data is compiled at the company level, I can tell you that it's a pile of fiction. There are all sorts of accounting shenanigans going on to make numbers look like whatever they want to look like, and a fair number of company owners and managers actively manage their share prices to make capital gains for themselves - I've seen where the operations of the company are purely secondary to the market gains from share trading.
Why do you think this is limited to Thailand? Every country has its Enrons and Parmalats, even squeaky-clean Singapore had a bit of a scare with the China Aviation Oil (http://en.wikipedia.org/wiki/China_Aviation_Oil_(Singapore)_Corporation_Ltd) bubble.

[The Enforcer!]

Is it not sad to reflect that the 'Old men and their boy" have done more damage to the Thai economy, and the well-being of Thai people, in one day than Thaksin did in six years of alleged corruption.

The Enforcer!

[Scuba22]

Why do you think this is limited to Thailand? Every country has its Enrons and Parmalats

I don't think this is limited to Thailand, but I can only comment on the two systems I've had direct experience with - the US and Thailand. The difference I see is that in the US, ferreting out corruption is a means for personal advancement, so you do see aggressive prosecutions by the politically ambitious - consider Giuliani or Spitzer, who both launched their political careers (in different parties, no less) by going after the rich, powerful and corrupt, including corporate malfeasance. Of course the system still has tons of problems and much needs to be fixed, but it's a far cry from what I see here. It's the difference between someone who's kind of wierd but more or less functional vs. a true psychotic who needs medication to avoid hurting himself and others.

, even squeaky-clean Singapore had a bit of a scare with the China Aviation Oil bubble.

Singapore's alleged cleanliness is a whole other topic in itself. I've had a fair amount of contact with Singapore, but not its stock market; and I've met some pretty shady Singaporeans - but they all conduct their dealings outside Singapore. At home, nobody litters or chews gum. I grew up in a Mafia neighborhood in the US - there was NO street crime and we always got excellent attention from the garbage men and snow removal. Singapore reminds me of that.

Scuba22

[jpatokal]

Singapore's alleged cleanliness is a whole other topic in itself. I've had a fair amount of contact with Singapore, but not its stock market; and I've met some pretty shady Singaporeans - but they all conduct their dealings outside Singapore. At home, nobody litters or chews gum. I grew up in a Mafia neighborhood in the US - there was NO street crime and we always got excellent attention from the garbage men and snow removal. Singapore reminds me of that.

Oh yes; in particular, there is lots and lots of Indonesian money deposited in Singapore, and the banks here don't ask too many questions about where it came from. The Sing government's support for Myanmar is an acknowledged fact, and then you have the dealings of the many tentacles of the Lee family/PAP/GLC (govn't-linked corporation) octopus -- Temasek is notoriously secretive, and they're one of the more visible bits. But bad things happens to those who ask too many questions or try to probe too deeply...

[Scuba22]

Is it not sad to reflect that the 'Old men and their boy" have done more damage to the Thai economy, and the well-being of Thai people, in one day than Thaksin did in six years of alleged corruption.

Yes, perhaps it worse to be incompetent than corrupt, though it saddens me to think that these are our choices.

What do you suppose Thaksin and Somkid would have done in this situation? Given the speculative baht appreciation (rise in baht without a concomitant rise in demand for Thai goods & services) was indeed hurting exporters, it doesn't seem to me unreasonable to call for a policy remedy. I'm personally skeptical about the so-called liquidity value that speculation creates to begin with, but that's another story.

Would it have been better to do nothing? Perhaps - a lot of exporters would have been hurt, but the market would have remained fairly stable (have you noticed how few large-cap companies on the SET are exporters? It's totally dominated by domestic industries - banking, telecoms, property - yet another structural problem in the thai economy, the disconnect between national economic drivers and the market).

Or would they have found the sweet spot - something like a 15% withholding tax on short-term investments, but without the 30% reserve requirement (what brain fart produced that, I'd like to know)?

The previous government had their macroeconomic shock early on; for the past 4-5 years they rode on a global expansion where they didn't really have any major disasters to deal with and had cash to throw around.

It's a real shame that they were ousted just when the global economic situation is starting to look wobbly. The more mistakes this bunch of clowns makes, the better they're going to make the last bunch of clowns look. Sad indeed.

Cheers,

Scuba22

[Scuba22]

But bad things happens to those who ask too many questions or try to probe too deeply...

Yeah, I'm getting that feeling now. I'm doing a project involving Singapore and Indonesia, in a highly-regulated industry; and I'm finding a lot of funny things going on. In some areas, there's plenty of data, in others, there are curious holes. We start asking questions, get a few answers, and then hit dead ends.

Very interesting!

Scuba22

[BangkokPundit]

What do you suppose Thaksin and Somkid would have done in this situation?

I don't think they would have agreed to this measure (cough senior TRT members own too many stocks), but it is rather academic as if Thaksin was still in power there would still be a political crisis and no appreciation of the baht. If Pridiyathorn was still head of BOT I am not so sure.



Given the speculative baht appreciation (rise in baht without a concomitant rise in demand for Thai goods & services) was indeed hurting exporters, it doesn't seem to me unreasonable to call for a policy remedy. I'm personally skeptical about the so-called liquidity value that speculation creates to begin with, but that's another story.

But hasn't the Thai baht been undervalued for a while? I must say I have a problem with the speculation - I am not attacking your use of the word - as one could use that word to describe the stock market and a good percentage of the property market.


Or would they have found the sweet spot - something like a 15% withholding tax on short-term investments, but without the 30% reserve requirement (what brain fart produced that, I'd like to know)?

I must admit I still struggle to understand the rationale behind the idea of the 30% reserve requirement because if you don't keep your money in Thailand for at least one year the government only keeps 10%. This means the government returns 20%. Why not just make the reserve requirement 10%?

If I was investor I would be concerned on exactly when I was going to get my 20% or 30% back again. I personally have little confidence in any Thai government agency - regardless of who the PM is - returning the money quickly. You get no interest on the money and who knows how long it could languish before it is returned. With a military government and rules suddenly changing overnight I would also be worried about the entire 30% being seized. Risking 10% is one thing, but 30% is another kettle of fish.

[Scuba22]

I don't think they would have agreed to this measure (cough senior TRT members own too many stocks), but it is rather academic as if Thaksin was still in power there would still be a political crisis and no appreciation of the baht.

Academic indeed, speculative in fact. Of course it's a pointless question. I just don't think this particular incident has much of a political dimension - there are lots of "aha, this proves the junta are morons" arguments with a subtext of "see, the Thaksin regime was smart". There are plenty of good arguments against the coup group, I just don't think this is one of them.

But hasn't the Thai baht been undervalued for a while?

It's a good question, begging yet another question - what is the "proper value"? One argues with the market at ones peril. I'm not sure what metric to use to value a currency - the Economist Big Mac index possibly? That had the Baht 46% undervalued at 36.5 back in March (in 2004 it was 50% undervalued of this index). But of course hamburger prices aren't likely to take into consideration relative current account status, budged deficits, war debt, outstanding subprime mortgage lending, and a whole host of other factors that could well impact currency value.

I must say I have a problem with the speculation - I am not attacking your use of the word - as one could use that word to describe the stock market and a good percentage of the property market.

I WOULD use that word to describe the stock market and a good percentage of the property market. "Speculation" to me means an investment made in the expectation of a short term (generally <1 year) capital gain largely uncorrelated to the returns on the underlying asset - buying a property to "flip" it quickly rather than to enjoy the rental yield, for example. For property, rental yields are a good guide to speculative excess - if people are paying over 25x the rental value (getting a yield of <4%), one might ask why not put the money in a T-bill earning 5.25% at no risk? The answer is of course the capital gain expectation.

In property, for a foreigner, speculative investments make little sense, as the market is highly illiquid - there's not much of a secondary market yet. For stocks, I'd say almost all investments are speculative. My analyst friends make their fundamental assessments and invariably their targets are reached in short order (up or down), they have to reassess, and there's nothing new to explain the change. The SET index routinely shows daily fluctuation of 1 or 2% - the equivalent of a triple-digit swing on the Dow, which happens, but relatively rarely.

Why not just make the reserve requirement 10%?

Or just have an early withdrawal penalty of 10-15%. This is pretty standard in time-deposits and I doubt there would have been such an uproar. Maybe they should order a war on drugs or perhaps make a bid for a football team to divert attention, eh?

Scuba22

[BangkokPundit]

It's a good question, begging yet another question - what is the "proper value"? One argues with the market at ones peril.


For the Thai baht, it was around 41 baht in 1998 and it stayed relatively stable until recently. The Thai baht's value fell so greatly in the aftermath of the 1997 economic crisis that it was just a matter of time before there was a revaluation particularly given the improvement in the economy since 1998. I understand that both the Singapore $ and Korean Won are back close to their pre-97 levels ..., but I'll leave it at that until the post-earthquake internet problems allow me to continue.


I WOULD use that word to describe the stock market and a good percentage of the property market. "Speculation" to me means an investment made in the expectation of a short term (generally <1 year) capital gain largely uncorrelated to the returns on the underlying asset - buying a property to "flip" it quickly rather than to enjoy the rental yield,


To clarify what I mean. I just dislike the label "foreign currency speculators" and then to call others "stock market investors". I really don't see that much difference between the two. Speculator is just used as a pejorative term.


Or just have an early withdrawal penalty of 10-15%. This is pretty standard in time-deposits and I doubt there would have been such an uproar. Maybe they should order a war on drugs or perhaps make a bid for a football team to divert attention, eh?


A withdrawl penalty of 10-15% would be a better idea.

I realise your question was tongue in cheek, but if I had a choice between a bid for the football team to divert attention from the appreciating baht and the measures the government/BOT took, I would go for the diversion.

[Scuba22]

For the Thai baht, it was around 41 baht in 1998 and it stayed relatively stable until recently.

My understanding of currency fluctuations is pretty weak, but what I hear from supposed "experts" leaves me thinking that no one else knows much about it either. The whole field seems to me to be a crapshoot in the same way modern medicine is - there's a lot we've learned, but it pales in comparison to the things we don't know.

To clarify what I mean. I just dislike the label "foreign currency speculators" and then to call others "stock market investors". I really don't see that much difference between the two. Speculator is just used as a pejorative term.

I think the interesting thing in all this is the disconnect between the stock market and the export sector - isn't it interesting that these two should be at odds? For a country with such a high export dependency, isn't it curious that so few large cap companies on the SET are large exporters? Why are the large Thai companies almost entirely domestic industries?

had a choice between a bid for the football team to divert attention from the appreciating baht and the measures the government/BOT took, I would go for the diversion.

I actually meant bidding for the football team to divert attention from the BOT measures!

Cheers

Scuba22

[jpatokal]

I think the interesting thing in all this is the disconnect between the stock market and the export sector - isn't it interesting that these two should be at odds? For a country with such a high export dependency, isn't it curious that so few large cap companies on the SET are large exporters? Why are the large Thai companies almost entirely domestic industries?
Because the major exporters are not Thai companies, but subsidiaries of foreign ones. Look at eg. cars and car parts, a US$7.44 billion industry (http://www.nationmultimedia.com/2006/10/12/business/business_30015953.php) in 2006: "Over 15 different makers now assemble cars in the Kingdom, including all the leading Japanese makers as well as BMW, Mercedes Benz, General Motors, Ford, Volvo and Peugeot along with their legions of suppliers." (http://www.thailand.com/exports/html/industry_auto.htm)

Not that I'm saying this is a bad thing: just look at the mess Malaysia has dug itself into with Proton. It is, though, curious that there are so very few (if any?) Thai brands recognizable overseas, while eg. Japan, Korea, Taiwan and China have all been more or less successful in moving from OEM bulk goods to creating their own brands.

[Wisarut]

Now, Nongnuj Singhadecha has written the article "Money of Stock Market is Mirage - Money from Export is REAL Thing"

She CONDEMNED both brokers as "Gamblers" while pointing out that Stock market is not very diferent form Casino ... Billions of Dollars from Stock maerket is mirage that lull thsoe gamblers ... Billion of Dollar from Exportation is the REA THing that good fro TYhai Economic ...

Therefore, we thou NEVER give a DAMN to thsoe complains from those brokers

http://www.matichon.co.th/matichon/matichon_detail.php?s_tag=01act03281249&day=2006/12/28