Why the recent flight to quality to Africa is an untold epic fail

Safety from the Ukrainian Crisis investors?

Fine, begin your sadly shortened investor's joinery with a mixture of funk and bewilderment into the heart of financial darkness - the likes of Greece and Africa and two big winners in the most recent flight to quality.

It does seem odd.

In a year where $100 trillion dollars worth of bonds exist externally and only $300 billion inside this great torch-shaped continent, very few countries contain the credit histories one would normally require for a an 'all-buy recommendation' as vast inflows have moved toward Africa.

It often seems during times of political panic in the Ukraine Crisis by research analysts at Franklin Templeton or PIMCO mirror their mile-wide, knee, shallow-deep kind of analysis that ended with the words like "buy Nigeria", "buy Kenya" as they equally recommend sell-offs with "losers" like Ukraine, Russia, and Turkey.

The extent that investors require, and researchers will try to find and stretch, for yield can only remind one of Walter Bagehot's old dictum of financial crisis:

'History has taught me low rate of return on investments inexorably leads towards irresponsible investment … People won't take 2 per cent and cannot bear a loss of income. Instead, they invest their careful savings in something impossible – a canal to Kamchatka, a railway to Watchet, a plan for animating the Dead Sea.'

Likewise, the investor climate typical of panics means that the flock are lamb, lamb unwilling to stick it out or buy back and a cheaper price as the researching shepards obey the trend no longer suffer short-term loss for long-term gain (as I think Bill Ackman is facing and will profit from).

What's the answer for a fixed-income researcher?

Obviously our first job is to figure out the investor climate -- recommending trades investors are willing to do right now.

However, there's an ulterior motive that underlines every fixed income researcher. That, it seems, is the unquenching intellectual curiosity to see why a particular trend occurs, and when it moves in one direction, if a long-term tradable idea can be found.

Considering one trade idea

In sovereigns, if we take Russia, it one of the largest foreign exchange reserves, it has significantly restructured its energy industry to include private competitors who make their cash payments, and since the 1990s it has significantly upped its marcropudential management of its financial sector along with retained earnings no longer being siphoned off offshore, and above all and corporate profits have not been higher.

Most likely though, the researcher will be right to say that it will not grow at all.

The investor climate for Russia, simply predicting not the numbers of its economy but the number of people willing to stick and stay in the country as it dramatically cheapens after this crisis, means the bid-ask range has gone so wide that it's as wide as the Russian steppe.

Then Brigadier Frank Kitson at Parliament he reminded me once "George, the problem of defeating the enemy consists very largely of finding him".

This is true. You spend all of your time figuring out where to go, and once you get there, people often go somewhere else. Like the Heisenberg effect -- the whole problem of researching and predicting fixed income moves during a panic is, as soon as you do, and make a recommendation the situation is very dynamic and it means the recommendation is somewhat null and void if it's short-term.

Long-term recommendations, however, are different and often hard to generate.

Consider trading off of Hungary's recently re-elected Prime Minister, Viktor Orbán.

He's more oft putting with his frequent errors of solecism with other world leader and will be remembered for in the media for his perennial agenda of being against political correctness than maintaining an economy superior to every other neighboring country (albeit Poland).

If one politician could this, Baron Georges-Eugène Haussmann's overriding agenda of the economic and commercial, with scant regard to issues of justice sought his dictum from his Mémoires of: 'How rich France would become if it were well governed – above all well administered.'

Administration was for Haussmann fundamentally about forging the conditions of wealth and prosperity for the bourgeois order that had emerged victorious from the traumas of 1848.

How can you possibly trade something like 1848 beyond holding bonds until after the crisis resolves itself? Streching for the yield and moving toward Africa immediately means that the risk you take and rewarded for becomes higher and the reward lower.

Last week, millions of dollars worth of assets sold-off in Hungary's markets in this most untimely manner for a small, not particularly interesting Eastern European country.

When political scientists give long-term predictions (the least scientific of the scientists yes, but still funny lurching on to self-aggrandizing, uneffaced neologisms) they simply make brands like calling the irrational prejudice that can surface in financial markets: "orban(o)phobia", or what Jim O'Neill called the 'BRICs'.

Trading the BRICs became cool, selling the idea of that Hungary is run by an irrational dictator leads to further loss of investor confidence.

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