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Regulators must act on GameStop trade: advisor

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Gerber Kawasaki co-founder Danilo Kawasaki tells Reuters' Fred Katayama the frenzied trading on Wall Street seen in stocks like GameStop, AMC and BlackBerry impacts the integrity of the market. He also explains why he's bullish on emerging markets this year.

Video Transcript

FRED KATAYAMA: The Federal Reserve, keeping rates steady Wednesday as expected as the major market indexes drop more than 1%. For more on the Fed, a little bit of GameStop, and look at the potential for emerging market equities, we're joined by Danilo Kawasaki, CEO of Gerber Kawasaki in Santa Monica, California. Welcome to our program, Danilo.

DANILO KAWASAKI: Yeah, thank you.

FRED KATAYAMA: Well, Danilo, as expected. No change to bond purchases in terms of the Fed's schedule. The Feds also potentially flagged the potential slowing in the pace of the recovery. Were there any surprises in the statement for you?

DANILO KAWASAKI: No. No surprises at all. We're seeing the consequences of the second wave of COVID. And numbers in December weren't all that great. And it's not a surprise that the Fed is leaving rates unchanged and will continue with its bond buying program.

FRED KATAYAMA: And OK for them to keep fending off any suggestions of a potential surge in inflation for now?

DANILO KAWASAKI: Absolutely. I don't think they have a choice. And one of our biggest concerns here in the short to medium term is inflation. We think that there's a lot of pent up demand. And as things start to reopen again, and more stimulus is thrown into the economy, we are concerned about the consequences of that. So keeping rates at bay and maintaining the bond purchase programs are obviously great for the markets.

FRED KATAYAMA: And Danilo, let's go to GameStop. The stock is up. It's doubled today. It's up nearly eight times in just two weeks. And then you got AMC, which is tripling intraday today. What is this frenzied trading, this battle between retail investors and hedge funds? What does this tell you about the health of today's equity market?

DANILO KAWASAKI: We had a lively debate internally here this morning. And I'm a little torn about this because on one side, I think that this-- it impacts the integrity of the market. And we need confidence from investors to maintain an orderly market. But on the other side, my colleagues here are saying that this is an opportunity for the small guy, for the little guy, to kind of stick to the big guys. And we're dealing with a dynamic that we never had to deal with before, which is the power of social media.

And through social media, this is through Reddit, these people are gaining power by joining forces basically and pushing the hands of the shorts and names like GameStop, and AMC, and BlackBerry, and all that.

So I'm a little torn. I have to say as a more conservative person, I think that regulators need to step in and figure out how to regulate this a little better. Ganging up on a short squeeze to make a quick profit, it's not really what capital markets are for.

FRED KATAYAMA: And Danilo, I understand you're really bullish about the prospects for emerging markets this year. Why so?

DANILO KAWASAKI: I think this is the year that emerging markets may actually outperform developed markets. The IMF's projection for GDP growth for emerging markets this year is 6% versus 3% developed markets. And I think there are basically three forces helping emerging markets. Number one is we have a new administration that is going to be more diplomatic in dealing with foreign affairs. Number two is this advancement of technology, a lot of it being pushed by COVID. Emerging markets are always kind of late to the cycle. And because of COVID, they have been kind of forced to adapt and adopt new technologies.

And then thirdly is the weakness of the dollar, which obviously helps foreign currencies. And it helps a lot of the emerging market countries because a lot of their debt is in dollar denominated debt. So a weak dollar helps them pay off this debt or control with the payment of this debt a little more easily.

FRED KATAYAMA: And Danilo, lastly, among your top picks I understand is Mercado Libre, which happens to be in your native country of Brazil, this online marketplace. I was looking at the-- checked the stock. It's more than doubled over the last 12 months. It's up 7% this year already. So why do you think there's more room to run up in this stock?

DANILO KAWASAKI: Yes. Yes. I wish I was here nine months ago when we were recommending the stock to our clients. But Mercado Libre is a combination of an Amazon, Shopify, and PayPal all in one place. There's tremendous growth opportunities because first of all, only 5% of purchases in Latin America are done online. So we have tremendous growth opportunity there.

Out of the purchases done online, the bulk of the purchases are done directly through the manufacturer. So we have an opportunity to grow the marketplace for Mercado Libre to become the go-to platform for online purchases. So I think those two combined make Mercado Libre a very attractive investment over the medium to long term.

FRED KATAYAMA: We'll have to leave it that. Thanks a lot, Danilo, for your thoughts.

DANILO KAWASAKI: Thank you, Fred.

FRED KATAYAMA: Our thanks to Danilo Kawasaki of Gerber Kawasaki in Santa Monica. I'm Fred Katayama in New York. This is Reuters.