but our thoughts are elsewhere today, Dear Reader, drifting by the banks of the Rio de la Plata, across the fertile Pampas, down to poor ol’ Argentina.
That way crisis cometh…once again.
Recently, while musing on the topic of currency arbitrage, we wondered whether it wasn’t time to consider a return to the “Paris of the South,” as Argentina’s capital, Buenos Aires, is sometimes called.
The Argentine peso has been under intense pressure of late, you see. That’s good news for dollar earners/savers…but bad news for local porteños, trying to make ends meet with peso-printed paper.
Last we checked in, Latin America’s second worst currency (behind only Venezuela’s hyper-inflated Bolivar), was in dire straits.
Then, yesterday, bad turned to worse…and stumbled drunkenly off a cliff.
Here’s Bloomberg:
Argentina’s currency crisis intensified on Thursday as the peso plunged 20 percent in a rout that only accelerated after the central bank tried to shore up confidence with an emergency increase in interest rates.
The bank raised its benchmark measure to a global high of 60 percent, the latest attempt by policy makers to defend a currency that’s lost more than half its value this year. A day earlier, President Mauricio Macri shocked the country with an appeal for quicker payouts from the International Monetary Fund, which said it’s considering the request.
Argentina is crashing back into the kind of financial turmoil that Macri’s market-friendly government had supposedly left behind. Investors are running out of faith that the president, who came to power in December 2015 after more than a decade of budget-busting populism, can shore up the economy and bring Argentina’s fiscal and trade deficits, and its inflation rate, to manageable levels.
Had you walked into an Argentine bank on Tuesday afternoon, you could have bought the local scrip at a rate of roughly 30 pesos per U.S. dollar. By market close yesterday, that very same Greenback would have bought you more than 40 pesos.
This is what currency collapse looks like. The long-suffering gauchos recognize it well enough. They’ve been here plenty of times before (most recently in the early ‘90’s…and again not one decade later.)
At first, the pace is slow and measured; a gentle canter. “We’ve got it under control,” say the feds, crop firmly in hand. “It’s all part of a long-term strategy. Trust us.”
Next, momentum swiftly gathers… a canter becomes a gallop and the wind begins to rush by… then the reins suddenly tighten and… SNAP!
Before the rider knows what’s happened, his horse has bolted and he’s flat on his culo, gasping for breath in the beast’s kicked-up dust.
Your editor has a soft spot for Argentina…as he does for down-and-outers, ne’re-do-wells, earnest underperformers and angels fallen from grace in general.
We moved there in 2010, in fact, largely to further our (ongoing) studies in bubble economics and cheerful human folly. The country is rich in examples of precisely what not to dovis-à-vis fiscal/monetary policy. Any policy, really.
And so it serves as a useful classroom. Gresham’s Law, for example, holds that “bad money drives out good.” All else being equal, people tend to save and invest in currencies they perceive to be stable, deflationary, even…and to spend that money which loses its value over time.
In Argentina, to this day, the wealthy preserve their capital by stashing it away in dollars… or gold… or dollar-denominated assets (most local real estate transactions are settled on dollar terms, for example). The crumpled pesos they happily blow on juicy steaks and discounted Malbec.
And ¡Salud! to that, say we.
So what about investment opportunities? Aside from considering spending some time in the recently discounted locale, is it time to deploy some capital in the Argentine markets?
“Nope,” says our good friend and man-on-the scene, Rob Marstrand. “Not with inflation running at 30% and with all the current uncertainty.”
An Englishman abroad, Rob lives and works in Buenos Aires, where he and his team produce the OfWealth newsletter.
Continues Rob on the situation there…
“An earnings yield of just 9% simply isn’t enough. As a reminder, US stocks traded in single [price-to-earnings - P/E] digits in the late 70s / early 80s when inflation was in the high teens.
“There will be a moment when Argentine stocks will be set up for massive profits. Historically speaking, countries with the weakest currencies in the past year have tended to deliver the very best (dollar) results over the next five years…
“But investors should wait for the dust to settle first - perhaps in 3 to 6 months (although only time will tell). Speculators still have Argentina in their sights...but no longer in a good way.”
In the meantime, Rob concludes, “local prices, in dollar terms, are down about 40% from this time last year, even accounting for peso price inflation. For the international visitor, this is the cheapest it’s been for many, many years.”
Hmm… anyone in for an unhurried steak lunch?
First glass of Malbec is on us!
Of course, it’s not only the purchasing power of your money over which the State claims ultimate control…they also declare jurisdiction over your body, including what you may or may not put into it and under what circumstances. Consider the War on Some Drugs…as Doug Casey does in today’s feature column, below. Please enjoy…
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