Dear Diary,
Today, an update from the pampas – our favorite economic laboratory.
The gauchos try one monetary experiment. It blows up in their faces. So what do they do?
They back test!
More on that in a minute…
Friday saw a big jump in the Dow – up 208 points. Gold fell hard – down $23 an ounce.
What to make of that?
Nothing much. According to our Simplified Trading System (STS), readers should be out of US stocks and accumulating gold.
Sell stocks on the rallies. Buy gold on the dips. Keep at it until further notice.
Maximum Pessimism
It may be difficult to live in Argentina… but it’s fun to visit.
If you’re traveling to Buenos Aires, you’ll find the living is still relatively cheap. But only if you exchange your money at 15 pesos to the dollar.
That’s called the “blue rate.” As opposed to the white rate. And you get it on the black market. Got that straight?
We recommend Parrilla Don Julio on Calle Guatemala in the Palermo Soho neighborhood. Or Lo de Jesus on Calle Gurruchaga. Or La Cabrera on Calle Cabrera.
Have a thick steak. (The portions are so large you’ll find you have to share your meat with at least one other person… maybe two.) Have a nice bottle of malbec. Have dessert and coffee. The whole thing will set you back no more than $30.
Everything is cheap in Argentina because the exchange value of the peso is so low.
Last week, Argentine president Cristina Fernández de Kirchner accused the head of the central bank, Juan Carlos Fábrega, of sabotaging the peso. He quit. And the value of the peso fell even more.
So did Argentine stocks – down 15% in three days. Then the president hinted that the US was plotting to kill her.
We asked our man in Argentina, Robert Marstrand, if he thought it was time to buy Argentine stocks:
There will be huge volatility over the next year. This is a traders’ market for now.
I’d like to see another official devaluation of the peso and further loss of confidence first. Maybe then there will be a buying opportunity. A lot can change in this part of the world in a week, let alone a year!
We’re not at the worst point of “maximum pessimism” yet.
Missing Toes
At least we know when things will get better in Argentina. One year from now. Almost exactly.
That’s when Argentines elect a new president. According to our sources, we don’t know who it will be, but whoever it is will be better than Kirchner.
That leaves 12 months for things to go in either direction: better or worse. We have no particular opinion as to which way they will go, but we have a preference: worse.
The worse things get, the more Argentine voters will want a decisive change. Almost no other country takes such perfect aim at its own foot. A few more missing toes is a small price to pay for a new direction.
Besides, there’s a big advantage to a messed-up economy. When you conduct your financial affairs as loosey-goosey as the Argentines, you find that no one will lend you money.
Then – gracias a Dios! – you are forced into solvency.
For every peso of bank credit in Argentina, there are seven pesos of GDP. Long-term mortgage financing is almost unknown.
Credit cards?
They exist… but with an annual rate of inflation of about 40%, outstanding credit card debt is minuscule. When former Argentine president Carlos Menem pegged the peso to the dollar, he brought forth a flood of credit.
The economy floated high for a while. But the government abandoned the “dollar peg” when it couldn’t pay its bills. Then came a credit drought; debt of all sorts has pretty much dried up and blown away over the last 10 years.
A Brighter Future
The price of soybeans – Argentina’s biggest cash crop – plunged 34% in the recent quarter… the worst drop since 2008. The country’s GDP is falling, too, despite its president’s claims to the contrary. The peso is sinking. And dollar reserves are disappearing.
“It is actually a good situation,” explained an Argentine economist with his head screwed on right.
“We know Cristina is going. And we know that her replacement will be better. We also know Argentina is fundamentally a rich country… with little debt of any sort. I think we’re going to see a big boom when people realize how bright our prospects really are.”
Unlike the US, Argentina has not been involved in a war since the ill-fated Guerra de las Malvinas (Falklands War) 32 years ago. Its military spending is a rounding error for the Pentagon. And its social welfare, health and pension programs have been so eroded by inflation that there is not much left of them.
The outlook in the US, by contrast, is not nearly so bright. We have debt aplenty. And we become less and less able to pay it.
According to the latest Census Bureau report, median household income in the US has fallen to $51,939. That’s down from nearly $57,000 in 1999. And the Fed reports that median household income fell 5% in the 2010-to-2013 period.
The US faces another 24 months under the current president. And there is no guarantee that his replacement will be any better. A Clinton may win. Or a Bush.
“Past performance is no guarantee of future performance” is a line the SEC insists on. As an investor, we know it is true. As an American, we hope we can count on it.
Regards,
Bill
Fear: Your Best Friend
In his February letter to Berkshire Hathaway shareholders, Warren Buffett had this to say about the business of investing:
[T]umbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.
This is what makes Argentina so interesting right now… and the US less so.
Here’s how we put it on Friday in our bonus letter to paid-up Bonner & Partners subscribers, The B&P Briefing:
Whatever your long-term view of the health of the US economy is, the “End of America” thesis so far has not panned out.
Today, it’s the rest of the world that looks weak compared to the US, not the other way around.
That doesn’t mean we should expect the US stock market to deliver strong long-term gains from here on in. There are plenty of pockets of opportunity. But a trailing P/E for the S&P 500 of 19.5 and a Shiller P/E of 26 do not bode well for investors.
Market history tells us that when the sun shines brightest, investment returns are the lowest. And when dark clouds are gathering, investment returns are the highest.
So, is it time to buy Argentine stocks?
We agree with Rob. Things are bad there. But they are likely to get a lot worse before they improve.
And as you can see from the chart below, the Argentine stock market is a falling knife.
Source: StockCharts.com
For now, concentrate on building up your cash position. Argentina is shaping up to be a fantastic long-term buy.
P.S. Here’s that link again to pick up your FREE copy of The New Empire of Debt. All we ask is you cover shipping costs.