Herd Behavior: Why Lack Of Patience Could Spark Argentina’s Next Crisis

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Time, that fickle mistress, is persistently stalking Macri’s administration and is not on his side.

By Bianca Fernet, Argentina, The Bubble:

It’s been almost one year since President Mauricio Macri shocked the world by winning Argentina’s presidential elections, and the country is in a state of flux — hovering in an uncertainty characterized by hope, anxiety, fear and just a few whiffs of the dreaded stench of failure.

Besides displaying a shocking lack of political PR and taking on a few petty wastes of time, this government is doing most things within its power correctly to right the course of a vessel that seemed destined to crash.

Despite these positive steps, one sinister question looms: Has the Macri government managed to avert the looming economic crisis entirely, or is it merely kicking the can down the road? It’s scary, but Argentina is in uncharted territory. Rather than boom, the economy is in a prolonged recession that could be heading for an all too familiar outcome — bust.

Yet this time, the question really isn’t about economic fundamentals. The real variable threatening Macri isn’t economic at all — it is time. Time, that fickle mistress, is persistently stalking Macri’s administration and is not on his side. And Argentines aren’t exactly famous for patience.

Now that Argentina is back on the world stage, there seem to be no shortage of Argentina investment-themed symposiums, conferences, forums, delegations, road shows, panels, seminars, and other names they give to the indistinguishable gatherings of hundreds of white men in suits assembled in windowless spaces to watch powerpoints and exchange business cards over mediocre coffee and stale snacks.

In the past, representing Argentina at these business rituals meant repeating some variation of the tagline, “Argentina: it’s not so bad!” Now the conversation invariably veers first to new opportunity, but then quickly pivots to the question of Argentina — same old risk?

People love to say that “Argentina has a crisis every ten years.” A nice round number, except it is 2016 and the country’s last real crisis was in 2001 (no, the 2009 global downturn doesn’t count). The truth doesn’t follow simple formulas.

To understand the situation, let’s think of economies like dinner plates, spinning atop sticks. Balance is essential.

iStock_000012016504_Medium
A balanced, diverse economy leads to stability

A poorly balanced plate will wobble dangerously and even crash to the floor from external conditions. Take a look at Argentina’s neighbors. Chile was thought to be as stable as they come, but a sudden drop in world copper prices have caused the country to wobble. Brazil was the next big thing in biofuels, technology, renewables — you name it. But a plunge in oil prices spun out the endemic corruption and tipped that plate right over.

So what do spinning plates and susceptibility to external crises have to do with Argentina?



From a purely economic standpoint, Argentina is just about the most stable, well-balanced, solid plate there ever was. The economy and the geography are large and diverse. Argentina was resilient through the global economic crisis of 2009. Sure, soy is important piece of the pie but even when soy prices took a nosedive in 2014, Argentina’s plate wobbled a bit but kept on spinning. The good news is that despite more than a decade of Kirchnerism, the plate was somehow able to keep spinning.

Macri’s government has acknowledged systemic flaws and is leading the country to come to terms with uncomfortable and unpopular realities, such as that 30 percent of Argentines live in poverty. The administration has acknowledged persistently high inflation and taken painful steps to bring it down. It has dismantled the capital controls that created a de-facto dual currency system (RIP Blue Dollar), settled with the holdout creditors (aka “vulture funds”) and are setting clear rules for doing business.

Sad Aranguren
Aranguren’s sad face :(

Perhaps most laudable, the administration has forced the population to acknowledge that energy subsidies for both electricity and gas are unsustainable and has launched a clear plan for prices to rise to meet generation costs. It’s not easy being Energy Minister Aranguren, the public face of these unpopular hikes. The man basically looks like he needs a hug all the time.

Yet that analysis misses a fundamental point of Macri’s challenge: to succeed, he won’t just have to right a plethora of economic distortions and rise above a mire of tragicomic corruption, he must also change a culture.

If Argentina’s economy is a plate, its next crisis won’t be caused by an external shock that throws an overweight area off balance. Argentina’s next crash will be caused by its people, who run from one side of the plate to the other, like an emotionally charged herd. Call it passion, color, soul, whatever you want — but we in Argentina are opinionated, loud, and most importantly impatient.

And without political patience, Macri will fail.

The key test will come next year, when the midterm elections will serve as a de facto referendum on his policies, many of which while are unarguably necessary albeit damningly unpopular.

Macri’s real challenge is not only to convince the world that Argentina can change; rather, he must lead his own people through a painful recession and politically maneuver entrenched powerful interests to restore an attractive labor market and an unsubsidized energy matrix.

There is no doubt he is dedicated, but the question looms as to whether it is possible to convince a country of fiery, passionate Argentinos to endure a recession without throwing a tantrum and inexplicably sprinting off the edge of the plate. By Bianca Fernet, The Bubble

Venezuela’s plight is only getting worse even as its bondholders buckled. Read…  Venezuela Escapes Bankruptcy for Now



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  24 comments for “Herd Behavior: Why Lack Of Patience Could Spark Argentina’s Next Crisis

  1. John Doyle
    October 26, 2016 at 5:55 pm

    Perhaps If the government understood a] never use another nation’s currency, particularly the $US and b] They’re not spending limited to the tax revenue, but instead the fiscal space, when looking at their budget.They have to work out what the fiscal space is but it’s bigger than the tax “revenue”.

    • October 26, 2016 at 7:08 pm

      They understood nothing. They just issued about $15 billion in foreign currency bonds. Of course, no one is buying their peso bonds because they have consistently destroyed the peso. So now they have to borrow in foreign currencies (and amazingly, investors fell for it). So it will start all over again, not now, but years down the road.

      How did they destroy their peso: they paid for government deficits with newly created pesos because they couldn’t borrow. Ha, in a jam money-printers get themselves into.

  2. NotSoSure
    October 26, 2016 at 7:20 pm

    What would truly be funny is when the Ponzi scheme called the United States economy finally collapses, that Washington will be forced to issue foreign bonds in pesos or horror of horrors, Russian Ruble.

    Perhaps some of us will see that day.

  3. October 26, 2016 at 7:24 pm

    A biased view from Kansas, where we have a Macri fellow reactionary (Brownback) as governor.

    While MMacri did indeed win the count, it is becoming increasingly doubtful he won the vote.

    1) Argentina “needs” hot money “investment” and foreign denominated government bonds like a recovering alcoholic “needs” a drink.

    2) After 12 years of enormous and continual toil and effort, the Argentine people have again accumulated enough personal savings and public assets (e. g. the railroads, the airlines, YPF) to make another raids to loot the country practicable/profitable under the guise of “privatization” and another currency crisis.

    3) The capital necessary to to repay the “vulture funds” is being extracted, not by higher taxes on the high income individuals, particularly the reactionary tax evading mega-land-owners, but by worker repression including loss of jobs, salary cuts, benefit cuts, and cuts to necessary pubic services such as primary, secondary, and post-secondary education, public health efforts such as immunization and mosquito control [zika and chagas], and shredding the social safety net, which had lifted huge numbers of people out of abject poverty, especially children.

    4) The MMacri administration appears to have completely accepted the “Washington Consensus” that Argentina’s place in the word is to provide food to their betters, and for this they do not need scientists, engineers, and domestic manufacturing, so the scientific institutes which persuaded the ex-pat Argentine scientists to return are to be shut and the programs promoting domestic manufacturing using domestic materials, e. g. Lithium are to be terminated, and the tariffs protecting domestic industry are to be eliminated.

    5) Helicopter rides for ex-presidents exiting La Casa Rosada may be re-introduced.

    • foreignlander
      October 27, 2016 at 6:45 am

      George, you’re on to something. While I’m not so sure that railroads/AA/YPF are so much an accumulation of public assets but rather a pile of hollowed out shells of former assets and one, the national airline, the only public asset that was profitable and sold out under the former edition of the Washington Consensus of the ’90’s…you’re spot on the rest. What this neo-liberal cabal was going to do predictably, and is doing, ain’t rocket science: invite back the IMF, pile on more debt for a few years of feign ‘prosperity’ for the masses and real wealth for the elite. Let the roof fall on Argentina. Rinse and repeat. Chopper rides a la Saigon off the La Rosada reintroduced? Not too far fetched.

      • George McDuffee
        October 27, 2016 at 12:17 pm

        Thanks for the kind words. The important thing about Argentina is the lessons their bitter experiences have for other countries, including the U. S.

        Two documentaries you may find of interest:

        https://www.c-span.org/video/?185857-1/money-kept-rolling
        which details how the international financial community played both the “investors” and Argentina in the run-up to the 2001/2 collapse, and how the IMF and consulting firms aided and abetted in what effectively was a classic “re-fi” scam, on a national level.

        https://www.youtube.com/watch?v=Zsqa-YHE36A
        which details their 2001/02 socioeconomic collapse from inside Argentina, and how the corruption of the Menem regime [classic “bait-and-switch” politician], and its plunder of state assets and currency manipulation, caused the collapse, which drove the country back to a barter economy. Effectively Argentina was Chicago, but on a national scale, including the pension shortfalls.

        Helicopter rides for the ex-presidents from La Casa Rosada is historical fact. IIRC, there were 6 presidents in 6 weeks toward the end of the collapse in 2001, and because of “active citizen demonstrations” [riots] around La Casa Rosada, the only safe way for the ex-presidents to leave was by air. FWIW: From Kansas, it appears that the reason the presidents kept failing, was they kept trying to implement the failed IMF panacea policies of Austerity, Austerity, and yet more Austerity, even as their people starved and were eating garbage to survive.

    • walter map
      October 27, 2016 at 8:59 am

      Nice job, George.

      Macri is merely the latest in a series of corporate hacks trying to extend the plunder past its expiration date. History suggests they should hold off until the leftists have had a chance to restore some balance before they resume the profiteering and lurch back into crisis mode.

    • Helicopter Pilot
      October 27, 2016 at 3:50 pm

      Actually, the ride in the helicopter will be not enought. Maybe he will be landing in Panama of Bahamas at the next day, for sure he have some other obscure societies and laundred money that he “forget” to declare.

  4. Northwest Resident
    October 26, 2016 at 8:56 pm

    I’m not so sure that Argentina’s “next crisis” won’t be caused by an external shock. The global economy is intricately interconnected especially at the banking and finance level. An economic earthquake of sufficient size just might send a giant shock wave around the world, with a lot of already wobbly plates including Argentina just sitting ducks. There’s a nice long list of realistic “grey” swans lurking, anyone of which could set off that earthquake. Something like 10 on the Richter scale ought to do the trick… (Italian banks, Chinese housing market collapse, etc…). Then let’s watch the hot-blooded Argentinians run, and everybody else too!

    • HD
      October 27, 2016 at 2:01 am

      With an economic earthquake of the size you are describing, every country will indeed be a sitting duck and Argentina will be no more than a ruined country just like any other. Yet a global economic shock of that size seems the only option left: politicians and economists alike will not change course as long as the quest for exponential growth still seems attainable to them as a means of outrunning the buildup of debt. By its own nature it is not and we are currently witnessing the demise of that theory in real time. At least, that’s what I have been thinking for a while now, but I’m still deciding whether I’m the one wearing a tin foil hat or the others.

  5. d
    October 27, 2016 at 12:18 am

    “If Argentina’s economy is a plate, its next crisis won’t be caused by an external shock that throws an overweight area off balance. Argentina’s next crash will be caused by its people, who run from one side of the plate to the other, like an emotionally charged herd. Call it passion, color, soul, whatever you want — but we in Argentina are opinionated, loud, and most importantly impatient.

    And without political patience, Macri will fail.”

    Argentina is another country, that needs to look at a proposed law, that would make it illegal, for any party to campaign in an Election. (it isn’t law yet in that country, but it may become law)

    With a budget, tax policy, or spending proposal, that would create a fiscal deficit.

    Ie. buy elections, with long term untenable social spending, and handouts.

    A remarkably Astute piece, from Senorita Fernet.

  6. Sander Boss
    October 27, 2016 at 2:41 am

    Over good analysis but the statement

    From a purely economic standpoint, Argentina is just about the most stable, well-balanced, solid plate there ever was. The economy and the geography are large and diverse. Argentina was resilient through the global economic crisis of 2009.

    is far off base.

    Carlos Menem came into power in mid 90s to privatize, to lock peso into dollar, to drive productivity and the free market, to eliminate corruption etc. He turned out being one of most corrupt ever, was toppled with peso devaluation in 2000 to 3:1 causing massive hits to pensions and USD-leveraged foreign investment, etc.

    To make that currency lock work, the country of 40 mm had to get really tough, really productive. That didn’t happen. (No comment.)

    Etc. etc.

    Any apparent stability was appearance only. PS – USA companies were in there thick, too, taking advantage and aggravating. (Read Oppenheimer’s Ojos Vendados.)

    And Menem’s new-age Peronism led to the Kirchners (after a short-term presidential shuffle), e.g., big energy subsidies, taxing agricultural exports (!) to 43% leading to national strike and total highway block, government jobs and jobs, etc., plus national authority/ rule of law collapsed especially under pressure from narco-trafficking that has converted much of the country to borderline narco-state and destroyed so many young people.

    Macri is doing the right things but he is betting heavily on making it ‘foreign investment attractive’. Of course everyone loves to be in Argentina, what a beautiful county, my god these women and wine, etc. etc., but especially in today’s global excess of supply to demand, it is a tough sell. Why go there? You know what is going to happen. That is OK when things are rolling and you can take some hits. (‘Oh too bad, hey, what time are we teeing off today?) And the IMF/World Bank crowd loves to get people fired up about Argentina; why not, they have nothing to lose? A Greece-type fiasco, based on getting people to believe they can support a standard of living 2X reality which assumes massive productivity gains which is nuts, especially with no plan.

    Sadly much of the rest of South America is a wreck, too. The darling Chile has tied its fate to copper and did little with its immense windfall profits from record prices in mid to late 2000. It has a second-rate education system plus is a very small market, the size of Shanghai. These countries have immense natural resources and little intellectual capital. By contract, one of the wealthiest per cap countries in the world, Singapore, has no natural resources – it even has to import water.

    Re Argentina patience, I think the majority realizes they cannot go back. To do so risks turning it into a state of Chavism, which is where Madam K was going.

    So likely it will be a long time before glamour returns. Global supply-demand conditions must improve substantially. In the meantime, the Argentines must slug it out with lots of hardship for all. If there is even a hint of cronyism and corruption creeps into the Macri regime (how could it not?), all hell could well break loose. A downtrodden people will accept fate only if they know everyone is pulling on same oar.

  7. walter map
    October 27, 2016 at 7:22 am

    Argentina will continue to lurch from one crisis to the next in patterns that were established by the moneyed classes in the 19th century. Neither dictatorship nor democracy nor anarchy can end those patterns. It’s their way. Just fence it off and ignore the ruckus.

  8. October 27, 2016 at 7:39 am

    Argentina has disappointed it’s people for 100+ years. If my memory serves me correctly, Argentina in 1915 had a per capita GDP somewhere near where Australia’s is today: a rising star heading for 1st world status. But corruption and Leftism has basically hurt them all along.

    The problem is Leftism. It ruins societies. The problem for Argentina is the people of Argentina. The problem for the US is the people in the US, who seem likely to vote for another incompetent, money-grubbing, wrong-about-everything Leftist named Hillary.

    The US is now Argentina and Hillary is De Kirchner. This is not an exaggeration. Expect similar outcomes.

    • October 27, 2016 at 7:40 am

      Let me clarify a bit: Argentina in 1915 was a “rising star” economy. I’m not sure about GDP per capita.

    • walter map
      October 27, 2016 at 7:59 am

      “The problem is Leftism. It ruins societies.”

      And yet, all the happiest, most prosperous, and most just countries in the world are all ‘leftist’. Capitalist rapacity is well-restrained. You wouldn’t like them.

      Here in the real world, HRC is anything but a “leftist”. She’s a Goldwater girl. Always has been.

      • October 27, 2016 at 12:52 pm

        I call anyone a “Leftist” when their basic philosophy is ‘big government’ and those who have faith in “central planning” Their path is one of failure and collapse. Europe is well on the road to collapse in the same way the USSR collapsed, so yeah it looks like a happy paradise now, but pain and collapse is coming. It might “look” good, but try getting a job there! European Socialism is a bust and collapse is coming.

        Hillary is a massive incompetent, a serial liar, has the wrong idea about everything (just like Obama). Obama/Hillary’s foreign policy legacy is one of total failures, catastrophes and destruction followed by non-stop lies to cover-up their near-perfect record of failures. (http://gulfcoastcommentary.blogspot.com/2016/09/obamahillarys-foreign-policy-legacy.html) The Middle East is even more in flames than ever and we’re on the verge of WWIII as a result of Hillary/Obama. Her only success, and apparently her only goal was to use her office for massive personal financial gain: clearly illegal.

        Our oversized government, freed from any sound money and fed by huge debt, has caused the cost of medical care to skyrocket and you can bet that Hillary will recommend even more government as a solution which is surely a ticket to calamity. The government (direct loans and guarantees) has also funded a huge college tuition price surge in the past decade funded by student debt. Some 42% of these loans are in arrears now and outright defaults are already 14% or so. And the government is still cranking out these loans. Nothing is being fixed in Washington. Her solution? Bail-out students and place the burden the next generation, while spending even more govt money which will further inflate tuition! There’s already too many people in college who are not “college material.” What a dunce!

        But all this is typical for big govt Democrats and 1/2 the Republicrats, Hillary will be just like deKirchner (and her relatives and cronies) who left Argentina with pallets of cash, the nation in ruin. Hillary is DeKirchner and the US is Argentina. This is what happens when the Government becomes huge. It is accompanied by huge corruption, huge incompetence, huge waste and ultimately collapse. Collapse is where we are heading as well as Europe and China. So much for socialist paradises.

        • walter map
          October 27, 2016 at 1:40 pm

          “So much for socialist paradises.”

          I find western Europe and Scandivania rather pleasant. Peaceful, prosperous, and progressive. What don’t you like?

    • MC
      October 27, 2016 at 1:43 pm

      Plenty, plenty, of people from the valleys here have relatives living in Brazil and Argentina. Emigration through the first half of the XX century was strong and most emigrants picked Latin America and especially Argentina because the country was so rich and had so many opportunities.
      Most of Argentina’s economic growth happened under the influence of the Union Civil Radical (UCR), which arose to challenge the unicato, or one-party system, which ruled the country between 1880 and 1910.
      Here it must be understood in Latin America the word “radical” is not used as in the Anglo-Saxon world but means something along the lines of “Tory” or “moderate conservative”.
      The UCR’s hold on power started to crumble around 1935 (like in France the Great Depression hit late but hit hard) and came to an end in 1943, when a military junta, the first of many, took power.
      One of the golpistas was Colonel Juan Domingo Peron, who was given the position of Secretary of Labor as a reward for his part in the coup as his colleagues thought was a position with little responsibility but a nice income. Peron, helped by his second wife Evita, instead used the position to build up a power base which took him to power.

      The Peron’s were pretty much the perfect Populists. Their ideology is difficult to understand for many persons, brought up and taught to consider Fascism and Socialism completely different, while in reality Fascism developed from Socialism in the 1910’s.
      Peron was a Fascist or, to use Mussolini’s own words, a “National Corporatist”.

      This means that he advocated stiff State control and regulation of the economy but not widespread State ownership. Peron’s famous nationalization of the railroads owed more to his public image than to his ideology: he often presented himself as a patriot and railed against foreigners stealing Argentina’s wealth, so the mostly British-owned railroads were a perfect target for him, even more so as Britain exited WWII victorious but exhausted and unable to defend her economic interests around the globe.
      But like all Populists, the Peron’s had a dark side. Their enthusiatic following in the cities was paid for by the people of the countryside, as Peron kept food prices artificially repressed at a time when Argentine farmers and ranchers were dealing with much reduced foreign orders due to the end of WWII.
      The army which revolted against Peron and forced him to flee (very aptly) to Spain in 1955 was largely staffed by and had the almost universal support of farmers and ranchers.

      It has often been said the Peron’s split Argentina in two: on one side those who would never trust a politician ever again, on the other those who believe that any problem can be fixed by a government edict.

      • October 27, 2016 at 2:56 pm

        Thanks for sharing this information. I knew of the Peronists, but didn’t really understand the background and history prior to them. Thanks again. Very interesting!

  9. prepalaw
    October 27, 2016 at 8:38 am

    I go the Argentina every year for two weeks of fly fishing. Local fishing guides have college degrees. Many are entrepreneurs in the off season – rehabing and owning rental real estate. They earn many more times as guides than they could otherwise – US$ cash tips.

    I have been doing business in Brazil for more than 20 years. Both Argentina and Brazil have regimented systems: You need money to control bureaucracy and maintain small to large monopolies. I am not talking about shopkeepers or small businesses. In these countries, consumer goods cost a fortune for the local resident. Locally-made goods, like automobiles, cost effectively twice the US price and are riddled with defects: compare the cost and quality of a Ford Focus made and sold in the US vs Brazil.

    Locals want to lure you in to transferring money into their country and buying rental real estate. Getting the money in and buying is not the problem. Liquidating and getting your money out is the problem. I know too many American fishing guides who wish that they had never bought that ponderosa in Chile or Argentina.

    • MC
      October 27, 2016 at 10:44 am

      Amen.
      That’s the reason I have never invested a penny in Argentina, Brazil or Chile despite the fact so many people from the valleys here have close relatives living down there that can help: for foreign investors they are the equivalent of the patented Roach Motel. Lots of arrivals but no departures.
      Local oligarchs, bureaucrats etc obviously know how to get their money out (more of which in a minute) but those benefits apparently don’t extend to foreigners.

      I remember when I was living in South Florida Brazilians, Chileans etc would swarm all over the place and spend money like drunken sailors.
      Turns out they were no mere shopaholics: they all had very detailed lists of what to buy and in which quantity and they usually banded together to hire a container to ship all that stuff back home.
      Most got a buyer’s fee on what they bought for friends and relatives and they usually bought some products to sell and make a profit on the side.
      Knowing the crazy custom duties those countries have I asked a few Brazilians how they dealt with that. They all smiled and winked…

      Curiously enough the one item they were most interested in were tyres. Tyres made in the US, Japan or Europe were highly sought after in Brazil. Apparently those made down there were either poor quality or obsolete models and locals prized a set of “US-specs” Bridgestone or Michelin tyres even more than a new car.

      • Petunia
        October 27, 2016 at 11:29 am

        I lived in south FL too. One of the most interesting things I learned about Argentinians working illegally in FL was that they are not really illegal immigrants in the traditional sense. They come to America on a tourist visa, work illegally while the visa is active, then return home with the cash and goods they buy. Then they rinse and repeat. This way they never get deported and retain their right to return to the US. I met some people from Uruguay who do it as well.

  10. raoul
    October 30, 2016 at 4:09 pm

    Yet another great article on Wolf Street, followed by some really useful commentary. I had been seriously searching for some up-to-date information on this very interesting place.

    If I understand the general tenor of the article and comments correctly, rent – don’t buy, keep your footprint small, and be ready to leave in an instant. Have I missed anything?

    Thanks to all commenters, particularly to Sander Boss. I will read Mr. Oppenheimer’s book.

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