How Argentina is Forced into Solvency

By Bill Bonner, Chairman, Bonner & Partners:

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!

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. By Bill Bonner, Chairman, Bonner & Partners

Argentina is an adventure. Even for the Argentines. We greatly admire their willingness to experiment with policies others have already proved don’t work. But this country will get worse before it gets better. Read… Shining a (Hilarious) Light on Argentina’s Black Economy

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