PORTLAW, IRELAND – “Now that’s a rate hike!”
Our colleague James Wells sent a report from The New York Times. It told us that the central bank of Argentina wasn’t fooling around.
Instead of pussyfooting with 0.25% per quarter rate hikes like the Fed, it is moving fast and furiously with a hike of 12.75%.
The headline: “Argentina Raises Key Rate to 40%.”
Uh oh. We have fairly large investments (for us) down in the land of gauchos and gigolos.
Is Argentina headed for another financial crisis?
Fall to Crackpotism
One thing you can depend on in the financial world is that you can never depend on anything.
Stability begets crisis. Crisis begets stability. The rich get poor. The poor get rich.
But it takes time.
In the early 20th century, Argentina was the seventh-richest country in the world, richer than most of Europe.
Estate owners from the pampas owned elegant houses in London and Paris. There, they entertained lavishly and lived extravagantly. The locals introduced their daughters to them, whispering… “He’s as rich as an Argentine.”
But wealth, like power, is self-correcting.
And it wasn’t too long before the poor and middle classes were ready to vote for someone who promised a new deal.
That was Juan Perón, a military officer who had been sent to Italy to study Mussolini’s new system.
The resulting political battle pitted the rich, traditional, landed gentry of the countryside against the young, urban, left-leaning working classes of Buenos Aires.
Perón, representing modernity… progress… and the future, won.
And Peronism – a blend of socialism, militarism, and crackpotism – ruled Argentina for the next 70 years, until Mauricio Macri narrowly won the Casa Rosada in 2015.
Going the Other Way
Since then, Macri has tried to steer the country away from Venezuela and back towards a “normal” market-based economy.
That trend is not unique to Argentina. After tasting the bitter fruits of win-lose deals for so long, all of South America seems to be headed towards freer markets.
Meanwhile, the original champion of free markets – the U.S. – is going the other way.
Nobel Prize-winning author and defender of capitalism, Mario Vargas Llosa, explains to the Financial Times:
The U.S. may have fallen for demagoguery, but Latin America is enjoying a democratic wave… The appeal of military rule has gone. Nobody supports that anymore…
Socialism also no longer has any real traction… This is a great step forward.
Argentina is leading the charge. It cut inflation in half in the first years of Macri’s administration. And stocks recorded a 77% gain in 2017, making Argentina one of the best-performing stock markets in the world.
But it is not easy to go from win-lose to win-win.
In Argentina, for example, the government has diddled prices for so long that releasing them to the free market causes shake-ups and resentments.
Inflation reached 45% under the last government. That was a large part of why it was defeated. But now, a friend in Buenos Aires reports that his electricity bill rose by 1,000% when the feds eliminated price controls.
There were bound to be problems. And they showed up, big time, last week.
In one day, the price of the peso in dollars fell 8% – a huge move for a currency. That prompted the rate hike we mentioned earlier.
But it didn’t stop the peso from falling more. It fell a total of 13% in 13 days, increasing prices on imports and putting further strain on Macri and his team.
What’s ahead?
Hard to say. Macri is going in the right direction, but there is no guarantee that he’ll be able to continue. The socialists, activists, meddlers, do-gooders, and world-improvers… even the originarios… are all trying to stop him.
Update From the Ranch
So… what does this all mean for our ranch in northern Argentina?
“This drop in the peso is bad for the economy, but it is good for us,” our local consigliereexplained. “We get our money in dollars. And now, they go a little further.”
The dollars come, Dear, Dear Reader, from selling our wine to Americans.
That is, to you. As we explain here, it’s almost impossible to make money on such a high, dry, remote cattle operation.
Selling our wine directly to our readers is just about the only thing that keeps the farm in business. And, as you will see, our very small-quantity, very high-quality, and extremely high-altitude Malbec is not only one of the best wines in the world… it is one of the healthiest.
Regards, Bill
Category: Geopolitics