By Kim Iskyan
Economic crises in Argentina are like hurricanes in Florida, or floods in Bangladesh…
They come around every so often and destroy the livelihoods of millions of people. And despite the lessons of the past, no one is ever prepared for them…
They take a lot of time and money to clean up… And just as things seem to be on track again, another crisis/hurricane/flood hits.
Most investors do everything they can to avoid economic crises. Crashing stock markets, plummeting currencies, and shrinking economies spell red for your portfolio.
Right now, Argentina, Latin America’s third-largest economy, is in the middle of a 52-car-pileup kind of crisis. And sure enough, investors have fled like the country was on fire. On August 12, the country’s stock market fell 48% in dollar terms… in a single day.
It took the S&P 500 about a year and a half to fall that much during the 2007-2009 global economic crisis. In the tech-bubble bust in 1999-2000, the Nasdaq needed nine months to fall that far. Even bitcoin took around three months in 2017-2018 to be cut in half.
When a stock market collapses like that, a lot of babies are thrown out with the bathwater.
The Argentine market’s decline was the second-biggest one-day stock market collapse of the 94 stock markets that Bloomberg tracks since 1950. Every single one of the 10 biggest decliners that day on the New York Stock Exchange were Argentine companies.
When a stock market collapses like that, a lot of babies are thrown out with the bathwater. Fundamentally solid companies are sold along with those that deserve to plummet… And valuations, along with share prices, fall to multidecade lows. It’s sell first, ask questions later.
So I recently visited Buenos Aires, Argentina’s capital, to find those babies. Because if history is any guide, there’s enormous opportunity in Argentina’s crisis.
Grown-Ups and Peronists
Cycles of crises have been behind a long, slow fall from grace for a country that just a century ago was one of the 10 richest countries in the world. In the early 1900s, the average Argentine made more money than people in France, Germany, or Spain… and four times more than his neighbors in Brazil.
But it’s been downhill since around 1930. As of last year, GDP per capita in Argentina – one way of measuring economic output per person – was one-quarter that of Germany (and close to one-sixth that of the U.S.), and only 25% ahead of Brazil. With this year’s 50% drop in the Argentine peso relative to the U.S. dollar, Argentines are a lot poorer.
What’s Argentina’s problem? It’s a question that Argentines debate endlessly over Malbec or cappuccinos in sidewalk cafes of Buenos Aires. For decades, Argentina has zigzagged between toxically populist politics and more responsible, grown-up-in-the-room governments that come in to fix the mess.
When the grown-ups do show up, investors come back, the stock market rises, and investors trip over themselves to lend Argentina money. The latest government of adults, headed up by a well-intentioned former engineer named Mauricio Macri, was able to sell $2.75 billion worth of 100-year bonds in June 2017. That’s how much investors wanted to believe that this time, Argentina – despite defaulting on sovereign debt eight times, including twice since the turn of the century – had finally turned the corner for good.
Then there’s the International Monetary Fund (IMF), a multinational lender that’s always been at the ready. Just a year ago, the IMF made its biggest loan in history, a whopping $57 billion to Argentina.
The problem is, thanks to the electoral cycle, the grown-ups don’t last long in office. To help pay for massive subsidies that Argentina’s spoiled voters have come to expect, successive governments mercilessly tax the country’s companies (Argentina has the world’s second-highest corporate tax rate.)
Worse, the governments of grown-ups put in place economic policies designed to erase the stain of the populists. They also have to satisfy the IMF, which attached a lot of unpopular strings to its money. These almost always result in recession, currency devaluations, and unemployment. In turn, that guarantees that the populists – called Peronists, named for the charismatic general who was the country’s president three times between the 1940s and the 1970s – return to power… And the cycle starts again.
Sure enough, that’s what happened in August, when a preliminary election unexpectedly showed that Macri would be kicked out. Overnight, the stock market collapsed 48% in dollar terms, and the Argentine peso fell as much as 30%. The so-called century bond, issued at a par of 100, fell 20 points.
Pending final elections on October 27, Macri will likely be replaced by a bureaucrat who’s never held elected office – Alberto Fernández. But investors fear that he’s a Trojan horse for his vice president, Cristina Fernández de Kirchner (no relation to the likely new president). She’s a Peronist who helped make Argentina’s current mess when she was president from 2007-2015.
Argentina does economic crises like it does steak – thick, juicy, well-done, and plenty for everyone. The 2008-2009 global economic crisis – the gold standard of economic disaster for a generation of investors in most of the world – looks like a kid losing his lunch money compared to what Argentina suffers every several years.
Over the past few decades, Argentina’s crises have featured hyperinflation, a president escaping on a helicopter from the roof of the presidential palace, a decadelong battle with creditors, oil-company nationalization, mass bank-deposit seizures, taking private citizens’ pension funds… Argentines have tried every dish at the smorgasbord of economic crisis.
No Blood in the Street… But Plenty of Opportunity
Argentina’s economy has been mostly shrinking since early 2018. Since then, the currency has fallen from around 19 pesos to the dollar, to the current 57 pesos to the dollar. Bank deposit rates run at around 80%, but even at that rate, no one wants to hold pesos or put their money in Argentina’s banks. There’s no lending going on at all. Currency controls, implemented in August, are crippling companies, which have to ask the central bank’s permission to buy dollars to purchase anything from abroad.
But as Argentina’s economy and markets find the bottom – as disgusted, broken, penniless, disheartened investors give up – there’s going to be a massive opportunity in finding those babies that were tossed out with the bathwater. I’ve followed Argentina since the mid-1990s when I was just starting out on Wall Street in Latin American markets… And it happens every time.
John Templeton (and every would-be contrarian investor who cites him as an inspiration) would be disappointed: There’s no blood in the streets in Buenos Aires. But some of the biggest financial crises are bloodless… But still just as desperate.
In Buenos Aires – a beautiful European-style city that today doesn’t exactly lend itself to “gripped by crisis” headlines – things seemed… normal. Sidewalk cafes were bustling, and the city’s craft-beer scene is still burgeoning. Flights into the Buenos Aires international airport were packed. Staying at the Four Seasons will set you back a very un-crisis-like $400 per night.
Downtown Buenos Aires… blink and you could be in Madrid
But appearances are deceiving. If your pesos are inflating away at 5% a month, what else is there to do but spend them today? Of course you’re going to order another Malbec and steak. People in Buenos Aires know to have a good time before they can’t anymore.
One longtime investor in the agricultural sector I spoke with forecast doom: “You might not see it, but people are desperate. They see it all happening again, and there’s nothing they can do but hold on and hope.”
But people are upset. Rising inflation, at around 55% now, is destroying the livelihoods of large swathes of the population. A few weeks before I was in town, protestors demanding food assistance occupied a main square downtown.
Another sign of inflation – stickers to update prices on menus…
And Argentines readily take to the street. “It’s when we see footage on CNN of people throwing rocks at police in downtown that things will be really bad,” the agriculture investor told me.
According to Goldman Sachs, the economic crisis that’s unfolding in Argentina could rival the country’s 2001 crisis, widely viewed as the country’s worst of the past few decades. Then, the peso – when its peg to the dollar broke – collapsed from one to three to the dollar, and the sovereign bond default was then the biggest in history. Inflation accelerated to 40%. The proportion of Argentines living in poverty more than doubled to an incredible 58% from 1998 to 2002.
“Right now, investors have sold so much that Argentinian assets are priced like the country is going the way of Venezuela,” one analyst told me. “And while it might get bad, it’s not going that far.”
The head of investor relations of one company I went to visit in Buenos Aires – which raised hundreds of millions of dollars in a New York IPO just a few years ago – said that he’s heard crickets from investors since August. “We were busy before… but now, nothing,” he told me. The shares are down 68% since early August… and 83% since its IPO.
Every crisis eventually exhausts itself. Markets self-correct – the expensive become cheap, the desired becomes undesirable, and sooner or later all the sellers have sold.
Kim Iskyan is an editor at large for Stansberry Research, and has written about investing in a wide range of frontier and emerging markets. Until recently, he was the publisher of Stansberry Research’s Asian affiliate, and he lives in Singapore.