Elliott R. Morss'  Instablog

Argentina: A Partial Defense of the Lady

© Elliott R. Morss All Rights Reserved

April 2013

Introduction

A couple of weeks back, an American friend living in Buenos Aires asked me: "Have you been following this crazy woman? I would love to hear your take on her." In what follows, I offer a little background on the Argentina's financial situation and review the most controversial actions President Kirchner has taken. I conclude with a prescription for the future of the country.

The Financial Situation of Argentina - Not the Lady's Fault

Argentina's debt to GDP ratio of 43% is not high by international standards. But troubling problems remain following the country's 2001 default on $132 billion of debt. According to a Reuters report, 92% of Argentina's defaulted bonds were restructured in 2005 and 2010 with bondholders receiving 25 to 29 cents on the dollar. But there were holdouts. And a New York Court ruled in March that further payments could not be made to the bondholders who did settle until a deal is negotiated and payments are made to those still holding out. However, a failure to pay those who did settle would constitute a default and violate the 2005 and 2010 agreements. This would most definitely not be good.

The holdouts are owed $1.3 billion. And in a court of law, their position is quite strong: they have a loan agreement and want to be paid in accordance with the terms set forth in the agreement. In such cases, it is common for courts to allow the claimants to attach other assets of the debtor. As a consequence, the Lady has resorted to chartering a plane rather than use one owned by Argentina for out-of-country flights.

In this case, the New York Court ordered Argentina to come up with a proposal to settle with the holdouts. Argentina responded by saying it will make payments to the holdouts on pretty much the same terms it settled on with its other bondholders. The lawyer for Argentina said the country has a law that keeps new governments from improving the terms of previous restructurings. The Court has given the holdouts until the end of April to review and respond to the Argentine proposal. But Elliott Management, one of the largest holdouts, has already said it will not accept the 2010 terms.

The uncertainty surrounding this issue makes Argentina's financial position quite precarious - nobody in the right mind would lend Argentina money unless it was secured by something that could be seized - like commodities.

Seizing the Pension Funds

And yes, a few years back, the Lady did take over the country's pension funds. Kirchner's opposition claimed this was done so pension monies could be used to "award" provincial governors for political support. Maybe this is true. But there were economic reasons for the government to take control of the funds: not performing well, not invested in Argentina, and rumors of corruption.

How About the Repsol Takeover?

In the "civilized world" government takeovers are generally frowned on. But as I have reported, there were mitigating circumstances in the Repsol case. Keep in mind that a country's energy strategy is fundamental to its well-being. And Argentina is an extreme case inasmuch as it cannot borrow on world markets. That means it is extremely important to keep its trade and current account balances from going negative. Table 1 shows that Argentina's energy imports are growing rapidly.

Table 1. - Argentina: Energy Import Shares

Source: UNCTAD

Kirchner wanted Repsol to develop Argentine energy reserves so it could cut back on its imports. Repsol had other priorities.

The Lady's Shortcomings

While one can argue the problems discussed above are not the Lady's doing, what follows are her responsibility.

1. Falsifying Inflation Data

The Argentine rate of inflation has grown in part because Kirchner reversed the long-standing tradition of federal subsidies for critical services including public transit and basic utilities. Most economists would applaud this move.

But the continuing falsification of inflation data and the intimidation of anyone who questioned the data have taken on a life of its own. The International Monetary Fund has censured Argentina for these actions. It has given Argentina until Sept. 29 to implement reforms before it risks losing membership privileges. If Argentina does not comply, it would be the second country to be forced out for failing to provide accurate economic information. The former Czechoslovakia was kicked out for the same reason in 1954.

Why does the Lady continue this charade? Is it because, as the Palisades Hudson Group claims, that by reporting inflation lower than it really is, the country has avoided paying the full interest due on its $37.6 billion of inflation-linked bonds. Is this a legitimate reason for falsifying the data? Of course not.

Just how much falsification is taking place? To answer this question, I turn to data assembled by LatinFocus, arguably the best source of information on Latin America economies that there is. LatinFocus provides two sets of inflation data:

• Projections made by 25 financial/academic/consulting institutions projections of the falsified government inflation rates (I presume institutions dutifully make projections on this false data because they don't want the Lady to get angry with them), and
• Projections made by 16 unnamed "panelists".

The projections for 2013 and 2014 appear in Table 2. If the panelists are right, the inflation rates reported by the government are less than half the actual rates.

Table 2. - Argentina: Inflation Estimates

Source: LatinFocus

b. The Peso/Dollar Paranoia

When I was last in Argentina (2009), both Pesos and Dollars were used, and the system worked well. If you had one and wanted the other, you could buy them, and the buying and selling rates were quite close. But the Lady, fearful of running out of dollars, wants everyone to use Pesos. She also appears to be under the illusion that she can "mandate" the exchange rate. Her paranoia on this score has led to:

• requiring that all Argentine real estate transactions be done in Pesos;
• limiting high tech imports into Argentina;
• limiting dollars available for travel outside Argentina;
• charging a tax on credit card charges made outside of Argentina and payable in dollars;
• controlling/limiting payments made to suppliers outside Argentina
• establishing the "official" peso/dollar exchange rate.

This is all crazy nonsense. Whenever one tries to set prices that are out of line with supply/demand forces, a secondary market develops. So Argentina now has the dólar blue secondary market where it will take more than 8 pesos to buy a dollar versus the official rate of 5+ pesos per dollar. So now there are "criminals" making illegal currency exchanges making lots of money. Government policy that encourages such activities is bad government policy.

And what happens if anyone speaks up? The Lady does not like objections: you might get fined or worse….

Explaining the Lady's Behavior

As is true of most Latam countries, Argentina has a history of military dictators with little regard for free market mechanisms. They like to issue commands to get things done. It reminds me of my first trip to Ghana for the IMF when the military had just ousted Nkrumah and was running the country. The military had no understanding of economics and markets. They were used to commanding things to happen and seeing their commands followed. So if the exchange rate was not to their liking, they would tell the banks and the money traders what the exchange rate should be. Money changers normally worked on the streets near the central bank. If the military did not like the exchange rates being offered by the money changers, they would put a few of them in jail and disperse the others. It never worked. After a few weeks the money changers would return…. I observed the same behavior by Myanmar's military leaders a couple of decades later.

I think this explains the Lady's behavior. I also think it is the way Chavez was. They both operate like military generals, using commands and intimidation to get things done. This approach never works. If you don't let markets clear, a black market will develop allowing criminals to make a lot of money.

The Economic Condition of Argentina

With all that has been reported above, keep in mind that Argentina, like Russia, Argentina is a natural resource rich country. And a lot of its exports are food. The world's growing population has to eat. I quote from an earlier piece I wrote with Marcela Gonzales on Argentina: "The size and role of government will probably continue to grow (it has grown from 20% of GDP in 2002 to more than 30% now). And political power grabs will probably continue. But at least the first quarter of the 21st Century will be good to natural resource rich countries. And it is hard to imagine things will be bad in Argentina in the long run. Its exports will rebound."

With this rosy backdrop, let's look at some economic data. Table 1 provides GDP growth rate data for Argentina and other Latam countries. Both before and during the global recession, Argentina did as well or better than its neighbors. That is now changing. Can a significant portion of the slowdown be attributed to Kirchner's economic policies? Yes.

Table 3. - Latin America: GDP Growth Rates

Sources: Latin Focus and IMF

In recent months, my writings have focused on the weak sisters in the Eurozone. The "weak sisters" (Greece, Italy, Portugal, and Spain) are in dire straits: their GDPs are declining and they have high unemployment, large government deficits, and massive government debts. As Table 4 shows, Argentina is not in such straits - not even close!

Table 4. - 2013 Argentina and the "Weak Sisters"

Growth, Unemployment, Government Deficits and Debt

Sources: FocusEconomics

There is one area where Argentina faces problems equal or greater than those facing the "Weak Sisters". While the European Central Bank and the IMF are providing huge sums to bail out the "sisters", nobody is eager to help Argentina out. But this is a resolvable problem.

A Prescription for the Future

Argentina has a bright future. The Lady temporarily taken it in the wrong direction. This can be easily remedied. To start, a group of the country's best economists working in academia, government and the private sector should draft An Economic Plan for the New President of Argentina. Every major sector in Argentina should be examined with an eye to removing all the foolish policies the Kirchner regimes have enacted. The group should also commission a set of in-depth studies looking at such issues as what the country's energy strategy should be for the next decade. To protect the group from Kirchner intimidation, it should work obtain support from the international private sector, international organizations and foundations.

Legislative elections take place this fall in Argentina. And a new President will be elected in October 2015. It is time for work on this plan to start.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Growing Disillusionment with the US - Do Americans Know or Care?

© Elliott R. Morss All Rights Reserved

March 2013

Eisenhower warned: Until the latest of our world conflicts, the United States had no armaments industry…we have been compelled to create a permanent armaments industry of vast proportions. This conjunction of an immense military establishment and a large arms industry is new in the American experience. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society. In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist….We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together. Dwight D. Eisenhower, 1961

Open Secrets reports 2012 US Defense lobbyists spent $130 million and made campaign contributions of almost $30 million. What do they want? They want more orders.

Introduction

I grew up in the Kennedy/Rockefeller era. The Rockefellers helped establish the United Nations to promote the well-being of mankind throughout the world. It was intended to be a place where nations could come together to express and discuss their views. Kennedy created the Peace Corps and said the US would put a man on the moon. The Peace Corp was the best foreign assistance program the US ever had. It gave regular Americans a chance to see poverty worldwide and try to help out as volunteers. And putting a man on the moon - people everywhere were caught up in watching.

Because of the Rockefellers and Kennedy, the US projected hope worldwide: most nations believed the US would be a good steward for the world. And in those days, wherever I went overseas (I worked professionally in 45 countries), people asked me my opinion on almost everything because I was an American.

Times have changed. I remember travelling in Africa in the early '70s after the US got bogged down in Vietnam. Africans did not understand the Vietnamese campaign but they still liked and respected Americans. But then, other things happened. US support for Israel1 raised questions in Muslim countries worldwide led to the 9/11 attacks followed by destabilizing land wars in Afghanistan and Iraq.

Back to Vietnam: Mao Tse Tung asked for diplomatic recognition so as to avoid being controlled by Russia; John Foster Dulles said no because Mao was a communist. Ho Chi Minh asked for diplomatic recognition in hopes of avoiding yet another invasion from China. Dulles again said no because he was a communist.

Iraq: By invading Iraq and deposing Saddam Hussein, the US destabilized the Middle East by destroying a balance of power between Saddam (Sunni) and Iran (Shiite).

Afghanistan: After 9/11, the US wanted to "get" Bin Laden. The US learned nothing from the experiences of France and Russia there. So a ground war in Afghanistan lasting more than a decade was launched.

After the trillions spent on the Vietnam, Afghanistan, and Iraq land wars, what can we say has been accomplished? Better not to ask. More than 60,000 Americans dead and over 3 million Afghanistan, Iraq and Vietnamese deaths.

And then in late-2008, US banks collapsed, pitching the world into a global depression. And all of this occurred while the primary US foreign aid program (USAID) was telling banks in developing countries to increase leverage.

The world watches what the US does and draws its own conclusions. So what do the countries of the world think? I address this question below with the assistance of surveys done by the Pew Research Global Attitudes Project.

Opinions of the US

Table 1 provides survey results on how countries viewed the US in two periods: 2002-04 and 2010-12. The question was: "Do you have a favorable or unfavorable view of the U.S.?" The figures in the table are the net of responses. E.G., if that number is 0, the same percent of respondents answered positively and negatively, if the number is negative, more respondents answered negatively, etc. The table provides data on all countries surveyed in both periods.

Table 1. - Views of the US

Source: Pew Research

So what do we find? The overall approval ratings, weighted by population size, have fallen from 19% to 10%.

Another survey question asked if citizens think the US respondents cares about their country's interests? As in Table 1, the net of the percentages answering yes or no are presented in Table 2 for all countries surveyed in the 2010-12 period.

Table 2. - Does the US Care About You?

Source: Pew Research

With all the US actions outlined above in the last decade, it is not surprising that the image of the US has suffered. Tables 1 and 2 have something else in common: Many of the countries giving the US the lowest ratings were Muslim. People living in the "Palestinian Territories" were not included in the tables because they were not surveyed in the 2010-12 period. But they were surveyed in 2003: 92% said the US did not care about their interests.

Unqualified US Support for Aggressive Israeli Acts

Few Americans are clear on this matter, so it is worth reviewing in some detail. During the Six-Day War of 1967 Israel seized lands from Egypt, Jordan, and Syria that it still holds. Keep in mind that when Saddam Hussein invaded Kuwait, the US spearheaded a UN military force that got him out. Back to Israel: Syria, Egypt and Jordan brought a resolution before the UN saying that Israel would give back the lands it seized during the six-day war and that the resulting borders would be the basis for the Palestinian state. The US vetoed this 1976 resolution.

Since the Six Day War, Israel has been condemned by the UN Security Council for aggressive acts 29 times, far more than any other country in the history of the UN. And there would have been more condemnations if the US had not vetoed them. Recently, the U.S. vetoed a U.N. Security Council Resolution, condemning Israel's settlement activities in the Palestinian territories, including East Jerusalem. The vote: 14 1 with the U.S. exercising its first veto since President Obama came to office.

Can the anti-US terrorism that started in the Middle East more than 3 decades back, including the 9/11 attacks, be attributed to the pro-Israel position of the US? That would clearly be an overstatement. But it is worth noting that Michael Scheuer, CIA's analyst who led the hunt for Osama bin Laden, said he was motivated by a belief that US foreign policy had oppressed, killed, or otherwise harmed Muslims in the Middle East.

Do Americans Know or Care What Others Think?

Gabriel Almond2 and others have documented that most Americans have no idea of what is happening in the rest of the world and US foreign policy. Recently, a study was undertaken to determine how the knowledge of US citizens compares with other nations. The conclusion: Germans are most knowledgeable followed by Britain, Canada, and France. Americans had the least knowledge. To work effectively, democracies require an informed public. When it comes to US foreign policy, Americans know very little so they will go along with what its political leaders (and lobbies) want.

What Could Be Done

Should the US care about what others think? Yes. It is in its national interest to care. So what could be done to change foreigners' perspectives?

1. Stop engaging in foolish wars

How can this be done? The defense lobbies remain at work. The only effective thing we can do is bring back the draft. This would force wealthy and influential parents to start thinking about where their children will be sent and why.

1. Stop coddling Israel

The fact that Israel continues to build settlements in "Palestinian territories" is an outrage. And as long as this continues, Obama's assertion that he favors a "two-state" solution is laughable. What can be done? In 1967, U.N. Security Council Resolution 242 passed unanimously. That means the US supported it. UN 242 said Israel would give back the lands it seized during the six-day war and that the resulting borders would be the basis for the Palestinian state. Following discussions with the Israelis and Palestinians over land adjustments, the US should bring a similar resolution before the UN Security Council. It would pass unanimously.

1. Education

US high school students should be required to take a course on global history and US foreign policy since World War II. A democracy cannot operate effectively if its citizens are not educated. And the outside world is now too important to leave to political leaders and lobbyists.

Conclusions

Robert L. Borosage: The country finds itself constantly at war. New presidents inherit the wars of their predecessors. They are faced not with deciding to go to war, but whether to accept defeat in one already in progress….And slowly, the great power declines from the inside out. The wars are costly, running up national debts. Vital investments are put off. Schools decline. Sewers leak. For a long time, circuses distract from the spreading ruin….Other societies become productive centers, capturing the new industries. Some begin providing better education for their citizens, better support for their citizens. Their taxes, not drained by the cost of wars past and present, can be devoted to what we used to call "domestic improvements." This is a very rich country, despite the years of conservative misrule. But even wealthy countries must choose. We can afford to police the world - to sustain 800 bases across the globe, to station troops in Korea, in Japan, in Bosnia, in Europe, fight wars in Iraq and Afghanistan, sustain fleets to police the seas… A rich country, Adam Smith wrote, has a lot of ruin in it. We seem intent on testing the limits of that proposition. Borosage, 2009

1 John Mearsheimer and Stephen Walt, The Israel Lobby , London Review of Books, March 2006.

2 Gabriel Almond, The American People and Foreign Policy, NY: Harcourt Brace, 1950.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Judgments of Paris, Princeton, and Lenox, Part 2

© Elliott R. Morss

January 2013

Introduction

It was striking in 1976 when Californian wines "sort of" beat French wines in Paris tastings. That tasting was memorialized in George Taber's great book Judgment of Paris. I say "sort of" because Orley Ashenfelter and Richard E. Quandt obtained the Paris results and found that while Californian wines got the highest ranking in both red and white categories, judges found very little difference between the French and US red and whites overall.

Ashenfelter and Quandt went on to establish the "liquid asset website, the "Rolls Royce" of all wine tasting sites.

Taber, Ashenfelter, and Quandt arranged a re-enactment of the Paris tastings last summer at the annual meeting of the American Association of Wine Economists in Princeton. But in Princeton, French wines were compared to New Jersey wines rather than Californian. The New Jersey wines did quite well, but again, the judges rankings differed significantly.

In November 2012, the Lenox Wine Club (LWC) was created. Consisting of 14 "veteran" wine drinkers, it decided to start with four tastings: "heavy whites", "heavy reds", "light whites", and "light reds". All tastings address the following questions:

1. Among comparably-priced wines, are the judgments of the veteran drinkers similar enough to identify a significant preference among the wines, and
2. Does price matter?

The "Heavy Whites" Tasting

In November 2012, the "heavy white" tasting was held. The ranking results and prices are presented in Table 1. That's right - the 3-Liter Box Set won the tasting.

Table 1. - Lenox Wine Club Scores, "Heavy Whites" (5 - best, 1 - worst)

The Box Set price equivalent for a regular 750 ML wine bottle is only $4.47. The Drouhin costing $84.63 was included because it got the highest score among whites at the Princeton tasting last summer. It came in next to last in the Lenox tasting.

The "Heavy Reds" Tasting

Earlier this month, the LWC held its second tasting. It was limited to wines with Cabernet Sauvignon the dominant grape, meaning Bordeaux wines were not included. Aside from the Bota Box, all wines originally selected for the tasting were rated 90 or higher by Wine Spectator.

Once again, the overall winner was the boxed wine! Well okay, the statisticians in our group might again say that its final score is not significantly different from the Catena. They are very close: the Bota Box got 5 top votes and the Catena got 4. The Mulderbosch and Four Sisters are right in the middle while the Neyers (by far the most expensive) came in a definitive last.

Table 2. - Lenox Wine Club Scores, "Heavy Reds" (5 - best, 1 - worst)

In Table 3, the correlation between each taster's choices and the average rating for both the "Heavy White" and "Heavy Red" tastings are presented. A high positive number indicates a taster is close to the overall average. For example KM's correlation of 1.00 in the "Heavy Red" tasting means KM's rankings are the same as the overall average. Low or negative numbers indicates the opposite.

Table 3. - How Tasters' Rankings Correlated to Average Ranking

It turns out there was very little correlation between the conformity of each taster to the overall rating between the two tastings (-0.08).

Table 4 is a correlation matrix showing how tasters' ratings compare to other tasters For example, BG, TB and SG appear to have similar tastes while MS and LS gave opposite ratings.

Table 4. - Tasters' Correlation Matrix

One other measure is worth mentioning. The Kendall W statistic indicates how much congruence there is among the ratings of the tasters. The Kendall W for the "Heavy Reds tasting was only 0.214, indicating there should be very little confidence in the judges' overall ratings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.