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Argentina Is Replaying Another Inflationary Collapse

Feb. 14, 2013 11:48 AM ETARGT23 Comments
Nicholas Pardini profile picture
Nicholas Pardini

I knew the inflation situation was bad in Argentina (ARGT), but recent acts of desperation from the Argentine government have likely clinched an hyperinflationary collapse. Last week the government passed a two-month price freeze of groceries, and followed that up with an outright ban of advertisements that disclose consumer prices on Friday. These actions are signs of a desperate government trying to cover up its tenuous currency crisis to the general public. However, no real anti-inflationary measures -- such as reducing government spending -- will match these measures. Putting duct tape on the problem will do nothing to solve this.

Argentina has one of the worst track records in terms of both fiscal and monetary policy of all the emerging markets. Since 1950, the country has defaulted five times (1951, 1956 1982, 1989, and 2001) and has four separate years of hyperinflation (1981-82, 1989, and 2001). The actions of the Cristina Fernandez de Kirchner's administration are following a similar path with a familiar endgame. Throughout Argentina's history, left-leaning parties often promise social program spending to implicitly buy votes and win elections. When the bills for campaign promises come due, Argentina's tax revenues are not enough to pay for them. The consequences for this is unsustainable deficit spending.

Due to past defaults, Argentina has limited ability to issue local currency denominated bonds, and U.S. dollar denominated bonds come with high interest rates. As a result, Kirchner -- like her predecessors -- has resulted in printing money to finance expenditures. The Central Bank of Argentina has no independence whatsoever, so this policy is feasible. Inflation rates have risen slowly from her election in 2007 to 2011 when it breached 20%, according to private economists. The first step the government has taken to stem inflation has been to continuously lie about it. Official numbers for inflation are around 10.8% for 2013, while private economists estimate it to be closer to

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Nicholas Pardini profile picture
Nicholas Pardini is the founder of Davos Macro Research, which is a specialty macro research platform. Davos Macro Research Company Website:http://davosig.comNick has been invited and speaks at investment conferences globally and has appeared on financial media such Seeking Alpha, Zero Hedge, Futures Magazine, and USA Today among others. In addition to his financial publications, he runs the Youtube channel, Analyzing Finance with NickPreviously, he worked as analyst on the buyside for eight years. He has developed an expertise in global macro trading, commodities, options markets, and equity analysis in the US and emerging markets. Nick has visited and lived over 43 countries in five continents to develop an understanding on how the world and markets operate from a direct perspective. He also speaks at investment conferences globally and has appeared on financial media such Seeking Alpha, Zero Hedge, Futures Magazine, and USA Today among others.

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Comments (23)

DJHLS profile picture
I haven't heard that they banned meat exports and this wouldn't make any sense. Argentina needs exports even more than domestic low prices.
It's not written..., but it's hard to export. Take a look at our meat exports, why do you think they are coming down?
DJHLS profile picture
Again: Argentina needs USD inflow by any means and thus export is most important for them.

Meat exports are coming down? Are they? Seasonal effects? Producers hold them back waiting for better prices?
Seasonal? Better prices? You're right and I agree with you... Tell the government... Taxes, regulations... When there's poverty it´s difficult to export what you eat... That's the reason, and that's why we export lots of soy, we don't eat it...
13 Mar. 2013
I don't know much about Argentina, but from a few articles I read, including the recent one by John Mauldin, it is apparent that a country that has been in so many economic crises since 1930s must have more than just rotten politicians. People must want to be pampered by government, collect some benefits and live a easy life for them to keep voting politicians that promise them such things to office. People must also be naive enough to let government control supermarket prices, thinking that that is how they can get cheap products. If people do not change their mind set, new politicians will just do the same thing over and over again. Too bad for us meat lovers that they banned export of meat. the government, and the people, believes that this would keep price in the country down.
I think Argentina would be a great nation if not for leftism.
Argentina is a great country, have you ever been here? The problem is our politicians, left, right, center, whatever...
Amouna profile picture
What is the expropriation risk for a foreign investor willing to buy real estate in Buenos Aires?

B.A has always been a fabulous city in my eyes - visited twice already from Europe- and I like most things about it...
Depends..., if you're planning to buy an apartment or a house, I think there's not expropriation risk. If you plan to buy to get a rent from it, remember that you'll get pesos so remember our inflation (three years contracts, you can stipulate increasing amounts year after year, let's say 20% but what happens if the inflation is 24% or more?) and you'll have to buy dollars in the black market..., no way to get your rent from a bank transfer...). The other risk, it only happened once in our history is to have your rent freezed by law (remember that this government has taken populist measurements before...).
If you're thinking about land for a farm, NEVER happened before, but what if the government turns to the left (I think it had happened in Venezuela)? I think the probability is near zero, but...
Amouna profile picture
I love Argentina, but I think the risk is a little bit too high for me right now. Will be keeping a close eye on the political landscape there, should things shake up a bit...
DJHLS profile picture
So, what do You think about AGRO? Since it owns farmland in Argentina it could derive benefit from inflation?

But selling land for Pesos would be a silly move.

YPF and CRESY could be interesting short candidates, since Argentinians can buy the shares at Argentine Stock Exchange for Pesos and sell at NYSE for USD.
What you say about YPF and CRESY is already happening, it's the way people who can access to the market is getting dollars for less than the black market or to take dollars out from Argentina, but it had happened for years.
YPF expropriation is fully priced in, don't see a reason to short it, to be honest I'm long YPF even it had it dividend cut.

AGRO to be honest I don't know the stock, but from what I just read CRESY is more on less on the same business.
From my point of view you can benefit from inflation when you can price in your cost increase. As these companies sell "food" it will be hard that the government will allow those price increases, it already happened with beef and wheat. Remember that our poverty base is high, where inflation hits harder..., the government won't allow price increases, it already happened with beef and wheat markets. A totally different story is with soy, because we don't consume it...

You're right when you say that is silly to sell land for Pesos, that's the reason why the Construction market declined.
DJHLS profile picture
But I suppose CRESY and AGRO produce their corn and grain not for domestic sales but for export and the government is interested in supporting export since it helps to get Dollars in.
Sounds nonsense but it happened with beef and wheat for example... We've got export taxes as well...
Hi Nicholas, very well written article, I live in Argentina and I couldn't have done it better.

I agree with you on shorting ARGT but from another point of view..., when MERVAL went up since last November, I couldn't find a reason why, the only changed was the black market dollar going higher..., everything else was more or less the same as you explain in your article, the very same reasons why MERVAL went down March 2012...

Regarding Real Estate, if you live in Argentina is one of the few investments you can do to keep the value of your pesos... From a dollar point of view I find the dollar per sqr meter a little bit overvalued.

I enjoyed your article as I enjoyed reading your ABV articles as well!
User 353732 profile picture
Argentina has been in decline for decades. Once better than European in its material and civic quality of life it is now increasingly third world.
The more Argentina apes Venezuela and Cuba the more its capacity to produce long term wealth and prosperity compresses.
Argentina, like Venezuela, does have tremendous energy resources( shale oil and gas) and once the oligarchs and dictators are gone, at least for a few years, these resources can be the basis for national economic renewal.

After decades of egregious misrule Brazil has been able to find a model that allows its oil and gas resources to be developed with enough( though not spectacular) success to make a strategic difference; for the sake of ordinary Argentines one hopes that Brazil rather than Cuba becomes the source of guidance for Argentina in the closing years of this decade.
afurth1 profile picture
But again, putting Venezuela and Argentina in the same category (as much as Cristina and Hugo share in terms of ideology), is a mistake. The perversity of the dynamics created by the oil monopoly in the hands of the Venezuelan state goes way beyond the corrupting influence that the Argentine elites can ever do to their own country. The labor movement in Argentina, for example, as corrupt as it is ever since Perón co-opted it into the state apparatus, is still a rather independent power within the state that checks the executive's, and Cristina's regime is no exception: they are now being confronted by labor unions just as any government with a right-wing rhetoric would be. The judicial system is also independent to a degree that it would never allow a takeover by the executive like Chávez did. In general, despite the similar political rhetoric, both countries are extremely different culturally, and have quite different long term prospects.
What about Norway as a source of guidance? They have avoided the "resource curse" of many commodity producing countries, and have a much better social system than soft-on-slavery-Brazil.
afurth1 profile picture
I wouldn't be so pessimistic about real estate in Argentina. People here traditionally use bricks and mortar as a store of value, and leverage is null as mortgages are almost non-existent. As the local currency falls, those who have some saving capacity run from cash and buy apartments, parking lots, and other tangible assets. This is specially true now that buying US dollars is so difficult. Obviously you need to buy with a long term horizon and research carefully for deals though, as the next couple of years will surely be quite shaky.
Amouna profile picture
Maybe she will have to flee by helicopter from the Casa Rosada, like De la Rua did in 2002...
I agree Argentina is risky, but its not worthless. How do you know these concerns aren't already priced in? At what price would you get interested in ARGT, which trades a little under $9 now? $5? $1? $0.01?
Nicholas Pardini profile picture
They are partially priced, but not completely as global risk sentiment has put somewhat of a bid in all markets. I would say that $4-5 is a reasonable target, but a full out currency crisis who knows how low it could go (zero if large scale nationalizations take place).
Nicholas Pardini profile picture
For more emerging market content that involves more specific trade recommendations for stocks off the NYSE, check out Emerging Market Insider.

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