Argentina/Emerging Markets: Apocalypse Now

|
Includes: AGT, ARGT, DEM, DIA, EEM, EWH, EWI, EWO, EWW, EWZ, FXI, GEM, IEMG, IWM, MCHI, QQQ, SCHE, SPEM, SPY, TUR, UUP, VWO
by: The Fortune Teller
Summary

Once again, Argentina is doing what it's best at - creating an economic crisis.

Although Emerging Markets are more resilient these days to crisis, they are still vulnerable, especially in light of other moving parts on the global economy stage.

While Argentina is the "poster child" of the EM team, we suggest investors should be very careful in choosing which other team members they may wish to play with.

Stairway to Hell

We've just used "Apocalypse Now" in the title of another article. However, while a question mark should be placed after these words at the other article, even a hundred exclamation marks won't be sufficient in this article.

Image result for exclamation mark danger Because when it comes to Argentina, no matter how many warning/danger signs are placed along the road - you can always bet that at the end of it a place called (an economic) "Apocalypse" is waiting for you.

If you're investing in any financial asset related to Argentina (ARGT, AGT) - stocks, bonds, currency, you name it - you should keep in mind that if history is an indication for what is about to happen - you don't have much time to be long (the asset) before it's going to become very painful (holding onto that asset for too long).

And just FYI: While betting on Italy (EWI) holding snap elections every year comes close, there's no safer bet than putting your money on Argentina going into a major financial crisis every few years.

Instead of a "Stairway To Heaven" what you get, when investing long-term in Argentinean assets, is a "Stairway To Hell."

Stocks

On August 12th, Argentina's MerVal Index experienced its largest 1-day decline in history: -37% (-48% in USD terms).

This was an over 20-sigma event which means that it should not have happened even once in the history of the universe (assuming a normal distribution which markets do not follow).

The 48% decline in USD terms was not only a >20-sigma event, but also the second largest 1-day decline among all stock markets, ever!

Just to make it (statistically) clear, a 20-sigma event is something that's supposed to happen only once every (take a deep breath...) 145,300,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 years.

Bonds

Oh boy!

Recall that few days back, we pointed out the amazing performance of the Austrian (EWO) 100-year, aka "century bond," over the past year. Well, the Argentinean century bond is literally the mirror image of that Austrian bond. While the latter doubled in price, the former has halved.

Argentina's main problem is that it's a stick in a doom loop.

The central bank ought to print money in order to maintain a reasonable deficit. However, due to the very bad economic situation in the country, the deficit keeps growing.

This means that you need to print more and more money to maintain "stability." Of course, that's only possible up to a certain point when investors lose faith, trust, and patience.

At that point, everything is collapsing - all at once - just as quickly and brutally as we just witnessed.

The big problem is that debts are supposed to be paid back, but in the current situation - as well as in light of Argentina's long history of defaults - it's impossible to see how the country can serve the debt load it's carrying.

The IMF may come forward to help (as they always do, only God knows why...), putting more money chasing bad money. Until then, and perhaps even after, investors are sending a very clear vote of "no confidence," sending the implied default probability (over the next 5 years) to the moon.

Inflation And Currency

When you run a country where an integral part of the usual/normal economic situation contains the following...

  • An inflation rate that can only wish it was in the teens.
  • Negative growth rate leading to a recession 1 in every 3 years, on average.
  • One out of every three persons is considered to be poor.

... there is very little hope for that country's currency

Indeed, the US Dollar (UUP)/Argentinian Peso currency pair (USD/ARS) has been a complete disaster for decades:

  • August 1992: 1.00
  • August 2002: 2.92
  • August 2012: 4.84
  • August 2013: 5.67
  • August 2014: 8.40
  • August 2015: 9.30
  • August 2016: 14.93
  • August 2017: 17.34
  • August 2018: 41.57
  • August 2019: 62...

Recession

Argentina has a long history of recessions.

As a matter of fact, since 1950, Argentina has spent 33% (!!!) of the time in recession compared to 10% for the United States (SPY, DIA, QQQ, IWM).

Other Latin-Central American leading economies, such as Brazil (EWZ) and Mexico (EWW) are nowhere near that horrific percentage.

For God's sake, even the battered Venezuela is spending less time in recessions than Argentina does...

Bottom Line: Beware Of Emerging Markets

Emerging Markets ("EM", VWO, IEMG, EEM, SCHE, SPEM, DEM, GEM) have already been suffering due to the 1) the escalating (now easing?) US-China trade war, 2) Fed's monetary tightening policy in recent years, 3) slowing global economy, and 4) USD shortage and funding squeeze.

Now, they also have a new Argentinean financial crisis in America, and a Chinese (MCHI, FXI) geopolitical (over the Honk Kong (EWH) protests) and financial crisis in Asia.

On one hand, EMs are better equipped nowadays to deal with a crisis like the one Argentina is "donating." FX reserves held by the 12 largest EM economies (excluding China) reached a record $3.25 trillion in July, far more than the $2 trillion they held back in 2009.

While there are few EM economies that are more fragile than others, e.g. turkey (TUR), we believe that investors would be better off reducing exposure to EM as a whole, due to an increasing risk of contagion which (as a result) is adding to an overall risk that currently seems like it's way outweighing the potential reward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: TipRanks: SELL ARGT, SELL VWO, SELL TUR