Miracle on the Pampas

Everybody knows what causes a nation to sink and decay. Everybody knows that over the long run, you can’t spend more than you can afford. And everybody knows that people will game the system.

Argentine Preisdent Javier Milei, Source: Getty Images

Tuesday, December 10^th, 2024

Bill Bonner, writing today from Baltimore, Maryland

Reuters…on the most exciting story in the financial world: Argentina’s Milei wants to make austerity great again.

Argentina's libertarian President Javier Milei laid out a bleak vision in his maiden speech a year ago amid an economic crisis. He warned there was "no money", pledged shock therapy for the economy and said things would get worse before they got better. A year later Milei has managed to pull off a gravity-defying feat: keeping that fervor burning and avoiding tipping the country into fiery protest even as he rolls out severe spending cuts…

A year ago, the question on the table was whether democracy was capable of genuine reform. We know from observation as well as theory — dating to the time of the ancient Greeks — that democracy seems to have a ‘best if used before’ date. As time goes by, elite special interests gain more and more power... and curdle the milk. They are corrupted by power... and the government becomes a means of ripping off ‘The People’ and distributing the loot to competing elite groups.

Then, along comes a demagogue who appeals directly to the masses, who by then are completely fed up with it, and promises real change. He dismantles much of the ‘checks and balances’ that restrict his own power... and the country becomes much less ‘democratic.’

And then, there are always surprises -- catastrophic events, war, bankruptcy, hyperinflation, plague or revolution. Debts go unpaid. Assets are marked down. Rich and poor are both impoverished... and the process begins all over again.

And so it was that a year ago today, Javier Milei took over as El Presidente in Argentina. ‘The People’ had had enough. He offered a new direction. He was very straightforward about it, carrying a chainsaw to his rallies and promising to use it to cut back the government.

So far, Milei has done what he said he would do. He’s fired 50,000 employees. He stopped the red ink and put an end to money-printing. The results?

Our friend on the scene, Rob Marstrand reports:

Consumer price inflation hit 25% in the month of December 2023, as Milei took office. That’s equivalent to an annual rate of close to 1,400% (with compounding). Actual (backwards looking) inflation peaked at over 280% in the early part of this year. By October, the latest available figure, Argentina's monthly inflation rate had dropped to 2.7%, equivalent to 38% a year (with compounding). That's still high, but it's a major improvement. It's also propped up artificially, to some extent, by the progressive removal of the previous government’s price subsidies for utilities (electricity, natural gas, water), fuel and transport (buses and trains). My electricity bill used to be $8 a month (now about $35), and a ride on the subway was about 10 cents a year ago (now about 80 cents). Both are still cheap, but rising.

There’s no secret to this. Everybody knows what causes a nation to sink and decay. Everybody knows that over the long run, you can’t spend more than you can afford. And everybody knows that people will game the system, if they’re allowed to.

Trouble is, it is very hard to correct. In a democracy, if you want power, you need your man to get elected. And he won’t get elected if he attacks the money flow. Because, whenever the feds spend, part of the money is destined for lobbying, campaign contributions, think tank support — all for the purpose of increasing the money-flow.

Try to eliminate the unnecessary spending... and the moneyed elites start working to eliminate you. The rich and powerful will undermine you. The poor – deprived of their handouts – will take to the streets.

Milei’s story is unusual because he has a strong ideological commitment to reducing the power of the government. But he also came along at just the right time in the Primary Political Cycle.

Cynics may doubt the motives of public figures. Cynicalists that we are, we assume the system works for those who control it. And in the election battle of 2023, it looks to us as though the Peronists (national socialists) who have ruled the roost in Argentine politics since the 1940s, took a dive.

Why?

Because the elites had squeezed so much juice out of the economy there wasn’t much left. Mismanagement and rip-offs had brought about the aforementioned 1,400% inflation. And it was getting worse.

Chaos and catastrophe were on the way. Better to let a ‘free market’ guy get the blame. Or, in the unlikely event that Milei were to succeed in reviving the economy, the Peronists would at least have more to steal when they returned to power.

Argentina is still no paradise. There are confusing and difficult money rules. The employment rules — very similar to those in France — make it hard to employ people. And there are still a lot of bills to pay. But Milei explains his progress so far:

‘When we took office…the inflation in the first week of December [last year] was running at 1% per day, which meant it was 3,700% per year…. In addition, for 10 years the economy had not grown. Per capita, it fell by 15%. Wholesale inflation was at 17,00%. Now it’s only 28%. And now we are bringing consumer inflation down to just 2.5% annually. And the poverty rate was 57% in January [2024], now it is only 47%.’

What is probably most remarkable about Milei’s speech is that he is able to talk about complicated and subtle economic issues confidently and intelligently. We know of no American politician who can do the same.

The drop in the poverty rate already has released about four million households from poverty. Investors have taken notice, too. A group of them recently visited our area, Salta, looking for bargains... and potential boltholes.

And some investors see in the Argentina story the kind of boom that took place in Eastern Europe after it was freed from the Soviet Union in 1991... or in China, after the entire economy was unleashed by Deng Xiaoping in 1979.

Of course, the Milei revolution may still fail. He’s cutting back on salaries, jobs, benefits and giveaways. As time goes by people are likely to forget why these cuts are necessary... and long for the good ol’ days of something-for-nothing.

But for now, Argentina is the biggest turnaround story since the Soviet Union disbanded.

Stay tuned.

Regards,

Bill Bonner

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Market Note, by Tom Dyson

This chart from Merrill Lynch shows the incomes available from different assets across the investment spectrum. Pretty skimpy, I’d say. The only assets that look attractive to me here are US cash and US 10-year bonds, although with inflation remaining stubbornly high, even these seem unlikely to produce any positive after-inflation growth.

What’s an income investor to do?

I’ve reluctantly come to accept, with high valuations and easy conditions so pervasive, that maintaining purchasing power is about the best one can expect from mainstream income investments in the medium-to-long term… at least until there’s some kind of correction (US government securities should remain well-bid as at least they are relatively cheaper than other income types.) The other area that should be of interest to income investors, which I spend a lot of time looking at, is income from energy and shipping sectors.