The End of the World
Black market exchanges, capital controls, fifty percent inflation and more...
Joel Bowman, reckoning today from Buenos Aires, Argentina...
“Tokyo today... Buenos Aires tomorrow!”
Such has been Bill’s working thesis for the past couple of decades, as he explained in these pages this week...
In 1999, we figured that the dot.com bubble was bound to pop and that the US economy would likely turn into a Japan-like slump. Stocks would go down, we thought. The economy would sink. It would take many years to ‘fix’ the problem… we imagined. And it would only be done in the worst possible way – by inflating, a la Argentina.
In recent months, Americans have watched the seeds of inflation begin to sprout in their own backyard... into ugly, invasive weeds. December marked the seventh consecutive month that so-called “transitory” inflation exceeded 5%. With the CPI clocking in at 7%, prices are rising at their fastest pace in almost forty years.
(The producer price index (PPI), meanwhile, is running hot at 9.7%. Remember that wholesale prices eventually get passed on to consumers, which is why the PPI is often seen as a leading indicator... a sign of things to come.)
Given the government’s own tortured stats, inquisitive readers may wish to know: if we are indeed heading to Argentina - the “fin del mundo” (end of the world) - what might that journey look like, exactly? What’s life like, down on the pampas?
The short answer - from someone who looks out his apartment window onto the Jacaranda-lined streets of Buenos Aires - is that life here is perfectly pleasant... provided one does not earn, save or invest in Argentine pesos.
Then, as a porteño friend of ours likes to say while practicing his very best Queen’s English: “You’re screwed!”
And yet, if you earn, save or invest in just about anything other than pesos (with the possible exception of, say, the Turkish lira) the cost of living here in Argentina has seldom been cheaper.
That’s because, as the inflationista politicians abuse and debase the local money, other stores of value - USD... gold... crypto... land... art... wine... - become relatively more valuable. Case in point: When we first arrived here in 2010, a pack of cigarettes was about $1... or four pesos. Today, a pack of cigarettes is still about $1... but it takes over 100 pesos to buy that same dollar.
And it gets worse (or better, depending on which currency you’re using).
Because the government doesn’t want locals divesting out of (selling) their pesos for dollars (or anything else), they enact strict capital controls. This includes limits on how much money Argentines are allowed to exchange per month (US $200) and heavy taxes levied on foreign purchases. (As of 2020, Argentines who buy dollars using bank cards or who purchase foreign currency for savings must pay a 35% tax on top of an existing 30%, the so-called “solidarity tax.”)
Of course, such measures do nothing to curb Argentines’ enthusiasm for foreign currency. En contrario! In a country where the “official” inflation rate is a whopping 50% (and where everyone knows it’s much, much higher), locals are as keen as ever to ditch their pesos in favor of practically anything else.
And so, they pay a huge “escape premium” to do so. The resulting spread (la brecha) between the “official” (blanco) and the “unofficial” (blue) rate is more than double. In other words, if you earn, save or invest in dollars... and you exchange them here on the blue market, you get 210 pesos for your dollar, more than twice the official rate.
The lesson, if it is not obvious, is not to be a milk cow for the state, leaving the powers that be to slowly inflate away the value of your earnings and/or savings. Milk cows eventually become beef cows, as the good people of Argentina know all too well.
Also, have an escape plan for when the temptation to inflate becomes too much for self-serving politicians to resist. To that end, Investment Director Tom Dyson has been gearing up for what he calls the “Era of Inflation Volatility.”
From his Weekly Investment Update...
“Everyone is talking about a smaller Fed balance sheet in 2022. But in the next cycle of inflation volatility, the balance sheet will have to get much LARGER. And not just the Fed’s balance sheet. All major central banks will be in expansion mode. And then?
“Then the markets will lose faith in a major currency… it could be the dollar or the euro or the pound or the yen or the renminbi. There’ll be a run. It’ll spread… a contagion… and we’ll finally arrive at what I’ve been calling the global synchronized currency devaluation.”
How to prepare - and even prosper - from this mega trend? “That’s what I spend all my time trying to figure out,” says Tom, who has identified a combination of gold and “old economy” value stocks to help preserve and grow his capital.
If you’d like to receive Tom’s Weekly Investment Updates to your inbox every Wednesday, feel free to join our paid readers right here. At less than $2/week, it’s a great place to begin your own Plan B...
And now for a weekend postcard from young Dusty Dyson...
Greetings from Chiswick, West London!
I hope you are doing well. We are having a nice time here. My whole family found out we had covid the morning we arrived in London. So we've been in quarantine. It's been a week already, but it's going by really fast and we're having a nice time together.
This is what my day looks like in quarantine:
We wake up really late because we have jet lag. Then we have breakfast. Then I do schoolwork all day. First I do my online course for 2-3 hours. I take classes in math, English, biology and history. Then I spend a couple of hours in my workbook, which can be whatever I want. Mostly I draw.
After lunch, we do group learning videos. Yesterday we watched a documentary called “School — society’s most broken machine” which a 15-year-old kid made. Today we watched an episode of “Welcome to Earth” by Will Smith and an episode of “The World According to Jeff Goldblum” on Disney Plus.
Next, I do an hour of independent research online, which is when I learn about whatever I want.
Then, we have group discussions. This week we’ve been talking about building healthy habits and setting goals for the year.
I read a lot too. Right now I’m reading MacBeth by William Shakespeare and Great Battles for Boys: WW2 in Europe.
That’s the end of my schoolwork for the day. In the evening we have family dinner, which my Mom cooks. Then we watch 2 episodes of Seinfeld together with a cup of tea.
I go to bed around eight. My brother and I listen to Audible in bed. We’re listening to the Harry Potter series (again.) And that’s my day.
From,
Dusty
P.S. Here’s a picture of me at school today…
And now for Bill Bonner’s reckonings, neatly archived, from the week past...
Cruel Contentions
When grace and humility give way to hubris and spite
In a civilized society, people make their own choices. Some turn out well. Some not-so-well. They follow their hearts, their minds, or their leaders. They are in thrall to some god… some guru… some Great Idea. Who are we to know whom to ridicule?
Roadside Slaughter and Railway Robbery
America lurches from Japan-like slump to the Pampas playbook...
A news item a few months ago caught our eye. A truck was carrying beef cattle through a poor neighborhood in Buenos Aires, on its way to the abattoir. The local people stopped the truck, unloaded a cow… and slaughtered it right on the street.
Financial Hanky-Panky
Market meltdowns, dishonest prices and lessons unlearned...
Price controls must be the economists’ equivalent of a winter campaign in Russia. Always disastrous; they are among the things that fool some of the people all the time and the rest of them occasionally. Which is more than enough for most public policies.
In Praise of Plan B
Rough seas, rising energy and Argentina's abandoned peg...
Typically, for foreign creditors, Plan B means lending in dollars, not pesos. This makes it impossible for the wine drinkers to inflate away their foreign debt. They don’t control the dollar. They can’t print more of them.
"Inflate or Die"
Runaway spending, unpayable debt and broken promises...
This week, we explored the pampas. That’s where the US is headed, we believe. Chaotic, divisive politics. Government that plays the public for a fool. Runaway spending. Mountains of unpayable debt. Persistent, and sometimes exorbitant, inflation. Are we there yet? We don’t know. But we must be close...
We’ll return next week with more writings, reckonings and assorted other ramblings. Until then, drop a comment in the space below and, if you’re feeling extra generous, maybe even consider giving this here message a share…
Enjoy your weekend,
Joel Bowman
Very good articule 👍
“Milk cows eventually become beef cows”. Great analogy, and thank you, Joel, for adding your perspective on Saturdays. And you, too, Dusty!
What bothers me about this international global devaluation pseudo-plan is that I see it rapidly getting away from these geniuses. The dollar has enjoyed reserve status for years, which means there’s an awful lot of international dollars floating around out there. If the dollar denominated inflation rate really cranks up, the rest of the world might decide it’s too expensive to keep carrying Uncle Sam, even if he has provided some modicum of “world stability” (and that’s getting more and more debatable). So when the opportunity to disconnect from a diseased, collapsing financial (or military) system comes along, might not those dollars, formally held as reserves, come back first as a trickle, then a tsunami, looking for something tangible to buy?
And wouldn’t they be competing with one’s already diminishing purchasing power, caused by a bloated money supply? Maybe this “7% inflation” is just the start. Maybe 20% next year?
I can envision decades of financial mismanagement coming home to roost rather rapidly. At least, in Argentina’s case, nobody’s been using their peso as a reserve currency that can then come back and bite them.
Well, if that scenario does come to pass, it’s been a good run. But the suffering in our population that is unfamiliar with, and unprepared for, real inflation will be enormous. Thanks for the continual reminders.
Best of luck with Bonner Private Research. I really enjoy it.