How meaningful the election of Javier Milei’s as president of Argentina will be remains to be seen but noteworthy is that a number of important commentators took up the subject of Argentina’s economic decline over the last 100 years or so with great enthusiasm.
And consider the larger effect on trade and domestic economic growth during this period, as recorded by David Rock in his book Argentina: 1516-1987:
‘By the outbreak of World War I, Argentina had experienced almost twenty years of prodigal expansion. Per capita income equaled that in Germany and the Low Countries, and was higher than in Spain, Italy, Sweden, and Switzerland. Having grown at an average annual rate of 6.5 percent since 1869, Buenos Aires had become the second city of the Atlantic seaboard, after New York, and by far the largest city in Latin America. Except entrepôts like Holland and Belgium, no country in the world imported more goods per capita than Argentina. By 1911, Argentina’s foreign trade was larger than Canada’s and a quarter of that of the United States.’
This era of prosperity, however, did not last. The 1930s saw a shift in Argentina’s economic policies following a military coup. The subsequent governments abandoned the principles of economic freedom for socialist and fascist economic models. The establishment of income taxation, a central bank, trade restrictions, and regulatory controls marked the beginning of Argentina’s decline. This shift toward a welfare state and regulated economy, similar to many other Latin American countries, led to recurring financial crises.
This marked the end of Argentina’s economic prosperity, eventually culminating in the election of Juan Perón, whose extreme welfare-state policies mirrored those of Franklin Roosevelt. Perón’s reign ended the era of Argentine liberty and prosperity. According to ultra-libertarian Dan Mitchell, “After a libertarian candidate took first place in Argentina's presidential primary back in August, I wrote that the runoff would be the most important election of 2023. Amazingly, Argentinian voters opted for the libertarian by a strong 56-44 margin. So why did Argentine voters opt for a radical libertarian after repeatedly voting for statists?
Did they finally realize that they ran out of other people's money? I assume part of the answer is that they realize their country is in economic decline. Wielding chain saws on the campaign trail, the wild-haired Milei vowed to slash public spending in a country heavily dependent on government subsidies. He pledged to dollarize the economy, shut down the central bank and cut the number of government ministries from 18 to eight. He has branded Pope Francis, an Argentine, an ‘evil’ leftist. Climate change, he says, is a ‘socialist lie.’ Jonathan Aguero, a 32-year-old father of two has felt shortchanged by his country’s economic troubles for his entire life. ’We’ve already seen what Peronism has done. We need a change.’”
MF: I am far more skeptical than Mitchell about Milei’s ability to slash public spending in Argentina because the country is heavily dependent on government subsidies. Furthermore, I believe that the pledge to dollarize the economy, shut down the central bank and to cut the number of government ministries from 18 to eight is completely unrealistic. Throughout history, cutting government spending has been next to impossible.
For us investors the question that arises is about buying Argentinian stocks and bonds after the victory of Javier Milei? Noteworthy in this respect is that Argentinian stocks have already performed superbly in 2023. The Argentinian MERVAL Index is up year-to-date by 124% in US$. Although I believe that Argentinian stocks may continue to rally further, I find currently better value in Colombia and in Brazil.
On another note, a recent Bloomberg column by Masaki Kondo caught my attention. According to Kondo Treasuries Return to Trend may see Yields halve. Kondo believes that, “the rally in 10-year Treasuries since late October may just be the start of a long-term trend. A model tracking trends over the past two decades shows the notes are undervalued by more than 200 basis points. A linear regression analysis suggests the yield’s fair value is at 2.3%, versus its current level at around 4.4%. The model uses the federal funds rate, an inflation gauge favored by the Federal Reserve, the US economic surprise index and the S&P 500’s implied volatility as variables to measure the likely movement in yields. Should yields drop to the estimated fair value of 2.3% by the end of next year, that would translate into a 22% return in 10-year Treasuries, according to calculations by Bloomberg.”
Let us briefly assume that Treasury yields would drop to the estimated fair value of 2.3% by the end of next year. I believe that we could all agree that such a sharp decline in yields would only occur if the global economy weakened much more and that we would be in the midst of a nasty recession. In such a scenario a decline in corporate profits would be inevitable and likely push stocks down. A decline in stocks would, however, not be a certainty because the decline in bond yields and easier monetary policies could support stock prices or even push them up. However, almost with certainty, the US dollar would weaken under this scenario.Furthermore, under the scenario of a US recession, declining US interest rates, and a weakening dollar, it is most likely that precious metals would soar. If gold were to move up, I would expect gold and other mining stocks to significantly outperform physical precious metals. After all. gold miners have meaningfully underperformed gold since 2011 and they are now in deep value territory.
Furthermore, under the assumption that Treasury yields would drop to the estimated fair value of 2.3% by the end of next year, a sure bet would be that bonds including TLT, EMB, HYG would rally. Long-term Treasuries would likely rally more than corporate bonds in a recession.
Another prime beneficiary from lower interest rates would be commercial property stocks around the world, which have badly underperformed the S&P 500 following the GFC. My preference would be stocks of property developers and REITs in Hong Kong and Singapore (HKL SP, 16 HK, 14 HK, 101 HK, 1972 HK, 19 HK).
Since we are at the beginning of the festive season, let me remind my readers of Thomas Mann’s words: “To be grateful for all life's blessings is the best condition for a happy life. A joke, a good meal, a fine spring day, a work of art, a human personality, a voice, a glance - but this is not all. For there is another kind of gratitude the feeling that makes us thankful for suffering, for the hard and heavy things of life, for the deepening of our natures which perhaps only suffering can bring.”
Wishing you all a wonderful festive season I remain
With kind regards
Yours sincerely
Marc Faber
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