Tuesday, June 24, 2014

Steady and slow improvement is boring, but things could be worse

Argentina has kept us busier than I anticipated this past week, so it's good that the news from the states has been unremarkable. As far as I can tell, the U.S. economy continues to grow at a disappointingly slow pace of about 2-3% per year, but it's still growing and things are still getting gradually better, and that means that it's best to avoid cash.

Argentina, on the other hand, is slowly going from bad to worse, as the government pursues economic policies that could charitably be termed inappropriate, and realistically termed crazy. Import restrictions are creating shortages of all sorts of things, and the gap between the official exchange rate and the parallel (black market) rate is huge—over 40%. (Good news: food and wine are incredibly cheap in dollar terms.)  On top of the disincentive this creates to export (exports must be cleared at the official rate), the government has severely limited exports of wheat in the absurd belief that this will keep the price of wheat and bread low and that in turn will keep the proletariat content (a certain North American country has banned petroleum exports for similar purposes). To make matters worse, agricultural exports—Argentina's main source of foreign currency—are taxed at a punitive 35%. A good friend hosted us for a long weekend on his estancia the other day, where he grows corn, soybeans, sorghum, and wheat, and he related how all of these policies simply cause him to plant less.

There's relief here that the Argentine government is making an effort to avoid a default on its debt, but it's comical to see how the government is trying to make the "vulture funds" look like the bad guys. How dare someone insist that the government meet its debt obligations? Meanwhile, the Argentine central bank has been expanding the money supply (mainly by giving "advances" to the government so that it can pay its bills) by 25-40% per year, so inflation is raging and the poor and middle class are taking it on the chin. The other night I got into a huge argument with some friends here who insisted that inflation was partly a cultural phenomenon and mostly the result of rapacious capitalists. It's fair to say that there is a grave shortage of economic wisdom in this country, especially among the ruling Peronists. As these posts point out, Obama—whom I've called the first Peronist president of the U.S.—is similarly lacking in economic wisdom and similarly fond of populist policies.

A few thoughts on today's economic releases:

New home sales in May handily beat expectations, thus throwing lots of cold water on the prevailing view among economic bears that the housing market was on the skids. As the chart above shows, new home sales have been moving steadily (though irregularly) higher for over three years. They are still very low, and have plenty of room to increase further.

Consumer confidence has been moving steadily and irregularly higher for the past five years. It's still relatively low from an historical perspective, which means that there is still a healthy amount of pessimism out there. We are years away from a situation that might be termed "irrationally exuberant."

Slow and steady as she goes; things could be a lot worse.

P.S. It's almost 10 pm here and we are leaving shortly to have dinner at a friend's house.


Joseph Constable said...

"(a certain North American country has banned petroleum exports for similar purposes)"

West Texas Intermediate futures started skyrocketing about a half hour before the close at 4:30 pm ET. After the close it kept going up to about 107.50 and has settled down to 106.70 something as I write approaching 8:30 pm PT. A probable cause for the fireworks was that the U.S. is going to allow export of condensates. If this announcement in fact did cause this price change it means there are investors who also think that prices in the U.S. will rise. I don’t think so, by the way. But it does seem so easy to believe that. I refer to the President as Barak Christina Kirchner Obama. Nobody knows what I am talking about and think I am weird.

I am under the impression that 50% of the cars in Argentina use compressed natural gas (CNG) for fuel. That maybe a quarter of the cars have the ability to use both gasoline and CNG. Do you have any knowledge of that?

Scott Grannis said...

There are certainly lots of cars in Argentina that use CNG. But it must be a lot less than 50%. It might be 25%, but I'm not sure it is that high.

Some years ago CNG was much, much cheaper than gasoline. Now I think things have changed. The government has nationalized most of the petroleum industry and has mandated prices in crazy ways, so they've undoubtedly screwed up the pricing and the incentives.

Benjamin Cole said...

Sorry to hear of Argentina's economic problems, which appear self-inflicted.
Of course, in the USA our government can pay off debt in dollars---that we print.

Hans said...

Nice thread, Mr Grannis.

"President as Barak Christina Kirchner Obama."

America's first transgender president!