The view from Argentina

We're in Argentina this week and next, visiting friends and relatives and looking forward to a big wedding this weekend that will be attended by 500+ people. Spring has just arrived, and the people and food are fantastic as always. Food, wine, lodging and taxis are delightfully cheap for American visitors, and now you can easily pay for things with credit cards or withdraw pesos from an ATM (last year both methods were subject to an unfavorable exchange rate), since money is freely exchangeable at a single rate (currently about 15 pesos to the dollar).

There have been many welcome improvements since Macri took over the reins of government from Christina Kirchner late last year. Unfortunately, there are still many head-scratchers: Argentina has uniquely refused to allow Uber to operate within its borders (hint: the taxi cartel is very powerful); it's impossible for Argentines to buy books from Amazon (because customs officials must check each book mailed into the country to make sure there is not too much lead in the ink, and they have no budget to do that, thus "protecting" the domestic publishing industry but intellectually impoverishing everyone in the process); Apple can't sell iPhones in Argentina (because they aren't made in South America, which means that scads of tourists entering the country and Argentines returning to the country carry at least one new iPhone for a friend or for resale); and the great majority of Argentines refuse to acknowledge that the Falkland Islands are British (even though they have been a British Protectorate for over 100 years and unanimously voted to remain one not too long ago). Macri—a successful businessman, an advocate of free markets, and a decent person of the sort I wish Trump were—isn't a miracle worker, but he has accomplished more than most would have hoped for so far and he hasn't given up. He knows that Argentina must regain the trust of the world, the rule of law must be the law of the land, and inflation must be brought under control if capital is to return and businesses are to invest and the economy is to grow.

I've been following the markets throughout the past week, but can't come up with any new or informed observations about what's happening. However, there's nothing wrong with a recap of how I see the economy and the markets, so here goes:

The economy is likely continuing to grow at a disappointingly slow pace, but we might see some modestly stronger GDP numbers in the second half as compared to the first half of the year. There are several reasons for sluggish growth, but monetary policy is not one of them. Tax and regulatory burdens are excessively high; confidence is still lacking; and business investment is weak despite strong corporate profits. Risk aversion, a lack of confidence, and weak investment have sapped the economy's productivity. More recently, the tremendous uncertainty surrounding the November elections—which could give us even higher tax and regulatory burdens and four more years of sluggish growth under a Clinton presidency, or reduced tax and regulatory burdens and four years of stronger growth under a Trump presidency—is most likely convincing risk-takers that it is better to wait until next year before deciding to undertake new investments, and that in turn is contributing to keep growth weak, especially this year.

The Fed has not been "stimulative;" rather, the Fed has been accommodating the world's almost insatiable desire for money and safe assets with its Quantitative Easing program. Short-term interest rates are not artificially low, and thus they are not artificially inflating the prices of risk assets and/or bonds. Interest rates are low because the economy is sluggish, inflation is low, and the market holds out very little hope for improvement in the years ahead. Rates are low because the world's demand for safe assets is very strong. In particular, the very low level of real yields on TIPS, combined with relatively low implied inflation, strongly suggests that the market is very pessimistic about the long-run outlook for economic growth. The Fed is not too tight, because real yields are very low and the yield curve is positively sloped. Deflation exists primarily in the durable goods sector, and China has been one of the driving factors behind ever-cheaper prices for the electronics that have boosted our standard of living—there is nothing wrong with that.

Stocks are no longer cheap, but neither are they obviously expensive. The current PE ratio of the S&P 500 (~20) is above its long-term average, but not excessively high considering how low interest rates are on notes and bonds. Key indicators of systemic risk (particularly swap spreads) are relatively low and stable, and this—combined with the absence of tight money—suggests that the risk of recession is low for the foreseeable future. The unusually wide spread between the yield on cash and the yield on risk assets is a compelling reason to stay invested.

The dollar is reasonably valued against most other currencies, according to the Fed's Real Broad Dollar Index, and my analysis of the dollar's PPP value against other major currencies is largely in agreement with this. Raw industrial commodity prices are neither very high nor very low, but they have been trending higher this year and this suggests some firming in the global economic outlook—which, like that of the U.S., has been unimpressive of late, if not a bit troubling.

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In the meantime, Trump's chances are improving daily and I think the election will soon be his to lose. On Monday I'll be scrambling to find a TV down here that will let me watch the first debate, or, failing that, an internet connection fast enough to live-stream the action.