Thursday, October 18, 2018

Hope for Argentina

Four months ago I proposed "A simple fix for Argentina's peso." Late last month, after some much-needed changes in leadership, the central bank announced an agreement with the IMF in which they proposed to do exactly as I recommended: sharply curtail future money printing. In fact, the central bank vowed to deliver zero growth in the money supply over the next year. Wow. Milton Friedman would be jumping for joy.

I'm happy to report that the central bank appears to be honoring its pledge. Over the past four weeks, year over year growth in Argentina's M2 money supply has plunged from 32% to 19%, which corresponds to a 10% outright decline in M2 over a 3-week period. Not surprisingly, this impressive resolve has translated into an almost 13% gain in the peso's value vis a vis the dollar. (Boosting short-term interest rates to 73% certainly helped in this regard, by stimulating demand for pesos.)

In dollar terms, the value of the Argentine stock market has plunged 57% since its January '18 high, but it has been relatively stable for the past two months. The economy is in recession, and discontent with the Macri administration is rampant. There's no assurance things will hold together for another 11 months. How will the government borrow what is needed to fund its deficit (3-4% of GDP) if it can't ask the central bank for free money? Only time will tell. But if the central bank can maintain its resolve for a few more months, a surge of confidence could produce a wave of foreign capital inflows more than sufficient to do the job. There is hope.

Chart #1

Chart #1 shows the level of Argentina's foreign exchange reserves. They surged by almost $30 billion following the late-2015 election of President Mauricio Macri, and were further boosted by about $8 billion thanks to the successful sale of bonds earlier this year. But beginning last April, the central proceded to squander some $30 billion (including monies received as the result of an IMF loan), in a futile attempt to "defend" the peso against massive capital outflows that were sparked by a terribly foolish tax on foreign capital (see the post linked above for more detail). In reality, the central bank simply accommodated capital flight, since the supply of pesos continued to surge. (In technical terms this is called "sterilized intervention.") Very foolish.

Chart #2 

Chart #2 shows the level of Argentina's M2 money supply, which grew at a roughly 30% annual pace from early 2010 until recently. In relative terms, Argentina's money supply expanded by about 25% more every year than did our M2.

Chart #3

In theory, much more rapid growth in Argentina's money supply should have resulted in a roughly 20% annual decline in the value of the peso. Chart #3 illustrates this (green line). Note that in recent months the peso fell by much more than would be suggested by its rate of monetary expansion: this is a measure of the panic selling that typically precedes periods of consolidation. With the peso at extremely cheap levels, the market was ripe for a positive shock, which the central bank fortunately was able to deliver in the form of a "no more money printing" pledge.

Chart #4

Chart #4 shows the dollar value of Argentina's Merval (stock market), which has plunged by 57% since early this year. All the gains that accompanied the election of Macri and the subsequent massive capital inflows have been reversed. If Macri and his new central bank leadership team can stay the course, the upside potential of this struggling emerging market economy is HUGE.


Roy said...

"In dollar terms, the value of the Argentine stock market has plunged 57% since its January '18 high"

Isn't that remarkable, that it only dropped by 57%? What's the explanation for that?

Benjamin Cole said...

Best of luck to Argentina, and of course everybody everywhere.

BTW the Shanghai composite is down 50% from highs of two years ago. Should investors trust the Communist Party of China? Interesting question.

marcusbalbus said...

5 paces

Cameron Khajavi said...

Scott - I would argue tariffs have suppressed yields and if / when we get a resolution with China (I’m still hopeful as I believe you are) that the ten year makes a steady move toward your 4 to 5 range prediction - ironically I think tariff resolution might be a net negative for equities as treasuries become a competitive asset class again - I also don’t see how anyone would want to own euro zone debt or emerging markets debt when treasuries are yielding 4 to 5 percent - curious if you agree with my logic here? Thanks

WealthMony said...

Benj, I think the answer to your interesting question is "NO".

marcusbalbus said...

Pangloss. Suspend your writings. You are going to hurt someone. Even if it is only one, no matter the magnitude, you are obligated to do none harm. Your scribblings are perhaps therapeutic for your inner conflicts, but belong not in the forum of gullible souls. All humans want leadership. Very few humans are capable. Please think hard about this.

Scott Grannis said...

I haven't objected to marcusbalbus's polite warnings over the years, but I've routinely deleted his rude remarks. I'll let his recent warnings stand as a reminder that I can be wrong, just as he can be (and has been) wrong.

I've been optimistic for many years, and as a reader mentioned a month ago, "optimism leads to carelessness." I agree that optimism CAN lead to carelessness, as I have made that kind of mistake several times in my life, to my great regret.

I make no claim here to being able to "time" the market, because I know that can be treacherous. I do hope I can remain as objective as possible when analyzing current conditions. But I would not be surprised if I miss something important, or if some unexpected event changes everything.

I receive no compensation from this blog, and I have no agenda other than to use it as a way to discipline my own investing and to share the benefits, whatever they may be, of my 37 years' experience observing markets and economies around the world.

Howard Marks is a legendary and very smart investor, and I regularly read his periodic memos on market conditions and investing. I recommend following him:

Like me, Howard is skeptical of anyone's ability to successfully "time" the market. He argues in his latest memo that while current market conditions are not necessarily indicative of a top, they do warrant caution. In other words, now is not the time to take on an undue amount of risk. That doesn't mean you should sell everything, it just means that these days you should be very disciplined in your approach to risk. Wise words with which I agree, but unfortunately it's hard to know how this should apply to each individual. Such are the difficulties that all investors must deal with. No one has a lock on the truth, and everyone has his or her own appetite for risk.

Throughout my career I've always sought out the views of others, in particular those with whom I disagreed. I appreciate anyone who has a view on things that is based on reasoned analysis. Reasonable men can always disagree, and often a disagreement can prove enlightening.

DownSouth said...

Scott, your blog and your approach to investing - and people - are to be praised. I have valued your input since around 2009, and although I do not always agree with your opinions, I respect them, and more importantly, I respect you. May you live long and prosper!

Larry said...

Scott, I am glad you spoke about this silly person on your blogs. Marcusbalbus serves no purpose except to be a thorn in our sides. I hope you realize that most of us do not even read most of the gibberish posted by him.

You have been a true guide to my investments. I know no one knows the future, but you have given common sense information which is invaluable to most of us.

Thank you, Thank you, Thank you!

marcusbalbus said...


Matthew Grech said...

Scott: I'd like to echo the sentiments of Larry. I enjoy your blog, yes. But I do so primarily because you explain why you have the opinion you have. You say what you're watching and are consistent across time.

In contrast, marcusbalbus never provides support for his opinions. Never. He just lobs in little insults from time to time. He's especially insufferable when he spins a seemingly profound line (see above) but still refuses to support his opinion. I've even called him out, actually inviting him to explain himself. I'm just dying to see him apply his "precision of thinking" while providing the foundational support of his pure reasoning. Indeed, I've called him an intellectual coward for his shtick.

I would urge you, Scott, to not suffer fools like marcusbalbus. Actually, he's likely not a fool; he's a jerk. Try not to suffer them either. And thank you, again, for the work you do for the public - gratis, I might add.

marcusbalbus said...

scott: i need not reveal to you my thinking, especially since you insult me. my analysis is my work product.

i do not insult. i parry. the insults start on your and other's side of the intolerance indifference curve.

pangloss is entitled to him opinions, and to publish them widely. but he does so under the substantial consequence that fools abound and his pretensions of great investor thinking (cf comparing himself to howard marks) will indeed do some harm.

do none harm, speak none harm, think none harm.

pangloss forgets this in giving in to his vanity. this is a blog freely available to the abounding fools. he knows none of you nor me personally, nor does he stand in any position of agency, yet he spouts endless panglossian views as if they were mere private discussions over a beer.

i note also he censors, as he is entitled to. but its the refuge of the coward. redeem yourself pangloss and restore my prior note.

marcusbalbus said...

oops. pangloss. what was that about market timing?

Unknown said...

Hi Scott,

How do you chart the 5yr HY CDS spread vs the 5yr IG CDS spread on Bloomberg. I can't get it to go back as far as you do. Also, would love to have you speak at my firm if you're ever in LA and have interest in doing something like that. I was a PM at Western Asset in the NY office when you left and have missed hearing you speak since that time. Fortunately I've been able to keep up with your thoughts on your blog since then. You're the best economist in my opinion. Thank you for continuing to share your outlook with us all.

All the best,

Scott Grannis said...

Barry: Thanks for your comments. I miss giving presentations to PMs, and wouldn't mind doing it again. As for the CDS data, I see that Bloomberg data now only goes back about 6 years. My data originally came from Bloomberg, and it starts in 2007. I don't know why they no longer publish the old data.

Joe Walker said...

Hi Scott,

Thank you for writing, I enjoy reading your posts.

In general is a golden age in financial stocks dawning?

Or am I way off?

steve said...

Scott, there's really only one improvement I can think of for this blog; delete forever any comments from anti-pangloss.

His comments are "puerile".

marcusbalbus said...
This comment has been removed by a blog administrator.
Fred Flinstone said...

Looks like Marcus was right. While it's fine to be an optimist for one's long term health and happiness, it also pays to be careful and have enough cash to cover your expenses to ride out a typical bear market. The charts that Scott posts tell us nothing about the future.

Larry said...
This comment has been removed by the author.
Fred Flinstone said...


While I do not believe you have to insult to make a point (apparently you do), I think it pays to be skeptical. I enjoy reading this blog but there have been times when the optimism is a bit much. Go back to the first posts in 2008 and you will see that Scott called a bottom in the market after almost every piece of bad news resulted in a new low. We eventually did reach the bottom in March of 2009 but it obviously took a while to get there. Although it was right to advise people not to panic sell (and I didn't and have not through other corrections), I also believe it's wrong to dismiss the events and proclaim it will all be good again tomorrow when there might be evidence to the contrary.

steve said...

So now now every time we get a drawdown of 10% which is completely NORMAL the pessimists are correct? Such BS it sickens me. Seriously, grow a pair. The stock market is RISKY and over time tends to move higher. Can't stand the heat...

Larry said...

Fred, I did not want to insult you, I was attempting a little humor on the blog.
Apparently at your expense, so I do apologize.

marcusbalbus said...

pangloss: i offer as per se evidence of your obligations the postings of my dear friend steve, who we all know merits no ad hominem attack,

further, i was not aware of Fred's data about you, and while it bolsters what i have been saying since i started reading this blog, I didn't need it to know you were indulging in vanity.

i will say, though, your postings on the political economy are refreshing, and i have applauded them when you have posted them and i saw them.

Fred Flinstone said...


No worries. I have been practicing law for 32 years and have had to deal with my fair share of insults from opposing counsel. I do enjoy a good debate and appreciate the opposing viewpoints. Thanks.

marcusbalbus said...

pangloss: you allow "steve" to insult me, yet delete my parry. w;hy pangloss? is "puerile" an acceptable insult?

do you delte mine because you only want affirmation? are you stuart smalley?

let's see if this stands:

steve: your comments are not puerile, because that would be awarding them too much credit.