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Argentina and the calm after (and before) the storm (from IKN480, dated August 5th)

It seems like weeks in the past, but in fact it was only eight days ago that the following piece, “Argentina and the calm after (and before) the storm” was published by your humble scribe in IKN480, dated August 5th. And here we are, lo and behold, just eight days on the Peso (ARS) is plumbing new lows, down 8.6% from the time of the note. 
I didn’t expect Argentina to start falling apart again quite this
quickly, but the falling apart thing was and still is a given and this evening I’m reading of all sorts of bizarre out of the country too, the pro-Macri local media (i.e. nearly all the main channels) trying desperately to lipstick the pig of a situation. The latest piece of wonderment is how the government plans to phase out the LEBAC (short term Peso bonds, currently paying an official 45% annual interest rate and close to 60% on the secondary market) by the end of the year with just a wave of the magic wand and “the deployment of reserves” (i.e. throwing good Dollars after bad local paper). It’s 1998 all over again, quite remarkable to see this country willingly commit financial suicide on such a regular basis and not learn a jot from its own history.
Anyway, have a read at what subscribers saw two issues ago.


Argentina and the calm after (and before) the storm

I ran a running commentary on the
Argentina Peso (ARS) as it did its collapsing show earlier this year, so for
the sake of balance it’s only right to note that since it peaked at just under
29 to the US Dollars a few weeks ago, the government and its emergency policies
(that include turning the dollar spigot on and raising Peso interest rates sky
high) have stemmed the bleeding. The Peso has traded for the last month in a
reasonably tight band of just over 27 to just under 28, with 28.24 marked this
weekend.

The calm will not last. For one
thing, the government is mopping up the Peso liquidity by offering 49% annual
interest on its short-term paper and if anyone reading this thinks that is
sustainable they are wasting their money by subscribing to a financial
publication. At some point the interest rate must drop (and not just by a point
or three, there’s no virtuous circle that begins this high) and to do that, the
real economy needs to improve. Unfortunately the reality is the exact opposite
and a quick trawl through headlines on the very useful AgendAR website (12) shows
supermarket sales down 2% year-over-year (YoY), retail sales down 4% YoY,
industrial production down 8.1%, and the Central Bank forecasting a GDP of
negative 0.3% for 2018. To put that last one into context, the December the
Organisation for Economic Co-operation and Development (OECD) was forecasting
+3.2% for the country and in May downgraded its forecast to 2.0%. As recently
as June, Argentina’s
FinMin Dujovne said that growth would be +1.2% this year. News of large scale
job losses is becoming common, with the auto industry now being hit (despite
that cheap Peso making production competitive for foreign markets).

Meanwhile, on the other side of the
equation the Central Bank now forecasts 31.8% annual inflation for the country.
We’ve just seen electricity prices rise again by 30% (August 1st, the hikes are
non-stop) and fuel prices are about to rise between 4% and 8%, depending on the
type of hydrocarbon. That list continues as well, so when you combine both
sides of the coin you come to one simple conclusion; Stagflation.

Argentina is in a deep financial
mess and just because it’s not made any headlines recently, it doesn’t mean
that the crisis is over. This weekend the Argentina airwaves are filled with
apparent smoking gun evidence of notebooks from the Kirchner era of Argentina
that document that government’s corruption and while they may or may not be
true (I think they’re the real deal, the CFK people are screaming that they’re
fake), the noise will blow over. Be clear that even if CFK and her buddies end
up in jail (unlikely CFK, possible to probable others) once the dust has
settled Argentina
will still have all its economic pain in front of it. In 2016, Macri told them
the turning point would be in 2017.
In late 2017 he and his government promised things would
be better in 2018 (and backed by all the world’s friendly financial bodies who
all predicted GDP growth…all wrong). It’s now Q3 of 2018 and Argentina is in recession, with no
clear path out. Time is running out for Macri and don’t think for a second that
CFK is his only political enemy. Avoid this country until further notice.

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