Big Boom Coming in Argentina

Argentina could go up 5,000%, all told.

I know that sounds preposterous. What market goes up 5,000%, especially if it’s a third world, bankrupt, socialist hellhole like Argentina?

Well, back in the early 2000s, another South American drug-infested, corrupt, bankrupt, crime-ridden nation did even better.

Here is a major bank in Colombia: Bancolombia S.A. It went from $2 to $70 in a decade.

You wouldn’t mind if you had put $1,000 into that one, would you?

Heck no.

The same opportunity is now presenting itself in Argentina. This large country at the tip of South America is blessed with abundant natural resources, highly fertile land, and a well-educated population. In the first three decades of the last century, it out-scored Australia and Canada in terms of total income and per-capita income. In fact, in 1910, Argentina had the tenth-best economy on earth.

You Chose Poorly

Then came the Great Depression, and it all fell apart. The economy nosedived, and the country made bad choice after bad choice. A military junta was followed by Perón, socialist corruption, and populist governments, which were followed by Gandhi-style isolationist trading regimes and more corruption.

But in December, all that changed.

A new leader, a free-market capitalist, has miraculously just been elected. In just one month, he has turned the tide.

Behold: Mauricio Macri, the first democratically elected non-radical or Peronist president since 1916.

Macri also studied at the Columbia Business School in New York.  

The WSJ says:

Revolution: One week into office, Argentina’s new president has slashed taxes, ripped out capital controls and restored the peso to its natural level. It takes guts, but this blaze of reforms has worked wherever it’s been tried.

The markets certainly think it will, with some stocks rising as much as 5% and the overall market not panicking in the wake of President Mauricio Macri’s announcement that capital controls are now a thing of the past. The move triggered a wrenching 27% devaluation of Argentine currency, causing it to fall from 9.8 pesos to the U.S. dollar to 13.9.

Economists such as Johns Hopkins University’s Steve Hanke have pointed out in the past that free-market reforms tend to have the best results when they are executed quickly, with conviction. That’s precisely the path Macri is taking in his lightning-bolt moves.

Death of Socialism

The politically driven switch from socialist policies to free-market capitalism is the greatest generator of wealth the world has ever seen. In the 20 years after the Soviet Union collapsed, more than 2 billion people were pulled out of dollar-a-day poverty.

You saw boom times when President Regan took over from Carter. When Thatcher won in the U.K. It happened when Harper took over in Canada and Lula took over in Brazil.

If you want a booming economy and a subsequent booming stock market, you cut import and export taxes, slash regulations and red tape, break up monopolies, drive out corruption, and by all means, kill off price fixing.

It’s a simple formula. It has been tried successfully from New Zealand to South Korea to Indonesia. It works.

Good Bank

Right now in Argentina, there are two main ways to play the coming boom. The first one is through agricultural exports. The country is the breadbasket of South America and is well known for its bounty in beef, among other things. The end of export tariffs, coupled with China’s growing dependence on meat, should see a boom in this sector over the next six months.

The second market segment is the banks. More than 14 years ago, the country defaulted on some international loans.

This means that Argentina’s banks were cut off from the international debt markets. Furthermore, due to the price fixing of the currency, the banks had no incentive to lend. The upshot of all of this is that Argentina’s banks are some of the most capitalized banks in the world.  

And Argentina has some of the lowest consumer debt levels. There is plenty of upside.

These banks have already started to price in the capitalist revolution: 

Banco Macro S.A.

Two Risks

There are two main risks regarding the Argentina revival story. The first is that the peso is falling. (As an aside, it is a good idea to flip currency charts over in your head. Like golf, the bigger number is bad.)

Argentine Peso:

The big drop you saw in December was when Macri cut the peso loose and it immediately dropped to the black market price. It is now seeking its own level. This is called price discovery. It is a good thing.

At some point over the next few months, inflation will reverse and this currency will stabilize. That will be the time to buy.

Political Risk

The second risk is political. Those that held power before are a large, powerful block, and as we know from government union fights in California, Chicago, and elsewhere, people don’t like to give up their entitlements. As they say, “Give a man a fish, and he’ll riot for more fish.”

That said, Macri won a popular election and is doing all the right things.

Next week I’ll tell you about the default settlement with the New York vulture funds, the return of foreign direct investment, the incredible value, and the right way you can profit from the great Argentina revival.

All the best,

Christian DeHaemer

Check us out on YouTube!

Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.