- Francois Quesnay
"There were at least one million people marching in the streets," said Alejandro.
"No," said Juan, "it was not anywhere close to that number. I don't think there were more than 600,000."
When I had driven past the center of town earlier that afternoon, around five, there were only a few thousand. "Where's the rest of the demonstration?" I asked.
"Oh," Enrique replied, "this is Argentina. Everything starts later here. People won't really start gathering till eight." Small pockets of people had started gathering on every street corner, banging their pots and gathering their neighbors as they made their way to the center of town. A trickle soon became a large stream and then a massive river. All across Argentina, demonstrations were held protesting the policies of President Cristina Kirchner. The local press proclaimed the crowd in Buenos Aires to be 700,000+, protesting the increased authoritarianism and policies that are clearly hurting the economy.
"As rich as an Argentine" was a saying at the beginning of the last century. And indeed Argentina was one of the richest countries in the world in the early 1900s. It has been a long, slow decay since that time. There have been many upheavals and sea changes. Once, in the early 1990s, Argentina saw hyperinflation, destroying the value of savings. Prices rose by a factor of 20 billion in Argentina from 1975 to 1991. Inflation was eventually contained by fixing the exchange rate, but by 2000 there was serious economic disruption, with bank runs and the eventual collapse of the dollar peg.
Some argue that the economic and political crisis was worse than before the peg was put in place. By the end of 2002, the economy had contracted by 20% since 1998. Over the course of two years, output fell by more than 15%, the Argentine peso lost three-quarters of its value, and registered unemployment exceeded 25%. Income poverty in Argentina grew from an already high 35.4% in October 2001 to a peak of 54.3% in October 2002. To say things were volatile is an understatement: Argentina had five presidents in two weeks.
Chaos? The destruction of wealth? No doubt. But as I sat down in a very fashionable restaurant in the historic and beautiful Recoleta district, in the midst of one of the largest demonstrations in Argentine history, the contrast of the recent past with the wealth I saw around me was thought-provoking. I thought back to my first visit to Argentina, just after their period of hyperinflation in 1992. It's hard not to notice the impressive buildings that have been erected since then. And I had just come from Salta province, where agriculture holds sway and the commodity price boom is in full force.
For the last two weeks I've been in Brazil, Uruguay, and Argentina. In this week's letter I offer a few impressions gathered on this trip, as we meditate on what French physiocrats have to tell us about true wealth.
Central Bank Insurance
"If you want to enjoy life, go to Buenos Aires. If you want to do business, go to Sao Paulo," the saying goes. It is hard to get an impression of a country by going to a city of 20 million people. It is like visiting New York City and thinking you can understand the United States. But I never fail to enjoy myself in Brazil. While it is clearly a Latin culture, the country has become serious about the business of business. I spoke to a large gathering of financial professionals (the local CFA society). Gustavo Franco, the former Brazilian Central Bank President who orchestrated the Plano Real, which helped save the country from hyperinflation in 1993, spoke before me in a very formal economic presentation. Inflation was running 30% per month in Brazil when his plan was implemented. Here was a man who truly understood the power of a central bank committed to stable monetary policy. I felt like the comic relief act trying to follow him, but his presentation left me with a thought.
(Sidebar: There were translators for me, as I know absolutely no Portuguese. And while there were headsets for those who wanted to hear my presentation in Portuguese, I did not see anyone using them. My unofficial survey of the CFA group left me with the impression that the members were fluent in at least three languages each. Serious indeed.)
Both Franco and the CFA society were thinking about monetary policy. And not just Brazilian monetary policy. They were looking around the world, and the massive quantitative easing underway was clearly causing concern. Currency valuations in a country where commodities play such an important role as they do in Brazil can mean the difference between boom and bust. The fact that the central banks of some of their largest customers are seemingly going wild does not make for a stable environment.
I have often said that I do not consider gold as an investment but rather as insurance. But the question is, insurance against what? As I spoke to that audience with their particular concerns, I realized that gold is central bank insurance. Central bankers are quite content to talk about stable monetary conditions, but history has shown all many too times that, under pressure, monetary stability yields to political exigency.
A Monument for Cristina
I went from Sao Paolo to Montevideo, Uruguay. As I reported last week, Uruguay is booming. Money is pouring into the country from all over the world but especially from Argentina. The country has an essentially open border with Brazil, too. Goods, people, and services travel freely both ways. You can get US dollars as well as Uruguayan pesos from the ATMs.
Around 85% of Uruguay's land is used for agriculture (77% for pasture, 8% for cultivation, and 9% for forestry), which generates 60% of exports. Cattle and sheep rearing is the main activity. As one might expect, Uruguay has the highest annual consumption of red meat per person in the world - almost 170 pounds (76kgs)! Soybeans, wheat, rice, barley, corn, and sunflower are the most important arable crops, with soybeans the main export. (Hat tip, Vulpes Investment)
The country is a financial center, as it has a well-established rule of law and economic free zones where business can be done tax-free as long as it does not produce income in Uruguay. A large number of international corporations have their Latin American headquarters in Uruguay. From a seriously challenged economic condition ten years ago, the country has grown to full employment and an increasingly diversified economy. Real estate is booming, and not just in agricultural land. Punta del Este is the playground of South America, and one tower after another of vacation condominiums seems to be rising on the beautiful beaches. Condominiums are being built and sold in Montevideo at a rapid clip.
Interestingly, in general the building is being done without debt. Large projects are financed with equity. Clearly, in the current culture there will never be a debt supercycle to blow up, at least not one generated by the private sector. And for now the government is behaving. An interesting sign of the current prosperity is that 50% of children now go to private schools. Evidently, one of the first things that parents do when they get extra income is to put their kids in private schools.
In talking with financial professionals and businessmen in Uruguay, it was clear that there is a large influx of Argentinean money and people, and has been for years. That trend has only increased since the re-election of Cristina Kirchner.
"We should erect a monument to Cristina," said my partner Enrique Fynn. "Her policies have created an investment boom in Uruguay."
"Well," said an Argentinean dinner companion rather sadly, "at least her policies have been good for one country."
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