Notes From Underground: Don’t Cry for Me Argentina

It is far too early in the situation circling the emerging market debt to make a prognosis. The financial media is filled with stories about the rising U.S. dollar coupled with a FEDERAL RESERVE that is rising short-term rates while simultaneously enacting quantitative tightening (QT). This is certainly having an effect upon global liquidity but at this point I would caution about the CONTAGION and fallout from this process, especially as the ECB and BOJ still are adding liquidity while standing ready to increase their QE if economic growth begins to falter. My phone and internet haven been inundated with questions about the Argentinian central bank raising short term rates to 40 percent. The Argentinians are in the middle of a reform process that is causing major disruptions in their economy, in addition to a severe drought that is having a major impact on the economy, especially for one relying on the agricultural sector.

The Argentinian government is taking a page out of the French playbook that was crafted by Bank of France President Jean Claude Trichet in the early 1990s. The French tried to defend the D-MARK/FRENCH FRANC peg right after the Bank of England was forced to devalue the POUND and break the pound’s tie to the German mark. There were massive speculative efforts to force a French franc devaluation. President Trichet had a program, le Fort Franc, in which overnight lending rates were raised in very dramatic fashion in an effort to make speculating against the franc a very expensive endeavor. Trichet prevailed and the D-mark/franc held its targeted band.

Instead of selling foreign currency to prop up the peso, the Bank of Argentina will try to defend the peso by elevating the cost of speculating against the Argentine currency. The fallout will be tougher for the Brazilian real and Mexican peso because emerging market traders will sell these currencies as LIQUID PROXIES as the Argentine peso is not as liquid and will be an expensive short. Brazil and Mexico are both having political problems as election uncertainties plague Mexico and Brazil is dealing with a government struggling to reform itself.

Then throw in the Russian problems. And factor in Turkish political and economic issues and Trump’s push for leveraging tariffs into global trade negotiations, it is a potential toxic brew. Yet the equity markets in the developed economies sustained large rallies on Friday. There will be more to follow about the growing uncertainties causing undertows in a sea of complacency.

The markets are not panicking as the defense of a currency by raising rates is not an unusual event. Remember that Argentinian inflation is close to 30% so rates this high are an attempt to bring inflation down to President Macri’s target of 15%. The problem is whether the Bank of Argentina has the foreign reserves to meet its dollar-denominated debt payments. As I recall, Greece had yields of 40% several years ago.

The question for the world: Is the Argentine situation manageable? The bigger question to entertain: Are we experiencing a dollar funding crisis? I think the near-term answer is no, but we will watch for the indicators of such a crisis.



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14 Responses to “Notes From Underground: Don’t Cry for Me Argentina”

  1. Chris Says:

    Since you mentioned Bernard Connolly’s favourite friend, Trichet, I will say it for you: buy The Rotten Heart Of Europe!

    • yraharris Says:

      Chris–thank you and all orders have to go directly to me at the Rotten heart of

      • Michael DeRenzo Says:

        Yra – after years of hearing you mention the Rotten Heart of Europe (most recently on your podcast with Nomi Prins), I feel I must read it! What is the full email to place an order?

      • yraharris Says:

        Michael–yes but I want people to wait until May 20th to order when I will have access to the books then I am going to do a final push to sell as many as I can—so be patient but that is the correct site

  2. Pierre Chapuis Says:

    Yra, I thought you might find this piece from Russell Napier interesting. You can fast forward to the end of the talk, 1:06. Russell talks about a Franco-German initiative to have open public debates on the future constitution of Europe. To decide: who’s in “fast” speed Europe, who’s in “second” speed Europe and who’s in “third” speed Europe. Thoughts?

    • yraharris Says:

      Pierre–thank you for the post–I will listen as this issue is heating up –read tomorrow’s Wolfgang Munchau in the FT and also the recent Joschka Fischer Project Syndicate piece–I am mentally composing a fresh blog on Europe—Merkel has been a weak leader and it is causing this issue to come to a head so to speak

    • David Richards (@djwrichards) Says:

      I think it’s just an excellent article from Yra.

      Mr Napier also recently wrote this per Grant’s (the free discussion):
      “it appears from the Bank for International Settlements data that U.S. banks will have little exposure to this EM crisis but European banks will. This has profound impacts for the future of the euro”.

      But an excellent piece by Yra that counters the growing financial media hysteria that an EM debt crisis beckons. Stocks’ strong upward momentum also belie that an EM debt crisis is close at hand. Watch your technical levels for a possible significant break.

  3. Rob Syp Says:

    In your writing’s about the SNB printing money to purchase equities and with Friday’s news of Warren Buffett in his AAPL purchase/position where does the SNB rank in their ownership of AAPL? The top 5 institutional holders on record of APPL are VANGUARD, BLACKROCK, STATE ST, BERSHIRE and FMR LLC.

    Would the SNB own APPL and other stocks through one of the institutions listed above, other institutions or how do they?

    • David Richards (@djwrichards) Says:

      Central banks would usually hold assets directly such as in share certificate form or direct registration. Otherwise they’re at risk of a 3rd party default and losing everything, a plausible event in case of major financial stress. Similarly, central banks increasingly prefer to be custodians of their own gold and are (wisely) repatriating it.

  4. Richard H Papp Says:

    Thanks Pierre for the R. Napier presentation. Mr. Napier has a text of 300 pages which would be helpful to those who are relatively new to Yra and Markets in general. The fourth edition (2016) of his “Anatomy of the Bear- Lessons From Wall Street’s Four Great Bottoms” would be of value. Thanks again folks for all your sharing.

  5. Chicken Says:

    BACML nailed the top with their GGAL upgrade, 🙂

  6. kevinwaspi Says:

    “The question for the world: Is the Argentine situation manageable? The bigger question to entertain: Are we experiencing a dollar funding crisis? I think the near-term answer is no, but we will watch for the indicators of such a crisis.”
    Yra, excellent post (as usual) and intriguing questions to end it with.
    On thoughts of Argentina, I tend to feel they will be less likely to survive their version of “le Fort Franc” than even was Greece more recently. I do not see Mario Draghi saying ““Within our mandate, the ECB is ready to do whatever it takes to preserve the Argentine peso”
    Just a thought….

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