CWS Market Review – November 21, 2023
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Milei Wins
Earlier this year, I wrote about the stunning presidential primary victory of libertarian economist Javier Milei. This was a major shock, not only to the political establishment, but also to world currency markets. The Argentine Fed responded by raising interest rates 21% to 118%.
Now Milei has been elected president and he has an opportunity to implement his agenda.
The point I want to make wasn’t about the particulars of Argentinian politics but about the interplay of financial markets and government policy. This is an important aspect that’s often overlooked by investors and policy makers.
Investors tend to see the economy as a chessboard and the politicians as those who move the pieces around. In many ways, the truth is the precise opposite. The economy calls the tune, and the politicians adjust their policies.
James Carville famously said, “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” Boy, is that right.
Indeed, there many times when investors can serve as the veto of last resort. In the end, currency markets get a vote.
Here’s part of what I wrote:
I should explain that Milei isn’t exactly your typical presidential candidate. Milei isn’t merely a small-government conservative; he’s a full-throated anarcho-capitalist. Two of his dogs are named Milton and Murray, in honor of Friedman and Rothbard.
I don’t want to give you the impression that Milei is somehow odd or unusual. For example, he wants to legalize the selling of organs and children. He also refuses to comb his hair. Additionally, he’s a tantric sex instructor. After that, things frankly start to get a little odd.
Now he’s president. Yes, Milei is zany but that’s part of his charm. The real story is that the economy is Argentina is a disaster. Inflation is running at 138%, and the country is on the brink of its sixth recession in the last decade.
People are frustrated and they want something done, even if it’s dramatic. In the U.S., we were alarmed about 9% inflation. Here’s a look at the inflation rate in Argentina.
This means prices double in less than a year.
One of Milei’s bolder plans is “dollarization.” He wants to ditch the Argentine peso and use the U.S. dollar. Other countries like Panama and Ecuador have tried this, but no one as big as Argentina has given it a shot.
The Argentine peso is governed by strict capital controls. There’s the official rate which is around 350 pesos to the dollar; then there’s the real rate. It never seems to occur to policymakers that their currency can be, and is, traded outside their country. The unofficial price for the peso is about one-third the official price.
For a land of such beauty and promise, Argentina seems to go from one self-induced crisis to the next. Forty percent of the people live in poverty. Yet it’s that frustration that’s driving Milei’s popularity. Milei said he wants to cut taxes and implement large spending cuts.
Did I mention that he cloned his dog? Yep, he did that too.
I’m not sure that the people of Argentina have embraced Milei’s strong views. Perhaps they have, but the truth is that things are so bad that voters are willing to give politicians outside the mainstream a hearing. Of course, we’ve had similar outcomes in our elections.
The problem with replacing the peso with the dollar is that Argentina simply doesn’t have enough dollars. They need outside investors and lots of them. Argentina could go to the IMF, but they’re already the IMF’s largest borrower.
Bond markets have been notoriously troublesome for some politicians. In 1981, Francois Mitterrand won a stunning Socialist victory. A lot of French money quickly found a new home in New York. Eventually, Mitterrand reversed course on his more radical policies.
Liz Truss faced a similar crisis last year, leading her to resign after just seven weeks as U.K. Prime Minister.
A Milei presidency could have a major impact on global commodity markets. Argentina is famous for its beef, but it’s also the world’s fastest-growing lithium producer. Milei has promised to take the axe to farm taxes. That could make Argentina’s agricultural sector more competitive. The country also has major deposits of copper and shale oil.
For now, the markets love Milei. In yesterday’s trading, shares of Argentina-based stocks soared on U.S. markets. There are 15 Argentine stocks that trade in the U.S. Most of the companies are financial or energy stocks, with a few utilities. Shares of Telecom Argentina (TEO) were up 22% yesterday, and they gained another 10% today. YPF Sociedad Anónima (YPF), a large energy company, jumped 40% yesterday. Check out the recent performance of the Argentina ETF (ARGT):
I’m skeptical Milei will get much of his program passed. Bureaucracies are hard to change. Still, it’s another indication that voters aren’t happy with high inflation and corruption. In the end, Milei will be able to go as far as the bond and currency markets let him.
The Fed Says It’s Not Looking to Cut Rates
This afternoon, the Federal Reserve released the minutes from its most-recent FOMC meeting (October 31 to November 1). Today’s minutes show that the Fed is in no hurry to cut rates. While inflation has been much better behaved, it’s still above the Fed’s target rate of 2%.
The Fed is not fully convinced that the battle against inflation has been won. That’s probably correct. During the 1970s, inflation came back again and again, worse each time. The Fed wants to avoid that.
The Fed is saying that policy should remain “restrictive” until it’s clear that inflation is headed back to 2%.
From today’s minutes:
In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time.
All participants agreed that the Committee was in a position to proceed carefully and that policy decisions at every meeting would continue to be based on the totality of incoming information and its implications for the economic outlook as well as the balance of risks.
Participants noted that further tightening of monetary policy would be appropriate if incoming information indicated that progress toward the Committee’s inflation objective was insufficient.
Translated from Fedspeak, this is simply the Fed trying to sound tough. That’s quite different from making an actual tough-minded policy decision.
The markets continue to believe strongly that the Fed is done hiking rates. Odds of a rate hike at the December FOMC meeting are currently at 5%. For March, traders see a 28% chance of a Fed cut.
That’s interesting because at his last news conference, Jerome Powell said the Fed isn’t even talking about rate cuts. For May, the rate-cut odds rise to 59%, and by Election Day, traders expect to see three rate cuts.
We’re now witnessing a growing gap between what the Fed is saying, and what the public believes. When in doubt, I have greater confidence in the market’s opinion.
That’s all for now. I’ll have more for you in the next issue of CWS Market Review.
– Eddy
P.S. If you want more info on our ETF, you can check out the ETF’s website.
Posted by Eddy Elfenbein on November 21st, 2023 at 6:13 pm
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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