Buenos Aires 5.12.24

Recoleta Neighborhood

In this 10^th anniversary of the Conquest, as much as I’d love to drop everything and go do it all over again, the responsibilities of my rapidly approaching middle age make that an untenable prospect. However, life being as random as it is, occasionally I get sent back for work to places that have meant something to me.

Today I sit again in Buenos Aires, which remains my favorite big city on earth. The lament of wasted opportunity hasn’t changed much since my last trip here with Ben nine years ago, but there has been significant progress in the “right” direction. I often wonder whether Javier Milei will be looked at as a historical aberration in the long descent into madness known as South American politics. Even before the Bolivar the Liberator breathed his last, any semblance of unity of the former Spanish colonies had fallen apart. His personal sacrifice of fortune, comfort and station served not as an aspirational goal for the jefes and neo-gentry of the new world, but as a cautionary tale that made Shel Silverstein’s The Giving Tree read like Mein Kampf.Bolivar’s sacrifice showed the local powers that came after the colonizers the Nietzschean ideal of power over virtue. This grew into the neo-Marxism of the haves and the have nots, which saw political power not into a shared asset of the commonwealth, but a cudgel to extract the most for one’s supporters to the detriment of the opposition.

But as is often the case, I digress.

Today the exchange rate for Argentine Pesos to the Dollar is almost exactly 1000:1. My last trip here, it was somewhere between 9-10. While Americans have lost their minds over annual inflation of 6%, the Argentines are cheering the drop in inflation to 20% a month as if Messi had just scored 6 goals in a Copa Final.

I’m sure that Frankl or Maslow has discussed in much better reasoned arguments than mine, but the ability of humans to adapt to nearly any set of conditions, whether Inuit in the Arctic Circle or Caligula’s childhood subservience to the man who destroyed his family, never ceases to amaze me. Whereas I look at the price of a capital good and for most of my life assumed that it would be the same price or possibly cheaper in any 12 month period, in an entrenched inflationary environment, that is laughably impossible. However, the middle class Argentines have, via the invisible hand of the market, built workarounds to a currency that is not a store of value. Whether it is buying bitcoin, or utilizing the blue rate to sell Pesos for dollars above the “announced” exchange rate or buying stocks in pesos to sell for dollars, this is as natural as going to a grocery store for Americans. It is just the cost of doing life in Argentina.

As I asked my Argentine friend Vicky, whose roots in Argentina started with her ancestors fleeing pogroms in Russia in the 1880s, how does one make any sort of a contract with inflation as high and variable as in Argentina. She told me that a lease for an apartment is signed for 24 month periods, with a renegotiation on monthly rent every three months based on an announced inflation number. Her day job as a Chief of Staff for a logistics firm renegotiates prices monthly. As a sales guy, I just can’t imagine trying to build new business while monthly engaging in negotiations with my current clients based on a  number that…well as a jaded US economist I never believe any number coming out of the Bureau of Labor Statistics on either payrolls or inflation numbers, and I can’t imagine that incentives for Argentine bureaucrats are very different.

If anything, this only reinforces Adam Smith’s invisible hand argument. People will always act in their perceived self interest (this is not me subscribing to the rational actor theory of economics…As Benny always said, “don’t try to apply your logic to someone else’s situation, you’ll do your head in.”)

As the force of gravity ensures that water will always find its level, markets will find a way to emerge against all artificial constraints. In this age where “trust the science” has become more of a religious dogma than a reflection of the constant struggle of science to disprove any hypothesis, the futility of fighting against the free market seems to be a Sisyphean battle that global political leaders seem willing to engage in.

The entire concept of arbitrage is contra to value creation. While arbitrage (the simultaneous buying and selling of an asset in different markets to capture the “spread”) does end up creating value for an economy overall by diminishing rent seeking, it does not, by itself, create any tangible good or service. It is merely collapsing a market abnormality for the profit of the arbitrageur.

Arbitrage is created by asymmetries. These can be natural, such as informational arbitrage (the Rothschild network informing them of the 6^th Coalition’s victory over Napoleon at Waterloo allowed them to make a fortune on the appreciation of English bonds before the rest of the market knew) but often times in a world with nearly frictionless information flows, arbitrage is found in the corners of regulation and government interference in free markets. If gasoline is subsidized in Argentina but not in Uruguay, it can be profitably bought in Buenos Aires and sold in Montevideo.  The profit of the arbitrageur is expropriated by the subsidizing Argentines.

Mankind’s ability to adapt means that no artificial system created by man cannot be subverted by man, any more than gravity can be subverted. There is an argument that the monopoly on force kept by governments can keep an artificial system in place, but history shows us that whether physical barriers, trade tariffs, or any other system is merely a dam waiting to crack.

Argentina’s current president, Javier Milei, is trying to shock a system with a cold turkey return to a free market. Like chemotherapy, the hope is that the cure takes before it kills the rest of the economy, and nearly a century of economic mismanagement means that there is quite the cancer to kill. By collapsing the informal exchange rate (the “blue rate”) to the level of the stated exchange rate, Argentina’s economy is forced to acknowledge the inflation that the official stats have long ignored, but eventually, this destruction of rent seeking by the state will ensure the stability that capital allocation requires for major investments.

In the short run, a lot of people will be worse off, but that sacrifice is necessary to build a foundation for long term economic growth.

I don’t know how the chainsaw wielding libertarian will fare. Half measures from a previous president, Macri, were unsuccessful as they sought to cause less immediate economic pain without producing the impact necessary for the population to start to see the “green shoots” of economic recovery. Just like trying to see results from 20 minutes of weightlifting, economic shock therapy takes some time.

Humans’ ability to adapt means that the absolute condition is less important than the delta, or change. The animal spirits that Lord Keynes speaks of are unleashed when things are better today than yesterday, regardless of how bad yesterday was relative to last week.

There’s an incredible feeling to be sitting in one of the 21^st century’s grandest economic, political and sociological experiments. He is 4 months in, but has seen a budget surplus and a significant reduction in the rate of inflation. The long knives of the populist left are waiting for a chance to pounce, feeding their supporters on the saccharine lies of “the new system punishes YOU unnecessarily.”

I’m anxious to see the results, as an interested observer with limited skin in the game.

As Benny said nine years ago… “Goodcountry Argentina!”