How Milei’s Surprise Win in Argentina Defied the Market

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2:15Welcome to Prof G Markets. I'm Ed Elson. It is October 28th. Let's check in on yesterday's market vitals. The major indices closed at record highs on hopes of a US-China trade deal. The S &P ended the day above 6 ,800 for the first time ever. Meanwhile, gold dipped below 4 ,000. And finally, Qualcomm shares popped 11 % after the company announced new AI chips that will compete with NVIDIA. Okay, what else is happening? Argentina President Javier Millet led his party to victory in Sunday's midterm elections. His party doubled their representation in Congress and won nearly 41 % of the national vote.

3:02President Trump congratulated Millet on social media, saying, quote, he's making us all look good. The peso surged 9 % against the US dollar, its biggest one-day gain in over 20 years. Argentinian stocks and bonds also rallied. This win should help Millet push through his economic agenda over his first two years in office. Millais has slashed spending, unified exchange rates, cut energy subsidies, and laid off tens of thousands of public sector workers. And that will all likely continue because the recent$40 billion bailout from the US is tied to the condition that he makes further progress on those reforms.

3:41Still, Millais has his work cut out for him. Inflation, though down, remains above 130 percent. Unemployment is rising and real wages have fallen over 20 percent since 2023. The election turnout was 68 percent, the lowest in a national election in decades. And even after the win, his party does lack a full majority. Here to explain what this all means for Argentina, we are speaking with Oliver Stunkel, Associate Professor at FGV's School of International Relations in Brazil. Oliver, thank you very much for joining us on the show. Thanks for having me. So we want to hear about this election. Just at a very basic level, walk us through the election results.

4:24What does this mean for Javier Millet and what does this mean for Argentina going forward? So those were the midterms. half of the House of Representatives and a third of the Senate were up for voting and renewal and it has been a surprisingly good result for Javier Milley the self-declared anarcho-capitalist who's been in power for two years and the elections were sort of a referendum on his policies he's a libertarian so his key argument has been that it's necessary to radically reduce public spending, to reduce inflation, to finally stabilize Argentina after decades of instability. And he did bring down inflation.

5:16However, the economy is still reeling from his policies of dramatically reducing public spending. So the economy is not growing. But he is saying that he still needs some time for the economy to finally recover that this is the medicine which initially has a negative impact, but which will eventually put Argentina's economy on a stable footing. And the voters have, despite the negative short-term impacts, given him a vote of confidence and said that basically signaled that they would like him to continue the liberalizing reforms. Over the next two years, he now has enough votes to override vetoes in Congress, which were employed during the past years against his decrees when he tried to liberalize the economy.

6:10So I think we can expect him to continue like that for now. Now, he still needs to deliver. So basically, voters have given him a lifeline and we'll now see how this experiment will unfold. Yeah, help us with the context there. I mean, from my understanding, Argentina's been in the news a lot recently. We had this other election, this local election in Buenos Aires, which, again, us, we Americans, weren't very aware of what was happening. But what we know is that it wasn't good for Millet. You saw this implosion in the bond markets, massive collapse in the peso, which was what led the U.S. to come in and intervene and give them that$20 billion.

6:56So this is quite a reversal. As just an observer, it seemed as though Millais was in trouble. Now apparently he isn't. Help us with the context there. Absolutely. So he had a pretty bad result in municipal elections in the province of Buenos Aires, which was traditionally more Peronist, which has been supportive of the traditionally populist, economically populist policies. And it was seen as a dull weather election for yesterday's election. So expectations were low. And the Trump administration made a big bet. I mean, they basically, you know, the U.S. government promised a rescue package, a lot of financial support, seemed to somehow condition that on a good result for Malay.

7:43Yes. And that good result now came to pass. I think that the U.S. certainly did have a role in that because a lot of voters are aware of the fact that the belay's policies haven't yet stabilized the Argentine economy. A lot of investors are still very concerned about the capacity to pay its debt. Argentina is one of the countries that has most frequently defaulted on its debt. So that lifeline, obviously, from the world largest economy does play a role. So it's a vote of confidence. And in that sense, it's also a geopolitical win for Trump because a lot of countries in Latin America are moving closer to China or are sort of multi-aligning, preserving ties to the United States, but also seeking strong ties to China.

8:35And Malay kind of stands out. He actually has actively sought to move closer to the United States. And in that sense, the U.S. government has now kind of offered a reward, so to say, for that strategy. And I think in many ways, a successful government in Argentina will certainly inspire similar figures in other electoral cycles in the coming months. So basically, Flamie Le has now gained another two years to reform Argentina's economy. But I think, I mean, were markets overly pessimistic? Perhaps a bit. I mean, last week I did speak to several investors and everybody expected MLA to not gain sufficient votes.

9:20So there was a sense of, you know, maybe investors will abandon Argentina. And I think that may have influenced voter behavior because they said, you know, they're actually concerned about MLA loss. Right. And said, you know, let's give him that vote of confidence in order to help stabilize the economy. I'd also like to get your reactions to the$20 billion, which may become$40 billion bailout. I call it a bailout because I think it is a bailout. they were in trouble and the U.S. came in and they intervened to try to help Argentina. There are debates over whether it was to help Argentina or whether it was to help Treasury Secretary Scott Besson's buddies who are invested in Argentina.

10:02We don't need to have that debate. But what does it say about the Millais agenda and the libertarian agenda, which was supposed to be about reducing spending, shock therapy, let's get rid of our addiction to spending in the short term to fix our problems. Let's figure out long-term solutions. Let's get this inflation thing under control. And then suddenly, they actually need an emergency wire transfer of$40 billion to prevent financial ruin, essentially. Right. Yeah. So, I mean, the first part of the question is, some progress has been made in reducing public spending. I mean, you had a massive reduction of, let's say, ministries, for example.

10:48Yeah. You did have tens of thousands of public workers which have been let go. But at the same time, these kinds of adjustments are inherently painful. and you know argentina's economy has been uh has had low uh indices of uh of productivity for a long time you need initially at least investor confidence uh and of course uh argentina's history uh you know generates a lot of caution among investors a lot of people got their fingers you know they got burnt over the past decades betting on argentina and then argentina uh defaulted it's still uh there's no other country in the world that owes more money to the international monetary fund than Argentina.

11:31So in that sense, it continues to be sort of a high-risk investment. And it may still very well fail. So this recent result is good news from a lay. He can continue to implement his reforms. He'd actually, I think, even accelerate reforms because he didn't have a governing coalition in Congress. He still needs a party which is sort of center-right tied to former President Macri. So I expect him to advance faster now than during the past two years. But there's no guarantee. I mean, the country has had for a long time a very bloated public sector, which attracted a lot of talent. This is a problem in several Latin American countries where the smartest people seek to enter government, where they make the greatest contribution to economic growth.

12:29So these are structural issues, of course. There's a problem of still excessive bureaucracy and excessive dependence on exporting commodities, issues with education, with infrastructure. So these things take time, and it's a big question mark, particularly now that we sort of see increasing state intervention in the economy around the world. You know, the United States, actually. You have the U.S. government purchasing stakes of strategic companies. You see protectionist trends. You see sort of a geopoliticization of the world economy. So it's going to be really interesting to see whether this kind of libertarian approach is still viable in this age of great power competition where everything seems to be politicized, right?

13:28I mean, it's not like Trump promotes free trade or China or any other major power. We're kind of in this completely different age where very few political leaders embrace the kind of ideology we're seeing in Argentina. All right, Oliver Stunkel, Associate Professor at FGV's School of International Relations in Brazil. Oliver, we really appreciate your time. It'll be very interesting to see how this all unfolds in Argentina. Thank you. Thank you very much. After the break, a look at the latest inflation report. If you're enjoying the show, give Profit G Markets a follow.

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15:52We're back with Prof G Markets. After a 10-day shutdown delay, the Consumer Price Index is in. Prices rose 3 % from a year earlier, the highest since January. Still, the result was under the 3.1 % estimate and was up 0.1 % from August. Major stock indices rose to record highs on the news. And the report all but seals the deal for a rate cut at the Fed's meeting, which takes place tomorrow. Here to explain this report and what it means for the economy, we are speaking with Robert Armstrong, U.S. financial commentator for the Financial Times and author of the Unhedged newsletter. Rob, great to have you back on Prof.

16:32G Markets. Great to be back. So we want to get your reactions to this inflation print, this CPI. We're up to 3%. We were at 2.3 earlier in the year. Now we're at 3. All that's on my mind is the tariffs and the fact that this is a reflection of tariff impact. But I want to get your angle, your initial reactions. Well, better is what I would say, but better with an asterisk next to it. So both on the good side, the series I like to look at are durable goods, which tends to be a series, as you mentioned, that's very much affected by import tariffs. So, you know, cars, refrigerators, everything but kind of clothes and food.

17:18And then at core services, services without energy. And both of those dip down a little bit. And that's welcome news. We're still about a percentage point above the Fed's target. But at least we're trending in the last month or two slowly in the right direction. But I haven't gotten you to the asterisk yet. Yeah, let's hear the asterisk. The asterisk is there were two very big items that went down a lot, sharply down in September. And that was on the services side, that was housing, rent, and owner's equivalent rent. And on the good side, it was new and used cars. And these are big series that have a lot of weighting in the index, but they're lumpy.

18:08and they move around a lot month to month. Also on the housing side, it's a very lagging number. It tells you a little bit more about the world six months ago than it tells you about the world today. But both of those were low. And so it could be that we sort of rolled the dice and got a lumpy month to the low side on those two things. And if you take those two out, we're still pretty warm. We're still well above 3%. if you take out those two. Now, it's not fair to just take out whatever you want. You can't, you know, go month by month and say, well, this month we're not going to count housing, this month we're not going to count autos.

18:48What this is just telling you is that the numbers are lumpy and we have to be a little bit careful about reading too much into September. There are some items that are tariff sensitive that we are seeing rising in price. I think probably the best example would be coffee, which is up almost 20 % year over year. I look at what's happening with inflation, the fact that we went from 2.3, the month of Liberation Day, it went up to 2.4, it kept going up, it went up to 2.7, then it went up to 2.9, now we're up to 3%. Is it in doubt at all that tariffs are passing through? I don't think so. I mean, we know the tariffs are being charged at the border to the tune of many tens of billions every month.

19:40And we know who's paying those tariffs as of right now. It's mostly the importers and the wholesalers who are doing the importing. But we know they're passing a little bit, maybe a third or a quarter of the tariffs onto the consumer. So that's what shows up in this report, not the full impact of tariffs, but just the bit that the companies aren't eating. So one of the big questions for the next six months or so is, are companies going to stop eating as much of the tariffs as they're going to eat? In which case, you could see goods inflation, you know, which is not even half of the picture, but it's a significant amount of the picture, total inflation.

20:24You could see goods inflation heat up in the next month, six months, year. And that's something I'm going to be watching really closely. We have no September jobs report. We'll have no October jobs report. This is obviously all very important in terms of the Fed's interest rate decision, which is happening, going to be happening tomorrow. I mean, I'll tell you, Ed, I think the whole picture is one where I think market commentary and the market itself has gotten a bit ahead of itself in terms of how many rate cuts we're going to get. We're a solid percentage point above the Fed's target on inflation.

21:03If you look at things like the Goldman Sachs index of financial conditions, financial conditions are very loose. Markets are extremely hot. And indeed, the economy, with the very important exception of the jobs reports, and we talked a little bit about those on the show in the past, looks pretty hot too. So, you know, I don't think any rational person would look carefully at the numbers we're seeing right now and say, inflation is beaten, the economy is slowing down, we have a percentage point or more of cuts coming. I just don't see the case. And yet we're looking at a, I think, near 100 % certainty of a rate cut.

21:48And the market appears to be unanimous. And in a lot of the reporting I was seeing, which surprised me, I agree. I think the commentary got itself in a bit of a spin because the commentary says, this seals the deal. Now that we're at 3 % inflation, hooray, now we're going to get a rate cut. It's like, hold on. We were at 2.3. I thought we were trying to get to two. We're at three now. And that is something that is sort of in the background on everyone's mind, I think, which is, does 2 % now mean the number starts with a two? Right. Do you know what I mean? Right. It's not 2%. Like 2.7 % counts as two now.

22:32Round up a number. You know? And I don't really know. I don't really know what the Fed's position on that is. And look, I sympathize with the people on the Monetary Policy Committee or the Federal Open Market Committee who are more dovish because the job situation is a little weird. You know, you're looking at a very low level of job creation every month. You're reading a lot of announcements about layoffs. And the fact that the rest of the indicators we have of the economy look pretty strong other than that jobs number, that's only so reassuring. I mean, the Fed's mandate is employment, right?

23:18The Fed's mandate is not economic growth, it's employment. So they've got to take the jobs numbers, which are a little spooky. They have to take them seriously. But everything else that I can see is saying the economy's warm, financial conditions are loose, and inflation is too hot for comfort. What would be your predictions for the next several months or so when it comes to inflation? I mean, I can just tell you where I stand on this. Prices are going up, tariffs beginning to pass through. We're starting to see it in the data, and we're cutting rates. I think it's only going to get worse from here.

23:54I just want to sit here if you agree. I agree with you on the good side. I think there's good reasons to think that there will be more tariff pass through to consumer inflation. We're already seeing it in producer inflation. It's going to move towards consumer inflation. The services side is the real question. Wage growth is still pretty good. But again, if you take housing out, services inflation, you know, haircuts, legal services, health insurance, all that kind of stuff, that stuff's pretty hot too. Right. So I think, but I just don't know. I feel less confident about what that's going to do.

24:36If the jobs number are telling us something about underlying weakness in the economy and we continue to see very low job creation, it makes sense that service inflation would come in a little bit. Because that stuff is really driven by wages and wages is driven by how tight the job market is. Yeah. We're also seeing a lot of sentiment reports coming out. UMichigan sentiment down 22 % from a year earlier. Trump is just increasingly polling badly when it comes to his handling of tariffs on the economy. I mean, I know that I struggle with these sentiment reports because I find them so political just by nature.

25:20But are you looking at these sentiment reports? Are they playing into your view of the economy? I look at them. The problem is, and I've written about this a little bit in recent weeks, is they're less and less predictive. That the sentiment has been bad for a long time. And in the last couple of years, it just hasn't been a great guide to what markets are going to do, what employers are going to do. I think there is no question that the Liberation Day fiasco put employers in a mood to wait and see. I don't think there's any question that people like to hire when the future looks predictable. And we haven't had a lot of that in policymaking.

26:13But I think we might be getting over that a little bit. The shock and horror of that absolutely bizarre news conference is receding a little bit into the past. And hopefully there's been some lessons learned there. And sentiment will slowly recover. Okay. Just while we have you, we only get to speak every so often. What else is on your mind? Anything happening in the markets right now that you're paying particular attention to that you're finding quite significant? It's fun watching gold wobble here. Because gold was an interesting case where it started out as a fundamentally backed story. So a year or two ago, it was like central banks were buying more gold as a kind of way to diversify their portfolios.

27:07Gold was cheap. The dollar weakened a little bit. You know, all this stuff was getting behind gold. But then the trade kind of took on a life of its own and became a kind of FOMO momentum retail trade. And in the last couple of days, it's kind of been like, whoa, let's slow down here a little bit. And I'll be fascinated to see what that does. And, you know, it's been a great case of when you have a price that's going up, the narratives will fall in place. Like, you know, gold went past$3 ,000 up to$4 ,000. It was like, let's just make up stories about what's driving the gold price. But what was driving the gold price was the gold price.

27:49Exactly. There's nothing else to it. It's a classic case of FOMO. And it's so interesting how the price increases in gold. We did see in the reporting, oh, it's because the central banks are buying gold. But that only explained a fraction of the price increase. And explained it like two years ago. The banks have actually backed off now, right? Yes. Because if you're a central bank, you have an allocation to gold, and it's a percentage allocation of your portfolio. Price of gold goes up 50%. Suddenly, you're over your allocation. You have too much gold. Yes. Right? Exactly. So it's a very funny story.

28:29And of course, we have 10. The other thing I would mention is just, we have big tech earnings rolling in this week. Absolutely. Oh, we always kind of hold our breath because this is a third of the market by value or whatever it is now. And we have five of the big ones reporting this week. And we're going to be waiting, of course, with a bated breath for all of that. Any thoughts on what you think we can expect the next week or so? I mean, any time I've been skeptical of these businesses' ability to just keep growing despite their incredible size, I've been wrong. So I'm just not going to step in front of that steamroller again.

29:10I mean, these businesses are just their ability to grow. And of course, everyone's worried about their spending right now. But the fact is they've got the money. Sales are growing. So, I mean, these things are an incredible story. And I think chances are good, they'll just report another good quarter. It's the tail risk you worry about. The small percentage chance that one of these guys says, ah, we've been doing some thinking and maybe we have to change our strategy with regard to these data centers a little bit. And then it's going to be game on. But I think the probability of that is low, but it's just going to be a high consequence event if the dice come up that way.