Argentina: Investable, or Not Yet?

0:00People are going to lose their minds. This is a moment in history unlike anything humanity has gone through. It's a very different world for humans to come. Take a step back and see the broad picture, which is the way all these technologies are interlinked. Because this is all about exponentiality, and humans can't think in exponential terms. How consequential do you want to say machine intelligence is? It's almost certainly as consequential as writing. How long did writing take to disseminate through the human population? You know, hundreds, thousands of years. And we're dealing with it now on a scale of months.

0:33But in this kind of world, you're compounding 100 % growth every year, and the numbers become astronomical. AI is going to spot patterns in the world that were just completely invisible to us. Even if you think that the AI and the robots are your demise, you might as well bloody invest in them and make some money out of it. If not, you're just going to be angry man shaking your fists at the clouds.

1:09All right. Hello, everyone. I'm Jacob Shapiro. I'm a partner at Cognitive Investments and really looking forward to this conversation about a country that has always been geopolitically confounding to me. It should be the wealthiest, arguably most powerful country in South America, and yet it continues to be a basket case in a dumpster fire. There was a former Argentine minister who I wrote down the quote. He said that Argentina is a world champion of missing opportunities. So we're going to talk about that today and the upcoming election. Rather than introduce you gentlemen, how about I just let you guys both introduce yourselves, starting with Jared, then we'll go to Ignacio.

1:40Yeah, I'm Jared Dillian. I'm editor of the Daily Dirtnap newsletter that I've been publishing for the last 15 years. I wouldn't say that I'm an expert on Argentina, but I've traded a couple of election cycles pretty successfully going back to 2014. I'm always taking an interest in it and I visited before and had a great time. So those are my bona fides. Well, my name is Ignacio Asis. I'm from Argentina. I'm currently in Argentina. I'm professor at International Relations and Political Sciences at Australia University in Argentina, and I'm also an M &E development policy analyst in Latin America, currently working for a regional development bank.

2:28Very nice meeting you, seeing you. All right. Well, nice to be with you guys. And Ignacio is in downtown Buenos Aires, so there was some noise beforehand as we were getting ready. So if you hear noise, you're getting the authentic Argentine experience here. It's nothing to do with Real Vision or mics or anything like that. I thought I would start off by asking Ignacio to help frame things for us? Because Jared mentioned trading a couple cycles, and I think people have taken interest in Argentina for a while. But my sense, Ignacio, is that this election is different than all the others, and that something has fundamentally broken and changed in Argentina.

3:01And whether Masa wins or whether Millet wins, it seems like the old political categories, the old political alliances, it seems like everything is out the window. Am I overstating things here or on the ground, from your perspective, is it that big of a stepwise change? No, no. Actually, you are not. You are being pretty precise. To my understanding, this is a new idea of elections for all of us here in Argentina. Something that hasn't happened in Argentina for a long, long time, for many people, has never happened. And it's also very odd in Latin American terms as well, because as you said, and we can deep on all of this, there are new players, there are new rules, there is a lot of uncertainty.

3:50So, yeah, brand new experience for many citizens in here. And I guess, how would you explain? So, I mean, I've got a couple of stats here just to underscore just how bad things are economically. We've got inflation at 143 percent, interest rates around 133 percent. Net foreign exchange reserves, I mean, they got as far as negative six billion. I think they've improved a little bit since then. The economy is projected to shrink 2.8 percent. On the black market, the peso is over 1 ,000 on the dollar. I think the government peg right now is 350. And yet one of the contenders for it to be the next leader is the economy minister who's overseeing this economy.

4:32So can you explain why Sergio Massa seems to have such staying power? Because I would think in any other election, somebody who oversaw that kind of economic record would be hiding in shame, not insisting that they should leave the country. Well, all of that has a weight in the current election as well. But probably, and that's amusing for you and for all of us, is that probably not as heavy as everyone of us would think, right? I mean, he has been the Minister of Economy for the last year and couple of months. and in this last year, but even before that happened as well, all the economic indicators have been getting worse and worse, right?

5:16And we can ask some more, right? I mean, for me, the big one, the one that I always mention is that every six out of ten kids, children in Argentina are poor, right? And again, every month we have a new record of inflation. Currently today, specifically today, we have started a devaluation of slow motion, slow paced devaluation of our currency. So things are not getting better economically, of course, not socially. But still, we have the main contender is the Minister of Economy, as you said. And why is that? Because on the other side, the other contender, it's a representative of the hard right in Argentina.

6:07Currently, the only person who has the power to move the people who are considered themselves as libertarians, economic libertarians, which doesn't necessarily mean the same in Argentina than in the U.S. So it's a campaign, it's an election, the one that we are having next Sunday, in which the two main contenders have a really big, complicated background and context. Yeah. Before I bring Jared in here, just one more question to set the scene for us. So, I mean, Javier Mille is almost a punchline. I don't even have to make jokes. If I just start describing factors of him, it's going to get laughs and things like that.

6:54But what I was most surprised about was, so Patricia Bullrich, who came in third in the first round of the presidential election, she came out and supported him and told her supporters to go out and vote for him in this next election. And she doesn't represent the far right. She represents the center right. And you start when you start poking around, you look at polls, suddenly they look a lot closer than they did a couple of weeks ago. You get reports about farmers sick of the way the Argentine government has always tried to control the market and all these other things and how they just want to vote for change.

7:23Well, first of all, just how do you sum up Millet is not a punchline. What does he actually represent? And do you think he has a chance? Because I know when you and I talked a couple of weeks ago, you didn't think he had a chance. And the polls have since surged quite a bit. So the big picture is that we have had more than 16 years of indicators that you mentioned getting worse and worse, right? So for a big part of the population, even more for young people, many citizens think that they are losing the hope on the usual suspects, right? on the politicians with a lot of history that has always been there, right?

8:14Between colors. So Javier Millet is an outsider of the politics. And that's a key aspect of him coming so big and so loud because he represents a lot of people who is tired of the economic situation getting worse, the social situation getting worse, all the aspects in their life getting worse each day, right? So Javier Millet has that. And a lot of people support him because he's the outsider. And you know how it works with outsider. We have seen it in Brazil. We have seen it in the US. We have seen it in many other Latin American and the Caribbean countries. Also Europe, the outsiders always have a lot to offer because they can promise a lot of things easily, but they also represent the hope for change.

9:12That's always powerful. That's always powerful for the regular citizen, right? Yeah. Jared, you mentioned you've traded Argentina successfully since 2014. So I guess my first question to you, and also feel free to pick at anything Ignacio just said, or if he has interesting things for you as you build your approach to these coming elections, But how have you traded it before? And are you approaching it any differently? Or do these political changes not actually affect the way you're thinking about it from that point of view? Well, 2014-15 was a long time ago, but I started to get the sense – you started to see some movement in the Argentine banks leading up to that election.

9:53And gosh, I really wish I could remember the details, but when McCree was elected, that was a home run trade for me like that. I killed it. It was terrific. Fast forwarding to today, I have positions in Argentine stocks, which I am not selling ahead of the election because this is the way I look at it. Argentina has already experienced massive change. And regardless of who wins the election, I think things are going to be different going forward. In particular, I think that dollarization is inevitable no matter who becomes president. I don't think Malay has to be president for dollarization to happen.

10:40I think it will happen under MASA eventually. It's unrealistic to expect a 10 ,000 % appreciation in the peso. The peso is a dysfunctional currency. They have to get rid of it. It's the only way out. It's checkmate. So I do think dollarization is in the future. And I do think good things are in the future. I also think it's worth pointing out, you know, Masa, despite being a Peronist, is not a far left Peronist. He's pretty centrist. And you had two right wing candidates, a center right and a far right candidate and a centrist left candidate. Like this is really the first election that I've seen in Argentina where there were really no terrible options.

11:23There was no Christina. There was no, you know, there was no far left person like that. Like there were really no terrible options. So, you know, going into Sunday, I think it's going to be kind of a coin toss. You know, in the primary, Masa got 36 percent. Malay got 30 percent. if Malay picks up two thirds of Bullrich's vote, he will win. She endorsed him. McCree endorsed him. He's picked up a lot of endorsements. Lula has endorsed Masa, right? But if he picks up two thirds of her votes and maybe pulls over some other votes, I think he has a realistic chance of winning. Neither candidate will have a mandate, right?

12:07A lot of people say if Malay wins, he will not have a mandate. He will not be able to accomplish anything. Well, the same is also true for Masa. The same is also true for Masa. Like, it'll be complicated afterwards. But I've talked to them. Oh, we're just getting started with that. And I mean, you mentioned Lula. I also know AMLO up in Mexico is also another corner heard from. And I believe he has also said very not nice things about Millet, which is, I mean, this is where ideology, I have no idea where the left begins or the right starts. It all feels like I'm walking around in circles. Hey, everyone, we're going to take a quick break right now to hear a word from our partners.

12:43We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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13:52Ignacio, feel free to, do you have anything you want to pick at with what Jared just said? I saw you. No, actually, Jared said a lot of very interesting stuff. So, for example, talking about endorsements, Mujica, former Uruguay's president, also endorsed MASA. I would say that most former presidents in Latin America have endorsed MASA. some some some some some some some from Colombia Spain Brazil they have endorsed Millay but they are the fewer right so that's one point I think you're right there they what you said that was pretty impressive because it's not that clear for people outside Argentina I said about candidates being from the right side of the line, both on the left, which I guess is what ended up giving you the idea that there are no bad candidates.

14:55I know I understand where you are, but that doesn't happen in Argentina for Argentinian voters. And you can see that by looking at the no votes, no shows, and white vote in the last elections. there are a lot of people who doesn't want to vote for any of these candidates. So I wouldn't say that there are not bad candidates, that there is something unusual for most citizens here that a lot of people in the center doesn't feel represented. But what I was amused by here is what you said about being from the right, right? Because that's a good, great point. I mean, Masa is supported by Peronism and many left-wing parties, but traditionally his ideas are not traditionally from the left, right?

15:49Which that's another point that you mentioned, Jacob, before. That's pretty, pretty unusual in Argentina. You have always had in the last 16, 20, 30 years, always a representative from left-wing Peronism or more central left Peronism, which is not that clear today. Mamasad doesn't represent that side. He's supported by that side. He's supported by that party. But traditionally, his ideas doesn't fit perfectly on the left-wing kind of thought. And that's why he has received endorsements from AMLO, from Mujica, and at the same time from the markets. Jared, I want to play a little devil's advocate with you on the notion that dollarization is inevitable.

16:43And Ignacio, I hope you'll weigh in too, because this gentleman just called your country's currency basically worthless. But I wanted to push on the dollarization is inevitable, because let me see if I can construct a counterfactual. So one of the reasons Argentina's net foreign exchange reserves went so low is because they've had a terrible drought there over the last couple of years. They had that triple dip La Nina, which meant that their grain exports were way down. And then, you know, the weather is already resolving. Argentina is probably going to export agricultural commodities like it has in the past and is going to have great demand for them.

17:14Argentina is a shale gas story about to explode here. I mean, they are sitting on a huge amount of shale gas and they're finally getting that into production. So Argentina will probably be a net hydrocarbon exporter going forward. They're also one of the only countries in the world that really have access to lithium that you can use and mine. And we know lithium is in batteries, this, that and the other thing. So I guess the pushback, Jared, would be, well, if you can get some sane center-right policy and get everybody to buy in, and you can get some sources of foreign exchange going and you can keep borrowing from over here, and maybe you take some yuan from the Chinese and get the Brazilians to continue deferring some payments, like maybe you can try and cobble something back together.

17:52So tell me why that's a completely unrealistic scenario and why you think dollarization is inevitable. I think that's realistic in the short term. I mean, you can put some Band-Aids on it and get inflation down to 60 % or 40 % or 30%. But if you want to get inflation down to 3%, which is what US inflation is, then you have to dollarize. There's no other way around it. The other thing I want to point out is, you know, I think this is super interesting. So if history, if I remember history correctly, Peronism started in the 50s or 60s. And, you know, the country has basically been Peronist for the last 60 years with a couple of stretches in between with Minem and a couple other people, McCree.

18:44but really you had to get to the point where there was so much economic pain that the people of Argentina were willing to try what is essentially Ron Paul right like they were willing to try Ron Paul in Argentina and the United States is a capitalist country and we were willing to try Ron Paul right like they had to get to the point emotionally psychologically psychologically where the alternative was so bad that they were willing to try anything they were willing to try a guy who names his dogs after a austrian economist right like you know and it's i i think i think it's a fascinating study in social psychology right and you know and like i said like regardless of the outcome of this election you know i think i think that argentina is on a better path.

19:38I said, I am not selling my stocks. I'm willing to hold them for the next five or 10 years. I think dollarization will happen. And I, you know, if you look what happens in Ecuador after dollarization, like you had 12 % GDP growth for like five years, you know, you'll have massive growth. So I think, I think it's inevitable. You said you're not selling. Are you adding? I'm not adding. I'm not adding. So there might be further to go. Ignacio, how do you feel about two Americans talking optimistically about your country? No, no, it doesn't actually change a lot. But for me, it's also fascinating that you, knowing the market so well, are willing to say that lunarization is inevitable.

20:27So when you describe Peronism and some part of history, that's pretty accurate. But you have also, because of that, you need to also remember that we have been here before, at least twice in the last almost 40 years. We have an hyperinflation in 1989. We have same social indicators in 2001. And the main parties are still there, right? So that's one difference. We have been already there on the streets saying everyone should live. We need new politicians. We need new parties. And here we are, right? But that explains Millet and all the craziness you've been talking about, which, as Jacob said, we can talk a little bit more about that.

21:20But because of that, also because of that, I don't see the polarization happening if MASA wins. Because Peronism and a lot of Argentinian society doesn't care so much about growth and GDP as we care about inequalities and distribution. And Peronism is all about distribution, as always being about social justice. So if the polarization, as it happened in Ecuador, or turns to growth with more inequality, Chilean indicators, I don't know how many people would sign that. Yeah, right. And if we can see the future, I don't know how many voters can sign that. And I don't think MASA would do that if that's the forecast, right?

22:12Because of the social pain that will take, that will happen. And for Peronism and in our equation, the social aspect is big. And as you said, Peronism has been there since the 50s, right? Actually, 48. And so Peronism, it's all around our country. It's all around our bureaucracy. It's all around our powers in our chambers, in our executive power. So you have to deal with that. But we have someone who would like to dollarize in Argentina needs to create a big, massive conscience, which has never been there. And that's why I think even if Millet tries to do that, he will find a lot of backlash there, right?

23:03I mean, it will take a lot of effort and a lot of hopefully not blood, literally, but a lot of sweat, I would say. I'm glad you said that, Ignacio, because the question I'm getting most often from from clients who are looking to me for political risk insights is, OK, like we agree with Jared's narrative that maybe not that much is going to change. The political leaders come and go that neither party or neither leader is going to have a Congress or a chamber of deputies that they can go to and depend on for anything reliable in terms of legislation. But if you did have melee, that there would be so much instability that you could see protests are up in the street.

23:41Could we get a Peruvian style, you know, I mean, that escalated eventually up into a coup. Could we get a Chilean style, you know, protests in the street that lead to new constitution and things like that? Like how how bad do you think things could get and go either direction? I mean, I'm thinking that the instability is more pronounced if Millet wins tomorrow and he realizes he can't just eliminate the central bank with a wave of his hand. But are you concerned about sort of political instability on that level being coming out with the result of the election? So we have political instability organized and unorganized.

24:16I would say that it's for sure we have organized political instability. the unions, syndicates, political parties, social movements will be on the streets. We are used to that. Actually, one of them, one union leader was saying yesterday that if Millet wins, he will be on the street doing a, hanging himself and how do you call it? He will stop eating until the end. He said something like that, right? No matter what. I think organized instability will happen, for sure, at least for a while, probably for long. Unorganized, we would see. I don't see the Chilean kind of instability happening. On the other side, I don't see if Millet wins, which is also a concern I read on international newspapers and media.

25:12I don't see Mila's party being on the streets claiming for fraud or denying the results of the elections, as probably happened in the U.S. or in Brazil, right? I think there will be some of that on media, on social media mostly. But if there is something about that on the street, it will be very small. I don't see he doesn't have the power to be there on the streets with the army or with his followers in the Congress as it happened in Brazil. Remember that Trump was leaving, Bolsonaro was leaving when all of that happened. Milet doesn't have institutional power, right? He is the outsider. Right.

26:03He has a chainsaw and some TikTok. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

26:17Can I jump in here for a second? Please, please. You know, Malay is not the market's preferred candidate at all. Like, in the last poll leading up to the primary, when Malay was in the lead, stocks went down quite a bit. Like, stocks went down quite a bit. Malay is not the market's preferred candidate. Bullrich was, right? So this is why, like, this is a very long-term investment for me. Like, let's say, you know, if Malay wins on Sunday, like, I'm not expecting my positions to be up 10 or 20%. I'm not expecting that at all. What I'm expecting is that the reforms will take place over the course of years, which will lead to growth, which will lead to higher equity prices.

27:06But I think there's sort of a misconception that because Malay is a libertarian and he's an Austrian, that he is the candidate that the markets want. That's absolutely not the case because markets like stability and he brings instability. That's a great point, if you let me take out of that, Jacob. Just to say that that's a big point because I think Jared has done his homework for sure. And from the outside, if you only read media, you said, OK, this is the candidate that markets would want, Millet. And exactly as Jared said, he's the representative of the far right, but he's pro-unstability, right?

27:52is going to become social instability, at least in the short term. So I want to emphasize that, thinking about probably the viewers or the listeners of this show. Massa is the favorite of the market, exactly as Jared said. And you can see it, again, giving some framework. In the past on the previous election, Millet won. The following day, the dollar went up very badly. And the second in the general elections, Masa took the first place. There was not a big moment. Most people here knew that, right? I mean, he doesn't say it, but the market is supporting him. Jared, you mentioned, so if Mille wins, you're not expecting a pop in your positions.