Ronan McMahon

Just over a decade ago Argentina spectacularly unraveled with the biggest default in history — $100 billion. Dollar deposits were converted to pesos. Then, overnight, the peg of one-to-one with the dollar was broken. The unpegged currency immediately devalued. Savings were wiped out. Banks were set alight and locals took to the streets in protest.

That crisis created the biggest buying opportunity of a decade. During the fire sales you could have picked up a historic, high-end property in Buenos Aires or a vineyard in Mendoza for a song.

Today, Argentina is back in a bind. There is a strong possibility of another crack-up within the next year. And then we’ll have the same opportunity we had a decade ago. The signs are all there. The streets of Buenos Aires have recently seen the return of the backstreet currency exchange.

According to the official exchange rate, which is subject to capital controls, 4.4 pesos buys you a dollar. But on the street people are happy to pay up to 6.7. Inflation runs at 25%. The purchasing power of an Argentine’s peso savings is going down by one-quarter each year.

The government claims inflation is 9.9% and has outlawed calculating or quoting any other inflation rate. Forty percent of dollar deposits have been withdrawn from Argentina since last October. Now there are capital controls. You need special permission to move your dollars overseas.

To take a foreign vacation, Argentines have to apply to a bureaucrat for permission and explain where they got the money for the trip. And there are rumors that it will be made illegal to talk about the existence of the shadow market exchange rate for dollars.

But a lot of Argentines’ dollars and pesos don’t reside in bank accounts. Property transactions typically take place in special rooms in lawyers’ offices, and they’re a cash deal. There’s that much distrust of banks. They are fine for day-to-day things like paying your electric bill. Not for your savings, though.

And these transactions more often than not take place in dollars…if you pay in dollars you could get 25% off the price of property. The government has outlawed this, making the buying and selling of real estate in dollars illegal. Just one more rule Argentines will find their way around.

By some reports, if an Argentine company complied with all the taxes and tariffs it faces, they would eat up more than the company’s pretax profits. So the shadow economy thrives. By necessity, it seems, rather than greed to pay less tax. Middle-class day-trippers take the ferry to Uruguay to put their savings in deposit boxes. The rich spend millions on condos in Punta del Este, Uruguay.

For Argentines, real estate is their bank. They understand inflation and expropriation from bank and pension accounts. If they have some spare cash, they’ll buy an apartment. Or a beach home across the Río de la Plata in Uruguay. Or a condo in Miami.

Now fewer Argentines are using local real estate as a hedge against inflation. New construction and permit applications have fallen off a cliff. They just want their cash out.

The government claims that the rate of outflow has slowed. But with every passing week, companies and individuals figure out new ways to get their cash out. For instance, companies buy financial instruments locally in pesos that they immediately resell in New York for dollars.

Argentines have seen it all before. When a government and a banking system take your life’s work with the stroke of a pen, you don’t forget. If you’re lucky enough to rebuild your savings, the next time you will be ready. And the harder the Argentine president, Cristina Kirchner, tries to keep assets in the country, the more they’ll be siphoned out.

Meantime, Argentina is all but frozen out of international debt markets. The government hasn’t reached a settlement with the group of creditors (known as the Paris Club) since its last default. So the country and the banking system desperately need these deposits to stay afloat.

But they continue to do incredibly dumb things. Two years ago President Kirchner seized private pension accounts. Now she is going to lend $4.4 billion of this money, at a rate of one-tenth the inflation rate, to new home buyers. A lottery will decide who gets the loans — not capacity to repay.

Argentina has major competitive advantages in beef production. But land under beef farming is contracting. Beef producers face large and complicated export tariffs and are forced to sell cheaply to the domestic market. Many have moved operations to Uruguay or switched to soya.

It’s one crackpot idea after another. And the cycle repeats. Expropriating your citizens’ savings or international companies like YPF (a subsidiary of Spanish oil company Repsol), which President Kirchner nationalized last April, might buy you some time. But not much. The writing is on the wall.

In the last crisis, the trigger event was Argentina’s massive default on its sovereign debt. This time around Argentina doesn’t face that scenario. Government spending has to be funded from printing presses, taxes, and expropriation of personal or company assets. It’s hard to see how the government can collect more taxes. The printing presses are already causing the inflation and the rush to backstreet currency-exchange brokers. There’s a limit to what you can expropriate.

This time around the trigger event for a full-scale crisis will be the country’s running out of hard currency. There will be no money to pay for imports. Argentina can make do without more Porsches and Gucci handbags, but the country will grind to a halt if industry and energy-producers can’t get their hands on crucial imports. The factories will shut. Things will have to get really bad before we’re in a “buy” situation. Pay attention if you turn on your TV and see news flashes of burning banks and of factories that don’t have hard currency to buy raw materials, locking out their workers. If you turn on your TV a second day and see similar reports, then book your flight. Your dollars will go a long way.

Comparisons between the high-end neighborhoods of Paris and Buenos Aires are correct. It’s a world-class capital with a wealth of cultural activities, fine dining, and shopping. Buy when the Argentine capital is in turmoil and you’ll be sitting on prime real estate in one of the world’s finest cities.

If you’ve ever dreamed of owning your own vineyard, I can think of no better place than Mendoza, Argentina’s most famous wine-producing region. Mendoza sits at the foot of the Andes, 600 miles west of Buenos Aires. Soil and climate are perfect here for wine production.

Argentina long held promise. In 1900 it was the world’s sixth-richest country — richer than the US. Immigrants flooded from Europe. The British came to build the railways. They brought along Irish and Italians. The Spanish came. What followed is text-book mismanagement. When it comes to a head again, we’ll have a full-blown crisis. And an opportunity to pounce once more.

Regards,

Ronan McMahon
for The Daily Reckoning

Ronan McMahon

A finance graduate, Ronan McMahon worked in the e-business consultancy and dot-com industries before joining International Living as Real Estate Marketing Director in January 2004. Ronan has been an active real estate investor since his early twenties and joining International Living gave him the opportunity to marry his personal and professional interests. Last year Ronan took up the position of Executive Director with Pathfinder. Pathfinder is International Living's preferred Real Estate advertising partner. Pathfinder scours the globe to find the most unique and value-oriented real estate opportunities.

Ronan also writes International Living's Real Estate Trend Alert and regularly contributes to International Living's print and online publications. International Real Estate investment is his beat. Ronan has travelled to 15 countries in the past 12 months alone following trends that could offer profit opportunities. Instinct, experience and an unrivalled black book of contacts give him direct access to the inside track to profit opportunities.

  • gman

    “an opportunity to pounce once more.”

    prepare to infest!

    just one problem though …

    “outlawed calculating or quoting any other inflation rate … capital controls … special permission … apply to a bureaucrat for permission and explain … all the taxes and tariffs … fallen off a cliff … a government and a banking system take your life’s work with the stroke of a pen … If you’re lucky enough … Argentina is all but frozen out of international debt markets … the country and the banking system desperately need these deposits to stay afloat … they continue to do incredibly dumb things … one crackpot idea after another … but the country will grind to a halt if industry and energy-producers can’t get their hands on crucial imports … The factories will shut … ”

    … you want to buy into THAT? what, you’re gonna waltz in, wave your dollars, and sit pretty while everyone else around your property is losing their income and losing their pension and the police are unpaid and the firemen are unpaid and the government is casting around for anything to confiscate? you think they’re all going to ignore YOU? you think you’re safe?

    do you even know these people exist?

  • Le Petomane

    If people were animals (as opposed to divine beings made in the image of God), you would be a vulture.

  • Travbot

    sitting on prime real estate in one of the world’s most socialist cities. FTFY

    Argentina is a socialist basketcase to the very core. It was on a trajectory to being a world power but threw it all away – repeatedly.
    It would not be worth holding prime property in Argentina as a local and if you’re a foreigner, expect “nationalisation”.

    The only time I would ever consider investing in Argentina would be if someone said, “we keep getting screwed by statists (socilist), so we are going to shoot every last one of them”.

  • et2cetera

    Well, I believe one must have one of the following if one is to follow the author’s advice:

    1) Know someone in authority (helps keep your property from being ‘nationalised’)
    2) Strong constitution or conversely, totally flippant about potential loss of money which brings us to
    3) Have loads of money to burn

    Sure, you may get a nice hacienda or viña, but if the neighbourhood is burning all around you, what makes you so sure you won’t be affected?

    Moreover, a foreign-owned property is susceptible to being targeted be either feckless politicians or opportunistic people.

    As a comparison, look at Detroit, there are some nice property still sitting around but why aren’t people buying them hand over fist?

    Buying a property is not like buying a fancy car or watch where you can move them wherever you like. Since it is fixed to one place, it needs a holistic understanding (like the surroundings and law of the land) to ensure that you get to enjoy the use or returns on the real estate.

    Sure, you may say in the long run, things will improve. However, there is a disturbing tendency for the Argentinian polity to repeat the worst lessons of economic history.

    And you want to throw money for their tuition lessons?

  • http://www.kyokushin4life.com FredInChina

    I think you are correct Mr McMahon, Argentina will be on sale once again soon…
    In 2004, following Mr Bonner’s articles and purchase of property in Argentina, I decided to go have a look for myself and spent 10 days in Buenos Aires; what I saw confirmed everything that Mr. Bonner was saying about the Paris of Southern America and how wonderful people the Argentines are.

    The above commenters are correct to underline that prudence, knowledge and understanding of the environment is necessary, but in my humble opinion wrong to dismiss the opportunity without taking a closer look.

    I’ll keep an eye on the news from Buenos Aires, and have a plan to hop on a plane when time comes within the next 24 months.

    Thanks for this good article.

  • http://www.kyokushin4life.com FredInChina

    I think you are correct Mr McMahon, Argentina will be on sale once again soon…
    In 2004, following Mr Bonner’s articles and purchase of property in Argentina, I decided to go have a look for myself and spent 10 days in Buenos Aires; what I saw confirmed everything that Mr. Bonner was saying about the Paris of Southern America and how wonderful people the Argentines are.

    The above commenters are correct to underline that prudence, knowledge and understanding of the environment is necessary, but in my humble opinion wrong to dismiss the opportunity without taking a closer look.

    I’ll keep an eye on the news from Buenos Aires, and have a plan to hop on a plane when time comes within the next 24 months.

    Thanks for this good article.

  • John Stone

    Pardon my bluntness, or do not pardon it, but… there is not a single previous comment from somebody who knows what they are talking about. If you want to take advantage of a situation like this, you move to the place AFTER THE BLOWUP IS OVER and things settle down. If they do not settle down, you do not move or invest.

    The vulture comment is only half true. Like the vulture you are taking advantage, but the vulture is damaging or eating the animal on the way out. Moving to or buying property in a foreign country is helpful to the locals because you are importing currency. With only a few exceptions, countries are happy to have US expats that have the wealth or foreign income to self fund.

  • The Old Coach

    Ask a man who lived in Argentina through the worst.

    www.http://ferfal.blogspot.com/

    He finally got managed to emigrate.

  • WaffenSS

    post a comment

  • gman

    “there is not a single previous comment from somebody who knows what they are talking about.”

    well that’s interesting, because my post was a quote of what the writer said followed by nothing but questions. so who doesn’t know what they’re talking about, him or me?

    “prudence, knowledge and understanding of the environment is necessary … I decided to go have a look for myself and spent 10 days in Buenos Aires”

    ten whole days?

    “it needs a holistic understanding”

    ten days should do it! but really, there’s nothing holistic about libertarianism or infestment.

  • Roland

    Why am I seeing so much hate for vultures? They serve an important purpose. They recycle the rotten and the nasty. If they were gone you’d be very sorry, count on it.

  • JMR Alan Greenspan

    How exactly do you know the “BLOW UP IS OVER”? When the mob stopped turning cars and setting buildings on fire? When the government stopped confiscating (er, nationalising) up and down the block?

    The “blow up” doesnt end in a day, but is rather a lenghty process that may take years to unfold. And prices get back to “normal” in the meantime, destroying any supposed buying opportunity. Investing in such a scenario is a tricky and extremely risky endeavor. Best left for those who can take huge losses (er, wipe outs) without breaking a sweat.

    Gman, I wonder, in all good faith, if you have such contempt for libertarianism and “infestment”, why are you such regular around this site?

    And whats wrong with vultures?? If I was walking around the jungle, I`d rather see a harmless group of vultures flying around, than a group of lions circling around. Yet the lion is the noble animal, king of the jungle…

    Investor dont break a country, their own stupid politics do.

  • Le Petomane

    Nothing wrong with vultures, sorry about that. I’m hoping to eventually swap a few gold coins for a catamaran myself.

  • http://cnp-keythai.com/Logo Logo

    Very sad to hear that. Argentina is one of the most popular country in the world because of their Football skills. I am also glad to hear hear that they were 6th richest country in the world in 1900. When current president were elected, I were hopeful that she would be able to take the country to the right direction. Now it seems she failed a lot.

    I wish all the best to them.

  • gman

    “Gman, I wonder, in all good faith, if you have such contempt for libertarianism and “infestment”, why are you such regular around this site?”

    because SOMEONE has to point out that libertarianism isn’t all so wonderful-special-wise-above-the-rest.

    but if one of the blog owners ask me to go away, I will. their blog, after all.

    “Nothing wrong with vultures”

    a vulture acting like a vulture is not repulsive. a man acting like a vulture, when he could be so much more, is.

  • RobertB

    Probably one of the most frequent questions I get is ‘Why didn’t you retire to the country?”; a variant is ‘Why didn’t you retire to some other country?”. My answer is that I live downtown in a city, where I can walk to get anything I want within a block or two, and many hospitals are from 5 to 15 minutes away.
    Even in this country, to move out to the country is to be in isolation; just to buy food or even just a quart of milk means you have to drive miles. If we’re talking social turmoil, then I wouldn’t want to be isolated in the middle of nowhere as a perfect target for roaming bandits. Being known in my downtown neighborhood is probably the best protection, if in fact there is really any protection at all. And no, I don’t want to grow vegetables, milk cows and stock up for a shootout at the OK Corral, one that I would probably lose anyway: there’s many of them and one of me.
    As far as moving to another country is concerned, first there’s the language, then you’re a gringo and you’re never going to be anything but a gringo amongst people poverty-stricken all their lives. Some financial advisors want you to spend 250-600K for a lot in the outback and then put up a house on it. It’s easier and cheaper to do it at home, (or just don’t move!) and you know the culture. Just travelling abroad and fighting off the thieves and beggars all day every day in third-world countries and even in many European countries gives you a good education.
    In Canada, we complain about the occasional panhandler – just imagine fighting off hordes of them all day!

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