Disappearing on the Pampas

The average cab driver in Buenos Aires knows more about financial crises than Trichet, Brown and Paulson put together. His training comes neither from Keynes nor Smith. And what the typical Argentine has learned, the English and the Americans are about to discover for themselves. Bill Bonner explains…

Last week, at the annual convention of the nation’s mortgage bankers in San Francisco, protestors used bullhorns to heckle attendees; they demanded a moratorium on foreclosures.

Meanwhile, south of the Rio Plata, a mob formed in Buenos Aires too. Their gripe was that the government of Christina Fernandez de Kirschner was grabbing their pension money. ‘No way,’ replied the queen of the pampas. We are just going to "rescue" it from the wicked capitalists. Like a Doberman rescuing a hot dog, the Argentina government will swallow $26 billion worth of private pension funds. The federales say they are taking the money into protective custody. It will just "disappear," say protesters.

The signal on the flag here unfurling is that, compared to the Argentines, the American mob is a bunch of naïve chiselers. At least the gauchos can tell the difference between self-delusion and grand larceny. But the average cab driver in Buenos Aires knows more about financial crises than Trichet, Brown and Paulson put together. His training comes neither from Keynes nor Smith. The great Anglo-Saxon economists may have laid out their theories of political economy. But they left some important holes. Argentina’s presidents have filled in the blanks. And what the typical Argentine has learned, the English and the Americans are about to discover for themselves.

Leaving Argentina, our cab driver tried a familiar flimflam. Hearing a foreign accent, he said: "My meter is broken…but the fare to the airport is always a flat 200 pesos." On the pampas, no self-respecting taxi driver gives a sucker an even break. But then, rarely do markets or governments, either.

"What is the message that the government is giving to the people today?" asks Argentine economist, Roberto Cachanosky. "That it is ready to take their revenues and their savings with no limit…and also, that they will continue to give out information and make announcements that, to say it gently, have no connection to reality."

"The only secure retirement is one backed by the state," said a member of the Peronist party, proving Cachanosky’s point. As the country approached bankruptcy in 2001, its leaders followed the traditions of all Peronists, Democrats, Republicans, and National Socialists; when they get themselves in a jamb. First, they lie. Then they steal.

Argentina has a parallel system of state-owned and privately-owned pension accounts. Its state system pension payments were cut by 14% in 2001, and then cut an addition 66% when the peso was devalued the following year. Now, the Kirschner government is nationalizing the private accounts. Set up in 1993, these funds must invest 60% of their money in Argentine bonds. Naturally, bonds backed by the Argentine government are not necessarily the strongest credits in the world. Argentine peso bonds – like pensions – are adjusted for inflation. But the government lies, with a measure of inflation that is less than half the real 30% rate. As to the dollar bonds, it steals. In 2001, it defaulted on $95 billion worth of loans made by overseas lenders. It didn’t settle up until 4 years later – stiffing the foreigners for 70%. And now the government is in trouble again; it must make a big payment to overseas lenders in 2009. Its main exports – soybeans, gas and oil – are down about 50% this year. And the country has more public debt than it did when it defaulted seven years ago. That’s why the private pension accounts are being seized; the government needs the money.

Things have a way of disappearing in Argentina. After WWII, hundreds, maybe thousands, of Nazis arrived in Buenos Aires from Europe, never to be seen again. Whether people are wanted by the law, or not wanted by the lawmakers, they have a way of vanishing. In the 1970s, when the generals running Argentina wanted to get rid of their opponents, they called on the old Nazis to help ‘disappear’ thousands of them.

Money disappears too. More than a half century ago, Evita Peron posed as an angel. She set up charitable organizations to help the poor and handed out Christmas presents, personally. After the holidays, she went back to her tricks – making the money disappear from the charitable funds and re-appear in her Swiss bank account. And then, after her spirit gave the world the slip, Evita’s own corpse disappeared. People wondered what had happened to the husk of her, until it was retrieved by Juan Peron 16 years later.

Senora Fernandez is a practiced magician too. Her recent acts of larceny have included disappearing Aerolineas Argentina from its Spanish owners…and then disappearing the profits of the nation’s farmers, first by preventing them from selling on the open market and then by imposing a confiscatory tax (later withdrawn) on exports.

"Nationalizing private pensions is theft," said Juan Domingo Peron himself. The Peronists say they are only acting in the public interest – like the U.S. Treasury and the Bank of England. We would never have done this had there not been a world while financial crisis, they explain.

"The question that many people ask themselves," continues Robert Cachanosky is: ‘what rate of interest do you need to compensate for the risk of keeping assets within the reach of a government desperate for more funds?"

Answering Cachanosky’s question, today, you can buy 8.28% Argentine bonds at 22 cents on the dollar – giving you a yield of 31%. By comparison, a US 10-year Treasury note, at less than 4% yield, looks like a broken taxi meter to us.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

October 31, 2008

P.S. As a reminder, there are 5 days left to get your ‘personal bailout package’, which includes a pre-released copy of the I.O.U.S.A. DVD, the companion book and a special report detailing how to stay ahead of the game during this financial meltdown – and make some money while you are at it. 

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now.

"U.S. consumers cut back sharply," says the front page of today’s International Herald Tribune.

"Decline is biggest since ’80; data show a shrinking GDP."

Well…what did they expect?

We are in an especially cheerful mood here at the Paris headquarters of The Daily Reckoning. Why? Because everything is happening as it should. God is in his Heaven. The Queen is on her throne. And the Big Boom is turning into a Big Bust.

As predicted in this space, many times, consumer spending is falling hard. But what else could it do?

Let’s look back over our shoulder to see how we got to this place.

The feds goosed up the slumping economy in 2002 with history-making inputs of new cash and extra-easy credit. What followed was an once-in-a-lifetime bubble in housing…which lifted up the entire world economy. Americans bought things they couldn’t really afford with money they didn’t really have. And the whole world rejoiced.

But when housing prices got so far out of whack that the average person couldn’t dream of buying the average house, something had to give.

Housing began to fall…taking the mortgage-backed speculative finance business down with it.

At first, few people took it serious; so it took a long time for homeowners to react. But they had to cut spending sooner or later.

In an economy that is nearly 80% based on consumer spending, less spending is bound to cause a recession.

And when businesses take in less revenue, their stock prices are sure to fall.

All that has happened, just like it should.

But what should happen next?

First, we should begin to see some shocking unemployment numbers. It takes time to prune payrolls, but we should be seeing the deadwood on the ground very soon. And then some green wood. Good, young employees will be cut along with the baby boomers.

A new hotel opening in Las Vegas put out a call for employees. It got 67,000 applicants for 500 jobs. And American Express said yesterday that it will cut 7,000 employees.

Unemployment is officially at about 6% now. It will pass 10%…and keep going up.

Then, we will begin to see a big increase in bankruptcies, defaults, and foreclosure. Even after layoffs and cutbacks, businesses will be unable to pay their bills. Laid-off workers will find it tough to find new jobs; they will declare bankruptcy too. Corporate bonds will become worthless. Billions in automobile and credit card debt – along with mortgage debt – will become uncollectible.

What else will happen?

Globalization will walk backwards. This time, there will be no need for Misters Smoot and Hawley. Mr. Market will do their work for them. Global trade will collapse as the consumers of first and last resort – Americans – stop spending.

We’ve already seen this happening in the capital equipment area. Volvo got orders for 41,970 of its big trucks in the 3rd quarter of 2007. In the 3rd quarter of 2008, meanwhile, Volvo got a total of 155 orders.

As Mark Gilbert reports at Bloomberg, if no one buys trucks, you don’t have to ship trucks. Shipping rates are collapsing too. Now it barely costs 10% as much to ship a truck as it did at the beginning of the year.

It’s a "descent into Hell," says Michael Bloomberg himself, describing what waits for the next U.S. president.

*** So, you see, dear reader, what MUST happen DOES happen. Sometime it takes longer than you expect. And often it doesn’t happen exactly the way you expect. But it is a relief to know that gravity still works…what goes up still comes down. ‘Regression to the mean’ is another old law still in force; when things become extraordinary, you can bet they will go back to normal sooner or later.

But what does this mean for stocks? And what about gold? The dollar?

Hey, you’re asking a lot from a free publication. But what the heck…we’ll make some guesses and remind the reader that he is likely to get no more than he paid for:

Stocks typically regress to the mean, along with everything else. The ‘mean,’ depending on how you measure it, would put the Dow between 6,000 and 9,000. But Mr. Market is can be a devilish fellow. He usually causes stock prices to regress beyond the mean, before he lets go of them. This could take the Dow down to 5,000…perhaps to 3,000…before it finally reaches a bottom.

And before we make guesses about gold and the dollar, we will tell you another thing that MUST happen.

Fish gotta swim. Birds gotta fly. And the feds gotta try to pump more liquidity into the system. All over the world, government officials are taking command of the situation. Well, they are taking command of banks…of trillions of dollars worth of bailout funds…interest rates…and financial rules.

Yesterday, for example, Japan announced that it would spend 5 trillion yen, about $273 billion, in a "stimulus" package. Also, the Bank of Japan told the world that it, too, was cutting rates. This news came as a surprise to us. We didn’t think Japan had any rates left to cut. But the BOJ nevertheless announced that it would shave the short stump of its main rate down to 0.3% and that henceforth it would make commercial loans at 0.5%.

By contrast, the U.S. Fed still has 100 basis points to work with. And the U.S. Congress is said to be planning another stimulus package of its own – surely wrapped in bright Christmas paper. The price tag might be another $400 billion, according to our sources.

Not only are the feds trying to bail out the U.S. economy, they’re also lending $120 billion to a group of foreign countries in order to help them swap their currencies for dollars. At least, that’s what it says in the paper…the actual transaction is a mystery to us.

The Russians are bailing out their own rich people. At least they’ve got some real money to work with – a fund of $200 billion. And the IMF has pledged to lend $100 billion to wherever it is needed.

You can also count on more rate cuts…trillion-dollar deficits…show trials…giveaways…and grandstanding. There will no doubt also be a "jubilee" movement – demanding forgiveness of debt.

The big questions are when and how will these things affect the feds’ ability to borrow? We don’t know the answer…but we have watched Treasury yields rising ominously over the last few days. That could be a sign that the worst is over for the economy. Or, it could be a sign that lenders are worried about US public finances.

If the world economy continues to weaken…and turns into the FWD (First World Depression), as we think it will…none of these measures will do any good. Finally, the U.S. government will run out of credit, out of money, out of time, and out of luck.

Then, the Bank of Ben Bernanke will do what it has promised to d it will print money. And when that happens…or even when investors begin to suspect that it might happen…the dollar will collapse and gold will rise.

*** "Here’s my question," begins a Dear Reader. "If in any business deal someone loses or spends money and then someone makes money on the other end of the deal, my question is where did all of the money go? Who is holding on to it? Why? I don’t understand the concept of a global recession. Please help. Thanks."

*** Another reader answers the question:

"I feel terrible. I feel like this thing has taken 10 years off my life. I took your advice. I think. I put half my assets in cash and gold. Okay…gold went down, but not catastrophically, so I’m okay there. But the other half, I put into stocks. Not US stocks. I bought India and Japan and some other foreign markets that I believe you had mentioned. Maybe over the very long run, those stocks will prove to be good buys. I don’t know. But I’m down about 50% in those investments…meaning, I’ve lost 25% of my wealth.

"Where did it go? It just disappeared. Nobody made any money on the other side of the trade. Because I didn’t sell. I held on, thinking that the bottom was in each time they went down. But they just continued to sink. I still have them. And now I’m afraid they could go down another 50%…but I’m so far down already I don’t care.

"I’m a big boy…I don’t mind the loss of money so much. But I can’t stop thinking that this money I made over the course of a 40-year career in business. It didn’t come from speculation. It’s not easy-come, easy-go money, in other words. Instead, it’s a quarter of the wealth I’ve accumulated over 4 decades of work. So, it’s as if an entire decade of my life had been lost."

The Daily Reckoning