The Paris of South America

The Daily Reckoning PRESENTS: Investors have been wary of putting their money into Argentina since the country’s financial meltdown in 2001. But Chris Mayer explains that five years later the Argentine economy is quickly growing – and there are many opportunities to profit. Read on…

THE PARIS OF SOUTH AMERICA

Don’t cry for me, Argentina,
The truth is I never left you. – Evita

Buenos Aires, Argentina. Travelers sometimes call it “the Paris of South America,” for good reasons, which I’ll get to momentarily. More importantly for investors, though, it is also a place where prime waterfront real estate goes for prices only one-tenth of what comparable properties go for in Europe and the United States. There are reasons for that, too. But I’ll make the case that they are not good reasons.

Argentine real estate may never trade on par with Europe or the United States. But if it is two-tenths as valuable, prices will double. Sounds like a fair bet to me. Especially since Argentina’s real estate is practically bubble-proof at this stage.

Investors who think about Argentina in their reflective moments perhaps recall the awful meltdown in 2001. If they had any money in Argentina back then, they probably recall the episode with a shiver and reach for the brandy.

The litany of woes was great. Bank accounts are frozen. The peso loses 75% of its value. The government defaults on its debt. The economy falls apart. Unemployment hits 25%. Violent protests in the streets. The stock market collapses. From 1998-2002, the Argentine economy actually shrank by about a fifth.

When the Argentines have a crisis, they don’t mess around.

Emerging markets generally have a habit of melting down every once in a while. Just look at the roll call over the last dozen years or s the Tequila Crisis (Mexico, 1994), the Asian Crisis in 1997, Turkey in 2000, Argentina in 2001 and Venezuela in 2002. And I’m probably forgetting somebody.

All in all, it was a tough stretch for emerging markets. Investors in these countries at these times stood about as much a chance as a toupee in gale-force winds. Consider that from 1994-2002, the MSCI emerging market index lost 60% of its value.

However, these markets also snap back famously. Last year, the MSCI index (a common benchmark for emerging markets) climbed back to its 1994 peak – and made back all those losses. Then, in May-June of this year, as I wrote in last month’s issue of Capital and Crisis, emerging markets as a group lost a quarter of their value in stunning fashion. It was a little reminder that stability and emerging markets are an unnatural pairing, like a courtship between a snake and an eagle.

Still, there are times to buy. With that thought in mind, let’s take a look at Argentina four years after the crisis.

Argentina has always had a romantic quality to it. The eyes of travelers everywhere widen at the thought of those lush grasslands of the Pampas, the rolling plateaus of Patagonia, the rugged Andes Mountains in the west and Tierra del Fuego (“Land of Fire”) at the southernmost tip.

Travelers also probably fondly recall Argentina’s biggest city, Buenos Aires. With more than 11 million people, about one-third of all Argentines live in and around the city. Buenos Aires has its charms. One of them is being easy on the wallet, a fact that has attracted a growing expat community.

The European-flavored architecture reflects the influences of its early settlers. There are wide avenues and plazas. You can wander down cobbled streets finding old-time cafes and world-class restaurants. Enjoy empanadas – small meat-filled dough pockets – which are a staple in the city. Be sure to visit one of the many local parillas (or grills) and you will find out why the Argentines consume more beef per head than any other country. Something about those free-ranging cattle on the fertile plains of the Pampas produces some of the world’s tastiest beef. A good meal with wine and an unforgettable steak can cost less than a pair of movie tickets.

Argentina is also the eighth largest country in the world and the second largest in South America. Yet its economy ranks only 38th in size globally – behind countries such as Iran, Portugal and Greece. Somehow, it feels like it should be bigger.

It is also one of the world’s fastest growing economies, and Buenos Aires is among the world’s fastest growing cities. “Perhaps the most tangible sign of Argentina’s economic recovery,” The Wall Street Journal reports, “is its booming real estate market, which has transformed Buenos Aires, the capital, into a construction site.” Though gauging economic growth is a tricky business, estimates peg Argentina’s at around 8% annually.

The stock market has come back, and real estate has been a top performer. Those who survived the debacle in 2001-02 looked to real estate as a safe haven against further inflation. Then, too, foreign investors snapped up cheap real estate as easily as they downed those magnificent steaks.

According to an Argentine real estate trade group, Camara Inmobiliaria Argentina, housing prices have increased 50% since 2002. Even though real estate prices have soared, they still look surprisingly cheap.

Prices in prime real estate locations are only one-tenth of what they are in the United States and Europe. Puerto Madero is one such prime location. Restaurants and lofts converted from old warehouses now line the old port. It is a popular barrio, or neighborhood, in Buenos Aires. There is also, as the Journal notes, “420 acres of undeveloped land within walking distance of the financial district, and an open view to Rio de la Plata, the wide estuary that separates Argentina and Uruguay.”

This area is among the swankiest and most expensive in town. Prices go for $280 per square foot. For similarly located property in the United States or Europe, you could pay 10 times that. It’s not surprising, then, that many buyers of cheap Argentine real estate are foreigners.

There are inconveniences. For one thing, Argentina’s mortgage market is practically nonexistent. Real estate transactions are mainly in cash. That means meeting someplace secure and counting out piles of notes before pushing them across a table to the seller. Then, the other side recounts the money.

Therefore, easy credit and excessive leverage do not make up the foundations of the Argentine real estate boom. In other words, it’s almost bubble-proof – though that could change at some point. The government is taking steps to encourage mortgages. But for now, it would seem Argentine real estate has a long way to go.

Argentina, because it is Argentina, may never command prices on par with Europe or the States, but if the discount goes from one-tenth the price to two-tenths the price – real estate prices will have doubled. That’s a small step for a market that is only beginning to use mortgages and is only a few years from a major financial crisis.

Fortunately, there is an easy way to get Argentine real estate exposure in your portfolio. You only have to buy one stock and you get the full array of Argentine real estate – quality office properties in Buenos Aires, shopping centers, residential developments, luxury hotels and undeveloped land.

Regards,

Chris Mayer
for The Daily Reckoning
October 12, 2006

P.S. Crisis can fall unevenly, as with a patchy rain. When the storm clouds clear away, the sun will shine again. And those valuable assets you always wanted to own are now at the right price. Read my full report on the three real crises that threaten our national economy.

Editor’s Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of Mayer’s Special Situations and Capital and Crisis – formerly the Fleet Street Letter.

No one entered the temple yesterday and over-turned the tables of the moneychangers at Goldman, the Fed, or the ARMs dealers. The earth did not open and gobble up homeowners; nor did the Dow collapse, taking speculators and dreamers down with it.

A booming voice from Heaven was not heard straightening things out.
“Now look what you’ve done,” it might have said to the Bush administration.

Fire and brimstone did not rain down on the nation’s Capitol…Wall Street…or even Hollywood, for that matter.

No, it was business as usual. And business as usual is confused…uncertain…nuanced and ambiguous.

Economists are beginning to take note of the housing slowdown, says Bloomberg. They now expect a “Slower US Growth Rate” for the year ahead…and maybe a rate cut, if things start to go bad in a major way.

Not so, says Investors Business Daily. Falling energy prices and rising stock prices dim prospects for a rate cut.

And who really knows? No one. It’s all guesswork. And our guess is that Bloomberg will turn out to be more right than Investors Business Daily. The housing industry has underwritten consumer spending and GDP growth in the United States for the last five years. When the housing industry turns down…so do a lot of other things. Economists know this. They’re betting – along with Alan Greenspan and real estate agents – that the correction in the housing market will take prices down less than two percent. We have watched the markets, the economy, and our fellow man long enough to know that anything is possible…but a decline of two percent seems like wishful thinking to us.

So, we leave that…and turn our attention to the big, wide world…and the vast panorama of history.

What are the serious challenges America faces?

‘Terrorism!’ comes the cry from the lumps.

Terrorists are a nuisance, not a menace. We can’t think of a single major power…let alone a single empire…that was undone by terrorism.

But right now, the United States is spending a fortune on this nuisance. The total bill for the wars and occupations in Iraq and Afghanistan is expected to top $1 trillion. The whole business is no more than an invitation to squander money and lives in a campaign against nobody-who-really-counts…an invitation the Bush administration gladly accepted!

So, we ask again – what are the serious challenges faced by the U.S. Empire? Three stand out:

1) The empire is going broke
2) The empire is losing market share
3) The empire is running out of fuel

The first is no secret at all. The federal government is on the hook for some $55 to $65 trillion in expenses, beyond what it can reasonably expect in revenues.

There’s nothing especially novel about this bankruptcy. Empires usually go broke…and then they collapse – or are destroyed by enemies. Military power follows economic power, at least in the modern world.

But why do thriving empires go bust? Why can’t they make a profit in the empire business? Well, of course, at first they usually do. That’s how they become great empires. Either by force of arms or force of commerce – usually both – they grow and expand. But there must be a flaw in the human character. Once it is set on course for expansion, it doesn’t seem to know when to stop. More and more conquests lead to more and more battles…more territory to administer…and more military expenses. The United States now has more than 100 bases all over the world, and a military budget equal to that of all the rest of the world’s nations combined.

Meanwhile, institutions age and wither like old trees. Gradually, they are taken over by parasites, freeloaders, and hustlers. In military matters, the defense establishment shifts from actually defending the nation…to expanding the empire…and then to expanding itself. Contractors grow fat and rich. Politics and profits dictate which weapons are put into service, not military necessities. Even wars are chosen for reasons other than their actual military benefits. Politicians need enemies. The military/industrial complex, as Eisenhower called it, needs a raison d’etre. The people themselves need to be scared and bullied into cooperating with the imperial agenda.

In the homeland, the mob of voters clamors for more protection, more benefits, more privileges and more entertainment. Gradually, old virtues of independence and thrift are swept away. Everyone comes to rely on the imperial state not only for handouts, but for emotional gratification. People cheer it on as if it were a sports team. Did the empire crush resistance in Baghdad? Hooray! Did it suffer a setback in Kabul? Well, no joy in Mudville.

George W. Bush is supposed to be a ‘conservative’ president, but he has actually expanded social spending programs more than any president in history. Like everything else, the old ‘conservative’ program has been corrupted by neo-conservative shills who serve the interests of the empire…along with their own interests, not those of the Old Republic.

Now there is no longer any major organized opposition to government spending. As a result, the nation is going broke.

But enough of this for one day…tomorrow, we take up the other major challenges America faces: losing market share…and running out of fuel.

Now, more news:

————–

Eric Fry, reporting from Laguna Beach…

“Some bottoms are better than others. Some lead to substantial capital gains; others merely deceive investors and lead straight to capital losses…because they’re not really bottoms at all. They just appear to be.”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.

————–

And more thoughts…

*** A note from our natural resource expert, Justice Litle:

“Most farming irrigation systems run on diesel engines. The fruit and vegetables your family enjoys were probably not just transported by diesel power; they were likely watered with diesel power also,” he reports.

“This could soon change. An Iowa company called Hydrogen Engine Center, specializing in alternative fuel engines, has gone into partnership with Sawtelle & Rosprim, a California irrigation pump manufacturer. Together, they plan to introduce the first-ever ammonia-powered irrigation system. Anhydrous ammonia, or NH3, is rich in hydrogen and carbon free; because farmers have long used it for fertilizer, regulations, pipelines and distribution centers for ammonia are already in place.

“The technology would be especially attractive to California farmers, who are under pressure to comply with increasingly strict emissions rules. A successful test over the 2007 growing season could lead to commercial sales in 2008.”

*** We are getting to have a bad attitude towards people with handicaps. We didn’t mind that they got the best seats on the subway…and the best parking places…but now they’re carrying their victim status a little too far.

“You need two bedrooms for handicapped people,” our architect told us yesterday, referring to the conference center we are in the process of building in Normandy. “I know they told you one would be enough, but the law has changed. Now you need two.”

“This is ridiculous,” we responded. “We’re already putting in an elevator just for the handicapped. Everyone else has to walk through the front door. The whole thing is absurd. If someone came up in a wheelchair, we could certainly pick the thing up and help the poor guy in through the main door. We’d be delighted. But instead, we have to provide a special elevator – and a special door – at a cost of thousands of dollars. And we may never actually have someone who wants these things.”

“You don’t understand, Monsieur,” continued the architect. “The law insists that you be prepared for a handicapped person. Whether he actually ever shows up or not is another matter. And let us suppose you only get one person in a wheelchair every five years. You may think, how silly it is to invest 25,000 euros in a special elevator for the man when you could easily help him up the stairs…there are only three steps to the front door, by the way. But the law requires that this man have the ability to be as independent as possible. He shouldn’t have to rely on you to help him up the stairs. He should have the same freedom of movement…at least insofar as his condition allows…as any other person.”

We were ready without reply, however: “But this applies to only one category of handicapped person…someone in a wheelchair. There are all sorts of handicaps…and most of them you can’t even see. What about the poor fellow who is blind? Is he supposed to be independent? That guy has to come up the stairs…someone has to take his arm, because he can’t possibly have memorized how many steps there are…he’s never been here before. And the guy with one arm…or no arms. How is he going to open the door…is he going to butt it with his head? No, we’re going to open the door for him, as any decent person would.

“Of course, we don’t have any way of knowing who is really handicapped and who is not. A man who can’t walk might still have his wits, his courage…and even the grace of God, for all we know. Compare that to a fellow whose mother beat him…or who, for a reason we never know, just is not happy with the world or himself. The poor fellow walks on two legs. He uses two hands and two arms. But inside, he’s all broken up and mangled. That’s the fellow who really needs our sympathy. That’s the fellow who really needs an elevator in life. But we can’t even see his defect…so nobody does anything for him.

“That’s what’s nice about people with visible handicaps…they give people without handicaps an opportunity to express genuine concern and charity. The people we know who are in wheelchairs would be happy to enjoy the extra sympathy and attention…because it is offered freely, in the proper spirit. But as soon as you force a person to build an elevator…or to give up a parking space…it’s no longer charity…it’s the police power of the state at work. Nothing charitable about that. That’s why we can pass beggars on the streets of London or New York without a trace of charity. We figure we have already been forced to pay to take care of them. And we can build an elevator here in Normandy…but we won’t feel good about it. The whole situation is perverse and disgusting.”

“Thank you for your thoughts on the matter,” interrupted the architect, taking back the conversation. “But the Department of Public Health and Safety is not the least bit interested. You’ve got to put in another bedroom and an elevator.”