By William Davis
To Boldly Go…
By definition, “frontier” capital markets drift somewhere along the far edge of the investment universe — a veritable Kuiper belt of political instability, corruption, and underdeveloped financial systems. We’re told that Kazakhstan is not easily accessible. That Kuwait has a small number of liquid securities. That Qatar restricts foreign ownership. That Argentina raised its prime interest rate by 300 basis points twice in the same week. Wait…what? Argentina?
The name “Argentina” comes from argentum, the Latin word for silver.
True enough, the world’s eighth-largest country by land area is tractor-beamed in with the likes of Sri Lanka, Cyprus, and Slovenia when it comes to investability. And for good reason we suppose. Since winning independence in 1816, Argentina has gone through eight different forms of currency, the occasional military junta, a dopey Madonna song, and nine iterations of its now near-worthless peso. And true to frontier form, what passes for its central bank just moved rates to an incomprehensible 40% — the highest in the known universe.
In 1913, Argentina was the world’s 10th wealthiest nation per capita. Now it’s the 54th.
Pretty dangerous stuff when viewed from our place on the bridge. Not so, of course, for a certain sort wiling to explore strange new worlds with other peoples’ money. Chatter around the system indicates some of the world’s biggest investors have been seriously disrupted by Argentina’s ailing markets. Reportedly, frontier funds at T. Rowe Price and Morgan Stanley have vaporized between 5% and 8% of their clients’ asset the past month, while emerging markets and Latin America-focused equities funds at Fidelity, BlackRock, and Eaton Vance dematerialized between 2.5% and 5% of value in similar short order.
Since 1970, Argentina has dropped 13 zeroes off its currency, a factor of ten trillion.
More shocking, perhaps, than the fact that so-called smart money continues chasing returns from a country where political parties have their own brands of beer, Argentina’s recent and sudden collapse seems to have caught even long-time investors off guard. “We went into a meeting, the peso was down 1%, we come out and the peso is down 5%!” howled one Wall Street genius. “The Argentina situation will not be sustainable if the government raises its debt burden much more!” cried another. “Where’s my resume?” said the most forward-thinking of the bunch.
Pope Francis used to work as a bar bouncer in Buenos Aires.
We get it that asset classes can de-couple and volatility can jump erratically. But we also understand why Botswana, Bahrain, and Bangladesh aren’t included in global equity indexes. We’d rather go boldly.
What the equity markets have been doing…
|INDEX||Friday’s Close||Two-Week Point Change||Year-to-Date Change|
What the fixed income markets have been doing…
|FIXED INCOME||Period Change||YTD||12 Months||Yield|
|U.S. Investment Grade||NC||-(3.9)%||-(0.8)%||4.0%|
|U.S. High Yield||+0.1%||-(2.0)%||+3.0%||6.4%|
What banking pundits have been saying…
“You can easily deal with 4 percent bonds and I think people should be prepared for that.”
- Jamie Dimon, JPMorgan Chase & Co. Chief Executive Officer
What the numbers are saying…
The level at which the yield on the benchmark 10-year Treasury note settled last Tuesday, after its biggest one-day advance since March 2017. The 10-year yield is used as a reference rate for mortgages, auto loans, and corporate debt.
What fed up bosses have been saying…
“Don’t show up at a meeting with me with your phone. If someone shows up with their phone, it’ll be their last meeting.”
- Jason Brown, CEO of Brown, Parker & DeMarinis Advertising
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