The Argentine stock market advanced again yesterday… just like it has been doing for most of the last two years. During this brief time span, the Argentine Merval Index has nearly quadrupled in local currency terms, and more than doubled in U.S. dollar terms.
This shockingly strong performance probably has much more to do with the deplorable condition of the Argentine peso than it does with the growth prospects of the Argentine economy. In fact, the Argentine economy’s growth prospects are subzero at the moment. The country’s GDP “growth” is now negative, thanks to a vast menu of governmental buffoonery.
But to keep this long story very short, suffice it to say that the bull market in Argentine stocks is less a “vote of confidence” in the economy than a big “vote of no confidence” in the forlorn Argentine peso. As the chart below shows, the “official” peso/dollar exchange rate has soared from about four pesos per dollar to eight pesos per dollar during the last four years, while the unofficial “blue rate” (i.e., black market rate) has soared from four to more than 12 pesos per dollar! In other words, the official peso has lost half its value during the last four years, but out on the street – the real world – it has lost two-thirds of its value against the dollar.
Therefore, the locals with any sort of savings are buying stocks as a hedge against the collapsing value of the peso. The Argentines on the street have very few options at their disposal to protect their peso-denominated savings. They can’t simply swap pesos for dollars; that’s against the law. They can’t take pesos out of the country and try to swap them for dollars elsewhere; that’s also against the law. Even modest little hedges like buying foreign goods when traveling overseas is problematic. The Argentine government imposes a 35% “surcharge” on credit card purchases outside the country.
What’s not against the law is buying Argentine stocks. So that means Argentine stocks are one of the go-to hedges against a currency meltdown. Typically, real estate provides a similar sort of hedge. And this time around is no exception… sort of.
While real estate values have not fallen as much as the currency, they have fallen nevertheless. Bargains abound!
Good investing,
Eric J. Fry
for Free Market Café
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