September 27, 2002
“Did you see the news? Argentine workers are taking over the factories. . . .”
“Yeah . . . the factory owners are probably glad to get rid of them. . . .”
Your editor was having dinner with his friend from Argentina, mentioned above.
“My brother still lives there,” the friend continued. “He said people are being forced to sell their furniture . . . even their wedding rings. Of course, it’s great if you’re a buyer.”
As you know, dear reader, here at the Daily Reckoning, we always try to look on the bright side of things. So, today, we turn away from the darkening days north of the equator and look south—where the sun shines a little brighter each and every day.
It has been a dismal season below the Rio Plata. The Argentine Bolsa has dropped 85 percent in the last five years. If that weren’t enough, the country has been in recession for the last four years—one that has been longer and deeper than the Great Depression of the 1930s . . . and worse than any downturn in the last 100 years. This year alone the national GDP is expected to decline another 16 percent.
Since January, the Argentine peso has fallen 60 percent against the dollar. So great has been the currency decline and the recession that typical monthly wages have dropped from near $1,000 at the beginning of the year to only $250 today. This places annual earnings of the average Argentine below nearly every country in Latin America. Even in Nicaragua, average annual earnings per capita beat those of Argentines.
Buy cheap, sell dear. Financial assets in North America and Europe are still dear, but getting cheaper. Financial assets in Argentina, meanwhile, are cheap. Mightn’t they get dearer someday?
The latest figures from the Homeland tell us that 1.3 million more Americans slipped below the poverty line last year, bringing the total to 32.9 million. But out on the pampas, nearly everyone has been reduced to living like hogs.
At the beginning of the twentieth century, Argentina was about as rich as Europe, per capita. Penniless English aristocrats would send their daughters either to New York or Buenos Aires in the hopes of making a lucky alliance. Failing that, they could at least support themselves by becoming governesses and private tutors to the upstart families with plenty of money but little else. . . .
And gone are the days when the poor of Italy or Spain would load the decks of cargo ships . . . hoping for a chance to make their fortune in the New World. Now the traffic is in the other direction, with Argentines immigrating to the lands of their
grandfathers!
Once a land of boundless opportunity, it is rare to see Argentina described in the press today without a modifier such as hopeless or basket case attached. This does little for the self-esteem of the proud race of the pampas, but investment value and self-esteem vary inversely, or so we think we’ve noticed.
For wasn’t it the Japanese that had the most magnificent brand of capitalism the world had ever seen—just before they entered the long, slow-motion downturn which shackles them even now, 13 years later?
And wasn’t it agreed everywhere that the U.S. model of dynamic, entrepreneurial capitalism represented the crown of all creation . . . at the very moment when U.S.
asset prices reached their most absurd excess?
And, last year, wasn’t Zimbabwe among the most corrupt, woebegone nations on earth? Yet, the Zimbabwean stock market has risen 120 percent so far this year—the world’s top-performing market.
Which leads us to wonder: What market might investors loathe most today?
We have no ready answer. But we do not recall any comments about the wonders of Argentine capitalism lately. Searching the bookstore shelves, we see no books exalting the Argentine system nor any praising the genius of Argentine central bankers. Nor can we think of a single Argentine business tycoon, nor even a single product that makes its way beyond the country’s borders.
Come to think of it, we’ve never heard a single comment about Argentina business or finance that was not a joke.
It is either feast or famine on the bolsa. The Merval index began the last decade below 200. The 1980s had been a lost decade with high inflation rates, incompetent generals, and a disastrous war with Britain. But then, the Brady Plan brought the country’s external debt under control and the Central Bank was liberated from direct government control. These measures helped make the Argentine stock market the world’s number one performer for 1991. Near 900 at the beginning of 1992, the Argentine stock market index collapsed below 300 in May of 1995. Then, it entered a new bull market that took it up 240 percent over the next 24 months. Since then, it has dropped back below 200—wiping out a decade of profits.
If this is not the bottom for Argentina, it can’t be far away; there is just not that much room left on the downside.
“The unprecedented level of the downfall that the Argentine economy experienced in the last four year presents a unique opportunity for equity investors,” writes Marcelo Mindlin in the latest issue of Mark Faber’s Gloom, Boom & Doom Report.
“Argentina is very close to its record bottom and could rebound strongly over the coming months.”
Faber makes a recommendation: “IRSA is the largest and most diversified real estate company in Argentina, with interests in office buildings, shopping centers, hotels, apartment buildings, and other residential developments.”
The company manages 60 percent of Buenos Aires’s shopping center space, for example, and 12 office buildings with 941,510 square meters of gross leasable area.
“Down from a market cap of $800 million,” Faber continues, “IRSA is now trading
at a market cap of $80 million, with only $120 million in debt. . . . If you can pick up real estate in an emerging economy at less than 10 percent of the value of its London or New York equivalent, I feel reasonably confident that its value will increase significantly in the future.”
You can buy low in Argentina. We will wait to find out if or when you might be able to sell dear.
The Gaucho’s Union
April 26, 2006 Yo no soy de estos pagos, soy de Arbolito. Lugar de mis amores, pueblo chiquito.
(I’m not from ’round here, I’m from Arbolito. It’s a small place, but when I’m away I never forget it.)
—Traditional Argentine gaucho song W e are not from these parts, either, dear reader, nor did we forget you. But, we were not able to write to you yesterday, because we could get neither an Internet signal nor a dial tone—not even a hot bath. Life can be a little hard, out on the high plains. Over the past week and a half, it has been more than a little hard to stay in touch.
When we wrote last, we were explaining why we bother you with the details about our trip to Argentina. After all, the Daily Reckoning is—most of the time—about money, but there is more to money than just making it. For many people, indeed, making money is the easy part. Unmaking it is much more interesting and dangerous.
A man can go through his life working away at his business with a fair amount of dignity, but only give him a little money, and he is almost sure to make a fool of himself. Usually, he spends so long making it that by the time he finally has some, he has no idea of what to do next. He lacks the taste, the experience, and the judgment to part with it gracefully or with dignity.
Instead, he is likely to squander his money on gaudy houses and expansive cars . . . reckless investments . . . bimbos . . . or even a ranch in South America.
But in your editor’s mind, a big spread in Argentina was designed not to expose him to humiliation, but to protect him from it. Way out in the foothills of the Andes, he reasoned, how much trouble could he get into?
Besides, imagine the many sad consequences that could arise from holding on to stocks or bonds: In a few weeks, your investments might be cut in half—or worse. Is the dollar not doomed? Are America’s businesses not losing ground to foreign competitors? What will happen to U.S. bonds when Asian lenders figure out that they will never be repaid? What would be the point of holding them? What pleasure could you ever get out of them?
When it comes to raw, mountain desert land—without electricity or central heating
—what could possibly happen that would make the place less valuable?
And so, out here, we have gotten ourselves into the cattle business, and we give you the economics of it, lest you be forced to learn it for yourself:
The cattle are all grass fed. Hay is stacked up for the wintertime, but the hay comes
from the bottomland on the ranch, too. Almost nothing is purchased, except some supplements and obligatory vaccinations, which only cost a few dollars per head.
On the other hand, you need some gauchos to mend the fences and go find the cattle, give them the required medicines, cut their ears, burn their hides with a brand, round them up, and load them on trucks to be sold. From what we could get out of Francisco, a herd of 1,000 cows spread out over thousands of acres of bad land takes a crew of at least three. Each gaucho costs the farm about 1,200 pesos a month, or about $400. So, setting aside taxes and other miscellaneous costs, you’ve got to spend about 60,000 pesos a year in labor (not counting the farm manager).
From a herd of 1,000 cows, you get about 500 calves a year, which you can sell for about 150 pesos each, which brings you revenue of about 75,000 pesos. But then you have to pay the farm manager and buy him a pickup truck. So, as near as we can tell you’ll lose money forever . . . unless the Chinese start eating Argentine beef for breakfast, which is what every cattleman all over the planet is counting on more than he counts on the eternal life of the soul or Social Security.
But according to Francisco, if we do it right—that is, if we invest more money in larger reservoirs to catch the summer rains and in more and better cows—we’ll be able to break even. At least we won’t lose money, which is all we ask from any investment.
Thus have we come to Salta Province, and thus were we taking a tour of the property we had bought—on horseback . . . the only way to see it. And thus, also did we end up bedding down for the night under the skies.
At high elevation, even the skies seem more open. The stars seem brighter and there seem to be many more of them. It was a delight for us just to lie in our sleeping bags and stare up at them as they came out. First, they were just a few fuzzy flickers. Then, there were hundreds of them, more distinct. Finally, there were so many that they all ran together like a kind of bright, shining dust. There was the Milky Way, of course.
Below it to the south was another batch of stardust we had never seen before, and then another we did not recognize . . . and another.
We could barely close our eyes. Partly because of the celestial lighting, partly because we were uncomfortable in our new sleeping bag, and partly because of the day’s events, which like a rich meal, needed to be digested before we could settle into sleep.
The next morning, Francisco and Jorge had saddled up the horses even before daylight, each one of them sporting a montura padded with a sheepskin. You are comfortable in them for the first couple of hours. After that, however, you begin to squirm in the saddle, to twist and turn and try new ways of riding. You even stand up in the stirrups to avoid the bounce, which is how your author ended up spending two days in bed, unable to walk or move, with no telephone or radio, at least an hour’s drive from the nearest doctor.
Do you see, dear reader, how one decision leads to another, each of which, individually, is perfectly reasonable, but all of which, taken together, lead ineluctably to an unexpected and disagreeable result?
Jorge, on the other hand, is a man who seems settled equally in his thoughts and his
saddle. He barely moves in either. When we speak to him, in Spanish, of course, he looks as though he is working hard to figure out what it is we are saying, but is respectfully reluctant to believe we might be saying anything as idiotic as it sounds.
Translating our own phrases, we realize what our conversation must have sounded like:
“Buen dia,” says Jorge.
“I wait that you had a good day both,” we reply.
“Are you ready to ride out, seủor?”
“We are ready to share. Let’s go with God.”
“Are you feeling okay today, patron?”
“True. I smell perfectly.”
Jorge knits his eyebrows slightly. His smile fades a bit. He must have been wondering what it would be like to work for such a madman. But, he keeps his thoughts to himself and urges his black horse down the hill and out onto the open range. The rest of us follow behind: Elizabeth sitting up straight like a real horsewoman; Edward on his mule, wearing a white hat and a tan poncho made by the same people who made one for Pope John Paul II; the rest of the family and Francisco bringing up the rear.
Spreading his pancho out so that it covers almost his whole body, Edward seems completely happy. The mornings can be chilly, even in the summertime, but warmed by the heat rising from the mule on which he trots along next to Francisco, Edward seems in his element. In London, it sometimes seems we are living with an animal that has never been fully tamed. His instincts are out of place; his energy has no way to express itself that isn’t annoying. But out here, he can run around, jump on a horse, ride for hours, and shout at the top of his lungs. In his own way, he is as much at home on the range as Francisco.
Francisco, of course, is a real gaucho, with a certificate to prove it. He even attended a gaucho school, and is currently the president of the local gaucho union.
“Gauchos have a union?” Henry turns the statement into a question by raising the pitch of the last word.
“Si. But it is not a union like other unions. We do not go on strike or ask for higher wages. We just teach people the gaucho skills. That’s why we have a school for gauchos . . . so the skills are not lost. We also try to preserve the history and culture of the gauchos. You know, in each part of Argentina, the gauchos are different. Here in the northwest, we are not like the gauchos of the pampas—not at all. We wear different clothes, and we do things differently, too. Down there, they barely have to ride a half an hour to find their cattle. Here, we go out for days. And here, it can be much colder. I once rode around this entire valley for 15 days, riding 14 hours a day.”
Hot Water
April 21, 2007—Gualfin, Argentina
Our architect, Nick, came up to the ranch a few days ago. He called the solar engineer to try to figure out what was going wrong with our solar hot water system. We are at almost 8,000 feet—nearly on the tropic of Capricorn—with clear skies and the strongest sunlight we have ever seen. We have a whole bank of sleek, modern hot water heaters behind the house; but as near as we can figure, they are producing less hot water than a garden hose in the Maryland summer.
Well, Nick got on the phone to the solar power engineer, and then went behind the house to turn a few valves. Ever since, we’ve had plenty of hot water. “Go ahead,” we told Elizabeth generously. “Take a hot bath . . . use as much hot water as you want.”
The water comes down from the Andes. There is no meter to the house. If we don’t use it, it flows down into the pasture. The sun shines on the hot water collector . . . if we don’t use the hot water it just sits there. Whether we use it or not, the price is the same.
And then, there’s the electrical system, which has worked flawlessly since we’ve been here. The sun hits the solar panels, which charge up a bank of large batteries, which give up plenty of juice. The only trouble is you can’t run large appliances—
except for one refrigerator/freezer. And those LED lights are cold and unattractive.
The whole system cost $75,000. All you have to do is to clean the dust off the panels from time to time and replace the batteries every three years or so. What’s the payoff?
No power bills. What’s the rate of return on that? We don’t know, but if the utilities would cost $500 per month, the implied rate of return is 8 percent. Of course, up here the sun is so bright that conditions are ideal for solar power. And since there is no power grid . . . or any source of fossil fuels within range . . . we had no choice anyway.
But the nice thing about it is that the system works whether we have any money or not. It’s . . . well . . . like having savings. If you have to pay $500 a month, it means you have to get $500 a month from somewhere. It is as if you had to pay a mortgage.
Unless you have a stock of money somewhere . . . you have to work and you have to earn . . . just to pay your utility bills. In fact, at a marginal tax rate of 34 percent you have to earn about $750 in pre-tax income in order to have enough money.
So the real rate of return, figured on a post-tax basis, is around 12 percent. Not bad.
And it’s . . . well . . . almost guaranteed. Where else can you get a deal like that?
The only thing that would reduce your rate of return would be a big decrease in the cost of utilities. Not very likely, in our opinion. On the other hand, a big increase in the cost of utilities would be an implied greater rate of return on your investment.
Besides, if we are ever ruined financially, we can hitchhike out to the ranch and still take a hot bath.
As for raising cattle, yesterday, Francisco announced that the price had gone up.
“Don Bill,” (we love it when he says that), “I just heard from some friends that cattle were bringing 2.6 pesos per kilo. Last year, we sold them for 2.2 pesos. This year, we’re going to make some money.”
Herewith, a brief introduction to the cattle business:
We went over the accounts with Francisco. Just as being an NFL quarterback looks easy to a plumber, raising cattle looks easy to an economist. Each cow produces about