Economic Crisis

What causes a financial crisis? Too much faith or too little?

Question one: What causes a massive loss of faith in a country’s political and financial systems?

Answer: About a century of upheaval and repeated crises should do it.

That’s Argentina in a nutshell. Over the past century, it’s gone from being one of the richest countries in the world to ranking 63rd by GDP per capita, at the end of 2017. Given the peso is down about 60% against the US dollar since December, most likely the ranking will be much lower this year.

Question two: How do you measure the lack of faith in a country’s political and financial systems?

One answer: Measure how much loot the locals stash overseas.

In the case of Argentina, the lack of faith is notable. The local tax authority just came out with an estimate of how much wealth Argentines hold overseas. That includes bank deposits, financial investments and physical assets such as houses and apartments.

The figure is US$300 billion, whether declared or undeclared for tax purposes. (Argentina has an annual asset tax, so this distinction is relevant.)

Relative to the size of the economy that’s big potatoes. Argentina’s GDP was equivalent to US$638 billion in 2017. That means offshore assets are about 47% of GDP (and most likely a much higher percentage by now, given the effect of this year’s currency collapse on dollar GDP).

What if Americans did the same?

Let’s put that into perspective. If Americans did the same, given the US$19.5 trillion US economy, they’d have US$9.2 trillion of assets held offshore. Swiss private banks would have a field day.

Incidentally, domestic bank deposits in the US are about 68% the size of GDP. In Argentina it’s more like 20%. A lot of people don’t trust the Argentine banks to pay their money back. Alternatively, they do ‘trust’ the politicians, sooner or later, to seize much of the money – through taxation, inflation, devaluation or outright confiscation.

None of this behaviour is because Argentine people are especially paranoid. It’s simply that they’ve learned from long, hard experience how to protect themselves in a deeply dysfunctional environment.

It also makes Argentina one of the best places in the world to learn about political idiocy, social fragmentation and financial mayhem. What’s more, yesterday marked a decade since I emigrated here and began my masterclass.

 A country with bullet holes in its shoes

Speaking with Argentine old timers, reading a little local history, or just keeping up with the daily news…all help to inform how countries can shoot themselves in the foot. Despite all the things that I love about Argentina, it owns many old shoes that are perforated with bullet holes…and it’s been left with a limp.

But Argentina has one unique creation that the world seems to want more and more of: Peronism. That’s the political, er, approach named after Juan Peron. He was elected president for the first time in 1946, having previously had a senior role in an unelected military government (the product of a coup d’etat in 1943).

Peronist-style populism is now going global, at least across the developed world. The signs have been clear in recent years, as many countries have seen the rapid rise of new political forces, whether already in power or still waiting in the wings (perhaps only until the next economic recession).

By “Peronist”, I mean populist without ideology. Peronism can be hard left-wing or hard right-wing, and everything in between. Sometimes it’s both extremes at the same time. It’s political pick’n’mix, void of any guiding compass other than the achievement of power.

A few developed countries have already begun their journey along such a meandering political track. Others are actively considering whether to follow (meaning their populists are gaining, but haven’t quite won the throne).

Some of those countries will travel a little way…before they nervously eye the dusk’s bruising heavens and head back to safety just in time. Others will march onwards towards the stormy night, convinced by their new dogmas and doctrines, until they find themselves lost…enveloped by a pitch black sky and leaking footwear.

Ironically, while all of this unfolds, I remain mildly optimistic that Argentina’s own worst days are behind it. Having steadily descended into the U-shaped valley of self-destruction, it’s now crossed the valley floor and is searching for the best route to climb back up the other side. But it can still stumble into the occasional ditch, as it’s done this year.

We’ll see…or perhaps only our kids and grandkids will. One thing’s for sure…there’s no lack of developments to monitor on the global horizon.

Argentina remains a place with deep-seated structural problems to resolve, and a local populace that’s rightfully sceptical…and low on faith in the system. But, that said, it’s often those other places…where people have too much faith in the system…that actually pose the highest risks for investors.

Next time, I’ll look at just such a place…the complete antithesis of Argentina in practically every way. Trust in the system and in its ongoing stability is extremely high in that part of the world. Yet I believe it could be on the cusp of a major economic crisis that’s been brewing for years.

Watch this space.

Rob Marstrand

PS: I was recently interviewed by Jake Desyllas, who runs a blog called The Voluntary Life. Jake asked me about a wide range of topics, from life in Buenos Aires…to how to achieve financial freedom…to my approach to stock investing…to why I think gold is an attractive, long-term investment. You can listen to the interview here.

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.