The Weimargentina rollercoaster: At least it’s not boring

Level 2 - Value Investor

Welcome Avatar! Just a month ago we had BowTiedMara join us for a guest post on Argentina. Since no one alive in the USA has seen true hyperinflation, we figured it is best to get information from someone with years of experience in this mess. In just a month, the exchange rate has collapsed once again going to a 300+ ARS to USD conversion from around 200 (blue rate is the black market rate for ARS - Argentina pesos).

During a press conference in Buenos Aires in September 2021, Sabina Frederic, Argentina’s security minister, was asked if she would move to a safer country due to  a rise in crime since the start of the pandemic. She answered with the now famous  line, "Switzerland might be safer, but it's very boring." 

The Swiss ambassador to Argentina responded with this absolute ratio video promoting Swiss boredom, transferring some Swiss Francs to Robert de Niro in the process (recommended watch). 

Frederic was right to a certain degree, that Argentina has the lowest crime rate in Latin America outside Uruguay and Chile, but of course her answer was completely off the mark. 

Argentines might just shrug their shoulders at these things, but this gives you a good idea of the level of absurdity that everyone has grown used to, and that is, by default (no pun intended), never boring.  

This meme exemplifies that: 

Translation: I’m bored / You WERE bored 

Another gem came out last week, this time from Argentina’s press secretary who @‘d her girlfriends in a vibrator draw on national Best Friend’s Day. None of this has  any repercussions, except for the secretary’s best friends that won the draw.

BowTiedMara @BowTiedMara

National 🇦🇷 Press Secretary participating in the draw for a vibrator while the country is on fire. Never a dull moment.

Rollercoaster picking up speed, “down only “

Vibrators and exciting country dynamics aside, multiple factors started a big price move in the USTT price this July, as I predicted in my previous post for BTB.  

The TLDR: 1) Minister of Economy, also called “The Intern” by local Fintwit because he was  a Stiglitz apprentice, resigned. 2) Rumors of Argentina not meeting the IMF debt restructuring goals. 3) Biden-level approval ratings for the current admin. 4) Record local peso debt to finance the treasury, bought up by the CB, which is already above the printing levels allowed by the IMF and 5) Renewed capital controls to prevent capital flight / further devaluation. 

At the time of my previous post $ARS exchange rate was $216, and now it floats between $315-$350.  

As a result, MoM inflation for July is at 23%+, and some stores have paused sales, waiting for the dollar to stabilize. Without knowing their base costs, they can’t determine what the price of certain goods should be. 

Riots and protests broke out here and there in July, but it is not yet on a scale of full mayhem. Guess it’s a good thing that Argentina does not have a 98% ESG score like Sri Lanka, thanks to fertilizers – there is still enough food. 

The new Minister of Economy flew to Washington this week to talk about the current situation and the status of the IMF loan restructuring.  

Chronic Debt Problem: Argentina puts the FML in IMF 

The IMF loves good Ponzi fundamentals, and technically there is no better Ponzi than the United Provinces of the Masters of Default (UPMD), also known as Argentina. 

Argentina’s history with the IMF goes back a long time, and after 22 arrangements,  you’d be hard pressed to find a single person in the country stating that these loans  improved their lives in any way, shape, or form.  

As you can see in the graph below, the IMF lent the UPMD another 43 billion in 2018 – a mind-blowing 43% of all outstanding IMF debt to all countries! 

Source 

After receiving that sweet inflow of capital, UPMD acted like 3AC pocketing another loan from Genesis to fill a previous debt hole, and the 43 billion USTT quickly went  up in smoke. 

When easy money dries up  

Today, Argentina can only print up to 765 billion pesos ($5.8 billion) to cover its deficit for the whole year. But: UPMD already printed more than half of this year's total of 630 billion pesos in the last month and a half!

Argentina's central bank promised investors that if prices went down, the bank would protect their investment. This “protection” could cause the bank to print even more  pesos to back up the new guarantee, since no investor in his right mind will buy worthless bonds, no matter at what discount or they trade.  

This is what that “protection” looks like in debt emissions in pesos:  

Public debt in pesos at the Argentine Central Bank 

In September alone, about 900 billion pesos ($6.8 billion) in local currency debt is due.  

Even though the government claims it won't happen, we all know how that debt will be repaid: by means of the maquinita, (peso printer go brrr). This would trigger more $ARS devaluation and kick hyperinflationary pressure into overdrive. 

Please don’t swap your USTT on the black market, Mr. Tourist UPMD is desperately trying to attract more US Trash Token, and recently it came up  with the idea of the “tourist dollar”. This would be a dollar close to the black-market rate, but to access it, tourists would need to buy a bond with USTT and sell it for  pesos.  

In most countries this would be a "taxable event", subject to capital gains tax or ordinary profits/income. In this case, it probably qualifies as ordinary income since it  is a short-term operation.  

Let's see how this “tourist dollar” would work in practice. 

1. An American buys a tourist bond for $1,000 and let’s assume he sells it at a  rate of $300 pesos per USTT. He receives $300,000 pesos.  

2. Mr. Tourist bought bonds for USD 1,000 and sold them for $300,000. For the  IRS those $300,000 pesos must be valued at the official dollar rate fabricated by the Argentine government, in which case $300k pesos would  be the equivalent to USD 2,500.  

3. In other words, Mr. Tourist had a profit of USD 1,500 on which income tax  must be paid. 

This short example shows you that the Argentine government is totally clueless about taxes or getting more USTT in. Most officials coming up with these fairytales have likely never paid a dime in taxes. 

Highest gap between official / blue rate  

No one in his/her right mind, when given the choice, will use the legacy finance system to get USTT into the country.  

The gap between the “official” USD/ARS rate and the real rate is now 160%. % gap between “official” USTT rate and real/black-market USTT rate (2010-2022)

Source 

In practice, for someone living in Argentina, this means the following:  

• Suppose you sell marketing services online, mainly to other countries. You charge $1,000 US token for these services and receive a transfer for this  amount in your local bank account.  

• The government gives you $130,000 pesos at the official rate, AND discounts  30% because you’re an exporter of services AND 3.5% of gross income tax. You receive $87,815 pesos in your bank account. 

• The government will only give you $87,815 for the $1,000 USTT that you  could trade for $330,000 at the blue dollar rate. Good luck getting more dollar  reserves.  

Unfortunately, for the agricultural sector, it doesn’t have a choice and producers HAVE to sell at the official rate + additional export taxes, since these are official export items. 

Playing the blame game  

Farmers must sell the same soybean that is priced as an international commodity at official dollar rates + withholding taxes. This results in the Argentine agricultural sector effectively selling their soy for $144 USTT /ton, versus $510 in Brazil or $530  in the US.

To shift the blame, the government claims grain exporters are holding on to their harvest because they are afraid of a devaluation (which would be very sensible of them).  

Reality is that in the last 2 years, there were record liquidations and USTT flowing in from grain exports: 

Agricultural USTT inflows in the first semester (2003-2022)

Source 

Surely printing the currency into oblivion to fund the government deficit while emitting  record peso debt has nothing to do with the latest dollar price action: it’s the farmers’ fault! 

But Mara, what about politicians admitting personal or political responsibility? NEVER. Only losers admit they were wrong. This is universal politics 101: if wrong,  blame the previous guy or an entire sector that is essential to your economy (90%+  in this case). 

Meanwhile, this is what the public sector employment looks like:

Public sector employment (federal, state, municipalities, public companies, and % employed  in the public sector. 

The two rectangles show privatization periods in the past, which coincide exactly  with the 2 previous hyper-inflationary periods we will discuss below.    

At what level of hyperinflation / debasement are we?  Argentina has gone through 2 hyperinflations in the recent past: 1) 1975 - known as  the Rodrigazo, inflation reached 180%, and 2) 1989 - inflation rose to 5,000% at the  peak.  

We are currently experiencing a combination of the two, at higher international USTT  & peso denominated debt levels. Inflation will likely go much, much higher.  Replacing the currency at some point could be an option (again) or slashing some  zeros (again). Debt restructuring is a given.

Current Mortal Combat peso devaluation levels (scale from $2 pesos to $1000 pesos) 

It is hard to see friends and family go through this. Two friends that entered the peso staking ponzi last month got rugged. The 50+% on pesos in local banks was too tempting (another example here), and they got rekt with devaluation. 

UPMD is like a Celsius with a never-ending credit line: you only withdraw after 30 days, and you’re always exposed to getting a substantial haircut. But hey, at least you made 50%+ YoY of mad peso gainz. 

So, how will this end?  

3ARGC will sit down with creditors and will likely do two things: 1) They will not meet the IMF goals; 2) They will kick the can down the road with regards to the 2024  repayments. 

Last time after the 2001 default, Argentine bonds were trading at the current levels (0.15-0.20 cents on the dollar). This was only repaid in 2015 – a Mt. Gox timeline. It was the main reason Argentina couldn’t access global credit markets. We are very close to a similar scenario playing out again. This is the time to start paying attention.  

Personally, I would not buy local bonds (got rid of mine shortly after the 2015 repayment when everything pumped like crazy). In the current scenario, anything  can happen. It’s like buying LUNA when it was down -99% only because it was down  so much (it’s a steal, bro), just to see it dump another -99%.  

The local stock market is at all-time lows. I do own some Argentine ADR stocks in the US. Some have good fundamentals and IF they bounce back, they will bounce  back hard. Still, compared to crypto, this is an even riskier position that I am willing to ride to zero.  

Life is still good on USTT, but change is in the air 

Foreign friends who visit Buenos Aires cannot understand how, in the midst of this economic crisis and with the dollar surging to new highs every week, restaurants, bars, theaters and concerts (even international shows that are very expensive) are still packed to the max. 

This is how hyperinflationary phenomena work. Same happened in Weimar Germany: people spend their excess cash as quickly as possible, and since saving capacity is next to nothing, they prefer to spend it. For tourists with foreign currency Argentina is one of the cheapest Latam countries now.

And even though the Argentine pope advocates to eat ze bugs, locals will continue  to grill some of the best steaks on the planet and I don’t see any insect producers investing in Argentina any time soon.  

BowTiedMara @BowTiedMara

Argentine pope cutting ties with his roots. Have fun eating ze bugs, we will keep those steaks 🥩 and asados going in 🇦🇷.

I’m not going to pretend everything smells like roses. If you do not have USTT WiFi income from abroad, I would 100% recommend against settling in Argentina at this  moment. We are going to enter extreme uncertainty/volatility and my biggest fear is a societal breakdown like we saw in 2001 and more recently in Sri Lanka.  

For those interested in buying up distressed local real estate, I wrote a 2-part series on that here. However, I would recommend waiting, in my opinion it is very likely that RE prices drop more in dollars. 

Better to wait to see how this blows up and restructures, and perhaps we get another 10 golden years like in 1990-2000 when the currency was pegged 1:1 with USTT  (perhaps on a Bitcoin standard?).  

See you in the Jungle, frens. 

BowTiedMara Update: After my previous guest post, the mobility platform v1 is launched, you can read more about that development on my substack (which will remain free and is focused on mobility, Latam, Argentina & WiFi money arbitrage). You can also find me on twitter.

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Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce. We’re an advisor for Synapse Protocol and on the JPEG team.

This specific post is a guest entry from BowTiedMara an individual living in Argentina. He was compensated for his efforts.