October 2, 2018

Another week and another all-time low for the Argentine peso, which registered its first weekly close above 40 per dollar, or 41.28 to be exact. At the end of 2017, the Argentine peso was changing hands at 18.59 against the dollar. Argentina has the weakest G20 currency, down 55% so far this year, followed closely by Turkey and its lira. The South African rand, the Indonesian rupiah and the Brazilian real also have issues, but not nearly as challenging as what is going on in Turkey and Argentina.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The sad part is that the Argentines have been there before, and it does not take them long to bastardize a currency. The issue is the tendency of the central bank to run a very lax monetary policy with negative real interest rates. I remember many stories over the years about how most Argentines do not believe their government’s official inflation statistics. This causes them to hoard dollars, and for very good reasons, given the serial currency crises the peso is prone to. In the past 30 years the Argentines have managed to turn the peso into confetti three times, with the caveat that the third such cycle has not been completed.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In a negative real interest rate environment, the economy gets a boost and grows faster than would be possible otherwise, but ultimately the type of economic disaster that comes from the high inflation that typically accompanies a currency crisis ends up not being worth the sugar rush of negative real rates.

What to Do in a Currency Crisis

In a currency crisis, besides the most obvious move  to reach for hard assets like gold and silver bullion, and hard currencies like dollars and euros  the best moves for Argentina-based investors and dollar-based investors are somewhat different. For those outside Argentina looking for bargains in Argentine stocks, we have not come to the end of this crisis, so it is too early to look for values in Argentine stocks.

I know it is possible to pick up companies with staying power at 25 to 50 cents on the dollar, but the volatility in Argentine assets can be so high that it is simply not worth “catching the falling knife” now, so dollar-denominated investors should stay away, as we are still very much in the contagion phase of this emerging markets crisis. It is a different emerging markets currency making negative headlines every week, which is a good indication that this dislocation in the currency markets is not over.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

On the other hand, Argentina-based investors, apart from stockpiling euros and dollars, should very much buy stocks. The Argentine benchmark Merval stock benchmark is up from 5000 to 35000 as the peso has dramatically weakened, simply because Argentine “blue chips” – if there were such a term in a country prone to serial currency crises – can reset their operations at a weaker peso exchange rate and, despite disruptions to their businesses, most will likely still be here after the latest IMF bailout, so a position in a Merval index fund is vastly superior than holding Argentine pesos in an Argentine bank.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

You can see the same dynamic playing out in a more extreme situation like Venezuela, which has been deteriorating for much longer, even before the present Federal Reserve quantitative tightening cycle started. Since it does not appear that that the Fed is done, or that the Trump administration will stop its aggressive policies to rebalance the U.S. trade imbalance, I am of the opinion that we will make a fresh all-time high in the Broad Trade-Weighted U.S. Dollar Index in this cycle, which means a level above the 130.196 high registered in February of 2002. Aggressive moves both on the monetary policy and fiscal fronts in the U.S. mean that this emerging market crisis has further to go.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Would you care to guess where the non-trade-weighted U.S. Dollar Index was in February 2002? It was near 120. Last Friday it closed at 95.13. There are numerous technical factors that make the dollar seem a lot weaker than it actually is, particularly when looking at the old-style US Dollar Index, which is not trade-weighted. Still, the rampant dollar borrowing in the past 10 years is backfiring at the moment and promises much higher values for the U.S. dollar, looking at both the trade-weighted and Dollar indexes.

Borrowing in U.S. dollars is out of control because many emerging markets (EM) borrowers assumed, erroneously, that U.S. interest rates would never rise.  Well, they are rising, and such rampant borrowing is backfiring spectacularly.  Emerging market debt is over $40 trillion, over half of which is China’s:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As a reminder, let me repeat the point I have often made, that dollar borrowing is equal to dollar shorting. When an EM government or corporate entity borrows dollars, they sell them back for their local currency, to use as they please. Rising U.S. interest rates accelerates these dollar loan repayments and causes the exchange value of the dollar to surge, creating what is in effect a gigantic synthetic short squeeze.

And It’s not done surging.

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. *All content of “Global Mail” represents the opinion of Ivan Martchev*

Disclosures

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives