Finance

Today in “It Was Always a Bad Idea”

By David Stockman  |  May 9, 2019

It is not often that you see life and fiction take each other by the hand and dance.

– Lawrence Thornton,
Imagining Argentina (1987)

At its intraday bottom today, the Dow Jones Industrial Average was down 449.91 points. Just like yesterday, a late-day rally made things look respectable.

Bubblevision played the old “China Trade Deal” card to explain Wednesday afternoon’s rising action.

Perhaps it’ll be Facebook (Nasdaq: FB) co-founder Chris Hughes striking a blow against the billionaires by calling for the social media behemoth’s breakup.

The Federal Reserve has already capitulated.

What else is there? It’s not a healthy underlying economy. To wit, the Institute of Supply Management released its semiannual survey of capital spending in the manufacturing and non-manufacturing sectors on Thursday.

Turns out that CEOs and CFOs remain focused on share buybacks rather than investing in new growth.

Laughing is all there is to keep from crying in this market.

That Argentina’s sovereign bonds are crashing… again… takes the tragicomedy to operatic proportions…

Yields on Argentine bonds crossed the 10% barrier in late April. And the implied probability of default within the next five years reached 61%. That’s up from 23% a year ago, notwithstanding a massive bailout from the International Monetary Fund (IMF) in the interim.

Bloomberg provided the details:

This week’s declines mark a setback for a country that weathered a market rout last year when it scored a $56 billion lifeline from the International Monetary Fund. Now the economy is back in recession, inflation is above 50 percent and investors are concerned Macri will lose October’s presidential election, with former president and populist Cristina Fernandez de Kirchner rising in the polls. The crisis prompted Macri to announce price controls on food products last week that some analysts said smacked of panic.

Argentina has defaulted eight times over the course of two centuries. As these things go, that’s a lot. It’s also responsible for the biggest sovereign default in history, back in 2001.

During the last 50 years, it’s been an ungovernable mess presided over by an alternating cast of populists, authoritarians, and straight-up crooks.

But, just two years ago, Argentina sold $2.75 billion of 100-year bonds on the international dollar market at a 7.13% yield. The issue was “hotly demanded”… “investors clamoured” for it… indeed, there were $9.75 billion worth of orders for the bond.

It was an expression of confidence in President Mauricio Macri’s “pro-market” plan to stabilize the country.

Within a year, Macri’s government asked for a $30 billion loan from the IMF to help it get through a currency crisis caused by a policy choice to ease inflation restrictions.

That those 100-year bonds are now circling the drain at 68 cents on the dollar is not exactly a surprise. In an honest market, they’d have been unsalable.

But “easy money” has bred bands of desperate, yield-hungry asset managers. They’ll buy anything with even the slightest bit of promise to help them beat their benchmarks.

They got placed because of monetary central planning.

There’s a complacency on Wall Street that tells all money managers they’ll be able to glean any threats in time to unload toxic cargo to the next greater fool before their enhanced coupon is completely consumed in principal losses…

Even this rationale is sign of the sweeping deformations wrought in the Bubble Finance era.
They bought this ludicrous 100-year Argentine bond on the theory that they can out-trade the market on a week-to-week basis, the long-run fundamentals be damned.

It is why the money and capital markets have been reduced to wagering casinos, and it’s also why global growth is being slowly suffocated everywhere on the planet.

if you do not have an efficient, disciplined, free markets for money, debt and risk assets—you will end up massively wasting real economic resources in unproductive investments and rent-seeking speculations.

That’s not investing. That’s gambling.

At some point, however, the epically ridiculous will devolve into the catastrophically consequential.

When It All Goes Argentina…

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

To common sense,

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David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR