Back in August, I attended a school fundraiser. A ‘bloke’s night’.

Tickets covered a beer, pulled-pork buns, and entertainment.

I ended up watching that disastrous rugby game with a friend who had moved his family from Argentina to New Zealand.

 

All Blacks vs Argentina. Source: 1News/Photosport

 

Yes, I’m talking about the All Blacks’ historic loss to Argentina on the 27th of August.

Fortunately, we had other things to talk about beyond the rugby. And economics is one subject Argentines don’t mind talking about.

 

 

The disaster of money printing

 

Here in New Zealand, we’re worried about inflation running hot at over 7%.

This country is a relative newcomer to money printing and debasement of its money supply. In this case, used to cover the enormous burden of subsidising people through Covid-19 lockdowns.

Europe and America began their journey with quantitative easing much earlier, stemming from the GFC. And are now seeing even higher rates of inflation.

But for New Zealand, the production of money from thin air represented a very large proportion of the economy. Much of it appears to have gone into a debt-induced housing bubble now starting to unwind.

Now, spare a thought for my friend from Argentina. Victorious that night with the rugby. But in his home country, inflation currently runs at almost 80%!

Argentina is the second-largest economy in South America (after Brazil). And it has been using the lure of money printing to attempt to clamber its way out of deficit and debt for years.

If you want to understand why inflation is such a poisoned chalice for an economy — and why the stiff medicine of central banks is now so vital — take a look at Argentina.

 

What does 80% inflation look like?

 

Sometimes, to understand something, it’s useful to take it to its wildest extreme.

Governments get tempted to pull the string of easy money to try and resolve problems. In particular, that age-old problem of there never being enough money to go round.

Central banks struggle to get inflation under control. You can only bump rates so much before you risk serious recession and harmful inequality. Meanwhile, as price expectations keep rising, inflation gets away.

In Argentina, despite price freezes on many essential grocery items, prices go up every week.

For example, take my friend’s local hardware store back in Argentina. It stocks thousands of items. But there are no prices on the shelves. You take what you want to buy to the counter. And the cashier rings up the price. The prices are updated from the wholesaler every week.

The first problem is that all this leads to a very dysfunctional relationship with money.

Pesos are to be spent as soon as possible. Local banks aren’t trusted.

And the most common area in which to dispose of pesos? Buying US dollars.

Though Argentines are restricted to no more than $200 a month. As you might expect, there’s a thriving black market for US bills.

In the wealthier neighbourhoods of Buenos Aires, restaurants are packed. Often booked up weeks in advance. But that’s only for a slim slice of society.

The main problem with runaway inflation is you end up with an economy that doesn’t work for most people.

And the dark reality for Argentina? About 40% of the population lives below the poverty line. With incomes below US $465 per month.

For many, this means living in houses with no running water, no bathroom, and no gas to cook with.

 

One of many slums surrounding Buenos Aires. Source: Borgen Project

 

This also makes for a government that features endemic corruption and low levels of trust. Polarisation means the country is not well governed.

Argentina was once among the world’s wealthiest nations. It is rich in natural resources. Yet today it scrapes by as a middle-income country with extreme levels of inequality.

 

Inflation’s medicine

 

The central bank in Argentina recently hiked its base interest rate to 75%. They’re trying to get people to stick with pesos.

Unfortunately, the economic system is such that even extremely high rates fail to dampen out-of-control prices.

Homes are priced in US dollars. And mortgage-lending is hard to come by.

The stark reality is that money printing and inflation — left unchecked for too long — destroys currencies.

Inevitably, high interest rates pull the rug from under home prices.

The sharemarket sees drawdown as companies face higher finance costs and investors see higher return from fixed-interest.

Lessons from previous inflationary spirals (the 1930s and 1970s) show that home prices can take a decade or more to recover. Whereas stock markets may spring back within a year or two.

 

Investor’s antidote

 

A smart investor positions themselves for the cycle to change.

Right now, stocks dependent on property and finance have been hit. Many are offering big discounts on their intrinsic book value.

Other businesses in banking, energy, and commodities are profiting from interest rate and price spikes. As a result, many offer strong dividend yields to help combat inflation.

Most portfolios will be seeing drawdown right now. But allocations in anti-inflationary positions are helping to ride out the storm.

Now the compelling choice (and risk) is to invest in businesses that have become too cheap to ignore. And are poised to benefit when the cycle turns.

Fortunately, unlike in Argentina, we see central banks in developed countries ready to nip inflation in the bud.

Sure, they’ve been ‘too little, too late’. But the gun is now fixed on the target.

While there remains risk that they won’t get control on prices and money will continue to debase, recent strength in the US dollar suggests at least one central bank is willing to fight erosion.

 

 

Our opportunity for you

 

In these worrying times, it’s easy to batten down the hatches and miss opportunity.

History tells us that those who invest when ‘there’s blood on the streets’ may prosper greatly when the cycle turns.

We’re investing now in the portfolios we manage for our Wholesale clients. And we’re investing in our own portfolios.

Wealth Plan is an opportunity for Wholesale or Eligible investors to discuss this further.

As a reader of Wealth Morning, you’ll likely be in this category.

If you’d like to discuss the economic outlook and the opportunities it could present, please get in touch by requesting a free consultation.

 

Regards,

Simon Angelo

Editor, Wealth Morning

(This article is general in nature and should not be construed as any financial or investment advice. Wealth Plan services are for Wholesale or Eligible investors as defined in the Financial Markets Conduct Act 2013. Please request a free consultation if you would like to discuss your eligibility.)