By Alejandro A. Tagliavini *

              For decades the industrial sector in Argentina has had very little weight because the State not only takes away work capacity with so many regulations -limitations and prohibitions-, but also takes away large resources through taxation and takes almost all the financial resources.

              Today, as Gabriel Rubinstein points out, 90% of the private sector’s deposits in pesos are placed in instruments issued by the Central Bank, BCRA, (62%) or the Treasury (28%). Banks are «tempted» to lend more to the government. Obviously, in the face of any disruption that occurs, the entities would be too exposed or, rather, the depositors since the «financial friends» always ends up arranging with the politicians. According to Broda, credit to the private sector fell 11.8% so far in 2021.

             In short, in the absence of an industrial sector, substitute imports must be paid for mainly with the export of primary products or natural resources with a low level of industrialization. Carlos Boyadjian says that, according to official data, of the USD 35,373 million that were exported in the first half of the year, 11,900 million or 34% correspond to soybeans and derivatives. It is followed by the corn complex with USD 3,744 M and a percentage of 10.6%, then the automotive sector with 8.6% of the total, and then the oil-petrochemical complex, contributing 5.9% and the wheat complex with 5.1% of the total. The rest are divided into fifty items, the vast majority from agricultural and mining resources with low industrialization.

               Now, the total quantities exported grew only 4.7% in the first half of 2021 compared to the same period of the previous year despite the lifting of restrictions with the excuse of the «pandemic», but there was a substantial improvement thanks to the increase in prices in commodities. According to the Indec, the export price index increased 22.4%. But this could change due to, among other things, ironically, global inflation.

                Alasdair Macleod recounts that last week, in his Jackson Hole speech, Fed Chairman Jerome Powell reluctantly admitted that prices could go «a little higher» than previously thought, but that it was too early to conclude that policies should be adjusted immediately. In other words, with prices rising to more than double the 2% target, there is nothing to worry about according to him.

                   By the way, independent analysts, such as John Williams from, assure that the rise in the CPI -in the US, that is, in dollars- today is more than 13% annualized, a figure unthinkable until a few months ago for the first global power. Figure 1 clearly shows that the monetary issue -M1- has skyrocketed and seems uncontrolled:

                Certainly, there is a generalized distortion of prices -and logistics as in the case of chips- because of the restrictions imposed by the governments with the excuse of «the pandemic» but at the base, the increases in the general price level occur as the newly issued money enters circulation. But it turns out that, as Powell admits, businesses and consumers report extensively on upward pressure on prices and wages.

                  Thus, while inflation causes the CPI to rise, at the same time it destroys production and then the demand for inputs and raw materials falls, leading, ironically, to a drop in commodity prices. The Commodity Research Bureau (CRB) index acts as a proxy indicator for today’s global commodity markets. And in the following graph you can see how, thanks to inflation, it has been rising strongly but now it seems to stabilize as a prelude to a fall:

            Now the Fed uses two separate mechanisms for currency expansion. One of these is quantitative easing (QE) that aims to provide financial institutions with cash in exchange for low-risk assets, specifically US Treasuries and government agency bonds. This QE has the effect of keeping the yields – inverse to the price – of the bonds repressed and the equity markets inflated due to the liquidity of the receiving institutions. Thus, in real terms, interest rates are now negative.

            The other mechanism, independent of QE, is the government budget deficit, theoretically financed with private sector savings, but in the absence of an increase in the savings rate, it is financed through the expansion of currency and credit. Thus, as the following figure shows, the general account of the Treasury in the Fed is lowering strongly:

Since March 2020, when the balance was USD 380,000 M, the government accumulated 1,437 B more to a balance of 1,817 B in just over four months. Since August of last year, all that accumulation and a little more has been spent in general circulation, causing liquidity in the economy.

                 So, unusually, in the meantime, equity markets have been grossly overvalued thanks to the Fed’s assurance that they will never fall; that’s the main purpose of QE. A fall in the dollar and a rise in bond yields along the curve will almost certainly signal the start of a bear market. And with foreign investors taking $ 13,300 B worth of US stocks by the end of June, the foreign sale of stocks and dollar earnings could be an early warning of a new bear market.

               If the Fed loses control over rates, the market will be considerably bearish. But the Fed is expected to keep «economic confidence» high. If you want to save the markets, you will have to increase QE at the start of any significant decline in the S&P 500. This is the reason why QE was reestablished in March 2020 and continues to this day at $ 120B per month, adding USD 2,000 B so far.

                Thus, in 2021, global stocks have returned 16% through September 1, with historically low volatility. Although not everything has been rosy, in fact, MSCI China has fallen 26% since February 14, while MSCI Europe has risen 14% during the same period.

                 By the way, this inflation has reached the cryptocurrencies that do not fall even when they are accused of being highly unstable. Bitcoin managed to react at the end of last week exceeding $ 50,000. Thus, other crypto assets also followed the trend reaching growth even exceeding 120%, according to Cointelegrah, as is the case of Revain (REV) which was trading at USD 0.031 which represents a rise of 121.57% in one week.

                 Anyway, by the way, in the long term, there is always the yellow metal. Since Nixon, in 1971, decided to deliver the death blow to the gold standard, the dollar has lost 98% of its value against the precious metal.

*Senior Advisor, The Cedar Portfolio  


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