Milei Bros: It's Time for the Truth About Caputo-ismo and Inflation in Argentina

Let's start by saying—Javier Milei is the greatest salesman for individuals, families and businesses relocating to Argentina the Casa Rosada (pictured above) has ever seen. But what Milei's doing in cutting government bureaucracy by itself, won't fix Argentina's decades-long run of terrible inflation. Which we're seeing and feeling in all its stubborn persistence, on the streets of Buenos Aires, in our favorite nearly empty weeknights steakhouse, and in conversations with the steakhouse's underemployed maître d.

Photo credit above: Casa Rosada presidential palace in Buenos Aires

Uploaded to iStock by Elijah-Lovkoff Jul 2023 iStock photo ID: 1536454228

What is La Bicicleta aka the Argentine Peso-US Dollar Carry Trade?

For those who will decide TLDR, the Argentine Peso (ARS) is subject to a carry trade speculation also known to Argentines as la bicicleta (the bicycle). At the risk of quoting a leftist paper, here's a concise summary from Federico Rivas Molina in El Pais:

If you are Argentine and can save, you will almost certainly do so in dollars. But imagine the government tells you that it will depreciate the peso at a rate of 2% per month. But if you buy pesos, it will pay you between 4% and 5% interest on them monthly. Your financial advisor will then recommend a very simple operation: exchange your dollars for pesos, buy bonds with those pesos or put them in a fixed term interest account, and buy dollars again once the difference has been harvested at the end of the month.

The difference between the peso depreciation promised by the government and the interest rate you will have received will determine your profit margin. It sounds like a tongue twister, but it is an operation with a name and a surname: In Argentina, it is known as the “financial bicycle”; traders prefer to call it carry trade. It involves investors buying riskier currencies in the hope of pocketing enough interest to more than cover exchange rate losses.

The carry trade was a classic investment model during the Argentine dictatorship of the 1970s, revived in 2016 with Mauricio Macri, and now back again with the far-right leader Javier Milei. Argentines who have “ridden” the bicycle have gained up to 50% profit in dollars over the space of 10 months, another miracle to emerge from the Argentine macroeconomic meltdown.

For the bicycle wheel to spin, a number of conditions must be contradictory: a confluence of high interest rates on local currency along with evidence of its weakness against an appreciation of that currency against the dollar, which implies strength. As Argentina is usually an exception to the rule regarding macroeconomics, speculators invariably cream off high-risk profits there. Right now, the conditions are ideal. In a bid to control inflation, Milei’s government set the peso depreciation at 2% per month, two points less than average inflation. And, since it needs to clear the market of an excess of pesos, it is offering rates above inflation, up to 5%, to exchange them for dollars. Add to the mix a foreign exchange ceiling: i.e., the purchase and sale of foreign currency is controlled by the state, preventing free floating. The scenario is completed with the laundering of capital which introduced $12 billion into the market, which went to the banks and strengthened international reserves.

As investors are confident that Milei will defend the backward exchange rate at any cost and not back down on his war against inflation, they are encouraged to carry trade, with quicker and more lucrative profits than, for example, an investment in capital goods such as industrial machinery. This has been going on since January, and for now the wheels are still spinning, to the benefit of high-risk investors. The consequences for the real economy are obvious.

The financial bicycle is tempting, but it is also extremely risky. All it takes is a devaluation of the dollar for the spread between the initial investment in pesos and the repurchase of dollars to vanish. This happened in 2018, when investors who had acquired peso bonds lost confidence in Macri’s government and fled in a mass exit. The Central Bank went so far as to sell almost $1.5 billion of its reserves in a single day to contain the value of the currency, but it wasn’t enough. In April, when the crisis began, a dollar could be bought for 20 pesos; two months later the exchange rate had already exceeded 30 pesos per dollar. What is clear to investors is that the conditions that allow them to profit from the carry trade are short-lived because, for an economy to function, they cannot be sustained.

For further reading on the Argentine peso-USD carry trade in Spanish, check out this thread by the BA economist Juan Manuel Telechea.

Photo credit above: Panoramic shot of Avenida 9 de Julio in Buenos Aires

Uploaded to iStock by Elijah-Lovkoff Nov 2022 iStock photo ID: 1436162463

Oh I know, Milei is a libertarian's dream—he's got great slogans, "¡Viva la libertad, carajo!" (Long live freedom, dammit!) and the succinct " ¡Afuera!" (Out! Or "You're fired!" translated into Trump lingo). But his fans on X/Twitter promoting Argentina as an excellent relocation destination for North Americans and Europeans—which we're convinced it will be, over the medium to long-term—tend not to look more carefully behind the curtain. And the great and powerful Wizard of Oz character behind that curtain is Luis Caputo the Economics Minister, a former JP Morgan trader and head of Deutsche Bank in Eastern Europe. Note especially that Deutsche Bank connection.

Mr. Caputo, the former finance minister who re-negotiated Argentina's IMF debt, is the one setting the true austerity and monetary policy of the country, on behalf of players exploiting the Peso/USD carry trade. Milei is a showman/salesman, who unfortunately, lacks the power to fire Caputo and deal with the fallout. And former IMFers know it.

The fact that Argentina is under carry trade-pumping Caputo-ismo rather than Milei-ismo is the basic point everyone contemplating long-term relocation of their families and capital to Argentina needs to understand. Despite rosy statistics, ordinary people here are still struggling after decades of Peronist bureaucratic bloat, ravaging inflation, and IMF external debt management. The rosy statistics released by the relatively new government do not match what we see on the streets. But please, don't take my word for that!

Prices for everything imported and a growing list of local goods remain high, which implies the people who can make their purchases on the much more affordable Brazilian, Uruguayan or especially the Paraguayan side(s) of Argentina's borders will keep much more of what they earn. But even with a solid digital nomad job while buying clothing, jewelry and watches abroad, not all Argentine living costs can be mitigated by simply paying for extra bags on frequent round trip flights to Asunción. Private health insurance premiums in Argentina are starting to bite.

Take a good look at the honest X feeds of others who've been living here for years below. Here are some extensive comments from the expat community in Buenos Aires over high inflationary prices:

Private healthcare insurance in Buenos Aires isn't the great deal it was before. Costs keep going up each month. Many locals who had private insurance are having to drop their coverage. There is free healthcare at the public hospitals but many prefer to have private insurance. Here you can see the monthly inflation with many of the local insurance plans. When the government talks about lowering inflation, they aren't including many essential things that many people are paying for. Healthcare is definitely an area where costs keep skyrocketing in Argentina.

2:05 pm Nov 14 2024 @BuySellBA

In Argentina for a decent OSDE 210 plan I'm paying $460 USD per month for 2 adults. Adding on 3 kids would likely add on another $540 USD so around $1,000 USD per month. Private healthcare coverage has skyrocketed since last year. It's gone up tremendously with inflation. And unfortunately, it's still going up. The government stepped in to try to get companies to stop raising it so much but in the past few months, it's been going up about 5% each month. It isn't cheap like it used to be but less than the USA. But if the inflation keeps going up on healthcare costs it will be terrible.

1:59 pm Nov 14 2024 @BuySellBA

Not so simple…Prices have skyrocketed to unsustainable levels. Most [imported] items in Argentina are now more expensive than Switzerland. And as with most government numbers, the real inflation is much higher that that which is reported.

4:14 am Nov 14, 2024 @TheJerzWay

100g Nescafé: $5 en Chile. $20 en Argentina. Totalmente de acuerdo, Chile no tiene una Copa del Mundo. @Geologo_Trader

11:39 am Nov 11, 2024 @Geologo_Trader

Argentina is a peaceful country, with very little violent crime to speak of, and murders are rare. At least where I am in San Rafael. Things are relatively inexpensive, especially meat and wine, but wages for the average citizen are pitifully low. Earning just a few dollars an hour makes it tough to afford even the basics. While violent crime is exceptionally low, petty theft is rampant. We took the usual precautions: alarms, cameras, even night patrols with flashlights. But nothing beats a vicious dog.

The best ones have a single master, and they’re put up during the day because they’ll attack anyone. Everyone.

One of our farm workers, Ricardo, took pleasure in raising these beasts. Imagine the dog in [the movie The] Sand Lot. Always growling in the shadows. I'd look nervously at the frayed rope they were tied with, knowing they wouldn't hesitate to pounce on me if they could. We have plenty of stories about those dogs defending our property.

Someone would try sneaking in at night, breaking into one of the houses or barns, only to get an unwelcome greeting. Sometimes the only trace left behind was a torn piece of clothing or a bloodstain—but they were long gone by morning. So, what did we do? We bought a golden retriever. He’s never met a stranger and would probably open the doors for intruders if he could. Now, nobody is nervous to stroll around our farm. We named him Oslo. Oslo’s getting older now, but the grandkids all still adore him...

7:54 am Nov 15 2024 @Wine_Cowboy

What we are seeing with President Milei's recent highly publicized visit to Mar-a-Lago and reported enthusiasm for a bilateral if not Mercosur-wide free trade deal with Trump is a negotiation for more favorable terms on Argentina's IMF loans, not permanent relief from the vulture capitalism that has plagued Argentina's outstanding bonds. Nor is there any relief from the short-termist carry trade economics that for decades, have detracted from the long-term investment in Argentina's mining, industry and farms. The kind of FDI that would create higher wages like you saw during Chile's economic miracle, until things took a turn for the worse during the collapse of copper prices amid the Global Financial Crisis and have yet to fully recover there. Or prospering in a less controversial way without Los Chicago Boys like Uruguay, a country that very quietly dislikes comparisons to its bigger, rowdier and more renowned in the World Cup neighbor. Gordon Gekko famously said money never sleeps but old South American money does prefer peace and quiet.

Make no mistake, the IMF debt ball and chain is not being removed from the Argentines' ankles, only the chain length is being given more slack.

As Billy Joel sang, I still belong, don't get me wrong.

I will keep pounding the table for the Southern Cone including Buenos Aires as a destination for upwardly mobile global investors, and not just the stereotype of divorced middle aged men burned out on the dating scene in Colombia...

Get residency in Paraguay, live and play most of the year in BA as they say.

BA is a gorgeous city with beautiful women and unlike the South American answer to Zurich of Montevideo with its odd shuttered business hours, there's never a shortage of things to do here--or places that are conveniently open.

Anyone interested in high culture, farming or viticulture, regardless of what happens with the Argentine Peso, needs to keep Argentina top of mind. But it's good for the Milei bros on X and even some MAGA Americans who only intend to visit to receive a reality check about the ridiculous Peso inflation and Switzerland-level prices for imported goods and meals in the fanciest areas. A saving grace that keeps me here is that rent, particularly if you are willing to live further out from the most tony neighborhoods with their "gringo pricing", remains more reasonable than in the more expensive North American and EU cities.

Speaking of which...the USD is strong against the euro. Everyone knows with trillion dollar deficits every 90 days plus the way too-high cost of manufacturing in the US, the USD is ridiculously overvalued. So is the euro with Europe's own terrible fiscal deficits and the spectacular collapse of energy-starved German industry, a big reason we expect Germans who see Russia as cold or controversial will emigrate to the Southern Cone. Poor Germany, so close to the NATO provoked Russian Bear, so far from being able to say nein bitte! to the Nordstream 2 destroyers in Washington and Langley.

How can G7 manufacturers compete with the Chinese behemoth in so many areas? And how besides having your President hang out with Elon Musk at Mar-a-Lago do you bring the first Tesla Gigafactory in Latin America to Argentina? Simply driving down wages in real terms won't do it.

Mary Anastasia O'Grady in an early December 2024 Wall Street Journal column (paywalled here) commented on how Argentina has become "a very expensive country". Well, I lived through the President Carlos Menem era. As with the US and EU, life in Argentina is far more expensive now then 25 years ago. The USD has gone up (measured against an average of other nations' currencies) 7% since October. It makes no sense that it's dropped against the ARS. When Trump won bigly over Kamala Harris, the dollar strengthened everywhere. The Euro lost 5% and the Pound Sterling 2%, yet the ARS strengthened. How is that possible?

Some Argentines know that Trump’s policies contributed to the ARS collapse, back when Mauricio Macri was president in 2018. The power behind the throne Caputo was also finance minister back then. And, perhaps most worrying for the entire Mercosur, Brazil is devaluing. And Brazil remains the locomotive engine pulling Mercosur. If the locomotive sputters, the whole train slows down. There are a lot of parallels with the present and the end of la convertibilidad in the early 1990s and 2001.

Simply put, I agree with don’t see how the present Caputo fiscal or monetary policies are sustainable. Every news item/tweet etc I read about Arg economy comments on the overvalued peso, yet the government and Caputo don’t comment on it.

Argentina is a beautiful country with lots of hard-working and talented people. The 8th largest country on the planet has amazing spreads of temperate climate farmland (sorry ESW Eurasia Editor Stas, but Southern Russia's famous black earth regions are stuck in a much colder climate) plus lots of opportunities in Patagonia glamping, Mendoza wine country tourism and Inshallah--if the government successfully opens the Vaca del Muerte to mid-size investors--there's money to be made here for the gringo natural gas frackers of West Texas as well. But look beyond Mr. Milei's rousing libertarian speeches and approach this country where I've lived for years with a clear eye.

If you plan to settle in Argentina long-term, our strong recommendation is obtaining residency in Paraguay, Uruguay or Brazil first (for young internationally mobile couples, the latter is also a fine country for birth tourism). Given the probability the ARS carry trade will blow up knocking la bicicleta into the ditch again in the coming months, it's advisable that you start the process of obtaining permanent residency in a neighboring country before you get started in Argentina.

David Segal is an American Jewish Russophile residing in Buenos Aires and a classically trained concert pianist. You can find him on X @DavidS_Liberdad.