[Editor’s note: because Bill is usually writing from the US, we don’t publish his copy until the day after he’s written it. So if you’re a bit confused as to why he’s predicting events that have already happened, that’s why.]
POITOU, FRANCE – Today is a holiday in France.
The 15th of August recalls the day when the Virgin Mary was assumed into Heaven.
It also typically marks a change in the weather. The locals say the heat of summer tends to end on the 15th.
Pretty Country
To mark the occasion, we got into our little Renault Kangoo and drove south. The roads were narrow, winding through valleys and over hills, always with beautiful views. France is a very pretty country.
“The French don’t deserve it,” said a Belgian acquaintance recently.
Cattle and sheep grazed in green fields bordered with oak, lime, or chestnut trees. We were crossing into the Limousin, a hillier region with large ferns – many of them already golden-brown from the warm weather and lack of rain – growing on the flanking roadsides.
Every few miles, we came upon a nearly deserted village. In the 1960s, on a warm summer evening before a holiday, these towns would have been full of life – with people sitting outside in front of cafes and bars… playing boules in front of the World War I monument… or perhaps enjoying music and dancing in the town square.
Local people have their own folk music called la musette, which is played on accordions, concertinas, fiddles, and guitars. Even as recently as 23 years ago, when we first came to the region, we went to festivals and danced to the musette, doing something similar to a Texas two-step, until late at night.
But little by little, the young people left. TV and Netflix replaced local entertainment. Bars closed. Restaurants locked their doors.
The residual geriatrics retreated into their own homes, barricaded their doors, and closed their shutters. So when you drive through one of these little burgs at 8 p.m., it appears completely dead.
Cocktail en Blanc
Our destination last night was a “cocktail en blanc.” The invitation came from an elegant Argentine woman who had married a Frenchman.
Every summer, they install themselves in his ancient family house deep in “la France profonde.” We had only the name of the farm, which we plugged into our GPS. We trundled along, arriving an hour later.
Everyone wore white in honor of the Virgin. About 100 people all told, we all foraged for appetizers and sipped wine, standing on the lawn and admiring the rolling hills in front of us.
These were different people from those of the farms and villages we had driven through. These were the elite… who lived in apartments in the 16th arrondissement of Paris, but maintained handsome family homes in their native regions.
Professionally, they were fund managers, engineers, managers, bureaucrats, and university professors.
Their children went to top schools and, more often than not, moved abroad to take advantage of career opportunities before returning to France to marry and raise children.
As the conversation began, inevitably, our fellow cocktailers detected an accent.
“Are you English?” they asked.
“No…”
Relieved, they probed further. Sooner or later, the question came up:
“What do you think of Mr. Trump?”
We ducked, dodged, and managed to deflect the conversation onto a related subject: the story we have been following for the last couple of days.
Suspected Sh*thole
So, we leave the soft pleasure of summer garden parties in douce France and turn to the “sh*tholes.”
The phrase, “sh*thole country,” was popularized by the U.S. president, the same fellow who just referred to one of his former colleagues as a “dog.”
For him, faithless lieutenants have tails… and anything north of the 49th parallel, south of the Rio Grande, west of the San Gabriel mountains, or east of the Hudson River is a suspected sh*thole.
Readers may not know this (we barely remembered it ourselves), but we have invested in what we now call a “Sh*thole Portfolio.”
The idea is simple: Just look for the markets that have done the worst… buy them… and count on regression to the mean to make money.
No research necessary. Last year, for example, that portfolio made a healthy 30% return.
But when the credit cycle turns, the dogs howl. One of the five investments in our Sh*thole Portfolio was – you guessed it – Turkey.
That market was a dog at the beginning of the year. But it’s down another 55% since January. And it’s dragging our whole portfolio down to a 12% loss.
Is it time to buy Turkey? Well, who knows? In a real downturn, the sh*tholes tend to become even worse sh*tholes… especially when they’re deep in debt.
Turkey has used cheap money to build houses, roads, and shopping malls all over the country.
President Recep Erdoğan, a strongman president with big plans, hopes to spend a further $1 trillion (an amount greater than the entire Turkish GDP) on bridges, canals, and even a third airport for Istanbul.
Already, the country has nearly half a trillion dollars in external debt to reckon with. More than likely, the next few years will be long, slow, and painful, as Erdoğan stiffs foreign creditors.
From macro economist, Russell Napier:
One wonders why investors expect President Erdoğan, a man who has referred to them as like the loan sharks who enslaved the Ottoman Empire, to choose to repay the foreigner and accept the crushing socio-political cost on the local population of doing so? Even if Turkish institutions have the ability to pay, something your analyst has long doubted, the president will forbid them from doing so. This is a large default and it will prove to be almost a total default.
Grim News
We also have substantial investments (though not in the stock market) in two other sh*tholes – Argentina and Nicaragua.
Long-time readers will already know of our mountain ranch high in the Andes of Argentina. And we also have a small interest in an oceanside estate on the Nicaraguan coast.
How are they doing?
The news from Nicaragua is grim. There, too, today’s troubles have a financial root.
Violence erupted when the government tried to raise taxes to cover its deficits. People were fed up with President Daniel Ortega, his wife, and their cronies, who have been skimming from public funds in various flagrant ways for many years.
A revolution seemed to be underway. But our sources tell us that rather than negotiating an exit, the Ortegas are digging in.
They are sending death squads to scour the cities, arrest dissidents, and lock down the entire country.
Our community on the Pacific coast of Nicaragua – Rancho Santana – is calm and peaceful… but empty.
“It’s just like it was when we first got there,” said one of the family. “It’s delightfully quiet.”
“This is really probably the best time to go,” she urged. “You can get there by going through Costa Rica, so you don’t run into any of the problems they’re having up in Managua, the capital.”
“I don’t know,” said a Nicaraguan friend. “If I were you, I’d be thinking about how I could moth-ball that place until the troubles are over.”
Seasoned Champion
Meanwhile, Argentina is a seasoned champion at stiffing creditors. Fake money causes errors. And when lenders are making a mistake, the Argentines don’t interrupt them.
So it was, almost unbelievably, that the financial press reported “hot demand” for an offering of 100-year Argentine bonds in June 2017.
Argentina defaults about once every 10 years, so the lenders could expect to be stiffed 10 times before the bonds matured. Nevertheless, they ponied up $2.9 billion… with a 7% yield… and looked forward naively to collecting $20 billion in coupons by 2117.
It took only nine months for the first pedals on this rosy scenario to drop. The peso began falling in April. It’s down 33% since.
With that background, the country can’t possibly attract the dollars needed to make the interest payments. So the Macri government went to the International Monetary Fund (IMF) to ask for a $50 billion bailout. And it raised its key central bank rate to 45% to attract foreign capital.
This is not necessarily bad for us, personally. We don’t make money in Argentina, we spend it. The drop in the peso helps our dollars go further.
But in a tightening cycle, everything goes wrong. Credit disappears… but debt remains. And then the debtors – in acts of patriotism, desperation, or depravity – find ways to get rid of it.
More tomorrow…
Regards,
Bill
Category: Economics