Argentina President Milei’s Bold Economic Reforms Should Be a Model to the Rest of the World


As an advocate of sound fiscal policy and a strong believer in the power of free markets, I find Argentina’s recent economic overhaul under President Javier Milei not just refreshing but essential in today’s world of bloated government spending.

Since taking office in December 2023, the libertarian leader has had to make some hard choices to stabilize Argentina’s economy, which has long been beleaguered by high inflation and overspending. His “shock therapy” approach, deeply rooted in free market principles and fiscal restraint, could serve as a blueprint for other nations grappling with similar economic ailments, including the U.S.

Milei’s strategy hinges on two critical pillars: fiscal reform and monetary stabilization. By addressing the country’s chronic overspending, his administration achieved a noteworthy milestone—a budget surplus in the first quarter, the first since 2008.

Tackling Inflation

On the monetary front, Milei’s government is working tirelessly to restore the balance sheet of Argentina’s central bank. This includes reducing the large peso-denominated liabilities and increasing foreign assets.

In a bold move, Milei halved the number of ministries and eliminated 70,000 public sector jobs. He also suspended new public works contracts and removed various subsidies, further underscoring his commitment to reducing state intervention in the economy.

The early results of these efforts are promising. Argentina has seen a significant drop in the monthly inflation rate, from a staggering 25% in December to 11% in March. Such outcomes not only bolster confidence among citizens and investors alike but also demonstrate the efficacy of disciplined economic policies.

Argentina Tightens While U.S. Continues to Spend Freely

While Argentina shows signs of fiscal tightening, the U.S. paints a contrasting picture with its out-of-control spending. The national debt continues to balloon, with liabilities now representing over 120% of the country’s gross domestic product (GDP). The government now pays over $1 trillion a year just to service the interest on that debt. This bloated bureaucratic machine not only stifles economic freedom but also poses a significant risk to the financial security of future generations.

The consequences of such fiscal irresponsibility are becoming increasingly apparent. The U.S. dollar, while currently strong, faces long-term risks if the nation’s debt trajectory continues unchecked. The average American family is increasingly pessimistic about achieving financial security, with only 35% of Americans believing their finances will improve in the coming year, according to a recent Acorns survey.

Bullish Bets and Cautious Analysis

High-profile endorsements have rolled in five months since Milei took office. Following a meeting with the Argentine president in Los Angeles, Tesla CEO Elon Musk tweeted to his 182 million followers that he recommends investing in Argentina. Similarly, billionaire investor Stanley Druckenmiller, after listening to Milei’s speech at Davos, described the president as the world’s sole free market leader today and disclosed investments in five Argentine companies.

At the same time, caution has been advised by researchers at Alpine Macro, who contend that the recent surge in Argentine stocks and dollar-denominated bonds might be excessive. The S&P MERVAL Index, which measures Buenos Aires-listed stocks, has rallied 40% year-to-date, which is a “one-sigma overshoot above its long-term trend, a level that is hardly sustainable,” Alpine Macro emerging markets strategist Yan Wang writes in an investment brief this week.

Gold’s Timeless Appeal

Against this backdrop, gold retains its age-old allure as a safe haven. Historically, gold has served as a reliable store of value and a hedge against currency devaluation and inflation. As the U.S. dollar appreciates due to high interest rates, gold becomes more expensive for investors using other currencies, which can dampen demand and affect prices. Yet, the intrinsic value of gold remains undisputed, particularly as a diversifier.

Historically, gold and the U.S. dollar shared an inverse relationship, though this relationship has weakened in recent weeks, as you can see in the chart below. The 14-day relative strength index (RSI) shows that both assets have reverted to the mean in a rare alignment of price action.

As I shared with you back in January, gold appears to have a new driver besides the U.S. dollar and rates. Namely, emerging economies’ push to diversify away from the U.S. dollar by increasing their gold holdings is now the most important driver of the metal going forward.

As Bloomberg’s Mike McGlone recently put it, “A top reason [gold] has remained resilient is the deepest pockets on the planet—central banks—are accumulating at a breakneck pace.”

Watch our latest video on gold’s Fear Trade by clicking here!

Index Summary

The major market indices finished up this week. The Dow Jones Industrial Average gained 2.16%. The S&P 500 Stock Index rose 1.85%, while the Nasdaq Composite climbed 1.14%. The Russell 2000 small capitalization index gained 1.18% this week.

The Hang Seng Composite gained 2.03% this week; while Taiwan was up 1.86% and the KOSPI rose 1.91%.

The 10-year Treasury bond yield fell 1 basis point to 4.49%.

Airlines and Shipping

Strengths

The best performing airline stock for the week was Air Transport Services Group, up 13.5%. Qantas announced that it has reached an agreement with the Australian Competition and Consumer Commission to resolve court proceedings in relation to its flight cancellation process. Qantas has agreed to a $100 million civil penalty; $20 million in remediation expenses; and will contribute to ACCC costs. RBC sees this outcome as incrementally positive.

JPMorgan’s channel checks suggest major container liners are pushing for another round of General Rate Increase (GRI). The bank notes the prior rounds of GRI, effective May 1, have successfully gone through, which led to a 10% rally in the Shanghai Container Freight Index for the week. It is also worth noting another major freight rate index, the Drewry WCI, inflected last week after the prior 13 consecutive weeks of decline.

Apparently, more Chinese opted to fly out of the Asian nation, with Japan/Thailand standing out as the two most popular destinations, followed by Hong Kong/South Korea/ Malaysia. Overall, the number of Chinese traveling abroad surged over 120% year-over-year during the May holidays, according to JPMorgan.

Weaknesses

The worst performing airline stock for the week was Tripadvisor, down 29.5%. Raymond James estimates that the Spirit Airline midpoints of second quarter 2024 guidance implies earnings per share (EPS) of $(1.19) or $(0.94), well below its $(0.40). The miss is driven by a much weaker topline with CASM-ex slightly better than expected.

According to Clarkson Research, April 2024 charter fees for car carriers (6500-unit capacity) were flat year-over-year at $110,000 per day. This level has remained stable since October 2023, but dropped for the first time in 47 months on a month-over-month basis (down 4%). Morgan Stanley is concerned about a deterioration in the supply/demand balance.

Ryanair shares declined following comments by Michael O’Leary in a press briefing, saying that he now expects summer fares to be up 0-5% year-over-year, below his previous expectation of 5-10%. As per Bank of America’s discussion with the company, the lower summer fare outlook is based on the April performance, which required demand stimulation to drive traffic.

Opportunities

Spirit Airlines appears to be planning a pivot in its operating model, citing new merchandising efforts and a potential recalibration of ancillary-versus-base fares. JPMorgan expects decisions regarding potential rebranding and reconstitution of its in-flight product to be announced in early August.

With the Red Sea Crisis likely to be protracted into the second half of 2024, or even into next year, the global liners which have hosted briefings recently have all lifted 2024 freight rate/profit outlook, reports JPMorgan.

Embraer may be selected as the OEM to supply up to 84 regional aircraft by 2028 to LOT, given its intention to double its fleet by then, reaching 110 aircraft, says JPMorgan. According to aerospace news sources, LOT is choosing between Embraer’s E2 family and the Airbus A220 for a fleet expansion plan, and they see recent leasing data as a positive indication that Embraer has higher chances to win this bid than Airbus at this point.

Threats

737 suppliers have emerged from first-quarter earnings remarkably well, with several raising guidance despite a stretched-out production ramp for this platform. The demand signal for most suppliers has not declined or declined only modestly, though some highlighted potential for it to decline in the future, says JPMorgan.

There are a significant number of new projects coming online, specifically in North America, which should help absorb ship demand. However, the production ramp is gradual, with full production likely until sometime in 2026. There are several other smaller international projects that could also add to capacity, but not in a meaningful amount. As a result, while there should still be some seasonal uplift in shipping rates this fall, Stifel believes it could be much more muted than had been seen the past few years, and this could be a challenging summer.

According to AeroIn, Azul’s Chief Revenue Officer, Mr. Abhi Shah, stated that despite recent speculation about a possible M&A between Azul and GOL, Azul is not in negotiations to acquire GOL. The executive reiterated that Azul’s strategy currently in place is to focus on the acquisition of new aircraft and the international expansion of the brand.

Luxury Goods and International Markets

Strengths

Preliminary University of Michigan consumer sentiment for May came in at 67.4, well below the consensus of 76.9, and April’s final figure of 77.2. This marks the lowest headline level since November, with significant drops observed in both current conditions (to 68.8 from 79.0) and expectations components (to 66.5 from 76.0).

China’s exports and imports returned to growth in April after contracting in the previous month. Shipments from China grew 1.5% year-on-year last month by value, according to customs data released on Thursday, in line with the increase forecast in a Reuters poll of economists. Imports for April increased by 8.4%, surpassing an expected 4.8% rise and reversing a 1.9% fall in March.

Faraday Future Intelligent was the best performing S&P Global Luxury stock, gaining 12.7% in the past five days.  The company’s shares are in danger of being de-listed after losing 99% of its value in a year. This week, Jia Yueting, the Chinese founder of electric vehicle maker Faraday Future, may start livestreaming to save the struggling American company.

Weaknesses

This week Nikkei Asia reported that luxury sales in China have been sluggish as more consumers, especially Generation Z, turn to secondhand shopping amid uncertainty in the job market.

Tapestry, best known for its Coach brand, reported an earnings miss, mostly due to weaker sales at smaller brands like Kate Spade and Stuart Weitzman, while Coach sales remained flat. The company also cut its revenue outlook for the remainder of the year following a decline in sales in North America.

Tesla was the worst performing S&P Global Luxury stock, losing 7.0% in the past five days. Tesla lost most of its gains from the prior week, with shares trading lower on four out of five days. Last week, Tesla shares surged on news of the company receiving preliminary approval for its self-driving system in China; however, this week, Tesla’s shares reversed course. The company has been reporting weaker demand for EV cars, and Elon Musk has been cutting staff, leading to a decline in morale.

Opportunities

Shares trading in mainland China and Hong Kong continue to climb higher. Despite Morgan Stanley advising investors against chasing the rally, it appears that the government is determined to support its struggling economy. This week, other major cities removed homebuying restrictions, with Xi’an City completely eliminating home purchase restrictions for both new and second-hand homes.

Global Blue released its tax-free shopping recovery update for April, which indicates improving trends compared to March. Sales have picked up sequentially in Europe and Asia compared to 2019 levels. Mainland China’s tourist spending in Europe reached 68% of 2019 levels. As the Chinese become more willing to travel again post-pandemic, luxury spending is expected to grow.

Eurozone retail sales experienced their sharpest increase since September 2022, signaling promising signs of economic recovery in household consumption. Data released by Eurostat on Tuesday showed that retail sales in the euro area advanced by 0.8% month-on-month in March. This rebound follows an upwardly revised decline of 0.3% in February and exceeded market expectations of a 0.6% increase, as reported by Euronews.

Threats

Car makers across Europe and Asia are warning of a challenging year ahead as rising costs and weak demand for electric cars weigh on profits. BMW reported a 19.4% drop in net profit this week, attributed to an inflation-related increase in manufacturing costs impacting the company’s profitability. Mercedes also announced that it will continue selling its combustion-engine cars longer than initially planned due to weakening demand for EV cars. Many carmakers are feeling the impact of slowing EV sales.

The German Economic Institute IW anticipates Germany’s economy to continue facing struggles in 2024, despite some signs of improvement at the beginning of the year. It forecasts that the largest economy in Europe will not return to growth this year, despite experiencing a 0.2% expansion in the first quarter of 2024. While consumption shows some promise, it’s not sufficient to generate a full upswing.

Paris is expecting to welcome numerous visitors for the upcoming Summer Olympics, though it may not attract as many travelers as hoped. Louis Vuitton is a major sponsor of the upcoming events. According to New York-based luxury travel agency Embark Beyond, Taylor Swift concerts are drawing five times as many Americans as the Paris Olympics. However, Olympic bookings could still pick up, particularly following recent price drops.

Energy and Natural Resources

Strengths

The best performing commodity for the week was wheat, rising 6.31%, as the U.S. Department of Agriculture estimated world wheat stockpiles came in below market expectations and…



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