There was big news in the world of debt this week. But, oddly enough, Yellen and her fellow central bankers had nothing to do with it.
Instead, this debt deal – and the investment opportunity that comes with it – is entirely political.
The news is good.
Argentina is back in the debt game.
[ad#Google Adsense 336×280-IA]It’s a huge move for the country, her citizens and her investors.
To understand what this means, we have to understand the power of debt.
We often talk about debt as we explore the idea of building liberating wealth, but I’m not sure the average investor gets just how important the ancient idea of debt (and the interest rates that control it) is to the economy.
It’s an immensely powerful force. Too much debt and trouble will certainly brew.
Too little… trouble, again.
Think of it no differently from the oil in your car’s engine. Run the engine low on oil… it will blow up. Fill it with too much oil… and, yep, it will blow up.
For some 15 long years, Argentina has had virtually no access to the world’s debt markets. Its economic engine sputtered because of it.
The only way the country could keep its economy “lubricated” was to print fresh money. The effects were disastrous. The country has long been the homeland of economic volatility and inflation.
But there’s a new man in charge – and he’s making quick progress.
Argentina’s President Mauricio Macri won the office in November largely by promising firm economic reform. He’s been busy making good on his word ever since.
On Wednesday, he made major progress. He kicked his congress in the pants, forced them to meet stiff conditions set by the country’s former creditors and, the vital part, got the nod to once again enter the world’s debt market.
All that’s left now is to start paying off its old debt on April 14.
The move has opened a slew of opportunities for investors not afraid to look for international opportunities.
A good friend of ours and the co-founder of Beyond the Dollar, Karim Rahemtulla, just got back from an exploratory trip of Argentina. It’s clear from what he told us on the phone last week that he sees big opportunities ahead.
The mood in the country is changing, he admits.
Investors are finally looking at the resource-rich country in a positive light.
“My local Argentine contacts – not Americans living in Argentina – have been making a fortune buying Argentine debt in anticipation of this resolution,” Karim wrote this week for his popular free e-letter, The Non-Dollar Report. “For a local Argentine to buy the country’s debt is a major change in local sentiment.”
It’s that sentiment that’s likely to start a long and healthy bull market. As the country overcomes a tough economic hurdle, the discounts long baked into its stock market will quickly erode.
One company worth keeping an eye on is Argentina’s industrial farming giant, Cresud (Nasdaq: CRESY). Shares of the company (which trade on U.S. markets) have performed quite well over the last 60 days as the hope behind Macri’s plans become reality.
Again, the story is all about debt. For over a decade, a critical factor for Cresud has been the value of Argentina’s peso.
That’s because much of the company’s debt is denominated in U.S. dollars (remember, the credit pipeline within the country has long been gummed up). As the value of the pesos the company earns falls… it gets that much harder for Cresud to pay its debt.
When the country’s credit crisis first hit, the exchange rate was roughly 2 pesos for every dollar. Now, it takes just shy of 15 pesos to buy a greenback.
With each slip in the peso, Cresud’s debt got – on a relative basis – larger and larger.
But if Macri’s work pays off, the trend will soon turn the other way. Cresud’s debt will get easier and easier to pay – great news for shareholders.
It’s a similar story across the entire country. As the currency gains strength and the economy becomes less volatile, Argentina is quickly becoming an economic bright spot.
It’s more proof that debt and the interest rates that surround it are the true hormones of the economy.
Good investing,
Andrew
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Source: Investment U