Milei Agonistes

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Self-described “anarcho-capitalist” Javier Milei realized an overwhelming victory in the second round of Argentina’s presidential elections. He intends to do the dramatic, but will contend with fractious politics, entrenched incumbents and factions, and the strangeness of what seems like a “post-state” society. Global investors must remain clear-eyed and tactical, opportunistic in their position-taking with an eye toward liquidity and risk mitigation. Things may start to seem promising, until they’re not. As such, fund local asset accumulation, if inclined, through local liabilities.

In late November, the arguable pop-star, roughly libertarian politician Javier Milei – a pundit and television commentator and, having been disclosed as well to the international press, tantric expert – is elected president of the Argentine Republic in the second round. He’s been able to realize this victory from the support extended from Juntos por el Cambio (JxC), the center-right group and the party of former president Mauricio Macri. Sergio Massa, the Peronist candidate, is thereby out-flanked. It is, as Bismarck might say, how politics is done and sausages are made.

And the sausage-making was over what? Access to the tiller guiding a country beset by 143 percent annual inflation, a fiscal deficit at close to five percent of GDP yet without access to the global capital markets, and a gross domestic product imploding by -4.9% on annual basis as of QII 2023.

The internal contradictions of Argentine society and the economy have come home to roost: a generous pension and welfare system that inevitably faces upending given the bureaucratic controls and limits that stymie growth and preclude tax revenues that can support the system. Accelerating inflation has become the consequence of a national arrangement where fiat purchasing power is extended, while phantom tax receipts and phantom growth defy any accounting.

But post-election, people are happy, or at the least excited for change they feel to be imminent. They are hoping that Milei will be able to take his often touted figurative, maybe even literal, chainsaw to the red-tape and inefficiencies that affect the Argentine economy and the lives of Argentine voters.

Fixed income and equity assets reflect the extant effervescent sentiment. Benchmark bond prices and the Merval have been bubbling up.

Some are taking solace as well that responsible players are showing up to chaperone the party, or so they believe.  As noted, the newly elected Milei seems to be arriving at some sort of modus vivendi with Mauricio Macri’s more numerous center-right faction in the Argentine legislature. On that note, the incoming government will now include Luis Caputo as economy minister. Caputo had served in the Macri government as finance minister and later central bank head. He is thought to be a cool head and voice of moderation.

Indeed, the new Milei government will stay its hand on one of the more dramatic intended policy actions – the dollarization of the economy. The reality the new government accepts is that forex liquidity resources needed to undertake such an action is just not there, unless the monetary base were to be more completely if not wholly devalued against the US dollar.

Meanwhile, the Argentine citizenry has been adapting, as they always must – sheltering hard currency wealth in offshore accounts, paying for things roughly in kind, converting local currency holdings that must be spent ex-post into goods and services purchased in short order. It really is, as they say, not a way to live, especially for a place that extols the dolce vita.

For the incoming Milei government, what will be important is not to consider the seeming monolithic severity of the problems effecting the state and economy, but to break it down into parts: to ask “cui bono?”, who benefits from the parlous arrangement of the way things are now. And then, knowing that, the trick will be to neutralize or convert those incumbents that effectively keep things the way they are now.

I’m sure Milei and his inner circle are aware of this angle, but the co-opting and circumvention efforts from different entrenched quarters will be treacherous. Milei may find himself, like the English writer John Milton’s adaptation of the holy figure Samson, shorn of his own somewhat unruly locks, and like the biblical Samson, powerless to get things get done – at least until he brings the temple crashing down.

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