The Sane Investor

October 27th, 2008
I think it´s safe to say that most market commentators have been thoroughly suprised at the fact that the dollar has gained heavily against most currencies, aside from the Yen.  In retrospect, it somewhat makes since, especially when you look at an instance like Iceland.  With the EU, the diversity that the currency gave you during the good times made it much more favorable than the dollar.  However, with the bad times, the exposure you have to all the different European Union countries makes it more problematic than anything.  Because of T-Bills and the U.S.´s ability to act autonomosly, quickly, and with relatively little needed consent compared to the European Central Bank (ECB), I can understand why people would rather be exposed to dollars at this point than anything else.  The only question is, will the trend last?

Massive Printing and Lending: Will They Be Able to Mop Up the Liquidity in Time?

With all the bailouts, incentive spending and direct investments, theoretically the government only has three ways to create this money: raise taxes, print more money or borrow.  The first one is garbage: after Herbert Hoover made that mistake in the Great Depression, no one would even dream of trying to boost taxes.  Because of this, we´re left with two options.  Printing money obviously leads to inflation, because now there´s more money supply, hence the relative value of each dollar goes down.  With borrowing, the value of the dollar is theoretically preserved, however the chance of the U.S. defaulting goes up, thus lessening the demand for dollars and dollar investments.

Either way, it would seem to point towards much higher than 3% inflation.  Unless of course, there was someway to mop up all the liquidity.  The Fed could do this by raising the Fed Funds target rate, and thus reduce the money supply.  However, the question is whether they´d be quick enough on this.  Also, there´s the question of what happens if America´s lenders throw up their hands and say ¨no más¨.  Theoretically, they all have a vested interest in propping up the dollar, because so many of their investments are in dollar denominated debt.  Hell, Japan survives economically by maintaining a favorable exchange rate with the U.S. and exporting to us.  But what happens when a few of the countries say ¨well, we´ll just reduce our supply of lending a little bit¨, or ¨we´ll just sell a little bit¨.  If one nation does it, that´s probably ok, but if one starts, others will follow to try and get ahead of the tidal wave.

This is a pretty apocalyptic scenario, but it´s the downside risk, of course, especially when you consider how much debt we have as a nation.  Looking at the U.S. debt clock and dividing that amount by GDP, U.S. debt represents about 70% of annual GDP.  Theoretically, you can go much, much higher and still be ok, but the problem is the U.S. has neither trading nor fiscal surplus´, meaning that the debt would be expected to increase.  You extend that situation out on a long enough timeline and it´s not a good sign.

So Which Way Do You Call It?

The problem right now is that either way you go, whether going long dollars or short dollars, you´re risking a whole lot.  My short dollar bet would be something like gold, silver or commodities, which have been absolutely punished as the dollar has gone up in value.  Thus, if this trend continues, we might see gold pushed to the $600, potentially even $500 region. 

That being said, if the dollar starts falling, my prediction is that gold is going to go up pretty substantially as people start taking their gains in dollars and making the move over to gold.  Thus, you have this sort of guillotine effect: if you´re right, you´re really right, but if you´re wrong, you´re really wrong.

Because of this, I think that a policy of holding on to cash and seeing where the currency trade goes is a good bet.  I think in the short term, the dollar is likely going to rise, although I see this path getting steaper and steaper as the dollar approaches 1 to 1 with the Euro, and people start questioning whether there are fundamentals to support this exchange.  Especially after the commodities bubble this summer, when shorting the dollar and going long oil seemed like a slam dunk, I think you´re going to have a harder and harder time convincing people that there´s rationale at this level.  I´d say that under $600, you should definitely be picking up gold, although under $700 would be a good point if fundamentals aren´t changing.  At that point, upside starts looking in your favor, since I think a serious dollar selling rush could easily push gold over $1,000 an ounce.

That being said, right now we´re in no mans land, so I think you really have to sit on the sidelines and watch, lest you fall prey to the market guillotine.

Disclosure: the author of this article is long GLD, DGP, SLV, SIL, FCX and trying to build a position in EDD

Questions? Comments? E-mail me at thesaneinvestor@yahoo.com

All material copyright

© 2008 Andrew Jarmon

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October 27th, 2008
So first off, let me say that I am not a beer expert. I cannot tell you how hoppy a different beer is, I can’t seriously evaluate a beer on a set of characteristics, and I sometimes have a hard time telling different beers apart. What I can say is that I really like beer.

That being said, I decided to write this article to talk about the most common brands of beer in Buenos Aires, the way the public here seems to view them, and a range of prices that would be “acceptable” for beer here. When talking about price, bear in mind that inflation here is expected to be at about 30% annually. Because of this, you could theoretically expect the price of any good in Argentina to go up 10% every four months. So when you’re reading this, note the date that it was written, and do the math according.

To start off, let’s go over some of the Argentine beer terminology.

Porrón

Porrón is the beer size that we would typically associate with the size of “one beer” or “a bottle of beer”. As strange as it may sound, relatively Porróns are pretty expensive, and at the grocery store they’re actually only a little bit cheaper than a litro of the same beer.

Funny enough, you will not find sixpacks in stores here, but rather individually sold bottles of beer. The same thing goes with cans of the stuff. If it’s a bar running a special, or just a cheaper bar, you might be able to find a Porrón or can of Quilmes for between 4 and 5 pesos. In general, at most typical bars a Porrón of Quilmes is at least 8 pesos, and can go up to 10.

Chopp

Chopp is the term for a glass of beer on tap. Funny enough, most bars do not actually have kegs, and instead either sell individual Porrón sized beers, or use litros to pour (like they’ll have a huge pile of litros of beer in the back and they use those to poor individual glasses). Thus, most bars will advertise when they have Quilmes or some other beer “on chopp”. The way that I use to ask if they have any beer on tap is “¿tenés cerveza de Chopp?”

Litro

If you’re traveling with two or more people, this is my preferred way to drink beer, and it’s the way that the Argentines do it as well (except you´ll see a guy drinking one by himself most of the time). It’s by far the cheapest, and since basically nothing comes out of the tap, the quality is as good as you’re going to get. All liters are in glass bottles but ironically, they aren’t a full liter. They’re actually 970 ml, but everyone just calls them litros. If it’s after class or something and we’re looking to have a beer, we usually just go between cafes and restaurants and ask them if they sell litros. A litro contains about 4 beers more or less, and in general they’re usually just a little bit pricier than a Porrón or bottles of smaller sizes (there are actually many different sizes of beers here, but in general, you want litros, since that’s the cheapest). As far a pricing goes, the cheapest I’ve ever found a litro in a restaurant or bar (this is Quilmes of course) was 8 pesos. Around 10 pesos is still pretty cheap, but once you get up to 15 it’s pricey. For the most part, if they’re selling litros of Stella Artois or Heineken for 15, Quilmes is going to be around 12-13 if they have it.

Now, let’s take a look at the different brands.

Quilmes

If you like to drink beer and you leave Buenos Aires not having tried Quilmes, you have failed. Mainly because it’s damn near impossible to go out and not drink Quilmes. Quilmes would probably be the Budweiser equivalent in Argentina, in that you can drink it at a bar and not look lower class, and since it’s bottled in Argentina it’s cheaper. You can usually tell the bars that consider themselves “high class” because they don’t usually list Quilmes or any other Argentine beer on the menu.

In general, I really like Quilmes, but I’m also a lighter beer kind of guy. You’re going to be hard pressed to find a darker beer here, mainly since I don’t think that Argentines are exactly beer connesuiers. Your best bet is probably Quilmes Stout, but for me it’s just too sweet and not strong enough (it has about the same alcohol content as the Quilmes Crystal, which is the normal Quilmes). See below for more Quilmes types.

Different Types of Quilmes

So the Quilmes I talked about above is the Quilmes Crystal, which is their lighter beer. They also have:

Red Lager: it’s really hard to find different types of Quilmes sold at restaurants. Because of this, my only real experiences with any of these have been times we’ve drunken it at someone´s apartment. If you want to try any of these types, you’ll have to go to a grocery store and pick one up. Buying beer in the grocery stores is by far the best, because a litro of Quilmes Crystal is usually under 3 pesos. The other types climb up to maybe above four, which is where you can pick up Heineken and Stella Artois (under five). As a testament to how ridiculous Argentina’s import taxes are, a litro of Corona will run you over 7 pesos (they do really like Mexican food here though).

But as far as the Red Lager goes, I definitely liked it. The brother I have from the family I’m living with here works as a boss in the marketing department at Quilmes, and he told me that the Red Lager was his personal favorite.

Stout: So I mentioned the stout above as one of the few dark beers you’ll find here. You mostly should try it, because if nothing else it’s a little bit of a cultural experience. My host brother that works at Quilmes told me that the Quilmes Stout is a big seller up in the northern region of Argentina, since they’re really in to sweet things. I can testify to this, since up in the north (Provinces like Salta and Jujuy) they also have their own brands of beer that are a lot sweeter. If you go up to one of these regions, check out the local Kiosco and pick up a litro of their beer. You’ll also always find Quilmes stout there.

In general, the stout is most popular with the females, according to my host brother. The girls here on my program definitely agree with that, so if you’re a female that doesn’t typically go for beer, you should at least give the stout a try.

Bock: I can’t really tell you that much about the Bock, other than I thought that it was pretty good. You should give it a try if nothing else.

Brahma

Brahma would be the Pabst Blue Ribbon of Argentina, in that you can actually find in restaurants on occasion, but it’s definitely the lowest level of beer that you can be drinking. Drinking a bottle of Brahma says that either you got done with a long day of doing a menial labor job, or you really want to get drunk as cheaply as you can.

It’s definitely not a bad beer, and it’s fun to try it if nothing else to see what it’s like. That being said, I’m not going to roll in to a café pleading with the moso (the word for waiter in Argentine Spanish) for a litro of Brahma. They do have funny commercials though.

Isenbeck

I hadn’t had Isenbeck before coming to Argentina, but from what I can tell it’s a German beer. Isenbeck and Iguana are the only two beers that I’ve found in Buenos Aires that have metal screw tops on their bottles in lieu of the typical beer bottle cap. This is usually a sign of the perception of the quality of the beer here, so my guess would be that it’d be definitely lower than Heineken and Stella Artois, potentially even lower than Quilmes. That being said, Brahma doesn’t have a screw top, so take that in to consideration.

Isenbeck is kind of an anomaly, since you’ll usually only find it at Kioscos or small vendors in touristy areas or parks. It’s alright, but I’d still say that I prefer Quilmes to Isenbeck.

Iguana

I’ve seen ads portraying Iguana as the “beach” beer, which leads me to think that it’s like the Corona equivalent here. I’ve heard people tell me that it has this honey, flowery taste to it, but I haven’t noticed it. It’s a bit more common than Isenbeck, but I’d say it’s another one of those “looking for a category” beers in Buenos Aires. Like Brahma, it’s bottled by Quilmes.

Heineken

If you’re from the United States or Europe, you’ve almost definitely had this Dutch beer, so I won’t spend any time talking about its taste or anything. What I will talk about is how surprised you’ll likely be at how cheap Heineken is here. It´s about even keel with Stella Artois for price, meaning that you can find a litro for as little as 10 pesos some places. The average I usually see is about 14 or 15 pesos though.

Stella Artois

This one you may or may not have tried in the U.S., but the Belgian beer is about even keel with Heineken here as far as price and quality perception.

Budweiser

You’ll likely be shocked at the fact that here Budweiser would be just a step below Stella Artois and Heineken on the quality perception and price level. My guess is that because it’s now part of InBev, it can actually be sold here because it doesn’t need to be imported. Although it’s still a fledgling, there are still quite a few fancy bars that serve Budweiser as their “main attraction” (i.e. advertised outside or as part of their sign). You won’t typically find it in most bars, though.

Micro Brews and Small Breweries

This definitely does not exist in any shape or form on the level it does in the United States. Although I’ve been to a brew pub like this (there’s one in Recolleta and Puerto Madero), they’re very uncommon and mostly for the upper class. A pint of beer from one of these places (which is actually really good in my opinion) is 15 pesos, so it’s definitely a step up. Considering that you’ll pay only a little bit less than that for a can of Quilmes in a Boliche (dance club here), it’s definitely not ridiculous.

To read other articles I´ve written on living and traveling in Buenos Aires, click here.

October 13th, 2008
This week has been a bad week for me.

According to Market Watch, gold futures for December delivery have lost $71.30 this week, or 8.3%, in a time where the Dow essentially didn´t move (from Monday open to Friday close, it ended down -14.79 points, or -0.1%). Even though there wasn´t a strong downward or upward trend by the end of the week, one certainly couldn´t say that things were calm. After Monday´s unprecedented 900+ point gain, equity markets have been in fits of volatility.

So what´s the deal?

Theoretically during extremely volatile times, people should be flocking to safe haven investments like precious metals. Yet, during a week that would be the quintessential example of back breaking volatility, precious metals performed horribly.

The typical argument I´ve heard is that precious metals prices are falling due to deleveraging of hedge funds. Forced either to make margin calls, refund investors, or simply to maintain higher levels of liquidity, the large claim is that these funds are engaging in fire sales, including precious metals that they might otherwise hold on to. This serves to be a decent argument, since leverage reached record levels during the middle of 2007. But this isn´t the first time that I´ve seen the lack of performance in some asset blamed on fire sales by hedge funds.

Physical Demand Remains High, Supposedly

Almost every single article bullish on gold seems to cite unprecedented demand for silver and gold bullion bars and coins from central banks, leading to long wait times. The thing I always bring up is why there isn´t someone using arbitrage in the spot market of gold to serve this physical demand market. I´ve heard totally ludicrous numbers for what the spot price would be if the price of actual gold was reflected in paper markets, and it just doesn´t make sense.

If something was really that cheap in another market, you´d be stupid not to just hop in to that market (hell, if future trades are so out of whack, why don´t you just buy one and hold on till delivery?) and then sell them back to the other.

Others have cited the carry trade that exists between borrowing gold from central banks, selling that in the spot market, and then using that money (the lending rates on gold are relatively low, typically less than 0.5%) to finance other transactions. The thing that doesn´t make sense about this argument is that someone engaging in this carry trade would have to hedge their physical gold short by buying gold futures. In this regard, it´d be really easy to see the impact of the carry trade in the market: there´d be a huge gap between gold spot prices and gold future prices, favoring gold future prices. In this way, it´s kind of hard to argue why things are so out of whack.

What I Think is Going to Happen

I´ve frankly been shocked by how poorly gold and silver have performed lately. The only real reason that I can point to is the strength that the US dollar has maintained. If you´re looking for a safe option right now, you basically have Treasury bills, cash and precious metals.

Treasury Bills are more or less considered to be one of the safest instruments out there, because they´re backed by the United States´ government. A lot of people have used T Bills as the reason that the US dollar has remained so strong, since many investors have fled riskier investments overseas for the greater security of American markets (ironically). However, if you´re a fund looking at where to have your money right now, in the short term you´re likely going to avoid T Bills, since further issuing of debt by the US government will likely only serve to push yields up, thus losing you money in the short term if you buy them now.

Thus, if you´re deciding between cash and gold in the short term, your decision is going to hinge on how much liquidity you´re going to need and where the value of the currency is going. With the direction as of late, it doesn´t seem like the dollar is going to being losing value any time soon.

Because of this, if I was a fund manager, I´d be looking at precious metals and wondering why I should even bother, given that you can´t get more liquid than cash.

Because of this, I really think that as long as the dollar stays strong, gold isn´t really going to go anywhere, especially if it is true that people are unloading just about all types of assets. If we see that unloading continue much longer, and then a coincedental fall in the dollar, that could create a massive ¨gold rush¨ so to speak. Until then, I think I´m going to continue to be frustrated with precious metals.

Disclosure: the author of this article is long GLD, DGP, SLV, SIL, FCX and trying to build a position in EDD

Questions? Comments? E-mail me at thesaneinvestor@yahoo.com

All material copyright

© 2008 Andrew Jarmon

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