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October 25, 2019 | Latin Spring = Danger for Investors

Lobo Tiggre, aka Louis James, is the founder and CEO of Louis James LLC, and the principal analyst and editor of the Independent Speculator. He researched and recommended speculative opportunities in Casey Research publications from 2004 to 2018, writing under the name “Louis James.” While with Casey Research, he learned the ins and outs of resource speculation from the legendary speculator Doug Casey. Although frequently mistaken for one, Mr. Tiggre is not a professional geologist. However, his long tutelage under world-class geologists, writers, and investors resulted in an exceptional track record. The average of the yearly gains published for the flagship Casey publication, the International Speculator, was 18.5% per year during Tiggre’s time with the publication. A fully transparent, documented, and verifiable track record is a central feature of services going forward. Another key feature is that Mr. Tiggre will put his own money into the speculations he writes about, so his readers will always know he has “skin in the game” with them

Massive protests have erupted in Chile, Ecuador, and Bolivia. The potential for more in other Latin American countries has some folks calling it the Latin Spring. The causes of the outbreaks vary, but there’s a common thread and it spells danger for investors—and everyone.


Is It a Spring?

The original “spring” uprising—the Prague Spring in 1968—was against the Soviet dictatorship. This makes the events in Hong Kong the most truly springlike of recent uprisings. Recent opposition attempts to get the public to rise up in Venezuela may count as well. But while the protests in Hong Kong may have inspired some Latin American protesters, the current events in Chile or Ecuador are not uprisings against dictators. Bolivia is closer to that, but not quite either.

Looking forward, Hong Kong optimists should remember that the Prague Spring didn’t end well for the Czechs and Slovaks back in the day. Same for the results of the more recent Arab Spring. Dictators were toppled, but it’s hard to say that the lives of most ordinary people in most Arab Spring countries are much better.

So, even if what’s happening in several Latin American countries were a kind of spring, it would be a mistake to conclude that this will make things better anytime soon.


It’s the Economy, Stupid

Today, the violent protests in Bolivia are over the election and reported irregularities there. But really, that means it’s about the economy, poverty, and different views on how to best move forward.

The protests in Ecuador that forced the government to flee the capital are about austerity measures, including painful cuts to gasoline subsidies. This too is clearly about the economy and poverty.

The protests in Chile that now have the army on the streets are also about austerity, particularly an increase in metro fares. If one is poor and needs subsidized transportation to get to work, this is life-threatening. So again it’s about the economy and poverty.

The failed protests in Venezuela recently were primarily about ousting President Maduro. He does have dictatorial powers, But Venezuela’s economy is in shambles. Desperate people are picking through the trash looking for food—or fleeing the country.

And remember that the spark that ignited the Arab Spring was a poor produce vendor who was harassed and taxed by the government to the point where life seemed impossible. Mohamed Bouazizi set himself on fire, and the blaze swept across northern Africa.


The Root of All Evil: Poverty

The common thread here is poverty. The left will say it’s income inequality. I’ll agree that envy is a big factor. But I think it’s misery and desperation that has so many Latin Americans on the streets. Envy alone wouldn’t do it if people felt safe and comfortable.

It’s been that way for many decades, if not centuries. I’ve often seen large demonstrations in the streets of Latin capitals over my many years of visiting these countries. It was, in fact, the poverty I saw among the teeming masses in Mexico almost 50 years ago that got me interested in economics.

One thing that makes this problem so intractable is that poverty begets ignorance. When people are starving, education loses priority.

But it’s not just the simple ignorance of a less-educated population; it’s the willful ignorance inspired by ideology that’s most dangerous. When strongly ideological forces take control of the universities, even advanced education won’t banish the ignorance of people who refuse to see what disagrees with their beliefs.

This has become a particularly vicious cycle in places where leftist ideologies dominate academic thought. That results in highly “educated” public servants, backed by an “educated” and willing population, enacting economically destructive policies. This creates more misery and in turn more will to enact even more disastrous economic policies.

What turns this negative cycle into a prison of poverty and misery is the lack of widespread understanding of how economies really work. The poor people protest against their misery, but they demand more of the subsidies and handouts that keep them poor, not the freedom to become rich. And the socialists are ready to deliver, because it keeps them in power… until things break down completely.

That’s when a “businessman” candidate sometimes steps in to try to make changes. Macri in Argentina is a recent example. But this sort of revolt against socialism isn’t driven by widespread understanding of how economies really work. Nor can it be seen as well-informed desire to liberate economies so they can create wealth. It’s just a rejection of what has so obviously failed, combined with a desperate scramble for any alternative. This is why Macri failed to make many of the changes he proposed, and was forced to embrace policies he opposed. Too many people just wouldn’t stand for the real reforms Argentina needs.

Greater understanding of the realities of economics and money has prevented this cycle from becoming as perverse in wealthier countries, but they are not immune. Just look at what’s happening in most North American universities today. Consider the support of young people for the likes of AOC, Warren, and Sanders. And let’s not forget the Yellow Vests in France, either. Global discontent is really a topic for another day, but I did want to warn people in wealthier countries not to kid themselves about it being just a Latin American issue.


Investment Implications

I feel for the desperate people in these uprisings. In many Latin American countries, the political class is the wealthy class, so I can understand the anger directed at the Haves by the Have-Nots. But the victims demand that politicians make things worse with more socialism, compounding the tragedy. Instead of making it possible for more people to have more, they end up making everyone have less.

But my job is to offer guidance to investors, and there are several clear implications to keep in mind:

  • All of these countries experiencing social unrest pose many risks to capital. Those range from roadblocks and other transportation disruptions, to physical destruction of plant and property, to draconian currency controls, and to outright nationalization of productive assets. I don’t currently expect any of these uprisings to turn into armed revolutions, but I wouldn’t rule that out, either.
  • None of the current protests are about mining or the natural resources I focus on. However, mining labor unions in Chile have joined in solidarity with the protestors, shutting down many mines across the country. So production is being impacted and it could spread to other countries as well.
  • Maduro has lasted far longer in Venezuela than I imagined he could. Just goes to show the power of promising people a free lunch and blaming others when there is no food. But at some point something has to give, and Venezuela could joint the list of countries facing mass uprisings.
  • Macri looks almost sure to lose the October 27 election in Argentina. If so, the new government will likely waste no time in enacting even more socialist policies, which will trash the economy and the peso even more. That could add Argentina to the list of Latin American countries experiencing upheaval.
  • Bolivia, Chile, and Ecuador are all countries with significant mining activity, but Chile is a major source of copper for the entire world. That makes Chile a particularly important place for resource investors to watch. Trouble in Chile could boost copper prices if it lasts long enough—possibly even lithium as well. The country would have to go up in flames to have a lasting impact on commodity prices, but this is something to watch for.
  • By themselves, any of these countries slipping into chaos and economic paralysis wouldn’t have too great an impact on the global economy. But several of them doing so at once would be a more serious blow. And that could spread to emerging economies with no uprisings, if investors simply turn fearful about the developing world in general. This is negative for demand for commodities, and especially industrial commodities not in short supply.
  • This so-called Latin Spring poses systemic risk to the global financial order. Enough simultaneous problems could destabilize the IMF and other major institutions. Private sector lenders and investors in wealthier countries who suffer major losses would become negatives for those countries as well.

I want to be clear: I am not saying the financial world is about to collapse.

But our fragile, interconnected global economy doesn’t need anyone knocking about with financial sledgehammers, and that’s exactly these uprisings are.

Wall Street doesn’t seem to get this yet, but I would avoid risk assets in general. And of course, I want to add as much in safe-haven assets—as well as stocks that add leverage to them—as I can to my portfolio.

That’s my take,

Lobo Tiggre Signature

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October 25th, 2019

Posted In: Louis James

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