Reflecting on South America Trip

March 13, 2017

Standing where I stood to snap the photograph, a casual observer wouldn’t particularly notice the structure or reflect on its history. The tourist’s eye is attracted instead to the jungle’s green canopy, the swirling waters of the river, or monkeys and a toucan. There are no markings now on this vacant building( It was originally designed to be the headquarters of Mercosur, a regional trade bloc of four countries. Founded in 1991, its membership originally included Argentina, Brazil, Paraguay, and Uruguay. Venezuela was added later but was suspended from membership in Dec. 2016.
At this three-country intersection only 20 kilometers from Iguazu Falls, the building sits in Brazil. Across the river to the left lies Paraguay. I took the photo from the Argentina side. These three countries plus Uruguay paid for the building, and three of the four nations engineered it. But they forgot to account for the flood plain. So when the rivers crest, the former Mercosur HQ is entirely under water.
We are back from 10 days in South America. At peak, our group comprised 20 people with diverse global business, finance, and policy-making experience. An absence of media allowed us to have a free exchange of views under Chatham House rules. This was a joint Camp Kotok–Camp Lopez effort that included a visit to Patagonia (more on travel and tourism at the end of this longer commentary).
First to markets and economics.
I’ve been to Argentina 20 times. I recall when the peso-to-dollar rate was one to one. It is currently 16 pesos to a US dollar, which makes Argentina a wonderfully inexpensive vacation destination, frequented by global visitors speaking diverse languages.  It also places Argentina in the category of a grand experiment in attempted economic recovery.
Currency volatility and political instability have destroyed Mercosur in substance. Over the years, retaliatory trade barriers eroded its benefits. Corruption in South American governments, including those of Argentina and Brazil, worsened conditions for all the citizens of the region.  For the present time, Argentina must go it alone.
Standing at the Iguazu frontier, I mulled over the present inventory of global trade issues. In North America, NAFTA is under attack by the Trump administration. The European Union (EU) faces dismemberment – Brexit seems to be a beginning, not an end. The common-currency Eurozone subsection of the EU is reeling under record TARGET2 monetary imbalances. The Trans-Pacific Partnership (TPP) suffered a fatal blow when the US withdrew in January 2017.  This happens at a time when “Trade Openness” is almost half (47.2%) of the GDP of 17 largest countries.  Trade openness is calculated as exports + imports, aggregated using GDP-PPP weights.  (Source: Barclays, NBER Macrohistory Database)  Note the previous peak was 38.1% immediately prior to the Great Depression era of the 1930s.
In our view, there is imminent threatening politics in Europe. 
With 14 political parties trying to gain a majority in the 150 seat Dutch parliament, we are not as certain of the Netherlands’ March 15th election outcome as Steve Wasserman,, but we think he has captured the risk and sentiment well in his recent missive.   He gave us permission to quote.
“Further on France and the EU. Fillon who was supposed to beat LePen in the final round is now essentially out of the race because he got caught using government money to pay phony salaries to his wife and kids. Juppe, who Fillon beat in the primary, refuses to step in so the party has no real candidate. The far left and the socialists could not agree to come together, so they will split the left wing vote. Juppe called the French political situation “the worst mess he has ever seen”.  That leaves Macron and Le Pen. Hard to say who wins, but LePen looks stronger by the week.  Hollande forced the banks and others to refuse to fund LePen’s campaign, so guess who she was left to turn to for money— Putin. Typical and stupid thinking by Hollande and the EU. Now there is also a real candidate contesting Merkel and he has a real chanced to beat her. Wilders will win in Netherlands. Brexit gets declared officially in two weeks. Week by week the EU slips into a political chaos which will unfold in May.”
“Reports that the world economy is improving are right but improving from the doldrums of 8 ½ years since the crash. By comparison any improvement looks good so don’t get fooled by these reports. Given all of the massive monetary stimulus, and the improving US economy, it was only time until there was some improvement. It is also a proven theory in economics that cycles always happen, so over time consumers build up pent up demand and eventually things start to get better. However, the EU banks are still weak- just look ta Deutche having to raise $8.5 billion of new capital. The EU banking system has never been integrated and is still suffering. Poland and Hungry are moving far right and not cooperating with some EU mandates, especially on refugees. There remains a fundamental flaw in the EU. The Eurozone’s unified trade market was established in 1986, and the Euro currency in 1999 to bring together the economies of the group. But they never established a unified banking system, nor a unified budgeting system, nor other rules and institutions of finance and integration to really have an effective financial system.  The ECB has very limited authorities. There is no FDIC or similar institution.”
“The crash followed by the disastrous refugee policies of Merkel has fed the extremes on both sides and led to Brexit, and will lead soon to the disintegration of the EU. Youth unemployment in Greece is 50%, in Spain it is 45% and in Italy 40%. This is a recipe for trouble.  Add in over 1 million Muslim refugees who do not assimilate and you have the potential for bad things to happen, a lot of angry young men, and a souring of the views of the middle and working class.  In Germany, due to over regulation of labor which limit upward mobility, there is a huge underclass of working class people who do not share in the German prosperity.  In the mid-eighties, the EU moved to set up the super national governance which gave the bureaucrats in Brussels powers over the whole of the EU, and took away the ability of individual nations to make rules for themselves- they lost sovereignty. Just as in the UK, the EU citizens and several nations, are fed up with Brussels technocrats issuing lots of rules, and they want their sovereignty back. It is a mess that has no solution…”
Thank you to Steve Wasserman.
Will the expansion of world trade and commercial exchanges go under water, as did Mercosur? What are the costs if they do? And lastly, how much more can be done on the monetary policy side to offset damage after nearly a decade of zero interest rates and after the financial repression of millions of people.
These victims of repression are in political rebellion, whether in the US (Trump election outcome) or in Britain (Brexit) or, increasingly, across France, Italy, and elsewhere in Europe.  We will quote Marvin Barth’s (Barclays) excellent research on the Politics of Rage.  “Of the 17 alternative parties and candidates that we survey, operating in advanced economies today, 16 demand greater protection of, or retaking of, national sovereignty.”  Barth’s survey is in the US and Europe and includes Trump and LePen.  This morning’s news from Scotland only exacerbates the Europe dismemberment story.
Let’s not ignore the South China Sea tensions, which subvert trade among South Korea, China, Japan, and others like Malaysia. And unpredictable North Korea is flirting with war as Japan moves to defend itself against missile launches into its territory. We are only one accident away from a retaliatory response to Kim’s missilery.
Expanding trade means rising incomes, more competitive prices, and higher productivity, all coupled with a growing global investment in peace. Conversely, tariffs, barriers and the dismembering of trade relationships reverse this process. That disheartening direction seems to be gathering momentum now.
What about stocks?
Markets may initially like protectionism. Stock prices rise when shares of protected industries gain short-term benefits. They also rise on expectations of these temporary benefits. We see that in the US during the “Trump rally.” 
That is a trader’s dream but an investor’s nightmare. The near-term benefit gives way to the inflationary outcome coupled with currency volatility. We already see the increased vol in foreign exchange markets. Systemic shocks may follow.
The takeaway for us from the South America trip is straightforward: worldwide risks are rising. Trump’s wall on the Mexican border is viewed from the Southern Hemisphere as a much broader and more significant barrier than just a fence to keep people out.  Europe is in serious trouble.  Asia is getting hotter.
For South America there is a smidgeon of hope.  Perhaps members of the Trump team will come to appreciate the history of the US’s southward-looking policy over the past two centuries, which started with the Monroe Doctrine of 1823. History is unkind here, and US policy has not enjoyed many successes.
But all is not lost. A Trump initiative could advance trade and economic stability in South and Central America so that both hemispheres of America win. Our experience is that many of the 500 million people who live south of us genuinely seek that outcome from the United States.
Meanwhile markets flourish at the slightest signs of positive advances. Argentina has enjoyed a stock market rally under new-president Macri, following the corruption of the Kirschner administration. Argentina has had a positive credit-rating response from rating agencies, as it is now attracting investment capital.
Other regional regimes that are changing their governments with votes and not guns are likely to grow. Those that don’t honor votes face failure, as in Venezuela. More will be revealed as US policy crystallizes.
We must segue to Zika.
We have been asked about Zika in South America. The news is not good. The latest evidence reveals that cases of heart failure in infected adults are likely attributable to Zika. See this ABC news story( And we thank Fred Pollack for sending us a link to the abstract of a study performed by Dr. Karina Gonzalez Carta, the physician whose work is profiled in the ABC story. Here is the link to the – !/4223/presentation/35844.
And here is text from the abstract itself:
Backround: Zika virus infection is a mosquito-borne disease that has caused an explosive pandemic throughout the Americas. Local transmission has been found in USA; there are no reports of cardiovascular (CV) manifestation of Zika. This study sought to describe the occurrence of CV involvement of Zika.
Methods: We enrolled 9 cases of Zika from a Venezuelan outbreak who had exhibited CV manifestations in a prospective observational multicenter study. Clinical, ECG, laboratory (including virological studies), Rx, echocardiogram, Holter and cMRI evaluation were performed.
Results: Of the 9 patients, 6 were female with a mean age of 47 ± 17 years. Arrhythmias were detected in 8 patients including acute atrial fibrillation in 3 cases, 2 paroxysmal and 1 persistent, non-sustained atrial tachycardia in 2 patients and ventricular arrhythmias in 2 patients. Heart failure was present in 6 cases, 5 with low ejection fraction (EF), and one with preserved EF, with pre-eclampsia and moderate to severe pericardial effusion.
Conclusion: This is the first report of cardiac involvement in patients with Zika. Physicians should be aware of the possibility of cardiac manifestations. Studies are needed to define the incidence of myocarditis systematically.
To fight Zika and Dengue in Argentina, there is an active mosquito control effort in the north of the country. This warning sign greets the traveler at the Iguazu airport ( Across the river is Brazil, where the Zika outbreak continues to intensify and the government is still dysfunctional. Sadly, preventive efforts in Paraguay are negligible.
The US will face year two of Zika summertime mosquito risk under President Trump. President Obama and a Democrat-controlled Senate led by Harry Reid held up emergency funding for Zika last summer. (See We wrote that last July.
Let’s see what President Trump and a Republican Congress can produce. Remember, the lifetime cost for each infant born with Zika-caused defects is estimated at $10 million. The emotional and social costs for the family are beyond measure. Also remember that Zika is preventable.
Enough of these reflections for now!  We want to leave readers in a less somber mood by offering some travel tips.
Two days in Iguazu is worth the effort. An hour and a half flight from Buenos Aires and a brief transit gets you hotel accommodations, a visit to the wondrous falls and park, where you can enjoy tropical jungle wildlife and excellent local cuisine. Loi Suites is a lovely resort hotel, as is the Sheraton near the falls. Those of us who made the trek unanimously praise a tour guide we met. His name is Elvis Alberto Ramirez (email: [email protected]). He can do the whole Iguazu tour for you, from retrieval of checked bags after landing at the airport to departure check-in. We rate him five stars.
Let’s move from the tropical forest to the dry eastern plateau that adjoins the Andes.
Our Patagonian fishing experience this trip featured a visit to Estancia Quemquemtreu, a 200,000-acre working ranch. We were 20 visitor-guests, and we filled the lodge’s capacity. Paula and Martin Zimmermann were our gracious hosts. For details on fishing or hunting, contact [email protected]. One of the folks in our group had a successful wild boar hunt. All members of our group met wild Patagonian trout.
Here is a rainbow taken on a small red San Juan worm dropped about three feet on 4x tippit using a Chernobyl as a strike indicator: The fish were holding tightly against a ledge on the Collon Cura River, which flows through the ranch. The throw was long (40–50 feet), with lots of line mends to achieve a drift in fast-moving water next to the ledge.
Here is a brown trout taken in the narrow stream at a small pool only 10 minutes from the lodge: A black beetle worked to seduce this magnificent fish.
All fish were barblessly hooked and released. During the three days we saw no other boats, vehicles, houses, roads, or fellow humans besides our 20 group members, lodge staff, and the highly skilled Patagonia River Guides who served us with a guide-to-fisherman ratio of one to one.
Clean air, the four points of the Southern Cross beckoning in the night sky, the crackling fire in the outdoor pit, the asado prepared and served exquisitely – all came together for a marvelous experience to accompany (and sometimes to divert us from) some very serious conversation.
Let me close by thanking J.J. Reynal at Exciting Outdoors(, who put all the packages together so that 20 of us could share this time together.



The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

The preceding is a commentary by Cumberland Advisors and has been reposted with permission. Cumberland Advisors commentaries are available at

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