Buenos Aires: The Buck Stops Here

By Dr. Steve Sjuggerud, President, Investment U
Tuesday, March 30, 2004: Issue #324

They wouldn’t take my U.S. dollars.

When the Patagonian Internet café wouldn’t take my dollars two days ago, I didn’t think much of it at first. It was just an inconvenience.

Looking back, that inconvenience could be considered a major danger sign for the U.S. dollar and yet another reason to consider having some non-paper assets in your portfolio.

The Patagonian Pain in the Rear

My Internet bill was roughly three pesos about one dollar. Instead of accepting a U.S. dollar in payment, the Internet café would only accepted pesos. Company policy, as far as I could understand. So I walked four blocks to the bank and exchanged US $40 for some pesos, walked the four blocks back, and gave her the money in pesos, of course.

No big deal, right? Maybe the Internet café didn’t want to keep changing $20 dollar bills for a dollar’s worth of Internet.

But then it kept happening even in the capital city of Buenos Aires. I was at the Intercontinental Hotel, at a meeting in the hotel bar. I ordered a sandwich and a drink. I tried to pay in dollars. Surely an international chain would accept my dollars in the hotel bar, right? Wrong I had to go and exchange more dollars for pesos to pay the bill.

I couldn’t believe it It happened too often for it to be coincidence The people of Argentina actually prefer pesos to dollars. Well, maybe that’s stretching it but they sure don’t mind pesos. You can understand why a dollar used to get you four pesos. And now it only buys three. The dollar has tanked in the eyes of the Argentines.

This is the first time I’ve experienced dollar indifference in the Americas and what it suggests about the U.S. dollar is ominous But there’s a way to minimize that.

Don’t Leave Home Without It? Well, Now You Can

If you’ve traveled anywhere in the less-developed world in the last decade, you know that U.S. dollars have been the preferred currency of choice. It reached the point where, if I was headed to Nicaragua or Belize, I didn’t even bother exchanging any money. There was no point.

It’s been the same around the world Russians would gladly accept your dollar, and give you your change in a handful of Russian rubles. Venezuelans would gladly accept your dollar, and give you your change in a backpack full of worthless bolivars. And Indonesians would gladly accept your dollar, and give you a wheelbarrow full of rupiahs. (I remember taking $20 out of an ATM in Bali in 1998, the machine squeezed out something like 300,000 rupiahs. Heck, if the dollar got any stronger, Indonesia would have needed new “super-size” ATMs.)

But times might be changing. This was the first time that I hadn’t seen a clear preference for U.S. dollars in Latin America. Indifference might be the best way to describe it. But it is a subtle change nonetheless.

What Buenos Aires Taught Me About the Dollar

At first, you might think, “So what? Those Argentines have lived through currency crisis after currency crisis what do they know?” But think about it the Argentines have lived through currency crisis after currency crisis. They know way more than you might think.

Unlike Americans, who are not discriminating when it comes to their dollars, the Argentines are aware of the value of a buck. They are aware that two years ago, a peso was worth a quarter. And today it’s worth closer to 35 cents a massive strengthening percentage-wise. They know that the U.S. dollar is losing value.

The Argentines have been through a debt bust. The smart Argentines see what’s happening to real estate prices in New York City, for example, and they believe deep in their bones that the bubble is going to burst. Real estate prices in New York City on the high end of the market are 10 to 15 times what they are in Buenos Aires, according to local Buenos Aires realtor Paul Reynolds (www.argentinahomes.com), who showed me some properties on Saturday.

The big question is, what if other countries decide that they’re not so excited about dollars anymore? It could be ugly.

The best way to protect yourself from a weak dollar is to make sure you’re diversified into some non-paper assets assets like:

1) Commodities

2) Real Estate

3) Timber

4) Gold Coins

Things that can’t be printed at a government’s will.

We’ve covered this idea here before. But my experience in Argentina was the first time I saw indifference toward the dollar. Is it a sign of things to come? I don’t know. But as a precaution, I’m not going to have 100% of my portfolio in paper assets, like stocks and U.S. cash. I suggest you don’t either.

Good investing,

Steve

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