Don’t Cry for Me Hyperbole

Every now and then, a narrative pops up that is so bizarre we can’t believe it is gaining traction. So it was today, as headlines strangely declared Britain is turning into Argentina. It started a couple weeks ago, when a former Bank of England (BoE) head observed that Britain’s savings rate trailed even Argentina’s. Then a Telegraph column grabbed the baton, arguing that if this persisted, the UK risks plunging in the national wealth standings … just like Argentina has done several times since the 1930s, including the present. A few days later, another former BoE chief accused former Prime Minister Liz Truss of turning the UK into “Argentina on the Channel,” and the OECD followed up by naming Britain as the world’s second-worst economy, beating only—you guessed it—Argentina. We share Milton Friedman’s opinion that all analogies are bad analogies, but this is one of the worst we have seen, one that ignores the actual reasons for Argentina’s calamity. The UK’s economy has its headwinds, but Argentina it is not.

That we are even writing this is an example of the problems with drawing conclusions based on surface-level comparisons only. Yes, the UK’s savings rate is below Argentina’s at the moment, and yes, the OECD’s GDP projections put Argentina and the UK at the bottom.^[i] Yes, Argentina has had a lot of financial crises, and yes, UK markets had a bit of a tantrum in reaction to Truss’s financial agenda a year ago, culminating in a brief pension crisis and BoE intervention. But even these comparisons are surface-level only, don’t account for differing magnitudes of the issues and don’t bother to explore “why” they happened.

So let us take a short jaunt through 20^th century history to see why “Argentina” is a symbol of economic mismanagement and financial crisis. Once upon a time, the South American nation was one of the jewels in the global economy, a thriving and prosperous nation. Then came the socialist government of Juan Perón, which nationalized a boatload of foreign-owned corporations and basically pillaged the entire private sector while eroding institutional checks and balances and attempting massive wealth redistribution. Hardcore socialism has never gone hand in hand with growth and prosperity, so it is no surprise that the subsequent decades saw Argentina lurch from one crisis and default to the next, complete with several rounds of hyperinflation and debt monetization. It has been in default or undergoing debt restructuring for 36 years since World War II, which is an awful lot. Occasionally a market-oriented government would come into power and try to fix things with privatizations and currency changes, usually at the IMF’s behest, but reforms’ economic side effects soon paved the way for the socialists to return and undo the prior changes—scaring off investors and breeding more poverty. That the country shows flashes of resilience and growth despite its government’s repeat self-inflicted disasters is a testament to the Argentine people’s perseverance and enterprising nature.

Call us crazy, but we don’t see historical or modern parallels with the UK here. Britain didn’t have a military dictatorship during the 20^th century. Nor did its governments seize a wide swath of businesses. The few state-owned firms that did exist went private in the 1980s. Corporate and individual tax rates have mostly fallen since WWII. Inflation isn’t in the triple digits. And that brief pension crisis that former BoE head Mark Carney said was evidence Truss nearly turned Britain into Argentina? It happened because markets overreacted to a proposal for some very modest tax cuts. Not massive redistribution à la Argentina under Perón, much less an actual debt default. Just small tax cuts to put more capital into people’s hands to spend and invest. The polar opposite of what gutted Argentina’s economy.

The people drawing these Britain/Argentina comparisons aren’t ignorant, and we have a strong hunch they are quite well aware of the relevant histories. So why go there? We see a few potential reasons. One, bold comparisons get clicks, which are currency in the proverbial attention economy. Two, hyperbole is sometimes an effective rhetorical device. Three, in the first case at least, seeing the comments in full context made us think the differences were the actual point. In his wide-ranging Telegraph interview, former BoE head Mervyn King observed the following: “‘The biggest challenge facing the UK economy is that Britain saves the smallest proportion of its national income than any other G20 country. We save less than Argentina. This is extraordinary.’”^[ii] Yep, extraordinary because the two countries are so different that the comparison beggars belief! And his point, which focused on Britain’s pension system, was made. But the nuance faded more and more with each repetition of the meme, and now it all seems more about headlines than anything else, especially since his comparison has since been hijacked and deployed in politicized debate over, you guessed it, Brexit. We guess that worked, because we kept clicking. (Or maybe we clicked so you don’t have to.)

This all might seem academic and political, but we think there is a key lesson here for investors: No correlation without causation. This might be an extreme example, and we would be surprised if people seriously considered ditching UK stocks and bonds because a few ex-policymakers made some hyperbolic comparisons. But we saw people compare America to then-defaulting Greece in the last decade with straight faces. And we have an election coming up here next year, which suggests the Season of Hyperbole will soon be upon us once more. We can see a situation where someone argues A is like B because of X, Y and Z surface-level similarities and investors walk away with the belief that A will perform like B. Sometimes it might be true and those similarities might have identical causes. And sometimes they might be mere coincidence, which isn’t actionable. Unless you can establish a common cause, there probably isn’t a there there.