Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Brazil, Dump this Market Now!

Stock-Markets / Brazil Sep 09, 2010 - 06:19 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Batten down the hatches. Brazil, the media-darling of the world financial press and the poster child for emerging-markets investing, is heading directly into the eye of the storm.

Until now, Brazil has provided investors with a thoroughly rewarding run. Investors who followed Money Morning's October 2008 call to buy the iShares MSCI Brazil Index (NYSE: EWZ) have notched a 160% return.


But with this BRIC country now clearly running into trouble, it's time to trim any holdings you may have.

Here's why...

When Good Governments Go Bad
Since the 2009 run-up, it has become clear that the Brazilian government under Luis Iñacio (Lula) da Silva has not really changed its anti-business approach. Yet next month's combined presidential and parliamentary election (Oct. 3 with a possible runoff election on Oct. 31) looks like it will reward this "bad behavior" with a victory for Lula's handpicked successor, Dilma Roussef, and their leftist coalition.

To understand what we mean, let's start with a look at public spending. Official government spending was budgeted in December to increase by a moderate 10.7% in 2010, and has been subject to modest further trimming since the spending plan was unveiled.

However, spending in Brazil's 119 state-owned companies - which has been accelerating in recent years - is currently expected to increase by 32% this year. Moreover, lending by the Brazilian Development Bank (BNDES) is expected to double from where it was in 2008 to reach 150 billion reals ($87 billion) this year, while housing lending for the first half of the year was up 51% from the same period in 2009.

In addition, the government recently announced an $886 billion infrastructure investment plan for the next seven years, the Program to Accelerate Growth. Brazilian state banking lending has increased in the last few years from 1% of gross domestic product (GDP) to more than 7%, and that figure should realistically be added to the official budget deficit.

Hidden Deficit
A second area of Brazilian backsliding is in the oil sector. The oil law passed last year gives the state full control over oil resources, and it has used that control to charge the partly state-owned Petroleo Brasileiro SA (NYSE ADR: PBR) $8.51 per barrel for rights to 5 billion barrels of oil the company itself discovered (plus all the various other extortions already in place).

As a result, in a market that can best be described as difficult, Petrobras is being forced to raise $65 billion in equity to pay the government and to finance the capital investment needed to exploit its sub-salt Tupi oil resources. Meanwhile, the $42.5 billion to be received by the government is, of course, accounted for as revenue, so the stated deficit should be increased by this amount - another 2.8% of GDP

Combine these two effects, of state bank lending and Petrobras' cash subsidy, and you can see that the forecast of a deficit equal to 2.1% of GDP that was put forth by the Economist panel of experts is actually more like a deficit of 10-12% of GDP. Yet, unlike the U.S. and British economies that have suffered under deficits of this magnitude, the Brazilian economy is in the middle of a roaring boom, with projected GDP growth of 7.8% for this year, according to The Economist.

It's not as if Brazil was under-indebted, either; the excessive public debt nearly sent the country into bankruptcy in 2002, and the leeway before debt repeats the process is less than Brazilian commentators seem to think.

Political Risk
Until a few months ago, it was commonly believed that Lula would be succeeded by Jaime Serra. Granted, Serra is a pretty uninspiring old hack; but he's a centrist who could at least be relied upon to be reasonably favorable to the private sector - and to be not too profligate with public spending.

In recent polls, however, it's Roussef - Lula's preferred successor and former development minister - who is leading handily. Economically unsophisticated voters seem to be giving the government credit for a boom that has in reality been produced by high commodity prices and excessive state spending.

Roussef is a true believer in creating growth through government spending and income redistribution. So if she wins, bet that current policies will be intensified.

Indeed, the road map for their intensification has already been set out.

However, with a true public-sector deficit of 10% of GDP and public spending that's already the highest in Latin America, there isn't much room to expand the state sector before the country runs into big trouble. While commodity prices keep rising, the commodity-dependent Brazil will at least be able to borrow the money it needs.

But if commodity prices falter, a crisis of confidence would be more or less inevitable.

There are positives. Brazil's central bank (the Banco Central do Brasil) continues to maintain an admirably sound interest-rate policy, which has kept the Selic short-term rate - currently 10.75% - far above the current inflation level of roughly 5%. That has prevented the inflationary spiral that would otherwise be well underway.

However, central bank governor Henrique Meirelles declined the opportunity of running as Roussef's vice president, and is likely to retire if she wins. Needless to say, monetary policy would quickly change if an inflationist were appointed as his successor.

Brazil has had these bursts of growth before, and they have always been ended by a debt crisis followed by a period of forced austerity that has wiped out the previous boom's income gains and worsened the country's huge inequality. If Roussef wins, as seems likely, this pattern is likely to repeat within at most two years.

For Brazilian investors and citizens alike, that will certainly be a pity after such a strong run.

[Editor's Note: Why is it that Money Morning's Martin Hutchinson has been right on the money with every one of his political predictions for each of the last three years?

The answer is quite simple. The same skills that made him a successful global merchant banker - where he was easily able to identify winning trends for his clients - also make him one of the very best political prognosticators.

Just look at some of his most recent global predictions. Earlier this year, just a week after Hutchinson recommended Germany, the European keystone reported much stronger-than-expected GDP. He recommended Chile back in December, and three of the stocks he highlighted have posted strong, double-digit returns - and one is up nearly 25%. He again recommended Korea - which analysts were downgrading - only to have the traditionally conservative International Monetary Fund (IMF) come out with an upgraded forecast that projects solid growth for that Asian Tiger for this year and next.

A longtime international merchant banker, Hutchinson has a nose for profits instincts - as evidenced by his unerring ability to paint a picture of what's to come. He's able to show investors the big profit opportunities that are still over the horizon - while also warning us about the potentially ruinous pitfalls hidden just around the corner.

With his "Alpha Bulldog" investing strategy - the crux of his Permanent Wealth Investor advisory service - Hutchinson puts those global-investing instincts to good use. He's managed to combine dividends, gold and growth into a winning, but low-risk formula that has developed eye-popping returns for subscribers.

Take a moment to find out more about "Alpha-Bulldog" stocks and The Permanent Wealth Investor by just clicking here. You'll find the time well spent.]

Source : http://moneymorning.com/2010/09/09/brazil/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules