I wrote last weekend on the currency crisis and its impact which is seriously underestimated . Today again the currency pegs are being tested; it recalls the collapse of the Exchange Rate Mechanism in 1992.
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Oct 27 2008
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Nov 13 2008
We rarely work with our homebanks for Forex trading, on the lonely exception of one they are all way too expensive and slow. In Brazil we have been working with Number One for more than years now. They are truly exceptional. We have a very clear framework agreement with them and they are extremely fast and professional. I can hardly think of a more efficient broker. Actually, Number One has an excellent content section on the Brazilian Real; some content is public , the best content is exclusive to Number One clients.
All this in sharp contrast to the broker we have been working with in South Africa for the past year. Banking in South Africa remains prehistorically slow and expensive when compared to the efficient banking system in Brazil. I have been trying to getsome non-resident money (read: even no Reserve Bank clearance needed) out of South Africa for the past 10 days and things simply don't happen. I had been promised the money would leave last Monday and again... nothing. This is unseen to me.
Anybody who has recommendation for fast, communicative and competitive South African currency brokers of the profile of Number One in Brazil? -
Oct 25 2008
Yesterday Paul Krugman was on Charlie Rose; the man deserved the noble price for his analysis of trade patterns and location of economic activity.
This weekend all Belgian newspapers are boasting "Belgium consumers don't care for the crisis, they keep shopping". Sometimes I wonder if the newspapers are directed by politicians to soothen us and make sure we don't have a clue of the doom which will fall over Europe and especially Belgium.
The Los Angeles Times published a list of countries and the % their stock index fell with regard to the peak :
Rusia: - 73,2%
Vietnam: -70,5%
China: -69,8%
Hong Kong: -60,1%
Turkey: -58,3%
Egypt: -56,9%
Italy: -55,2%
South Korea: -54,5%
The Brazilian Bovespa went down 57,2% from it's top. Take into accout that (1) more than 40% of the Bovespa is represented by Rio Vale Doce (steel) and Petrobras (oil), which are both very big buying opportunities today and (2) that the Brazilian Bovespa was one the strongest performing stock exchange for the last 3 year; which makes the 57,2% fall against peak much more relative.
And as a comparison: the Bel20 fell 59,62% against its 4750 peak; that's more than the Bovespa !
But currently the stock exchange is not worrying me most. What worries me most is the Yen shooting up like a rocket against all currencies. This is the only reason why stocks have been crashing last week: the Japanese carry trade is crashing because of the Yen rocketing up high. I wrote many times on "Peak Credit" the last months and this is what is ruling the planet now: the US cannot take on more debt. But actually, they ARE taking in more debt, not to buy products made in China, Japan or Brazil, rather to fill a massive bottomless pit that the derivate beasts have digged. Nothing is bought or created with all this money.
And both the US and Japan keep sailing the 0% interest rate boat. True, the US is still a little above 1% most of the time, but the will drop the rates below 1% eventually and kill the few last savers in the US.
It is stunning that no one actually undersands what is going on. In July I predicted the Brazilian Real to fall between 20 - 30%; in October I proved right. On October 1st, I wrote that the South African Rand will not raise above 0,085 against the Euro again in the coming year; I was right (and will be right).
At the same time, the central bank of Denmark is RAISING its benchmark lending rate by half a percentage point . I believe this is the right thing to do.
I also believe South Africa should raise its interest rate to 16%, Brazil should keep its current 13,75% Selic rate and the ECB should keep it for at least another year on 4,25%. Actually, if South Africa would drop its interest rate between now and February, the SAR would further tank to unseen dark lows.
But no, Japan will keep lending at 0%, the US will lower its intrest rate below 1%, the ECB will follow. All for the sake of trade and keep their currencies low.
I am 100% against the exchange markets as they are today. The entire floating currency mess is a nightmare and wrong. It is wrong and it will eventually kill the US and Japan in the long run.
As long as this mess is not solved, there is no way global trade can go back to normal. The whole system of free floating currency regimes and the free trade movements need to be burried. The attemps of corporation and nations to run this system has been a total faillure.
And this is why I admire Sarkosy so much recently (and China with him ): his call for an international meeting to talk about the Bretton Woods II and the Nixon floating currency is the only way out of this huge mess we are currently in.
But they will not be able to replace the current system, unless the US first stops spending trillions on military domination, etc... The horns of the dilemma are in the US and they will not kill the current system, they will keep it alive, kill many nations (economically) with it and we will all (also and especially Belgium) be trapped until something happens. And, unless Obama really brings change, this will only be the bankrupcy of the US government which will eventually change the world systems in a massive cascade.
Believe me: Bretton Woods II ending the current floating currency regimes and free trade movements is the only structural solution to the current crisis and the mess that's ahead of us. -
Dec 27 2007
Since February 2006, the South African Rand is in freefal . This year, the currency has been constantly drifting downwards. I was in South Africa early December and I was stunned how cheap life in South Africa has become when you calculate back to Euros. A Big Mac Meal in Cape Town costs SAR 16,75 or 1,67 EU. Last year I would pay 2,5 EU for that same Big Mac Meal in Cape Town. According to this Big Mac index the Rand is seriously under valuated. And this is exactly the strange thing, the interest rate in South Africa is high, but still much lower than what it has been in the past; the growth rate is on track (4,8% GPD growth this year) and things are looking good for the ecoomy in 2008 (5,2% estimate for 2008). But still the rand falls.
While the Brazilian Real keeps scoring records ; the slide of the South African Rand is continuing on a daily basis. Economists are clueless. They think the reason is a mix of more emotional factors: the Zuma factor , the politicians and their position with regards to AIDS , the situation in Zimbabwe. But none of these can justify the movement of the currency. The slide now has a momentum of its own. This is the time to enter the South African market or take a stake in a South African exporting business. The South African central bank is trying to dam panic and avoid inflation impacts by raising the interest rates -another reason to enter with money into South Africa-
My advice: wait until the SAR drops to 0,093 against the EU -very soon, a matter of weeks- and wire some money into South Africa and let it yield a healthy 11% on a Money Markets account until the currency takes up again by the end of 2008. Or better even: take a stake in a South African exporting business which is independent from importing machinery or raw materials.
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Nov 2 2008
A long overdue update on the Brazilianand South African economy. I included some Belgian figures for the sake of comparison. You can download the original presentation on Slideshare .
It goes without saying that I'm extremely sceptical on the South African prospects for 2009 and 2010. As I've written many times before, from Q2 2009 you'll be able to buy into unseen real estate bargains in South Africa. The prices will further plummet and the South African rand will remain low. It's hard to predict however when the uptake will then happen. Although the prospects of Africa as a continent are not at all bad; South Africa is really structurally ill and it will take a while to heal.
As to my biggest worry: the freefloat currency mess , which was my main concern as to the Brazilian Economy in a short term, the Real moved back to pre-crisis patterns . I wrote extensively end September and beginning October how unique the chance was to buy into Reals. The BRL is now again in the 0,35 - 0,375 bracket against to the EU; which is still sound enogh to buy into. When the Reals would move again up above 0,375 to the Euro, I would gold my horses. When the currency would leave that level however, the Banco Central will probably level off the selic intrest rate somewhat. Personally I hope however that move will be taken later than sooner.
Any opinions, input or considerations on the state of the economy in Brazil and South Africa? -
Feb 28 2008
Brazil's real strengthened for an eighth straight day yesterday, alomst reaching a nine-year high, as a tumbling U.S. dollar and surging commodity prices boosted demand for the currency. The real has jumped up 4,8% since February 15, making it the biggest gainer against US dollar among the world's 16 most actively traded currencies during the period. The currency has strengthened 28 percent in the past 12 months, also the biggest gain among the major currencies against the dollar.
Brazil's real interest rate, calculated by subtracting annual inflation of 4.56 percent from the 11.25 percent Selic benchmark lending rate, is 6.79 percent .
Crude oil also rose above $102 a barrel today, the highest dollar level ever, as the weakening dollar led investors to buy commodities as a hedge against inflation. Brazil exports the crude oil it pumps from what are the deepest waters in the world, with recent discoveries in fields as deep as 6 kilometers. Commodity sales helped Brazilian exports rise to a record $160.6 billion in 2007. Brazil will export as much as $180 billion this yea r, according to Trade Ministry estimates. -
Dec 12 2008
Update December 13th: average of 20 predictions is that 1 Euro will yield 3,14 BRL on December 2009; that's a little bit less than what it yields today (3,14). I remain with my position that the Euro will lower to 2,53 Reais by end 2009.
The first question in the new set of 10 prediction questions for the coming: what will the EUR / BRL rate be on December 31st 2009?
My prediction is 2,53 , what is yours? Vote here (caution: use . instead of , as a decimal marker) -
Mar 7 2009
When I arrived in Brazil the first thing that stroke me is that all restaurants are jammed with people. True: Embraer (planes) and Rio Vale Doce (iron) dismissed people; but national consumption doesn't seem to be affected for now. I explained in a previous post the dynamics behind this.
A lot has been writte on Brazil last week; Karine Huet wrote a very balanced Brazil special feature in the Trends of March 5th, titled: "The B of the BRICS dances the Samba" and The Economist also dedicated an article on Brazil.
The arguments of the article in The Economist repeat what I have been saying for the last two years :
"The reasons for Brazil's improvement are largely to do with public-sector debt , which was once a weak point but has been brought down below 40% of GDP . Foreign-currency borrowings have mostly been exchanged for real-denominated ones, so slumps in the currency no longer hurt the government’s balance-sheet . Brazil has built up $200 billion of reserves to defend the real . Its current-account deficit is small . Most important, this crisis is not pushing up inflation —Brazil’s congenital weakness. That in turn has allowed the central bank to cut rates (making public debt cheaper to service). This is the first time Brazil has been able to run a counter-cyclical monetary policy .
Yet by comparison with Brazil’s recent past, and also with what other countries are experiencing, the economy is in fair shape . The IMF forecasts that only the developing countries in Asia (which are poorer than Brazil), Africa (ditto) and the Middle East will do better in 2009. Given Brazil’s previous tendency to go into cardiac arrest whenever economies elsewhere became stressed, this is impressive . "
When looking at this chart of the economical status of Europe, with more than 13 European countries having a public debt versus GDP ratio of more than 40%, which is Brazil's public debt ration one can indeed only say the status of Brazil is indeed impressive. Belgian's public debt to GDP ratio is actually today more than twice as big as Brazil's.
Add to that Brazil's commercial balance was positive in February, the country exported 1,767billion US$ more than it imported , things surely look not as grim as one would expect in this worldwide downwards spiral. -
Oct 5 2008
Americans still don’t have a clue what the consequences are of voting the bailout bill .
The current financial crisis is not what counts; the upcoming recession is not what counts. Eventually, the G7 all want to get ‘back to the old’. Well, the old will not come back, ever; that is what counts. The G7 simply cannot figure out what is going on themselves. Just look to Europe, they are screaming for a cheap Euro against the dollar . Of course, everyone wants their currency to be weak against the dollar, so that they can flood the US with imports. Just look at what Japan did the last years, keep the Yuan cheap against the dollar and create a huge trade surplus. Also Europe wants this status quo to continue. BUT IT CANNOT.
There is no way this can continue. All the Europeans are hoping the dollar can be talked up. It is simply absurd that the dollar rises just because Paulson announces the bailout plan; as if his words would contain some magic secret spell. It is a very simple rocksolid rule of economics that any country running huge trade deficits all the time will have a weakening currency. Expect some huge volatility in exchange rates for the coming weeks and months, but eventually the hocus-pocus will fail and the dollar will crash.
But don’t be fooled, the problem isn’t the value of the euro (against the dollar). The problem isn’t the value of the Yuan and even not the value of the Yen. The problem is the wild spending of the American Empire. The repairs that are needed will change the whole economic system and the world’s political systems. It’s simple: the world has a trade surplus with the US. This surplus has been growing since 1968. In 1968, the trade deficit of the US was 5 billion US$. Then it was over20 billion US$ each year in the 1970's then in the 1980's, it rose to over 50 billion US$ a year and then in the 1990's, it climbed ever steeper to 100 billion US$ a year and more and then...today, it is nearly a trillion US$ a year.
A DEFICIT OF A TRILLION US$ A YEAR !!
A number completely outside the laws of equal trade which will eventually crash the hocus-pocus and drive the dollar down and down and change the powers in this world drastically. You can feel the ground trembling as the volcano is setting to explode; it will happen in an eyeblink. The US is preparing for tax cuts and dropping interest rates. This is insane, it will only speeden up the explosion of the volcano. People seem to forget that China has more sovereign wealth than anyone on earth and unlike the second sovereign wealth nation, Japan, China doesn't have much sovereign debt. After the US, Japan is number 2 in soveriegn debt. Indeed, its sovereign debts are 9 times greater than Japan's Forex reserves while China's is 4 times smaller than their Forex reserves!
This simply means that China has a grip on the world banking systems for the simple reason that China IS the bank . And now the US would have to ask the Chinese to make their currency the strongest on earth while the US pretends to be the number 1 empire? China will only rise their currency when it can forma strong alliance with Japan, when Taiwan is reintegrated with China, when Korea is re-united and in a military/economical alliance with China, etc… But Japan won’t agree with this path, Japan dragged Asia into World War II and it will do it again. Meanwhile Europe is imitating Japan, Russia and China and swallowing all the freshly printed dollars in the hoop to keep pushing the rate of the dollar up. But the end is in sight, the US customer can simply not swallow more debt and the US industry is dying. This brings us to the conclusion of the current events: all the actions taken by the European, Japanese and US nations are driving us into the very problems we all claim, we want fixed. Which means we want this mess to continue and make the US look strong even when it dies. This is exactly what the bailout plan is about. Europe wants a strong dollar, no matter what! Meanwhile we tend to forget that for decades Europe joined the US in destroying Russia. After promising Russia, we wouldn't expand the EU, we did. After promises we wouldn't expand NATO, we did. Now we are trying to park ballistic missiles right on Russia's front doorsteps! Only this time, Europe is at the mercy of Russia. Europe has no energy and depends on Russia like a baby who needs its milk.
Do not underestimate the “new Russia” that is standing up. Anyone who follows the news in Brazil (which already had 12,5 billion barrels of oil reserves in the ground) is aware that Brazilian Petrobras has discovered significant deposits (up to 70 billion barrels) of oil plus natural gas off the coast of Brazil. This is major news for Brazil.
The country its electricity is already for more than 90% auto-sufficient on hydro-electric, more than 40% of its cars already drive on ethanol and with these new gas and oil finds, the country could become completely energy-sufficient for the next century and beyond. Until…. the Americans decided to re-establish the US Navy 4th fleet and put its eyes on Brazil’s oil early September . After which Brazil reacted and is currently negotiation with France to build a nuclear-powered submarine to protect its oil. Brazil will also expand its Navy’s surface fleet and buy several more nuclear submarines to keep the Yanks away. But, eventually it will be Russia ruling the show, shortly after the US set off to Latin America, the Russians also set sea.
The world will never be the same. -
Nov 6 2008
Currently the ZAR trades at 9,845 against the USD. Bloomberg just posted a report in which they estimate the ZAR could trade at 8,4 against 1 USD in 2009 and 7,42 against 1 USD in 2010 . This would mean that the ZAR would gain 24% from now till end 2010 (read: some months after the election of Zuma as the new SA president). I follow the Bloomberg line of thinking. With some considerations through the fluctuations through 2008 and 2009 though. The volatility in the coming months will be extreme. Especially since I suspect that (1) the inflation in South Africa will remain well above 13% in October (results not yet published, they are kind of slow in SA publicising inflation index figures), November and Q1 2009. The fact that the SAR plummeted recently, fuels the SA inflation.
So, I think you will have various buying opportunities to get into the ZAR today. I believe the chance for a +20% currency gain by end 2010 is very likely. Just make sure you have an iron stomach when the SA Reserve bank decides to lower their intrest rate from the current 15,5% any time soon, you'll see the Rand fall down to historic lows.
The question then of course remains what the USD will do against the EUR by 2010. Still around 1,25 EUR for 1 USD ? Higher / Lower? Much harder to do predictions on that one. -
Dec 20 2007
Earlier this year, analysts projected Brazilian GDP to grow at 4,9% in 2007. I found this figure to be ambitious. The reality is that Brazil will be clocking off 2007 with a substantial higher growth rate since the Brazilian economy expanded with a 5,7% in the third quarter . Brazil has been consistently lowering its interest rates over the past year, fueling consumer and business spending. Only now speculation arises that the Brazilian bank may keep borrowing costs unchanged for most of 2008 to cap inflation. For me personally this is good news. This will keep supporting the high Brazilian currency rate and make a nice yield on Brasilian bonds. I however believe that the Brazilian economy would thrive on a further decrease of the interest rate to a 9%.
There is a growing consensus amongst analysts that the US (and EU) economy is moving towards a recession in 2008. Some believe it to be a mild recession, personally I bet on a more severe scenario. I have the impressions that US and EU policy makers are not really fully aware of the significant downward risk to growth. Typically economists tend to overestimate the risk of rising inflation and underestimate the risk of downward growth. Especially today this is the case; there seems to be a view that EU and US growth will have just a 'dip' and resume in the second half of 2008. I'm (very) wary of such a scenario in the context of the current macro economical policies applied by the US and the EU. -
May 9 2008
On April 30th, Standard & Poors nominated Brazil Investment grade . Not a word on that fundamental event in the Belgian press, even though it's far from being a fait divers. Remember my December investment tip ? From 59,9 at that time to 69,2 today, that's a 15,5% gain in less than 6 months; not taking into account the currency win. Expect the Bovespa to further rally now that Brazil is investment grade and the Brazilian IPO market to remain exteremely active . This coverage on BBC explains the underlying economical fundaments .
I truly enjoyed reading that Brazil's president Lula now critizes the AAA rating of the US , the man has a point of course.
Back to Belgium now, for only 3 weeks, on June 1st we're flying back to Sao Paulo. -
Feb 28 2009
Globo just published an article that the Rio de Janeiro car sales were up between 6-10% february 2009 compared to january 2009 . This is quite exceptional to other places in the world. Brazil never really had an interest rupture since January 2004, that is for the last 5 years. Since then the Brazilian overnight lending rate hoovered initially between 15 and 17% and then slowly came down to the current 12,74%. Contrary to the crazy EU/US lending explosion of 2002, 2003 and 2004, Brazilians never had a credit "explosion" in nominal terms. The country comes, with a +20% history, even in 200, 2001, 2002 and a somewhat frightening sudden surge to 25% in 2003, from a situation where until 2004, real estate financing was a marginal phenomenon. People bought houses to live in, to guard inflation away. The situation of Europe and the US, where every would-be tycoon wanted to build, with lended money, some houses and apartments to sell with a +30% profit two years later was and still is non-existing in Brazil. People buy a house or apartment to life it. It's their best guarantee to guard of inflation (which is very fresh engraved in their minds) and have a guarantee to have a comfortable place to stay in, even in harsh times.
To understand why Brazil differs (a bit) from the rest of the world, you need to take a look to the SELIC (Brazilian overnight lending) rate; comparable to the ECB or Bank of England overnight lending rate.
From early 2001 on, Europe, the VS and England all cut 4,5 - 6,5% interest rates drastically and to a big extent artificially. In one year time the US interest rates dropped from 6,5% to less than 2%. This is when the roots of the current financially crisis grew exponentially; the real estate financing versus GDP ratio grew at an unseen pace from January 2001 - January 2006; nearing 100% and even exceeding 100% in countries like Belgium or the Netherlands. Only in January 2006 (in the US from mid 2004 on) inflation rates showed us the engines were overheating; all due to this artificial wealth bubble that was created after the dot com bust.
Just look at this graph of UK real estate prices to understand to which extent this growth was artificial.
The situation in Brazil was completely different in that period. The Brazilian interest rates were 15% in January 2001. The real estate financing versus GDP was almost to be neglected at that time, less than 2%. The Brazilian central bank persisted in a very tight monetary policy and the intrest rates were raised to 19% in January 2002 and 25% on January 2003. No real estate financing bubble in Brazil while Europe and the US were experiencing their leveraged wealth bubble. From June 2003 on, the interest rates were slowly, coming down 10% in 2003. Yet, the real interest rate didn't came down; the Brazilian central bank kept it's tight stand. You can see this in the currency appreciation early 2003, which then stabalized throughout 2004 when the Brazilian interest rates stayed more or less equal between 15,25 and 17,5%. I entered Brazil exactly at that time. From december 2003 until december March 2006 the interest rate remained pretty much around 17% average. The currency was appreciating rapidly and inflation was kept at bay, so the Brazilian central bank lowered slowly the interest rate to 13,75% . For the average Brazilian mid it pretty much remained stable at that rate (with some minor fluctuations) until end 2008 and now it was lowered to 12,75%. Brazil, with it's history of hyperinflation remembers a period from January 2004 till today where the interest fluctuated between 15 and 13% with a slow downward trend. Today, Brazilians still get credit and the rates of all banks go effectively down (see this weeks table which compares charged interest rates of all banks in Brazil), this in sharp contrast with Europe and the US, where the central banks get lower interest rates but don't pass it down to consumer s and companies. Example: the interest rates charged by all Brazilian banks to consumers for car loans, January 2009 compared to February 2009:
Just look at the below graphs to understand the difference in patterns and in consumer psychology involved when you compare the Brazilian centra bank interest rate evolution versus the one in Europe and the US for the period Januuary 2004 - today:
From here on? A hard call because of the item raised in this article .
For the better part of a century now, the global gold trade has been dominated by the US dollar. This will change sooner or later thanks to the US Fed trying to destroy the dollar with exponential fiat-money-supply growth and zero yields , but it still holds true for now . Because of this, all over the world the prevailing gold price is a function of any currency's exchange rate with the US dollar along with the dollar price of gold.
What is happening now in the US and Europe will have huge impacts on the currency rates. Sooner than later we will have a huge FOREX mess and we'll need a new Bretton woods. I'm only wondering how long it will take before we'll get there.
Anybody's view? -
Sep 27 2008
I immensely enjoyed this debate on CNBC yesterday and fully second the opinion of Chris Whalen.
If this bailout bill will be voted, the stock markets will rally for a few days, but eventually liquidity will dry up even more, volatility will stay high and financial assets are going to suffer as the crisis continues to unfold. The bailout plan is unlikely to work and the global economy will take the hit; don't underestimate the force of recession knocking on the door. Personally I can't understand people who think we'll soon have new highs again on EU and US stock exchange; this is out of the question for a very very long time. Equities are still priced high and economically the world is going into a slump. I think the US economy is much weaker than what most think and I believe the trade and current account deficit to continue to contract. And the people counting on foreign reserves of resource-rich countries: these are also likely to dry up. Sovereign wealth funds will focus on supporting their own markets. I truly hope this bailout plan won't make it, although I believe it'll be idle hope.
And I'm not the only one, more than 150 prominent U.S. economists, including three Nobel Prize winners, urged Congress to hold off on passing a $700 billion financial market rescue plan until it can be studied more closely .
The next emergency measure might be that that Americans are not allowed to buy foreign currency and transfer money overseas, and the one after that could be not permitting Americans to buy gold and so on and so forth… It creates even more uncertainty in the market place when you continually change the rules. -
May 13 2008
I wondered who followed my 2008 predictions and bought on the Bovespa and especially went into Rio Vale Doce and Petrobras. Ratings agency Standard & Poor's upgraded Brazil to investment grade two weeks ago, and Bovespa shares promptly surged thanks to the earlier-than-expected bump. The iShares MSCI Brazil Index, an exchange-traded fund that tracks Brazil's Bovespa index, rallied 8 percent on the day of the announcement and continues to climb this week. Petrobras profit for the last trimester was up 68% totaling a profit of already 6,9 billion R$ for this year .
Slowly and without great fanfare (the Belgian news rarely mentions Brazil at all), Brazil's economy has turned a big corner. Already a global power in agriculture and natural resources, Brazil has added a key ingredient that had long eluded it: a currency with staying power. In turn, that's helping unleash the greatest burst of prosperity the country has witnessed in three decades .
Gross domestic product grew 5.7 percent last year, up from 3.7 percent in 2006, and public debt as a percentage of GDP has been shrinking for five years. Brazilian stocks jumped 70 percent in the past year, while other hot emerging markets like China and India watched equities slump mightily. The Bovespa index is now at 70.000 and I see it further rising to 74.000 end of this year.
Risks remain however. The S&P upgrade will mean the real will even go higher. I'll sum up my expectation for the economies indicators in a next article, but as to the exchange rate, I expect the Real to end at 1,72 by end of 2008 and 1,8 by the end of 2009. Make your own bets how the dollar will behave against the Euro by the end of 2009...
The big question is however how Brazil could derail at the end of the commodity boom and a return to health for the US economy.
First, I don't believe the US is close to a recovery. The US (and many other parts in the world) are in for a huge real estate deflation , like the article in the Economsit states: the housing price-bust has a long way to go.
Secondly, some people claim commodity prices will come down sharply when the US economy starts to recover. This is utopic, commodities will not get back to their pre-2004 levels. At most the growth rythm will be lower or flattened . True, this could impact somewhat the speculations on Brazilian shares, it would however not impact the Brazilian economy. People tend to overestimate the importance of export for Brazil. Brazil is not Belgium, only 15% of the Brazilian GDP is composed of export. Also, analysis of past S&P upgrades shows that shares often fall following an investment-grade bump. Other nations like Mexico and Russia saw declines in the months following their upgrades. Still, Brazil's boost came earlier than expected, and that could help minimize some of the post-party hangover.
What worries me personally most is the exchange rate. FX is a beast, the Yuan is still seriously overvaluated and already since early 2006 I have the fear the Real is a bit overevaluated. My guts proved wrong. The Brazilian central bank has managed for more than 2 years to keep its currency neatly stable. Usually by intervening and buying up dollars (Brazil has now huge dollar reserves and even becaming a net creditor on it's balance sheets, this in sharp contrast to eg. South Africa).
And to keep the growth afloat the senate now has voted a plan to massively stimulate exports through subsidies in various sectors . More than 20 billion dollar will go into these subsidies. I agree with Miriam Leitao however (I'm her biggest fan) that this sector-oriented approach entails some dangers and that a general policy would be more beneficial to the country. -
Jul 29 2008
In the Belgian news today: new apartments in Belgium drop 15% in price by the end of 2008 .
Only 2 weeks ago De Morgen was still wirting that Belgian real estate prices were growing fastest in Europe , or how deceivingly inaccurate the Belgian mainstream press is.
I’ve been writing for the last months about the deflationary hurricane that is coming towards Europe, the United States and even South Africa.
Surprised to read de flation, while all the newspapers and politicians are screaming inflation?
Let’s define inflation; dictionary.com defines inflation as:
“A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.”
Mind the "caused by". The problem with these “because of” definitions is that you don’t know why prices are rising or falling. Example: is there any way to decide what % of the increase in the price of oil (or any other product) was "caused by an increase in available currency and credit beyond the proportion of available goods and services"? The answer is no, of course.
The proper economical definition of inflation is:
“a net expansion of money supply and credit” , while deflation is the opposite.
In this perspective, the Brazilian inflation of 6,2% (projected yearend inflation) is a real inflation; the credit expansion is there and the Brazilian central bank is cooling it off by crunching the credit supply with higher interest rates .
Still, over the last years of growth, credit has remained much crunched in Brazil, the country still has the highest real interest rate in the world, after Turkey. And this is a good thing. This in sharp contrast the South African credit glut of the last decade. And this is where Brazil and South Africa diverge, a lot. The real interest rate (Money market interest rate – inflation) remains relatively stable in Brazil. In South Africa the real interest rate is increasing, rapidly. Which means that the deflation hurricanes are hitting the South African borders. In South Africa, as in the US, the weak South African Rand and US dollar have been masking deflation, this in sharp contract with Brazil, where the Real has been one (if not the) best performing currency of the last years, even at the moment of writing this article.
Everyone has been screaming ‘peak oil’ and ‘bond bubbles’ in South Africa, Europe and the US, while missing the more important point of the deflationary forces of foreclosures, bankruptcies and massive write downs in credits.
Exaggerating? You wish, quoting Standard Bank in South Africa -dated end June-:
"Lower house prices are expected as the credit crunch starts to have an effect, according to South Africa's Standard Bank. In 2005 South Africa was one of the fastest growing property markets in the world. But now analysts believe recent overvaluation means it cannot go unaffected by global economic conditions. We anticipate a large decline in demand for residential property as we enter a period of national house price deflation which we see as a correction in house prices to more plausible levels" , a spokesman said .
I have been writing since September 2007 on this upcoming financial change, Q4 2007 was the first quarter decline of asset backed securities in the US. Since then more than 225 billion US$ went from the asset sheets into the loan tables of US banks.
And guess what, this massive contraction hasn’t stopped yet, we now have a year-on-year decline curve and I don’t expect to see this change any soon. This means that the credit crunch is not coming to an end either.
Today in South Africa, lenders are paying well above market rates to lend money. Most South African banks are offering 250 basis points or more above treasury rates. On a percentage basis, this is an enormous spread. And expect this spread to widen further. In a credit crunch, junk yields should rise, and they are (in SA, the US and starting in EU); in a credit crunch lending standards will tighten, and they are. In a credit crunch lenders will say not to almost everyone and they are (certainly in SA). Expect the South African bank to do another rate hike this august, which will bring the SA prime interest rate above 16%. When you read this excellent article on the 3,5 Income versus property price (hat tip, Vincent), you understand that this next rate hike will kick start a true deflationary spiral effect on SA real estate prices. The deflationary spiral in SA (and Europe) is only starting, Q3 2009 is the moment to go in and buy. Until then: hold in to your Money Market accounts or rent out your apartments/houses. In Europe the renting road can be bumpy though. Look to Belgium: the politicians are well aware of the flood of people who will be turning to the rental market and the lobby machine to make sure rental prices remain contained is already white hot .
Why would Brazil be any different, you ask? I’ve written extensively on the macro economical differences of Brazil. Never forget the country in itself is a huge internal market, in contrast to South Africa. Just read this excellent Reuters article of last weekend on Brazilian millionaires . True, a commodity crash would impact Brazil. Yet, today only 16% of the GDP of the country depends of exports.
But all this of a lesser importance compared to the fact that Brazil only has a real estate financing of 2% of its GDP.
In Belgium and the US, this figure is today more than 70% of the GDP and in South Africa the figure must be also well above 50%.
This is where Brazil differs from South Africa, Europe and the US: the country knows what ‘peak credit’ is, whereas in Europe, the US and South Africa we have lived in an insane ‘leveraged world’ during the last decades and this world is now coming to an end. Don’t think this is just another cyclical crisis we are having; this is ‘peak credit’, worse than ‘peak oil’. This is why a real estate crisis is far less plausible in Brazil, only a tiny amount of the GDP of the country has been based on ‘leveraged real estate’ which means that a contraction of the money supply would not result in a deflation.
The uncertainty factor of Brazil is of a different kind: all the above leads to the Brazilian Real becoming so strong that the Brazilian government might decide to devaluate the currency and for example peg it to a basket of Asian currencies. Anyway, the effect would never be of such a magnitude of the 40% devaluation of the South African Rand against the Euro since February 2006. If you foresee, you can act. -
Oct 6 2008
I don't fully agree that "the banks" are the main culprits. Eventually "the system" is too blame and the systems that is our governments and ourselves.
Many people fail to understand the very definition of money. When I point people to the crashing stock exchanges, people running for their money on the banks, etc... people keep asking me the question "and where is all that money then going to?".
Well... that money didn't existed in the first place. That is the core of the problem of this crisis: PEAK CREDIT. I've written a lot on this phenomenon and people fail to understand it.
It is so simple: the "wealth" that you think you own by adding up (1) your house or apartment (2) your pension fund (3) your stocks and on which you base your "lifestyle", spending pattern and buying behaviour is not real in a fact that there is no money to back it up. For the simple reason that the balance sheet of the world is not matching: there are endlessly more debts than assets, even at the previously inflated values.
The below video illustrates the phenomenon perfectly.
The question that the world is now facing: how do you move your 'presumed wealth' around so that you can preserve most of it? And trust me, look beyond borders when you ask yourselve that questions.
Which currencies do you trust now that the US dollar's supremacy as the world's reserve currency is approaching? Do you want cash under your matress or do you prefer gold? Real estate is a safe gard asset? In which country is it the safest? etc... etc...
What central bankers need to do is abolish fractional reserve lending and ideally return to currencies backed by hard assets. This would be a disastor for the US, they prefer short term actions and try to force liquidity into the system to spur more lending. Such actions can no longer work because the problem is too much lending already. We have overcapacity of everything in Belgium: housing, commercial real estate, restaurants, debts,...
Peak credit: the biggest global credit boom in history is now over ! -
Dec 29 2007
Belgian financial analysts have always been somewhat pathetic when it comes to making predictions. This year, things are no different .
Patrick Casselman breaks all records though. First he wants you to go for the Nikkei; he believes it will be the best performing index in 2008 ! And at the same time he wants you to diversify into the Bel20; he is convinced it will break through 5.000 points.
Let's say Patrick buys 50% into the Nikkei and 50% into the Bel20. Good luck. Me on the other hand, I'll buy for simplicity's sake 50% Petrobras shares and 50% shares of Companhia Vale do Rio Doce . Don't be mistaken, I think there are many more juicy picks to make, especially when you eye into ETFs . But I wanted to make a plain simple pick of two Brazilian companies which already made me a monster return in 2007: Petrobras went up from 41,38 to 119,16 and Rio Vale Doce went up from 13,53 to 38,32. Yes, that is a return of 284% if you bought 50% PBR and 50% RIO. You have to augment his yield with an extra 10% I made on the EU versus R$ exchange ; the Real went 10% up against the strong-performing Euro.
I wonder what Patrick's December 2006 picks yielded in 2007.
And for stupidity's sake I'll hold on to those 2 Brazilian stocks. Sure, they won't yield 284% this year. But still I'm convinced that by end 2008 I'll make double the amount of money of compared to Patrick's Nikkei and Bel20 advice calls. I'd rather bet on Brasil than Belgium or Japan . -
Feb 21 2008
MoneyWeek is one of my favorite news sources in South Africa, they publish excellent articles like these . Last week, the South African business magazine had a special on Latin America. Their argumentation why Brazil has all the elements to become one of the strongest economical players on the globe are head on:
"In a nutshell: the United States and Britain have been victims of their own good luck; the banana republics had the good fortune of bad fortune. In the last twenty years, for example, the world rushed to lend the Anglo-Saxon tribes money. North of the Rio Grande and the Isle of Wight, credit was as abundant as calories. But when lenders visited the tropics, they hid their money in their underwear, and left their watches in the hotel safe. Our man in Rio sweated and counted his change. Our man in London or New York splashed out, and bought a $5 million house...and another one as an investment. In the air-conditioner zone there was no one to borrow from. Residents of the banana republics were spared the lure of debt, thanks to the near universal agreement on the part of lenders everywhere, who wouldn't give them a dime. And now, England and America are caught in the debt trap, while the Latinos swagger down their avenidas with hardly a care in the world. The price of soybeans is at an all time high...and their balance sheets have some of the lowest debt ratios in the world. An investor in Latin America has the trade winds at this back; the rainbow currencies are rising; so is the price of food. Most of these countries are net exporters - of bananas and other agricultural commodities, often of metals as well. Like China and the oil exporters, they are building up large piles of dollar reserves and watching their own currencies go up against the greenback. Several have had to intervene in foreign exchange markets not to protect their local currencies...but to keep them down."
The coming days, the Brazilian Central Bank will indeed have to buy massive amounts of dollars to push the currency back down .
The full article from MoneyWeek can be found behind the break . -
Dec 21 2008
The currency exchange markets are entering in one of their most volatile periode ever known in history. We had meetings with our bankers last week and the premium you pay for a Non Deliverable Option (NDO) for 3, 6 and 12 months are at record highs. Foir the EUR/BRL you will pay a 15,95% premium for an NDO ! Imagine what you can do in such a market when you have brains...The spread for strikes in a non delivereable zero-cost tunnel is also aburdly wide.
Personally I have very bit questions about the absurd low intrest policies of the Fed, ECb and BoE. Everyone with some brains in his/her head knows that will be facing super inflation in 2, 3 years from here. Why would any person/company then take the risk during this short period of Quantitative Easing to take investment risks when your risk will pay off, inflation will hit full force again. Willem Buiter wrote an excellent piece on this in the Financial Times this weekend . This is why we will be heading for a lost decade of stagnation, whatever the central banks will do (and they are now at the end of their story with these bottom rates).
Which is why 2009 will offer a very strong real estate opportunity; at least in countries with a housing deficit (read: not Flanders ). 2009 will allow you to buy in at deflationary prices; you can develop at artificially low construction prices (steel, cement,... have all plumetted in price) and real estate is the best insurance for the inflation storm ahead. But at all cost: don't apply this theory in Western Europe.
As Carlo Resta wrote in his excellent article on RGE on the future roles of central banks :
"To perform their fundamental function of establishing financial stability, Central Banks will have to recur to a new kind of active presence. “Perimeter of Regulation” was the past. In the post crisis world, and in the transition period as well, Monetary Authorities will have to be out in the marketplace to properly interpret their role in a new global order. They will engage in new functions, to effectively gain key information with important market players and engaging them in a process of cooperation and exchange, restoring confidence, financial markets soundness and achieving global governance.
The new world will seal a radical change that is taking place in the evolution of the global economy and of the political order. The emerging economies will play a crescent role and a bipolar era will open to a multi-polar one . T o properly solve the equation of balance and growth in the future, the variables to be solved will be a multiple to include the growing economies . Central Banks are now challenged in a different way and new targeted exchanges, key information gathering and global coordination are necessary. The first G-20 summit on Financial Markets and the World Economy that took place last month in Washington is a confirmation of the need for a new Central Banks presence. That the world authorities had a sense of fear and they showed up with a strong response is a positive thing. The world has changed and so the role of Monetary Authority . The near and long term challenges are really of difficult and unprecedented nature. Yet, in an ever interconnected world each of us has an interest that the unbalances be resolved."
If only Belgian politicians would have a clue of the real nature of the challenges ahead.
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