Hedge Funds-heading out-of Emerging Markets

Since the mid 2000's emerging markets have become the ever more popular places to invest. This herd mentality (very strong in the financial world) has been driving up prices as more and more money continues to flow into places which many investors have only seen on a Google Maps search. Emerging markets (emphasis on Brazil here) are now more en vogue than ever as this recent Bloomberg article notes:

"Investors put $71.2 billion into emerging-market equity funds this year through Oct. 27, after a record $83 billion in net deposits during all of 2009, according to data from Cambridge, Massachusetts-based research firm EPFR Global.

U.S. stock funds, by contrast, suffered withdrawals of $55.5 billion through Oct. 27, EPFR data show."

....

“Everyone and his dog are now overweight emerging equities,” Grantham wrote on the Boston firm’s website. He said investor enthusiasm could propel the stocks higher, even with the markets “fully priced.”

This article from Bloomberg has interestingly pointed out that some hedge fund's are finding better deals in the US. It's likely too soon for most to get out of emerging markets, because bubble or not it's going to grow for a while. But many of the easy bargains may be gone and it's time for investors to wisen up on the specific culture and politics of the places they are investing.

American Nightmare, Brazilian Dream?

Ever increasing prosperity and opportunities for each generation has been the hope and pride of the United States since its inception. As this occurs each generation can be satisfied with the increased opportunities from what their parents had, while also being content to know that their parents had greater opportunities than their grandparents did. And this attitude toward life improving with each generation has continued with each successive generation.

Generations have experienced have experienced huge increases in potential, in: religious freedom, increased industrial capacity, automobile ownership in the early 20th century, educational opportunities post WWII, technological breakthroughs of the 90's and 2o00's. Each generational increase in success is a sort of dream which grows perpetually. Each wave has opened enormous possibilities that were previously not dreamed of.

Debt destroys dreams. The biggest risk which will likely play in the lives of many individuals is the perpetuation of the mistakes of their parents, bringing on more of an "American Nightmare". This nightmare comes with a home never paid for, excessive student loans (and possible defaulting), underemployment for much of his/her career, increasing taxes. Paying more and more to own comparatively less and less than previous generations (studies have shown while we live in bigger homes in the U.S than 50 years ago, we actually own less of these homes).

This lifestyle can stifle the imagination and creativity, of a generation... It's definitely not what dreams are made of.

In Brazil newspapers and magazines constantly feature stories of success. Such as people immigrating from Southeast Asia and starting a successful businesses from nothing, or somebody who grew up in the slums of Rio or Sao Paulo and found a way to make their dream come true. You still find these stories in American publications as well, but they appear less prominently from what they were in previous decades. Perhaps the new American Dream is freeing yourself from debt?

Febreezin Carnaval

So, when you see "Brazilian Carnaval" scent on cans of Febreeze on the main aisle of Target, there is no question the popularity or 'buzz' of Brazil has reached a certain ubiquity in society, or at least amongst marketers. The common perception of Brazil here in the U.S has changed significantly from just one or two decades ago. What was then an image of an impoverished and unstable crime ridden country is now more of one which is hip and fresh smelling with cool looking sandals (Havaianas). Some of the current excitement for Brazil such as this are very likely short lived fads.

Note to Febreeze: Please visit Brazil, many places do not smell so sweet.

Confident default swapping??

Another optimistic article highlighting the growth and anticipation of future growth in Brazil. In particular, it examines the lower price of credit default swaps in Brazil, which implies credit agencies are more confident they will receive payment.

Also the article contrasts the growth prospects of Brazil with the more mature markets of Europe.

April 30 (Bloomberg) -- Brazil’s credit rating, raised to investment grade two years ago, is poised to increase as the economy grows at the fastest pace since 2007, trading in credit- default swaps shows.

“If you look at the European economies, they’re clearly credits in decline and this is a credit on the rise,” Sebastian Briozzo, an S&P analyst, said in a phone interview from Boston.

Here is the full article

The Relatively stable history of the Real 1994-2003

The Real was instituted as a part of a broader economic plan which is largely credited for initiating the process for much of the relative strength in the economy which has extended until present. It was pegged to the Dollar at around 1:1 until January of 1999 when it was floated freely on the market. While there have been some significant swings in the value of The Real it has been the most stable currency for Brazil in recent history. Maintaining stability in the Real is a key component to the continued growth of Brazil (or fueling of the Bubble...).

My guess is if China ever floated the Renminbi (a huge if) there would the opposite immediate effect, ie. The Yuan would quickly jump in value.

Note: Graph of the Real Courtesy of: Camila Fontana of Bloomberg News.

Commodities, Currency and Corruption

These three C's are at the center of any current discussion of the Brazilian economy. The value of the commodities of this land has it's roots (bad pun intended) far back to the Pau-Brazil trees (commonly believed origin of name of the country) which were heavily harvested and expor(loi)ted during the early centuries of Portuguese colonial rule. Easily extractable commodities have formed the basis of the early brazilian economy and continue to provide much of the force to the economy. Commodities today principally: Oil, Sugar, Corn and Coffee.

A stable currency has eluded Brazil for most of it's history. Many currencies failed prior to the establishment of the modern brazilian 'real' in 1994. This currency has been a very stable currency with little inflation relative to past currencies. The past year has been quite an interesting one. This link shows the Brazilian Real the 30% gain the Brazilian Real has experienced over the past year and also compares this to the slightly over 20% gain with the Ruble and slightly below 20% gain for the Rupee. These BRIC nations are more and more gaining a sort of collective identity and their future is becoming more and more aligned. The Chinese Renminbi is a distinctly different currency in this case since it is not traded on the open markets as the others, and is mostly flat during this same period.

Corruption at all levels of Government and Business is an interwoven reality of life and of course investment in Brazil. Political corruption has in many ways restricted a good deal of productivity and influence on the international stage.

These three C's are essential to the story of Brazil.

Brazilian Bubble?

This blog is an aggregation of articles and ideas related to the growth and potential 'bubble' aspects of the brazilian economy. Since most bubbles are discovered after they have burst, this is an open discussion inviting informed or insightful analysis from whatever relevant source.