Sunday, March 4, 2007

Hooray! The end of the world hath arriveth, finally! Hip hip...

About time now.

China dropped 9%, others followed suit; Greenspan is seeing nasty clouds up there in the sky, and I can't help but rejoice in watching the world fall apart.

Maybe I should rewind the tape a little.

If you want to understand Brazil, you must try to visualize 3 things:

First, the world's greatest natural resources on a gargantuan piece of land larger then the continental USA, properly packed with 180M people around the edges. Second, take out 90% of the brainpower you imagined in those 180M people. Finally, take out another 90% of the brainpower that's left in your imagination. Now you have a pretty good idea.

For these last few years, we have seen political scandals of the highest order. ALL top-ranking officials have been caught with their pants down (one, in fact, had 100K dollars in his underwear). Yet, despite the tragicomic corruption scandals, Lula, the Messiah, was re-elected. In the process the Messiah created a large divide in the country, throwing his own sins into "the elite". That elite, of course, was based mostly of poorly paid journalists pointing out that it is wrong to steal.

In any case, the economy saved the day for the "president". A strong currency pinned down inflation and increased gross earnings for the masses. Brazilian analysts heralded the economy's strenghts based on macroeconomic figures; inflation, exports, reserves, and so on. There is enormous consensus that Brazil is about to become investment grade just around the corner. The São Paulo Stock market has been on bullish for years, beating record after record. Since I have been bearish for quite some time now, it will be time to rejoice when the house of cards starts falling apart.

Lula the Messiah has never been in a financial crisis. His government is full of pathetic, embarassingly incompetent people such as the foreign policy or the economic ministers. In his first term, he managed to hire some 40 thousand additional government supporters employees, boosting government spending. Never in his entire life has he given any thought to the concept called productivity. The obvious result is Brazil's ridiculous rate of growth. Now, quite pathetically, he managed to create a fantasy dream "acceleration growth program", which will either fail fantastically or create a chicken's flight. He could very well buy some rapid growth now at the expense of tomorrow. He knows a lot about buying: this is, after all, the man whose presidency is under the charge of buying votes in congress for 30K reais/month.

But now that the storm may be finally coming we will stop seeing these ridiculous pretensions of greatness. Some think that the dollars flowing in were from exports... that view ignores the gigantic liquidity in economic markets, and the carry trade that Brazil had been receiving:

"The carry trade of Brazil is certainly one of the biggest in emerging markets and some people are reducing positions."

The party is about to stop anytime now. Expect to see that carry trade stop. Expect to see a higher dollar, inflationary pressures, stock market crashes, company crashes, the works.

Reality is knocking at the door.