BRAZIL-The three "calendars"

...each with a particular duration

This post considers the discussions of some top-level pundits on one of those ubiquitous Sunday morning panel discussions on TV. The guests have suggested three distinct calendars for Brazil as follows:

• A political calendar: the timeline over which the political gridlock will continue to prevail or be dismantled;
• An economic calendar: the timeline over which the economy can continue to decline or stabilize;
• A social calendar: the timeline over which the Brazilian population can continue to endure continued decline of the economy, rising inflation and rising unemployment.

The three “calendars” do not suggest synchronism. Each appears to differ from the other and this is notgood news.

The “political calendar” could extend all the way to 2018 depending on circumstances.

The “economic calendar” is potentially longer since it involves new governance rules, the reduction of kleptocracy, and a new way of governing Brazil and the recovery of the private sector;

The “social calendar” is the wild card. How long will the population tolerate or be able to tolerate the continuous rise of inflation, a worsening of the economy, increasing job loss, etc.?

The fact that the three “calendars” are not synchronous suggests a potentially explosive situation. 

The “economic calendar” is constrained by the length of time required to recover the effects of the lost investment, infrastructure deficiencies, and productivity of the economy. This differs from the other two “calendars” that are less subject to time constraints and more dependent on decisions. 

It is sufficient to make concessions or harden positions to affect the timeline of the “political calendar”. 

The “social calendar” is unpredictable because the pulse of the electorate is relatively poorly monitored. 

Only the “economic calendar” is a function of measureable variables such as the level of excess capacity, evaluation of the potential market, the cost of money, etc. etc.

The upshot of the TV interviews and panel discussion is that things are very much in the air in Brazil. As investors, your decisions regarding the future of the enterprise depend on how each of the three calendars either converge or diverge. The “calendars” are three sub-systems of the same economy and at present any one of the sub-systems could dominate the other.

You have little choice but to put your management team to work to build scenarios for the range of outcomes!

If you need help, contact me via e-mail. I’ve been through this before!

BRAZIL-All the chaos and none of the humor...

...of a Marx Brothers movie

To no one’s surprise, Dilma did not make it to the PT 36th birthday party. She issued a declaration and provided an interview in which she stated that she does not govern for a party but rather for 204 million Brazilians
.

Well, that’s the way it is supposed to be. However, the record suggests that neither is the case.

Lula “suggested” that Dilma change the course of the Brazilian Titanic – a monumental if not impossible task. The ship of state is dead in the water, there is too much water in the hold to allow the captain to control the ship in rolling seas. (Enough metaphor! I’m sure you got the message)

What the PT is proposing is just this side of ludicrous. It wants NO reform of the social security system and a 20% increase in the outlays for the Bolsa Família income maintenance program. The program is a formula for disaster.

Countries don’t go bankrupt, they simply become insolvent. Unfortunately, there is no lower limit to how far insolvency can take a country. It could conceivably become a Bangladesh or break out in violent revolution before falling that far.

Dilma is clearly a stone in Brazil’s shoe. Currently there are two ways to remove her from office. One is via impeachment. The other is by invalidating the 2014 election via the Superior Electoral Court (TSE).

The first ushers in Vice-President Michel Temer to the presidency. The second makes Eduardo Cunha, Preside president of the Lower Chamber, a pro-tem president pending new elections.

There are problems with both approaches. The PMDB (Temer & Co.) favor impeachment. Even some members of the PT support this approach in the hope of maintaining the supposed “alliance” as a means of holding on to power until 2018 when Lula will once again run for office.

Two factions of the PSDB (opposition) are against impeachment. The faction led by Geraldo Alckmin and the one led by José Serra, both potential candidates to the presidency in 2018 would prefer that Dilma remain in office for the duration so as to block the candidacy of the other faction of the PSDB led by Aécio Neves.

That faction of the PSDB supports removing Dilma from office via the annulment of the 2014 election and new elections in which Aécio Neves would be a likely winner in the new election. However, nobody wants Eduardo Cunha to become the pro-tem president! Cunha is currently under investigation by Lava-Jato and is threatened with the loss of his mandate in the legislature.

Impeachment would be initiated by the Senate under President Renan Calheiros (PMDB) who is also under investigation by Lava-Jato and reportedly does not support Dilma's impeachment (But that could change!)

So getting Dilma out of the presidential palace is fraught will all manner of problems!

If Dilma stays the course until 2018 Brazil faces continued policy gridlock. Unable to govern via the legislature, Dilma would have to continue to rely on her use of the powers of the president to legislate via Provisional Measures and presidential decrees. This will lead to “junkyard dog” fights as the various factions cited above react and oppose whatever measures she proposes.

This all probably marks the final phase of the “knock-‘em-down-and-drag-‘em-out” War of the Kleptocrats. One or another group will eventually win and the ultimate loser will be the Brazilian population that will be required to endure the continued decline of the economy.

The situation has all the chaos of a Marx Brothers movie but without the element of comedy. It’s the essence of the world behind-the-looking glass. The logic of each faction is impeccable given its initial premises and the outcomes of each are totally absurd in the world in front of the looking glass where the rest of the world lives.

Invoking Economist Herb Stein once again: “Things that cannot go on forever, don’t.” That’s probably the best one can expect for the time being.

BRAZIL-Everybody's got a plan

All are devoid of meaningful content!

Just some more tidbits.

A plethora of programs

• The PT has revealed its National Emergency Program, the PMDB is publicly promoting its Bridge to the Future Program and the PSDB continues with its “Get her out of there!” program (Impeach Dilma). None of the programs appear to be directed at a reasoned resolution of Brazil’s “fiscal dilemma”.The PT’s program might be better named “Program to Worsen the National Emergency”. Aside from the plethora of usual clichés that the fiscal adjustments cannot be laid at the doorstep of workers, and other such class warfare bullshit, it also contains some recommendations that are certain to increase the deficit and prolong “stagflation”.
• The PMDB’s program could be subtitled, “Brazil deserves a better class of kelptocrats – we wear ties!” As I have observed often in this blog, when the War of the Kleptocrats is finally over, the winner will still be a kleptocrat. “Nuff said, I think.
• The PSDB program appears to be based on the very generous assumption that getting Dilma out of office will be sufficient to “fix” things. The party continues to propose things that it knows full well the administration will not support. That strikes me as just as naïve as the PT saying that labor will not bear the burden of adjustment.

The Economist of the Moment

I have noticed over the years that Brazil tends to choose an “economist of the moment” whenever a crisis ensues. This crisis has apparently chosen Monica de Bolle, a researcher at the Peterson Institute for International Economics. 

In general the economists chosen are quite good and well-versed in the discipline.

Some examples from the past: Eugênio Gudin, Roberto Campos, Octavio Gouveia Bulhões, Delfim Netto, Mario Henrique Simonsen, Pedro Malan, Afonso Celso Pastore, and many others. They have all tried to beat some common sense into the heads of legislators, usually to no avail.

Monica is currently best known for her discussion of the concept of “fiscal domination” a short definition of the phenomenon that the fiscal policy of the government causes deficits that outrun the ability of monetary policy to stem the resulting inflation. She’s right, of course. 

As usual, her observations fall on deaf ears in the Executive and Legislative branches. Like lexicographers (as described by Dr. Samuel Johnson in 1755), economists tend to fall into the category of “harmless drudges”!

In today’s issue of the Estado de São Paulo, Monica has published an interesting, provocative, and intelligent editorial explaining why the global economy is not terribly worried about Brazil. Although she does not invoke Metternich’s rather insulting reference to Italy as a mere “geographical reference” her message mirrors the sentiment. She argues that Brazil has actually chosen to make itself “irrelevant”. 

Naturally, Brazil won’t go away. It will have the same address. Its resources will continue to be valued in the global market (as long as they are competitive) but the expectations for Brazil as a “player” were dashed when the Brazilian Titanic struck the “iceberg of reality” on its maiden voyage into global economic waters as Lula and Dilma changed course for Paradise. Amen!

The PT against itself

The PT occupies, via Dilma Rousseff, the highest political office in Brazil. However, Dilma and her party seem to have some differences that apparently have precluded her attendance at the party’s 36^th birthday party. 

Given that the PT has been at the apex of the political hierarchy for 13 of the 36 years, it seems a bit of a slight that Dilma would not show up at least for the cake! 

She is currently in Chile meeting with President Michelle Bachelet. She might stay around for the traditional folklore dances that accompany such meetings rather than have to fly to Rio for the PT party. 

Meanwhile, the PT has issued its National Emergency Program without Dilma’s review and sign-on. Hmmm!

“Family” fights are usually uglier than other fights. This one holds promise, watch it closely.

Analysis:

• The PT seems to have firmly inserted its collective head into a body cavity. When a political party cannot support the president it elected, you know there is a problem. (Dilma and US Republican Party nomination candidate Donald Trump have at least one thing in common!)
• The PMDB seems to have forgotten that it is and has been an allied party to the PT coalition for close to 14 years. Now it is designing a plan for the future? Seems to me the time for the plan was 14 years ago. The roster of commentators in the PMDB video presenting its qualifications to govern Brazil is not terribly encouraging.
• The PSDB appears to remain locked into its academic/intellectual corner with the notion that all that is required is a regime change and reason will settle in. Its position is more moralistic than moral. But it has successfully ignored the suggestion of former President Cardoso to court the political support of the “new middle class” that arose on the heels of the Real Plan. Maybe it feared becoming contaminated with the “smell of the common folk”. (The last military president, João Figueiredo, a former cavalry officer, once declared that he preferred the smell of horses to the smell of people.) In any case, smell notwithstanding, it would seem that the PSDB’s only plan is to get Dilma out of the presidential palace.

As to the question of Brazil’s “irrelevance” we can pretty much take that for granted for the next several years. The global economy is rapidly moving toward re-globalization on the heels of the 2007-8 financial disaster. A lot needs to be done and “busy times” lie ahead. There won’t a lot of time for the laggards. 

Brazil’s “local market potential card” can no longer be played against that of China (even with China’s current problems) with the prospect of 500 million members expected to join the “new middle class” in that country. (My February business risk report (in two parts)  analyzes the re-globalization issue. Part 1 has alreadybeen issued and Part 2 is “in progress”. The report is free and if you would like to get on the distribution list, send me an e-mail at the address in the side bar of this blog.)

I did not refer to the Lava-Jato investigation’s progress in my post, but it continues and contributes to the political gridlock as the “rogues gallery” of perps grows.

Discoveries of corruption tend to crop up virtually everywhere such that many votes for “fiscal reform” might have to be filed from the slammer! The number of legislators who can file “not guilty” pleas appears to be declining at a geometric rate!

Meanwhle, Macri continues with his trash removal program in Argentina. If he is successful, you might find moving to Argentina a less expensive option than having to look around for some other place. Buenos Aires does not have the beaches of Rio, but it is a great “walk around” city and the Argentines don’t wear flip-flops with Bermuda shorts and t-shirts! You can still count on the traditional blue blazer, grey slacks, open neck shirt,(accompanied by a bordeaux scarf in the Fall) and expensive moccasins!

Continue with your crisis management efforts in Brazil and batten down the hatches for continued stormy weather.

  

BRAZIL-Things are unraveling

Harder times ahead!

The past few days have been marked by some rather important events.

First, Moody’s finally downgraded Brazil to Ba2 – two rungs below investment grade. That now makes unanimous Brazil’s “junk status” among the three principal rating agencies. All three also added that the outlook was “negative”, implying further downgrades going forward.

The administration reacted as usual, stating that Moody’s failed to give adequate weight to the improvement of the external accounts that are yielding a surplus. (Well, kinda! Exports are rising on the heels of the devaluation of the Real and imports have fallen into the cellar. There’s been no change in the structural elements of competitiveness.)

There was a brief flurry of discussion of the downgrade. The most significant datum presented was that the average time observed for a country that has been downgraded to get back to investment grade status is between 5 to 10 years. The administration talked as if it could all be taken care of by next week! (Just a minor glitch!) 

The way back for Brazil will be complicated by a still-volatile global business environment, possible interest rate increases by the FED, and a slowing of the rate of global growth.

Another item of interest occurred in the PT. 

Dilma made it known that she might not show up for the party’s 36^th birthday party. It seems there are some issues to be resolved between the administration and its party.

One, for sure, is the administration’s support for the measure to remove Petrobrás’ obligatory participation in 30% of all exploration projects in the pre-salt oil deposits. The party mucky-mucks are opposed to the measure. (They seem to be oblivious to the fact that Petrobrás is practically prostrate!) 

The PT is divided between those who want to get to Paradise on the Brazilian Titanic (i.e. using the “system”) and those who would just as soon sink the ship and rely on increasingly frustrated passengers to simply riot (i.e. take the social movements to the streets). Both sides share the same ideology. The fight is over “method”.

While the leadership of the various social movements “talk” a good revolution I have not sensed the same degree of conviction among the rank-and-file of the groups. Brazilians are not given to “collective anger”. It’s one thing to show up for a demonstration, quite another to confront the army. Bravado tends to diminish under gunfire and nightsticks. However, I suggest you not rule out confrontation in your scenarios.

Another interesting development is the recent TV campaign by the PMDB essentially extolling its ability to govern. It no longer paints itself as the ally of the PT and sounds increasingly like an opposition party.

At the birthday party, the PT is expected to announce a National Emergency Program. It’s totally unclear as to what the party has in mind given its unwillingness to impose unpopular or painful measures. More policy “froth” won’t improve the situation.

Lava-Jato continues to get closer and closer to Lula and Dilma. The campaign marketing director for both Lula and Dilma (João Santana) and his wife and business partner have been arrested. So far, they have been throwing the firm Odebrecht under the bus. This could take a while!

Analysis:

Things are gonna get worse! The fiscal accounts showed a slight upward (and positive) blip in January but no one believes the improvement represents a change in the trend. Revenues continue to decline and the administration continues to spend in spite of some half-hearted efforts to make some cuts. The split within the PT does not help matters.

You’d think that at the age of 36 and having been in the presidency for 13 of those years, the PT would have acquired some maturity and “gravitas”. Unfortunately, the party hardliners seem willing to toss the baby out with the bath water.

Lula’s only response thus far is to launch an attack on the opposition (PSDB) in a kind of “you’re in no position to point a finger at anyone” approach. That does not address the issues that concern the public-at-large that is concerned for job loss, continued rising food prices, and inept management.

My suggestion is that you simply batten down the hatches and ride out the storm. Nothing seems to be moving in the right direction except the Lava-Jato investigation.

Invoking the Arab proverb: “The dogs bark, but the caravan passes”

BRAZIL-Inflation continues to rise

No sign yet of relief

Inflation for the first 15 days of February over the same period in January was 1.42%, substantially higher than expected. 

This could be a sign that the expected reduction in the rate that will occur because of continued declines in consumption only with a significant lag. Private demand factors are less at work than is the continued growth of government spending. 

Moreover, producers and retailers are afraid of possible tax increases and much of the price increase could be due to expectations in this area.

I now go grocery shopping the way I used to when retailers marked up prices overnight. The economy is still pretty much in “free fall” and no one wants to be caught by surprise.

BRAZIL-"Oh MY GOD! JUST LOOK AT THIS MESS!!!"

“Who’s gonna clean it up?"

On its maiden voyage to Paradise, the crew of the Brazilian Titanic, at the behest of some of the First Class passengers, threw a party. As the ship slowed and eventually stopped and dropped anchor after striking an iceberg of reality, the party grew more raucous. 

With the engines stopped, those in the engine room ascended to the main deck and joined the party. Things quickly got out of control and the party turned into a wild frenzy. 

The champagne was broken out and rapidly consumed. That was followed by a raid on the bar and later even the infirmary where even the cough syrup was consumed.

The Executive Officer who had been trying to maintain order aboard ship was frantically running around with his staff putting the revelers in the brig as he caught them stealing everything that was not nailed down – flatware, china, paintings, even light fixtures and light bulbs.

The party eventually slowed down as the booze and even the cough syrup ran out. As the noise abated, some passengers timidly emerged from their cabins and were shocked to see the deck strewn with food scraps, broken furniture, empty bottles, and trash. 

They were startled to see crew members walking around with their uniforms akimbo, some wearing their hats backward and staggering around the deck, still drunk.

The captain of the Brazilian Titanic remained at the helm holding on desperately to a wheel that no longer functioned and mumbling incoherently while plotting and re-plotting the course to Paradise, apparently oblivious to the mess on deck and unable to simply join the party. (The burden of command weighs heavy!)

The passengers stare dumbfounded at the chaos and no longer wonder if they will get to Paradise. They are now concerned for whether they will get anywhere at all and will simply have to live in the midst of the rubble for as long as it takes to clean up and then repair the ship.

Such is the current condition of the once luxurious Brazilian Titanic. It is now little more than the trash-laden skeleton of a luxury liner. When the seas get a little rougher, water covers the deck strewing the trash and the garbage around.

I’m sure you can conjure up a picture of this metaphor in your mind!

BRAZIL-The Brazilian exodus?

Britain does it again?

During my many years in Brazil it was common to hear Brazilians occasionally complain that Portugal gave all of Brazil’s gold to England in the 19th century.

Now the PT is giving away Brazil’s entrepreneurial talent to the UK. Several Brazilian firms and individual entrepreneurs have moved operations to the UK or set up subsidiaries there to conduct their international business. It’s essentially an exodus of talent.

Moreover, they are doing quite well in their new environment. If and when they return to Brazil it will be to set up a Brazilian subsidiary of their international operation. It will be a kind of national-foreign capital!

The PT should be proud of its contribution to the global economy via the odd way it manages the Brazilian economy! 

BRAZIL-The genius of Einstein

..goes beyond Theoretical Physics!

Albert Einstein’s genius allowed him to forecast gravitational waves 100 years before the technology to measure them had been developed. His forecast was based solely on mathematical conjecture, and most importantly he was right!

However, Einstein has also contributed other areas outside the realm of phyics;

• He observed that when technology overtakes humanity the world will be governed by idiots;
• He observed that you cannot solve a problem by employing the same mindset that created it.

We can verify his first observation by simply entering any public place that provides WiFi and see people sitting together each consulting his/her “smartphone” and texting conversations in total silence or occasionally giggling. One wag showed a sign posted in one such place that apologetically advised patrons that the WiFi system was “down” and patrons would have to “talk” to each other until it was back on line.

His second observation can be most easily verified by the fact that the various reforms now under consideration by the current administration in Brazil were actually proposed in the early 1980s. They have been sitting around ever since as one kleptocratic government after another continued to pursue populist policies. The one exception was the Real Plan that managed to attack one major underlying problem: inflation; the “mother” of many of the other problems that plagued the economy. 

The Real Plan was necessary but not sufficient to make Brazil more efficient. It did, however, create a huge base from which to implement other reforms, ostensibly with the support of a 40-million-member “new middle class” that was created with the Plan.

Now for my regular diatribe:

The deterioration of the economy shows signs of accelerating. Consider the following:

• General Motors announced that it is analyzing the wisdom of cancelling its investment plans in Brazil. The investment of R$6.5 billion is scheduled to start in 2017 with a two-year execution timeline to 2019. I don’t think it’s necessary to repeat the reasons given by the company’s management. They are well known and have been forecast for the past 5 years (at least).
• The Mexican subsidiary of Mabe (that in Mexico exports 70% of its output to the USA) has shut down operations after its 10 February bankruptcy. The company in Brazil manufactured white goods (notably stoves, refrigerators and washing machines) for the GE and Dako brands. It had not paid workers’ salaries since December and the press reported that it skipped out on its worker indemnity obligations and other debts. Labor indemnity obligations are not subject to a statute of limitations so the company cannot return to Brazil without coming up with the indemnity payments. Since Mexico is a member of the proposed Transpacific Partnership (TPP) it is likely than any new ex-Mexico manufacturing by Mabe will be in Asia.
• In an interview in today’s Estado de São Paulo, the chief economist of Banco Itaú announced that Brazil could drop directly into the 3^rd Division (using a football analogy). In baseball terminology it would be immediately reverting to the status of a minor league team in a small US city. It was Banco Itaú’s president who suggested that Brazil’s growth in 2016 could contract by as much as 5%. (As of this writing that might turn out to be the “best case” scenario!)
• It was reported recently that in 2015 some 100,000 small businesses shut down in Brazil. Unemployment has moved up a couple of notches to 9% (9.1 million people out of work).
• The situation in local government is even worse. Every time it rains municipalities are flooded and millions of dollars are lost to the lack of adequate urban storm sewer infrastructure. (So much for the song, "Pennies From Heaven"!)

Meanwhile, the administration continues to pay lip service to “fiscal reform” – so much so that the official prediction for GDP growth in 2016 is -2.49%. (Now THERE is a best case scenario that stands not a chance of materializing!) 

There is no lack of projects, promises, and hubristic planning (remember the high speed train ro Rio, the urban train in São Paulo to encircle the city and connect with other systems – e.g. subway and buses, the plan to irrigate the parched interior of the Northeast with water transferred from the São Francisco River, or the construction of electric generating stations without the requisite transmission lines?)

As Freud has observed, don’t judge solely what a patient says but also what he/she actually does. You can then analyze the difference and arrive at a diagnosis.

Thanks, doctors Einstein and Freud!

BRAZIL-Things WILL get worse

The world in FRONT of the looking glass

A friend once said to me that if you treat a cold, you can “cure” it in just one week. If you do nottreat the cold it will take 7 full (and likely miserable) days for your body to cure it.

Another friend agreed that it is useless to try to cure a cold, but there is a cure for pneumonia. His conclusion was that if you let the common cold develop into pneumonia, you can then effect a cure.

The rigorous application of logic will support either approach. The conclusion depends on your acceptance or rejection of certain premises.

If you have ever tried to debate the issue of capitalism vs. communism with a reasonably intelligent leftist (there are a few of them; most under the age of 30!) the  clever leftist will destroy your arguments at the outset by rejecting your premise that the difference is even worth discussing.

This is the “problem” with the policies of the current administration. Dilma Rousseff has made it clear that she rejects the application of the “liberal” economic “model” in any way, shape, or form. Her concept of a “new economic framework” includes the rejection of what she defines as “liberal economics”.

The adjective “liberal” is both useless and redundant. Every society and/or decision-maker faces the same universal “economic problem”, i.e. that there is no such thing as a free lunch. Every economic choice involves an opportunity cost, which is nothing more than the cost of the same resource in an alternative use. 

Even what economists once called “free goods” such as sunshine, wind, the air we breathe, etc. have proven to be subject to the “economic problem”. The use of those resources are now shown to involve a cost.

Economics, in fact, is little more than the study and analysis of “constrained choice”. That’s one reason for calling it the “dismal science”. In an ideal world we would face no consequences, i.e. no price, for our decisions. Every lunch would be free. But on this side of the looking glass it doesn’t work that way. If you earn $100 per day and spend $102 per day, you will go broke. If you earn $1 million per day and spend $1 million and $2 per day you will also go broke. It will just take more time!

If you reject the “constraints” on your choices and reject the consequences (i.e. the feedback) you will simply court disaster.

As economist Herb Stein observed (and I have quoted before): “Things that cannot go on forever, don’t.” 

Continuing to try to fund programs like Bolsa Família (Dilma’s income maintenance program for Brazil’s poorest) can last only as long as the money. When other choices wind up drying up the funding available to the government, Bolsa Família  will be toast!

Such is the “cost” of insisting on living life in the world behind the looking glass!

BRAZIL-In the world behind the looking glass

Jabberwocky

In the world behind the looking glass everything is back to front. To do what you need to do requires that you do what you can’t do. The logic is impeccable but the conclusions are totally absurd.

The administration first calculated that to meet the fiscal primary surplus target of 0.5% of GDP it would need to trim some R$50 billion to R$60 billion from the 2016 budget. It will announce today that it will trim R$24 billion and move the goal post to allow for a 1% primary deficit. There! Problem solved!

The administration concluded that no cuts shall be applied to “social programs” such as Bolsa Família (the income maintenance program for Brazil’s poorest). Rather, “superfluous” programs such as Science without Frontiers (a technology transfer program) and Pronatech (a vocational training program) will be trimmed. They only contribute to productivity and since production is declining, why bother finding them?

Another argument presented was that while the R$24 billion is smaller than the previously calculated reduction requirement, it is large relative to a budget that is already much smaller! That begs the question of why, if the budget had already been trimmed when put together, the team arrived at the R$50 billion in the first place. Did they analyze a different budget? Or is their calculation flawed?

I remember an anecdote from the US Civil Rights Movement of the 60s and 70s when segregationist states imposed literacy tests for blacks to keep them from voting. A black voter entered a polling station in Louisiana and was told he had to pass the literacy test. He was given a document to read that was written in Chinese. The polling station official paled when the voter sat down and began to read the document. After roughly an hour of perusing the document the voter returned it to the polling station official saying “OK, I’ve read the document.” Fearing the worst, the official then asked the voter what was written on the document. The voter responded: “No blacks will be voting in the State of Louisiana in this election!”

Meanwhile, in another corner of the land behind the looking glass, Dilma Rousseff submitted her defense statement to the Superior Electoral Court that had required her defense against accusations that her campaign had received funding from the Petrobrás financial fraud scandal. Her response was eloquent and simple. The essence of her defense was: “No I didn’t and if I did do it, I didn’t know it!”

 She added that the accusations, raised by the PSDB, were simply the result of frustration at having lost the election in 2014 and were “politically motivated”. Now the Superior Electoral Court exists precisely to review “political” matters so why would a complaint not be “politically motivated”?

You might remember from a previous post that “Jabberwocky” is the nonsense language spoken in the world behind the looking glass. It’s the language of the PT and it cuts off all debate because you can’t discuss what you cannot even understand!

When does it all end? Paraphrasing NY Yankee baseball player Yogi Berra, (known for his incongruous comments on practically any subject), the game ends when it’s over.

Clear?

BRAZIL-Further down in the junk pile

“Oh, we knew that was coming!”

You can’t surprise this government! The Finance Minister has two crystal balls.

Standard & Poors just pushed Brazil further down in the junk pile (to BB from BB+).

The administration said the downgrade was expected, but not just now. It was disappointed that the rating agency did not wait for the announcement of the “fiscal reform” program (which keeps getting pushed forward!)

The press today provided several “post-mortem” analyses of S&P’s decision. One reason for the downgrade was reportedly the possibility that the government would “save” Petrobrás. Give me a break! The government can’t even save “face” much less Brazil’s largest company.

Finance Minister Nelson Barbosa issued a statement that the downgrade was temporary and would be revised once the “fiscal reform” began to work its magic on the economy. (Oh, I thought there might be a problem! Silly of me!)

Ever vigilant, the PSDB chimed in with the observation of  party president, Senator Aécio Neves that the market does not trust Dilma Rousseff. Really? Who would have thought?! Might it not be a bit early to lose faith? After all it’s only been 5 years of dismal management of the economy. There is still time to recover! Or no?

Just yesterday the administration announced that it planned to revise the fiscal target for 2016 from a 0.5% “primary surplus” to a deficit of 1%-of-GDP . The downgrade will most certainly affect the cost of financing the deficit.

But, don’t be concerned. The downgrade was accompanied by the announcement that the outlook was also negative. So, this is not the worstthan can happen.

I am reminded of an old joke: In the face of severe economic problems a government announced that citizens would no longer be able to buy food and that they would have to eat manure. However, the government announced that there was also some good news: There was enough manure for everybody!

Analysis:

I reported yesterday that Brazil would soon be holding a yard sale to unload troubled assets. We can look forward to a most interesting period of M&A activity. However, the recent downgrade and possible future additional downgrades suggest that the time is probably not yet right to start buying. (There is still enough manure to go around!)

With the likely possibility of a budget deficit this year, the government is going to have to figure out how to finance it. The Finance Minister has ruled out subsidies so that would seem to mean going to the market for the money.

It would seem now that the 3.5% contraction forecast for GDP in 2016 could be closer to 5% by year-end. So hold on to your money to get some real bargains.

Ho hum!

BRAZIL-Oh no! Not again?!

So soon?

Finance Minister Nelson Barbosa (the guy with the crystal balls) was quoted in today’s press that the administration is (again) considering a reduction of the “primary surplus” target to allow for a deficit of 1% of GDP.

Since I had mentioned in a previous post that when the reduction from 0.7% to 0.5% was discussed it seemed like the administration had no intention of even reaching the 0.5% target. 

Dilma had already suggested a “band” of between 0.5% and 0%. Now it seems that after consulting his crystal balls, the Finance Minister has concluded that even 0% is not such a good idea. So, he has proposed a deficittarget of 1%.

Because of Carnaval, the real first work day of 2016 occurred just two days ago – Monday, the 15^th  of February, it’s not exactly a good sign that the administration is already reducing the fiscal target. 

It probably means further reductions later in the year! (At least that has been the experience thus far.)

Looks like we might be in for a rough ride this year!

BRAZIL-Interesting scenario data

This pretty much says it all

You don’t always need a pile of tables and data to draw a correct conclusion.

Sometimes a simple comparison is enough to tell you if things are good or bad.

A recent press editorial provided the following data as compiled by the IMF and the Brazilian Central Bank.

Over the past two decades the GDP of emerging and poor countries grew 190%.  Global GDP over the same period grew 110%, and Brazil’s GDP grew 70%.

The figures work out to an average annual rate of GDP growth over a 20-year period as follows:

• Emerging and Poor Countries: 5.5%
• World: 3.7%
• Brazil: 2.7%

Now, we can justify some of Brazil’s poor performance by remembering that at the outset of the 20-year period, (i.e. 1995), Brazil was in the midst of a plan to end a few centuries of chronic inflation, the creation of a new currency, and coming out of a decade of economic stagnation. 

Since I have not provided the data on a year-by-year basis we can’t establish which specific periods were the cause of the low rate of average growth. We can, of course, hypothesize that the past 5 years may have been responsible for bringing down the average.

What the data do tell us is that over a 20-year period, Brazil has been sliding backward relative to other countries in the global economy. That, alone, is sufficient to help us project the next few years.

With other emerging countries growing twice as fast as Brazil over a long period of time, catching up is going to require one helluva lot of work!

And it hasn’t started yet. Brazil is still in the throes of “taking out the trash” of years of kleptocratic management.

You might want to disaggregate the timeline with your management team so as to identify where things went wrong and why. During 13 of those 20 years, the PT has been in power. 

I don’t suppose we need to say more!

BRAZIL-Get ready for...

...the Great Brazilian Yard Sale

No one can even think of arguing that the Brazilian economy and its private companies are in anything approaching “good shape”. 

Three things now conspire to put many of Brazil’s best private companies on the block:

• The political situation: Political gridlock brought about by the War of the Kleptocrats and a plethora of opportunistic political parties with no discernible ideologies other than confiscating the economic rents of the country;
• The financial situation of many private companies: When the administration foolishly reduced interest rates to historic lows in 2012, numerous companies rushed to the trough. Since then the rate has doubled while sales have slumped and inflation has increased. Banks have increased their loan loss reserves (Itaú from a historical average of R$400 million to a current R$5 billion!);
• The Lava-Jato investigation: Endemic corruption continues to provide one case after another of some shady dealings. Until this plays itself out, it is unlikely that many investors will rush to buy a company that could suddenly turn out to have had the “wrong friends” in government.

It is estimated that some R$90 billion of corporate assets are being offered on the market. Everything from highway and airport concessions, to entire divisions, office buildings and factories are available.

Nevertheless, last year M&A activity fell 20% to US$69 billion. While this might seem to be a paradox, it’s simply due to the uncertainty in the market right now. Things could get worse and no one likes to buy a company that will continue to decrease in value in the short term. Buyers are lining up and reportedly have deep pockets, but they will wait until things seem a little more certain before acting.

The one thing that is certain is that there are some realbargains out there. Many good companies are thoroughlystrapped. It won’t be long before the game begins. Get ready.

BRAZIL-Crystal balls

The Finance Minister has crystal balls

Finance Minister Nelson Barbosa has not one but two crystal balls. Having been Planning Minister and is now Finance Minister he not only knows the “plan”, he is now in charge of executing it.

That unique condition allows him to take his balls to the presidential palace to negotiate budget cuts with President Dilma Rousseff. Barbosa estimates that expense reductions on the order of R$ 50 billion to R$60 billion should be sufficient to reach a “primary budget surplus” (i.e. revenues less expenses before interest) to offset some of the interest on the national debt.

So far, however, he has only come up with R$ 16 billion to R$ 18 billion. Something seems to be wrong.

The scuttlebutt so far is that the cuts are going to have to reach down to some of Dilma’s pet projects like Minha Casa-Minha Vida (the low-cost housing program) and Bolsa Família (the income maintenance program). Dilma has been advised by many of the social movements that support the PT that cuts in those programs will cause even further erosion of her popularity (if that’s possible) and further complicate Lula’s dream of returning to power in 2018.

The announcement of the cuts was therefore moved forward to March but now Barbosa was quoted that he will announce at least some of them by the 19^th before he heads for China. (Kind of confusing, I know, but what else is new?)

Meanwhile, Lula is facing problems of his own. The Lava-Jato investigation has been extended to his alleged undeclared ownership of two properties developed or improved by construction companies involved in the Petrobrás financial scandal. She reportedly will met with Lula in São Paulo to devise some sort of explanation or PR strategy in his defense.

The “market” is decidedly confused. Everything now hinges on Barbosa’s crystal balls.