Mobs in Europe, Records in Brazil
Union-backed workers rocked Europe this week with intermittently violent protests in Greece, Ireland, Belgium, Poland, Portugal and others. In Spain, a nationwide strike disrupted air travel, regional shipping and municipal services. Doctors at state-run hospitals walked off the job in Greece and subway lines shut down. Supermarkets reported shortages of basic goods
To call many of the increasingly regular demonstrations protests is generous. In Dublin, the gates to Ireland’s parliament were blocked yesterday by a demonstrator in a cement truck. In Barcelona, police cars were torched. And in Athens, a mob opposing cuts to government spending firebombed a bank in May, killing three people, including a pregnant woman.
What makes these frightening scenes so unnerving is that they’re not occurring in third-world dictatorships, but in advanced economies within many of Europe’s largest cities. We’re used to seeing violent street clashes in Lebanon. But Belgium?
The conflicts are the inevitable consequences of entitlement spending and a society geared towards the “common good," not individual rights. Turns out the much-heralded “safety net” isn’t safe at all: When bureaucrats decide how long you work, what type of benefits you receive and which industries or sectors receive privileged treatment, the economy quickly turns into mob rule.
Meanwhile, as Europe’s entitlement state crumbles, another economy an ocean apart is leaping to record highs. Brazil’s currency, accessible to U.S. investors via shares of WisdomTree Dreyfus ETF Brazil Real Fund (BZF), is in the midst of its longest winning streak against the dollar in nearly a year, up 14% since June and nearly 25% since the beginning of the year.
Stocks like Itau Unibanco (ITUB), Brasil Foods (BRFS) and Banco Bradesco (BBD) have soared. The iShares MSCI Brazil Index Fund (EWZ) is up nearly 100% in just two years. Capital flows into emerging markets are at record levels, up 20% to an estimated at $575 billion this year, in what one analyst referred to as a “wall of money.”
To the hordes of investors pouring billions into emerging market funds like the iShares MSCI Emerging Markets Index Fund (EEM) or the Market Vectors Brazil Small-Cap ETF (BRF), Brazil’s growth appears a smart bet. But for students of even recent market history, Brazil’s (and Latin America’s) unmistakable outperformance is actually just as surprising as the disturbing violence echoing throughout Europe.
Just a little more than a decade ago, Brazil was a basket case. As recently as the late 1990s, the country’s social security system allowed workers to retire after only 20 years on the job, oftentimes earning even higher pensions in retirement. Unemployment reached 14%, despite laws making it difficult to fire public workers. Inflation, which ran as high as 3000% in 1994, was stoked by printing and borrowing even more money. The country soon owed nearly half its gross domestic product to foreign creditors.
In 1998, worried investors began pulling money out of the country, prompting the Bovespa stock market to decline 60% from May through September of that year. Soon, billions of dollars were fleeing the country. “We're seeing $300 million leave the country every day… the market has run out of dollars,” one trader told the BBC. “Dollar outflows were expected to pass $2 billion, raising the prospect that the [Brazilian] government might run out of cash to defend its currency,” Newsday wrote in early 1999. On Jan. 12, $1.2 billion exited the country alone.
The following day, tapped-out Brazil was forced to give up its attempt to prop up its currency, which promptly dropped by over 37% in two months. U.S. investors shunned the region. Assets in Latin American mutual funds fell by half from 1993 to 1998.
Now, 11 years later, the Brazilian currency and equity markets are the world’s hottest investments.
The lesson is that no country has a monopoly on economic dominance. A culture’s success isn’t determined by its natural resources or stimulus program, but by the extent government protects each individual’s rights – and stays out of the way.
Makes you wonder if, ten years from now, Americans will be clamoring to buy stocks on the New York Stock Exchange (NYX) or throwing Molotov cocktails at the coffee shop across the street.
Published September 30, 2010
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