Re: Brazil
I really don't quite understand the markets reaction to the Brazilian rumor . I guess this, in part, is influenced by my view that the US market is overvalued. I won't even begin to guess where it goes, b/c
I admittedly don't understand many valuations. Particularly with evidence that the economy is slowing.
But the Brazil devaluation issue has been out there for quite awhile. Please don't take this the wrong way, but I have been warning about at least the threat of such for months on another thread. (on Aol)
Brazil is in a really, really tough spot. Its deficit is running about 8%
of GDP. Way too high. They must reduce it. Tax increases and decreases in government spending will likely be strongly proposed. That may put them in recession.
Additionally, Brazil's interest rates are almost obscenely high. That is a result of attempting to reduce capital flight from the country. The rate hikes helped reduce the level of capital flight, but did not stop it. The rate of the flight has slightly been gaining in strength the last week or so.
The currency is artificially pegged to the dollar. It can trade within certain defined trading bands. As a practical matter, the lower band is pretty much where it trades. I am not a currency guru, but most I have seen say that b/c of the foregoing, the currency trades at artificially high levels given Brazil's problems. Thus, the presure of devaluation.
A further bailout by the US through Rubin's authority (or otherwise) may and quite likely will help in the short run. Depending upon your view about the use of taxpayer dollars (and potential loss if its in some form of a effective guaranty), it might not be a good decision.
But, at least in my view, Brazil has fairly severe structural problems it must address. Not a prediction, but do not be surprised if they enter into a recession next year regardless of the contemplated US action.
Just my thoughts.
Regards,
Tundra |
