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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: RJA_ who wrote (71687)	3/8/2011 8:37:43 AM
From: elmatador	Respond to of 217485

'Alarming' Second Hand Inflation in Brazil by: Steve Rubens March 07, 2011 I wrote two years ago, at the nadir of the stock market collapse, I suggested that capital intended to stimulate the U.S. economy was finding its way to Brazil. Today it is becoming evident that this has played itself out to an alarming degree, resulting in second hand inflation. The movement of funds to Brazil has taken the form of direct investment, motivated by the high growth rate (GDP grew 7.5% in 2010) and “fast money” looking for higher yields. This has been a contributing factor in driving the inflation rate to above 6%, well beyond the 4.5% target set by the Brazilian Central Bank. Higher government spending, which jumped 22.4% in 2010 and 14.9% in 2009, and record low interest rates were also significant culprits in fueling inflation. Brazil was the first major country to emerge from the economic downturn and it is now proving to be the most proactive in combating inflation by raising interest rates to 11.75%, up from 8.75%. The government has also taken unpopular actions to curb growth, indicating that Brazil’s president, Dilma Rousseff, may be more of a pragmatist than she initially appeared. For instance, she was steadfast in raising the minimum wage no more than 6.8%. This was in sharp contrast to Lula, her predecessor, who had raised the minimum wage by nearly 60% over the course of his tenure. She has also agreed to cut funding for the government subsidized low-income housing initiative, Minha Casa, Minha Vida, by R$5B, despite having played a major role in developing the program during the Lula administration. These actions indicate that she is not a carbon copy of the man who hand-picked her as his successor and that she is willing to go against the positions she campaigned on in order to achieve long-term goals. Dilma is certainly motivated by Brazil’s recent experience with hyperinflation, but the steps taken may not be sufficient to tame the beast entirely. As the Brazilian Central Bank continues to raise rates, fixed-income securities look all the more attractive to foreign capital. The cheap money generated abroad continues to find its way to Brazil, adding to the money supply and driving up inflation. The government has aggressively tried to quash these activities by raising the tax on fixed income foreign investment from 2% to 6% in a very short period. Despite these measures and a pull back in the stock market, the magnetic attraction between foreign capital and Brazil continues unabated. External factors contributed to the rise in Brazilian inflation and external factors are likely to be the only real solution. Hence, the flow of capital to Brazil is likely to continue until yields begin to rise in the United States and Europe. The European Central Bank has already hinted that it may be raising rates shortly and with QE2 expiring in June the cheap dollars may retract as well. However, Ben Bernanke continues to believe that printing money does not cause inflation. He has denied any connection between QE2 and rising commodity prices or emerging markets inflation despite the correlation between these events. He appears to doubt that the current economy is a global phenomenon and remains blind to the reality that actions in one state (particularly one as influential as the United States) can have very direct consequences in the economies of other nations. He has also stated that those other nations should use the tools at their disposal to control inflation. Unfortunately, when dealing with a flood of foreign capital as powerful as that created by the U.S. Fed, the domestic tools available to a country like Brazil are less effective. The fate of Brazilian inflation, and to a greater extent the Brazilian Real, appears to lay in the hands of U.S. monetary policy even though the key decision-maker of this policy is ignorant to this fact. As a result, inflation may continue for some time thereby holding back the Brazilian stock market until the Brazilian Central Bank completes its interest rate hikes and qualitative easing in the U.S. comes to an end. Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. seekingalpha.com