Can Brazil Remain Immune to a New Crash?

I don't mean to imply there will be a new crash like that of last year. However, the Dubai situation, the continuing US problem with unemployment and mortgage defaults suggest that even with the late 2008 government stimulus measures, there is much uncertainty to come.

We have been mercifully immune to these problems in Brazil. The steady hand on the tiller of economic affairs that has enabled Brazil to impose a stronger set of controls on the banking and exchange rate system up to now has returned Brazil to positive economic growth and lower unemployment. However, as I've indicated elsewhere, this positive state of affairs has been based on a grand compromise that has seen the overtly socialist PT (Labor Party) of President Lula embrace the inflation and interest rate control policies of his predecessor, Fernando Henrique Cardoso, by maintaining high primary budget surpluses and interest rates in order to keep inflation in check and enable economic growth.

However, in the run-up to next year's presidential elections, this compromise is showing its age and beginning to come apart.

In his drive to elect his chosen successor and establish his place in history, President Lula is increasingly trying to establish a virtual socialist government. He is expanding government hiring almost without control. One has to wonder what all these new public servants will be doing other than being grateful to the PT for their high salaries (public jobs pay higher in most categories than private sector jobs), lifetime tenures and full pensions. He is even attempting, with some success, to extend the grasp of his appointments into companies, such as the mining giant Vale de Rio Doce, by threatening to reintegrate them as state owned companies if they don't follow the government's directions on hiring.

Who is going to pay for all this public employment is obvious.

However, the largest concern is that with his focus on the election, he leaves his government increasingly open to the strivings of the "desenvolvimentista" group in and out of government. This set of politicians and academics wants the government to lower interest rates more rapidly and open the credit markets more substantially in a set policies that more recalls the supply-side credo of Reagan Republicans than any reasonably socialist economic policy.

Credit markets in Brazil are already a point of serious concern as housing, automobiles and appliances are being offered with ridiculously long terms according to Brazilian standards. 60 months to pay for a car means that the loan will not be paid off before the car is junk (If you know the streets and roads of Brazil, you will know what I'm referring to.)

If there is another hiccup in international markets that affects employment here, what will happen to all these loans? The thought scares many.

In my next post, I will put some numbers on these concerns to move them beyond the normal level of blog alarmism.

New Bubble or Not

My partner, Ricardo Torres, and I have just had an article published in Valor Econômico here in São Paulo in which we lament the continuing lack of conscience in the drive for profits in financial markets and the lack of effective government regulation–both here in Brazil and in the US–of the markets. Although we wrote the article some three weeks ago, last Friday's news about Goldman Sachs new bonuses demonstrate that last year's crash and the continuing economic stability have not altered the practices that led to our article. It's still valid.

We are both also very concerned about the divergence of the markets from the underlying economy at this point, a short year after the meltdown of the markets. With the DJIA climbing back over 10,000 and the IBOVESPA reaching 67,000, despite sluggish economic performance, we are both concerned that we are setting the stage for a second market crash that will again attempt to bring market prices back down to a level that reflects real economic performance.

We are not alone in this concern. Daniel Gross, in his terrific Slate column, Moneybox, published on October 14, highlighted the recent, quiet withdrawal of private equity money from the businesses they had bet on. The New York Times' Breakingviews.com column has also highlighted the bubble prospect in the last week. In an interview with São Paulo's O Estado newspaper, Columbia University economist Jeffrey Sachs has emphasized that the current condition of the world economy is worse than it was a year ago and that predictions of a rapid recovery are misplaced.

I should also note that more American homeowners are still losing their houses with the arrival of every readjustment period on their adjustable rate mortgages. The bleeding in the housing sector has not been staunched in the US, despite the bland assurances of the government and the financial industry.

Will the bubble in the markets again burst? I believe the underlying conditions that could cause such a break are in place. It is up our policy wizards to carry out the actions they know are needed (in both countries, Brazil and the United States) to help us avoid the possibility. Obviously, the behavior of the Wall Street wizards is based on following their normal rules and programs. They failed us last year and will fail us again if they are not effectively checked.

Bummer - Getting Mugged

Brazil has much to commend it. People, opportunities, nature.

Public safety does not fall in this category. Living in São Paulo and the other big cities is becoming ever increasingly an adventure, and a little too exciting for comfort.

There I was late Friday morning taking a leisurely coffee and talking about our projects with my friend and co-author, Ricardo, in a very nice coffee bar and restaurant on Alameda Santos, right in front of BBS, the school where we are also both professors. It was warm, sunny and we sat outside in the first rank of tables under the awning so Ricardo could duck outside and have the occasional cigarette. (Bad, Ricardo, bad.)

Out of the blue comes along a young man dressed in a suit who starts yelling at me softly. At first, I didn't pay attention until I saw the size of Ricardo's eyes. Then I looked at the guy who at that moment racked the slide of his semi-automatic pistol and said, "Watch, quick" and a bunch of other stuff I didn't get until later. I took off my watch, gave it to him and he ran away. 15 seconds start to finish. Only wanted my watch, not Ricardo's fake watch.

Ricardo was shaking but I was still cool. And, strangely, not even really pissed off. You know it's going to happen. Faz parte. It's part of life here. Ricardo then told me that the guy had been saying to give him the watch quick or he would shoot. Don't react; don't do anything. But, I was so focused on the gun (a Targus, I think) that I didn't pay attention to the words. What I did notice was that he wasn't speaking as if it were something heartfelt, but that he was reading from a script. Probably was.

We learned from the waitress and owner of the coffee bar (who didn't charge us for the coffee and pão de queijo we had, many thanks) that a gang has been working the restaurants along Alameda Santos in this particular block, always attacking between 11:30 am and 1pm - lunch hour. The cops haven't done anything about it and have taken all their resources off Santos to go after a gang that has been working Avenida Paulista, just one block away. For those who don't know São Paulo, Paulista is the main banking street of all of South America and Al. Santos is its adjunct with many bank and financial services companies located on our street.

I'm certain that my mugger (the description recalls the great line in Steve Martin's LA Story movie--"I'll be your designated mugger this evening.") was working with a spotter, who was looking for swag to steal (the good watches instead of the phonies).

I only started to react to the mugging Friday night when we went to pick up our grandkids. They live near one of São Paulo's big universities and the streets around it are controlled during class hours by flanelinhas, the people who claim parking on stretches of public streets as their personal parking lots. Pay them or find your car scratched or damaged. When I stopped in front of the building and was approached by one of these shmucks, I wanted to a) get the hell out of there pronto or b) get out of the car to pound him. Fortunately, I did neither and we went to bring the kids to our apartment to spend the night with us.

When I bought the watch I lost in 2005, I said to myself at the time that it would just be a matter of time until someone stole it. Friday was the limit. The watch I bought the day I got my pilot's license I NEVER wear in São Paulo. I haven't even changed the battery in the last two years. I only use it when I go to the States or Europe.

This problem, I'm afraid, is not going away. In my 12 years here, it is one of the subjects that you hear a lot of bla-bla-bla from government, but little action that in fact will make the streets safer. The main drug gangs grow stronger and the state's security apparatus seems impotent to control them or protect the citizenry. The police forces of the country just held a conference in Brasilia in which they spent most of the time bitching about each other and decrying any attempt to undermine the privileges that each force feels it has. Feh on all their posturings.

You need to understand this post for what it is - a desabafo. A great Portuguese word which amounts to "getting something off your chest". It helps to move past things like this. But, mugging still leaves a bad taste in the mouth and should serve as a warning to all of you who plan on coming down here. By all means, come - but leave the good stuff at home.

Sorry for the Absence

First, a short post to apologize for being off line for so long. 3 months. Too much. I'm back.

Don't Count Your Chickens . . .

There is much talk in the last week that we have reached the bottom and there is only one direction to look--up. We may have reached the bottom of this recession without it becoming an enduring depression. NBER (the semi-official U.S. judge of recessions) scholars are now saying that the country moved back out of recession in the first quarter of this year. However, there are still more cards to be laid on the table and it is not clear how quickly the "green shoots" of recovery that I read much of in the last 48 hours will turn into the green grass of a healthy economy.

Remember that the commercial real estate bubble still has not fully burst and there may simply not be enough money to pay for stimulus for the real economy, TARP, commercial mortgage (shopping center and office building) failures, credit card losses (remember, it was just a Senate vote, not a Presidential signature), etc., etc.

If the US government does not take a very conservative approach to judging when the country will actually come out of recession and take on a healthy rate of growth, it could perpetuate the recession. Alan Blinder, former Vice President of the US Federal Reserve Bank and Princeton professor, wrote a New York Times piece recalling how President Franklin Roosevelt helped to create a recession within the depression in 1936 by tightening the budget and pulling back on his stimulus package. This is the same type of budget reduction talk that is current in Congress as it assumes that the recovery will be self-sustaining and puts its attention to reducing the national debt. Blinder believes that the US Government will be able to withstand the pressure for budget reductions until the recovery is, in fact, really underway. However, skepticism at this moment would be a healthy reaction.

There is also a current, led by Nouriel Roubini, Dr. Doom, in his RGE Monitor, that holds that while we may be really at the bottom of the decline, the question is how long will we remain there. Will we initiate real recovery rapidly or will we languish at this current level without declining further? I think there is a paucity of data to show one trend or the other--recovery in 2009/2010 or in 2010/2011.

Why am I in Brazil concerned with all this? As I've said in other contexts, there are two reasons that what happens in the States has a serious effect on all of us around the world. First, the United States is still the bellweather of the world economy. What happens there affects us all. And, second, it affects us because the US is still the second largest trade partner for Brazil and all Latin countries. If demand is slow there, then exports in Brazil and elsewhere in the world will also be slow. Interestingly, one of the side effects of the current recession is that China has now become Brazil's largest trade partner ahead of the US. If the United States recovers quickly enough, that fact could be short-lived.

The Brazilian government and public opinion now believe we are recovering from the recession. I will not waste space on the comments of our government officials here. However, I will point out that the relief at having reached a recovery (if that is the case) is leading banks and institutions to forget one of the major lessons of this recession--the dangers of leverage. Last Friday, Itaú-Unibanco announced that it would restart an auto loan program that provided financing of cars over 72 months and would not involve credit scoring to determine if the borrower was capable of repayment. This is distressingly similar to the scenario that led so many American families to lose their houses and cause the economy to tank. Now, in Brazil, sub-prime car loans. Distressing.

Joseph Stiglitz Gets It!

Since my post yesterday, I have read a number of articles that have given me hope that the business press is beginning to get it about the seriousness of our current situation and others that make me despair that we remain in a state of delusion about our economic future. Oddly, all these come from Brazil's Exame magazine and web portal in the last week.

Yesterday, I read an article from May 7 that states that the Bovespa at 51,000 points still has room to move up. None of the quoted sources seem to indicate that this is at all based on the same market unreality that led the same index to fall below 30,000 just last October. Two days earlier, it was extolling the virtues of index funds ("the American way of investing"). The appearance of new sounding financial techniques is one of the hallmarks of the type of irrational investing that Galbraith so thoroughly trashes. It provides a new cover, but the content – leverage – remains the same.

The hope comes from an entry I read this morning of the results of a conference of 3 Nobel winners that Exame held yesterday. The stunning remarks were those of Joseph Stiglitz. He gets it.

He basically held that the last boom was fueled and based on the acquisition of more and more debt. He praises Kenneth Rogoff, Jeffrey Sachs and Paul Krugman for predicting the collapse of the real estate bubble because of its basis in high consumer indebtedness.

He also perceives that the government is wasting its opportunities to rescue the economy by instead rescuing banks and that these opportunities are now in danger of disappearing as the US Government will at some point have to begin to cut its debt.

The real danger for the future, the danger that we could end up in a mild version of Depression of the 1930's is that demand worldwide is falling and is now making up part of the same vicious cycle that prolonged the Great Depression: weak economy leads to unemployment leads to payment default which then further weakens the economy.

He also points out that countries, such as Brazil, that have managed and regulated their economies well in the recent past will also suffer because the decline in exports due to weak demand in the US and Europe will weaken the economy overall. This is Lula's marola.

In proposing solutions, Stiglitz focuses on control of the banking sector and regulation of the markets as well as the currently popular solution of a world currency (the Special Drawing Rights of the IMF).

Parenthetically, the conference also featured presentations by Edward Prescott, who focused on the prospects of Brazil as a beneficiary of the crisis and Robert Mundell, who repeated the usual conservative, Republican mantra that the solution for the US will come from lower corporate taxes.

It is important that mainstream economists with Nobels are now speaking of the solutions we really need and are addressing the problems we face realistically. This crisis is a product of an exuberance based on speculation and leverage. We will continue to repeat these cycles until those who speak directly to that issue are not considered crackpots and unbelievers (in the orthodoxy of free market economics). Stiglitz' remarks help considerably.

The Fat Lady Hasn't Sung Yet

Yesterday, I flew from Angola to Brazil and had the plane ride to re-read a favorite economic book, John Kenneth Galbraith's A Short History of Financial Exuberance. For those who haven't read this short, mordant resume of financial mania and boom and bust cycles from Tulipomania in the 17th Century to the crash of 1987, read it. The book has only 110 pages, but it drives home its lesson quickly and sharply.
While in Angola, I was unable to keep up to the minute with financial data and news--partly my preoccupation with the course I was giving there and partly due to the as yet fully developed Internet infrastructure of the country. When I arrived home and began to catch up on the week's news, I was surprised at how similar were the descriptions of the qualities of the business cycles and the euphoria that Galbraith described and the current state of the markets and of economic commentary.
The entire world suffered a major financial shock in the third quarter of 2008 as stock markets lost an average of 40% of their value. Unemployment throughout the developed world has risen dangerously. The credit needed to keep industry and commerce ticking over has largely been absent from the market since last year. Defaults, bankruptcies, weakening demand have all characterized the economy in the six months.
Yet, as of the close of the market on Friday, the DJIA stood at 8,574.65, an increase of 30 percent over its low of March 9th. Likewise, the IBOVESPA index in Brazil had reached 51,396, an increase of 75% over its October 2008 low. As well, yesterday’s O Estado de São Paulo contained an editorial that asserts that the evidence is there that we have reached the bottom of the well and can now plan on recovery as early as next year. (“Fundo do Poço, o Bom Sinal”)
Are these values justified by underlying economic conditions? I don’t think so. We still have some episodes of the expansion of credit in which the losses have so far only been contained, but not yet recognized. I have already featured in this blog the risks to commercial mortgages and many commentators are periodically featuring the dangers in American credit card balances and rates of default. (See Robert Reich’s Blog – that’s its rather simple and direct title for more from one who remains skeptical.)
During the months in which the market was falling precipitously, market reforms were promised. New legislation was promised to control leverage and other sins of the Recovery plans were unveiled to both bails out the banks whose exuberance and folly led us into the crisis. In general, beyond a limited bank-refunding program (TARP and its European equivalents), there has been little stimulus money reaching the economy. There has been substantial use of the bully pulpit to promote the idea that the economy would begin its recovery soon. Confidence-building is a component on any sensible Keynesian style recovery program. Secretary Geithner and the rest of the Obama economic team regularly appear on Capital Hill to make positive “see the light at the end of the tunnel” remarks. In Brazil, Central Bank President Meirelles regularly does the same.
However, there has not been any attack against the underlying speculative urges that fueled the bubble that burst so spectacularly.
In the same issue of Estado, Pedro Malan, the conservative Finance Minister for ex-President Fernando Henrique Cardoso, wrote in an op-ed column that spoke of the complacency that government officials and market participants showed as the first signs of the effects of the American residential mortgage crisis began to stress both the markets and investors’ enthusiasm for more leverage. He is the first to adopt a tone that Galbraith would have respected – attacking the speculation itself and not some external factor.
In reality, the markets have little reason to go up other than the artificial optimism that politicians and “expert” investors are spreading. If we focus on the economic conditions we face, more restraint would be a better strategy. The boomlet we are enjoying ignores (and takes advantage of) the lack of regulation following the Fall crash. I believe the same types of pressures are feeding it as fed the original bubble. Speculators are trying to establish a price level that will enable them to close out their original positions at a profit. Other investors, industries and employees will have to live with the result once the market resumes its decline until some actual solutions are applied to the causes of the crash. We will be able to restore normal growth to the markets and to the economy only when our governments really attack the problems. They have not done so yet.

It's Great to Recognize the Accomplishments of a Friend

While my normal commentary focuses on politics and economics, I learned yesterday of an honor that a friend in Los Angeles received recently and I wanted to share it here. It this day of worrying about our own butts and surviving the financial crisis, some people manage to keep focused on the larger picture and creatively address the problems of the larger society.

Janet Halbert, herself a cancer survivor, has created a program called Hurdle Jumpers to address a simple but serious need--that of providing support to those undergoing the tribulations of chemo and radiation therapy for cancer. Everyone complains of the side effects of these treatments. Janet has done something about it with the energy and determination that she has always shown.

The City of Los Angeles has recognized Janet's work and named her one of 15 recipients of the Pioneer Woman Award for 2009. She deserves the award.

Learn more about Hurdle Jumpers and help them out. You can find more information at their web site, www.hurdlejumpers.org.

Congratulations, Janet. Parabéns. Mazel Tov!

Why the New Title

I've just changed the title of this blog to "Brazil Thoughts" from "Thoughts from a Distance". Why? A few days ago, I did a Google search for this blog with its title words. I discovered that this is a common phrase in the world of spiritism religions – the distance referring to the gap between our world and the world of spirits, or whatever the belief entails. Although I wish them well on every dimension, that's not the audience I'm after. So, I've changed the title in the hope it will make the blog more apparent on search engines and therefore increase my meager readership. I've seen 33 hits in a tracking report over the past month, so I'm more optimistic that people other than those I've personally urged to read it have logged in. It's a start.

More Pennies Dropping/Fichas Caindo

As I've been predicting in lectures and classes, shopping malls in the US are the next problem area for the financial system there. Today, GGP filed for Chapter 11 bankruptcy protection because it has not been able to restructure all the debt it took on during the housing boom of 2002 - 2006. GGP has 200 malls throughout the US of which 158 also filed today.

There are two basic reasons why shopping malls, particularly those owned by REITs and other public companies, are vulnerable to this recession. In general, they took on absurd amounts of debt during the boom, normally exceeding the standard 80% that banks and other lenders have allowed in the past. As I just explained Tuesday night to my entrepreneurship class, the risk with debt is that you have to make the payments whether you have sufficient income to support the payment or not. In a boom environment, that is generally not a problem. Rental income rises as consumer demand for goods in the stores increases. However, when there is a precipitous drop in consumer demand, rental income shrinks, frequently leaving the mall operators with an income insufficient to pay both expenses and debt.

Why rental income shrinks in a recession is the second reason why malls are vulnerable. Unlike apartments, rental contracts in shopping malls have two income components. The first is a fixed rent charge (like apartments). The second is a variable component based on the store's sales figures (generally 7% of sales). If sales go down, two things happen. First, the store owners are themselves squeezed. Although their variable rent will decrease, their sales may be insufficient even to pay their full fixed rent after they pay for their merchandise and administrative expenses. And, as I just said, variable rents go down with the decline in sales.

As a result, the mall operator faces two risks. First, a declining variable income, which he or she may rely on to pay the mortgage payment (although a bank, insurance company or fund should only have counted a small portion of this in assessing the creditworthiness of the mall property). Second, an increase in the stores in the mall that are in default on their rental payments because of their loss of income.

The mall operators have tough decisions to make. Should they keep on the stores even if they are in default in the hope that the default will be brief and that a workout can be structured for them? How should the mall "de-leverage", the artless term used by GGP on their web site, that is, to reduce their debt load to bring their level of debt back into balance with their properties' ability to pay? The situation is not a pretty one right now. Other large mall operators are likely to file for Chapter 11 reorganization in the wake of GGP's filing. This could be the next major bubble to break as the loan holders, the creditors, themselves are being pressured to restructure their debt portfolios, get out of the boom mentality and return their businesses to a more conservative debt posture.

If consumer demand is falling, then consumers are staying at home with their credit cards in their wallets. One reason for this is they themselves are falling to default on their credit cards. This could be the next major area of impact that will keep the United States in a recession through 2009 and keep the credit markets closed.

America and Innovation - Thoughts on Sustainability

I have been reading Tom Friedman's latest book, Hot, Flat and Crowded, and I was struck yesterday by one small portion on America's role in the world. He argues that the United States has traditionally led the world in technological and institutional innovation and that it must exert this same leadership our environmental problems.

He says:

It's not just technology innovations we need to be offering the world. America has also been an innovator in the conservation of natural resources, and we can promote this value globally as well. . . . If America would become the world leader in building clean energy technologies and promoting conservation, it would tip the whole world decisively in that direction. This probably sounds a little old-fashioned or jingoistic. I do not mean it that way. It is just that I continue to hold the view that many large-scale bad things happen in the world without American leadership, but few large-scale good things happen without American leadership. . . . Americans forget, especially in recent years, when so many people around the world seem to be criticizing us, how much American either stops setting trends or sets bad ones, the whole world fees the effects. (pages 176 -177)

From my perspective here in Brazil, I believe Friedman is right. His linking of innovation to American leadership and the need to create a sustainable world puts a challenge to the Obama Administration that the rest of the world agrees with. Technological innovations in the environmental area are expensive and are beyond the financial capabilities of most of the developing world, as Friedman and development economists such as Jeffrey Sachs point out. Likewise, only in the United States does the concentration of science, engineering and entrepreneurship permit innovation on a sufficient scale to create the basic technologies, which can then be adapted and applied throughout the rest of the world.

For example, support in Brazil for technological innovation is clearly lacking and technological innovations coming from Brazilian research centers suffer from lack of industrial development of them. The three big exceptions to this are Petrobras (the state-owned oil company), Vale de Rio Doce (mining), and Embraer (aviation). These three companies appear on all the "Top 1000" companies' lists for R&D. Brazil does have the industrial capacity to manufacture the innovative products created in other regions of the world, but it simply does not have the to develop fully new technologies. The situation is the same throughout the developing world.

Whether developing countries are angry at the United States for its aggressiveness or its "go it alone" posture towards foreign relations, they do look to America for innovation indeed.

Another factor to be considered is America's potential moral leadership to bring other countries along to sustainable thinking. A group of American environmental policy students recently visited the MBA program where I teach in Brazil. In the round table discussion they had with our students and staff, one of the Americans offered the opinion that Brazil would do best to avoid America's dependence on an industrial and consumer culture. This is the kind of naïve view that harms America's relations with the world. It was politely pointed out to this student that participation in industrialization and consumption is exactly what the U.S. had been preaching for the last 50 years and this is exactly what people in Latin America were seeking. How could the US suddenly pull the rug out from under these decades of aspiration and say, "Well, that didn't work, so don't you do it."

The message that could enable the US to establish its moral weight in favor of sustainable development is quite different. It should be that the US is willing to invest heavily in new sustainable technologies that will allow growth to continue but in a different direction than it has in the past sixty years. The US government needs to commit to an R&D program for sustainable development as part of its recovery plan from the financial crisis. Since the financial crisis became apparent some six months ago, many commentators and policy makers have urged American and worldwide industry to adopt a new, sustainable model for growth. A commitment from Washington to do just that would both help lead the world in the new direction that Friedman is speaking of and create a useful program that could help sustain America's technological leadership for a long time still to come.

Sorry for the delay in posting

We've been getting ready to move to our new apartment and the last two weeks of fitting out have been hectic indeed. To those few of you who read this blog, I offer apologies.

Old Article - Close (Enough) to the Front Lines

I wrote the post below the day I returned from an end of the year trip to Israel (January 7). It describes a rocket attack by Hamas that landed near the house where we were staying. It clearly influences my feelings about the desire of Hamas to reach a peace. I have been criticized recently for my support of Israel because of the "disproportionate" response that the Gaza war represented. While desiring peace and supporting a two-state solution, I obviously disagree with that representation.





I’ve just returned from two weeks in Israel. On our frequent trips to see family (cousins, kids, grandkids), we usually stay with our cousins and good friends at their house in Gan Yavne, which is a small, mostly agricultural town just to the east of Ashdod. This trip was no exception. We had a relaxed three days with them before the war with Hamas (“Fire in the South” as one TV network there calls it). We knew the war had started on December 27 as the F-16 activity at the nearby airbase became constant.

All continued well in our neck of the woods until Monday morning, the 29th. During the weekend, Hamas had been launching missiles at towns throughout southern Israel, reaching Ashkelon (some 10 km. to the south of us). On this morning, however, the air raid alarm sounded in the neighborhood, we ran into the shelter room in the house, and 10 seconds later, we heard the concussion of the Grad relatively nearby. When we went outside, we discovered that it had fallen some 300 meters from the house in an open field. The picture shows the police and military standing around the crater left by the missile explosion. As you can see, the crater is fairly small (as was the explosion since its energy was not contained by surrounding walls and buildings).

We stayed with our cousins for another day until prudence demanded that we move to the house of other cousins further away from the range of the missiles to let our cousins sleep in the shelter room, which they have done from then until now.

This war is an up-close and personal event for all Israelis. I have never seen the country more unified even as it prepares for a contentious election that squarely puts the issue of peace terms with the Palestinians at the center of the political landscape. I only encountered one person, a very worried mother of a soldier serving in Gaza, who was against Israel’s initiative in confronting Hamas.

The international press generally covers Israeli conflicts at a safe distance--from Jerusalem or Tel Aviv. In the first few days of this war, CNN and BBC were both uniformly and unfairly critical of Israel’s bombing of Hamas targets. Then, Lyse Doucette of the BBC moved her base from Jerusalem to Sderot, the Negev town closest to Gaza and subject to constant bombardment by Kassam rockets and mortars. Living with the constant threat changed significantly the balance of her reporting. Later the same thing happened with France 24, a newer news channel in English and French. On both channels, the abuse and misstatements spewed by various Palestinian spokespersons were now challenged and a more balanced coverage ensued.

It’s important that the question of the rockets get resolved. Getting shot at, even randomly, tends to focus one on the need to stop them. In part, it is the random nature of these unguided rockets that terrifies people. Being unguided, they can only be considered terrorist rather than military weapons. Israelis have lived with these things for 8 years, with no effort by the Palestinian Authority nor by Hamas to stop launching them. More heinous still is the storage and launching of these missiles from civilian locations, such as the UN Schools that have become the focus of attention in the last 24 hours.

Fichas Caindo

The chips are falling here in Brazil, to bowdlerize the Portuguese expression. In my last post, I spoke of the use and abuse of GDP rates by investment professionals. Now, the Brazilian government has released its 4th Quarter 2008 figures and the GDP has fallen by 3.6% in the quarter. This despite the government's claims that current GDP would continue to rise at an annual rate of some 4.5%. Yesterday's news is quite discouraging and is claimed by the government to be unexpected.

It shouldn't be. All the indicators were in place to show that the GDP would likely drop--reduced industrial output, increased unemployment, reduced consumer spending and confidence, reduced exports and imports (both). In fact, number reported in this morning's newspapers showed that only one sector of the GDP continued to grow. That, of course, was government spending. The Lula government has continued its expansion during the current quarter, increasing federal employment and granting significant wage increases to unions threatening to strike and disrupt government services. Yesterday, Lula's response to the release of the GDP data continued to be defiant. He continues to claim that there will be no recession in Brazil. This contradicts the general opinion of economists and market professionals. Commentators from Joseph Steigletz to Nouriel Roubini's Latin American EconoMonitor strongly suggest that a recession is now inevitable in Brazil.

The President's insistence just ten days ago that he could give a lesson to the other G20 leaders in April on how to run an economy seems a pretty vain boast right about now although he does not perceive it.

Brazil's reduction in its IPI tax to support the auto industry has proved success and the government deserves full credit to assisting the industry to avoid layoffs and salary cuts. Factories which had planned these reductions suddenly had to recall their workers as reduced taxes led to reduced prices which led to increased demand which led to patios empty of unsold cars. The government must find new ways now to boost demand now that pent-up demand for automobiles has largely decreased.

More on this tomorrow.

No Wonder We're in Such Big Trouble

[Originally published March 5, 2009]

Yesterday, I read a corporate pitch for money to investors on the part of a strong, mid-cap Brazilian company. A major bank prepared the report. We all know the bank but I will spare people’s reputations by not naming it specifically. The report had the temerity or the stupidity to base its projections of the company’s performance in 2009 and 2010 in part on the claim that Brazilian GDP would grow at a rate in excess of 5 percent this year and a whopping 8.2 percent next year.

I had to catch my breath. What alternative universe was this brilliant banker living in? I’ve had some fun recently on Twitter with Finance Minister Mantega’s assertions of a 4 percent GDP increase this year and my last post was about the entire Lula Administration’s unreally optimistic perception that Brazil can avoid the worldwide slide. But, this from someone representing the elite of the financial services agencies. Industrial production down, unemployment up, demand down, ineffective government response to the crisis. The consensus among economists, bankers and investors with whom I’ve spoken is that Brazil may achieve positive growth this year, but probably won’t. If the country does manage a positive result, it will be more luck than design. Clearly, our genius wrote this report and his senior officers approved it before the crisis really took hold. But, to insist in March 2009 that the Brazil will grow at these healthy rates simply stunned me.

Michael Lewis’ Portfolio Magazine article in November/December about the collapse of Wall Street and its reputation for wisdom and/or street smarts rings ever truer today. (It’s a brilliant article and you should read it.) We place confidence in the names of these institutions, but the people who inhabit them today do not do justice to the firms’ reputation. My MBA students have a better feel of the market than our analyst here. I also have to wonder who is going to believe this claim and give a client of the bank financing when the projected results start with such an unrealistic assumption. In my Entrepreneurship class, I teach students that the usual resting place for business plans with such outrageous claims is the waste basket--unless the reader/investor wants to be fooled.

Estimates like these show that all these elite financial institutions need to be rebuilt from the core or replaced with others that have a realistic vision of how corporate finance in the post-crisis globalized world should be structured. Perhaps our bankers need to pay less attention to Sheryl Crow concerts and more attention to realistic econometric data about the situation we are living through. (1. No, my example is not from Northern Trust and 2. Read Maureen Dowd’s article in the New York Times about that bank’s last big wretched excess).

8.2 percent would be funny if it weren’t so sad a comment on the people we put in the driver’s seat of our economy.

Marola or Much More?

[Originally published March 2, 2009]

This morning’s papers in Brazil headlined the news from Basel that exports worldwide have declined dramatically. This makes Brazil and other developing countries more and more vulnerable to the economic crisis although their rates of GDP growth have tended to remain positive into the first quarter of this year.

I commented on Twitter last week that the PT government here in Brazil was being wholly unrealistic about avoiding the crisis. President Lula says he can give lessons on how to manage an economy at the upcoming G-20 meeting. Finance Minister Mantega insists that Brazil will continue to grow at a 4% rate.

However, Brazil depends on the export of commodities for its foreign exchange and trade balance. Already the government has reported significant falls in commodity exports. The news from International Bank of Settlements in Basel only adds weight to this. The picture in yesterday’s papers showing 400,000 empty containers in a Chinese port gives a dramatic visual portrait of our current problems in the BRIC and developing world.

Lula, Mantega and many smug Brazilian analysts need to wake up to the reality of the global dimension of the crisis. We are not exporting from here because developed countries are not importing. Lula’s keeps referring to his principal metaphor for the crisis: Brazil will experience a “marolinha” (a little wave) in contrast to the developed world’s tsunami. It’s time down here to recognize that the marolinha has already grown into a marola and could well become the tsunami that we all fear.

First Try

[Originally published March 1, 2009]

As I said in the introduction to the blog, I have a number of areas in which I would like to contribute. First, it might help to know who I am and what I do. I am an American, transplanted 11 years to São Paulo, Brazil. By education, I am an urban planner. However, most of my career has been spent in commercial real estate development and business consulting. I have always been interested in entrepreneurial development and I’ve assisted a number of businesses to enter the market and survive. Now I teach the subject at a small MBA program in São Paulo called the Brazilian Business School. I also spent time as an advisor to a number of Democratic politicians in both New York and California. Since coming to Brazil, I have provided management consulting for a number of large and incipient companies as well as having run my own entrepreneurial business for 6 six--a security consulting firm. With the crisis, that business has now shut down and I’m focusing anew on business consulting.

Personally, I’m married and the devoted stepfather of 3 children and grandfather 10 grandkids spread between São Paulo and Israel. Beyond children and grandchildren in Israel, my wife has a large family, so we travel whenever possible to be with them. This makes me a fairly ardent Zionist and makes me very interested in both the Israeli economy and the politics of the country and the region.

The current crisis fascinates me as I have long taken a serious academic interest in crisis decision-making. My colleague at BBS, Ricardo Torres, and I are preparing a book on the crisis in Portuguese to try to explain how it came about to the Brazilian public and discuss its impact on the Brazilian economy.

I have been twittering for the past month, but 140 characters is a serious limit. It’s time to try my hand at a longer format.

I hope you enjoy these sporadic posts. Most will be in English; some will be in Portuguese. If you find them interesting, I will move the blog to a host that offers its own domain name and add more features. Let me know what you think. You can reach me at @jameshunterbr on Twitter and by e-mail. I look forward to hearing from you and to starting a dialog.

By the way, the photo is of smoggy, crowded São Paulo, taken from the balcony of our apartment.