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.