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.