A Brazilian Beauty

     If you haven't followed developments in Brazil's economy over the past decade, you've missed one of the great success stories of our time.

     Brazil is one of the so-called BRIC economies (Brazil, Russia, India and China), which are now developing to the point of actually having achieved something.

     Brazil is my favorite among these top developing economies for a number of reasons. But before I go further, I should reveal a prejudice.

     A few years ago, I remarried to a stunning young woman who was a recent Miss Brazil. Through her good graces, I have come to know Brazil better than an outsider typically would after visiting sporadically. Luckily, my wife is not only beautiful but also her family is well connected at the highest levels of Brazilian commerce and politics.

     My wife tweaked an interest in Brazil

     I can report from first-hand experience that Brazil is a country where you can live exceedingly well.

     Not only is it a great country in which to be rich, it has also become a great country in which to become rich. Brazil has more millionaires than India or Russia. In 2007, a new millionaire was minted in Brazil on average every five minutes of every business day.

     Brazil and the U.S. Trade Places?

     Ironically, while most Americans were looking the other way, Brazil flourished with the sort of sound fiscal and monetary policies that helped the U.S. attain prosperity.

     For example, Brazil ran a comfortable budget surplus of 4% to 5% of GDP for the past four years. Brazilian inflation is under control. The country also runs annual trade surpluses.

     And as the world's leading producer of biofuels, Brazil is energy independent.

     Meanwhile, the U.S. has run staggering trade and budget deficits of the kind that led to hyperinflation in Brazil in the last century.

     As we enter 2009, the U.S. budget deficit has swollen to a multi-trillion-dollar improvisation of bailouts and rescues sure to debase the dollar and downgrade the living standards of those solely dependent on dollar income.

     Just as it once would have been folly to trust your savings to the Brazilian government, I believe it is now folly to trust your savings to the U.S. government.

     In fact, I would not be surprised if the U.S. dollar as we know it ceases to exist in the next five years.

     That's because the pattern in every country that fouls its currency through hyperinflation is to scrap the tarnished brand and issue a new currency after hyperinflation has made the old one repugnant to the people it betrayed.

     Germany had six currencies in the twentieth century. It scrapped all but the euro in the wake of runaway inflation or collapse.

     To say the dollar is heading for oblivion may seem exaggerated or unpatriotic. But it would be rather thick of us to miss the point when the leading U.S. monetary authorities have been at pains to explain that it's their conscious policy to devalue the dollar.

     I am sure that the great damage the concerted policy of inflation by the U.S. government would cause is an argument for diversifying cash reserves and currencies outside the U.S. Hence the attractiveness of Brazilian government bonds, which you can buy for the time being at a discount courtesy of hedge funds that have dumped Brazilian assets in a scramble to raise cash.

     Hyperinflation once plagued Brazil. The source of this was a relentless expansion of the money supply. The Brazilian government used to finance its operations and development projects not out of taxes or by borrowing funds but simply by creating money.

     In other words, the cause of Brazil's hyperinflation is the very policy Washington is now adopting.

     As a result, from 1980 through 1997 the price level in Brazil increased by a factor of one trillion. Per capita real income growth ceased during this period.

     Almost every Brazilian adult -- even my wife, who was born in 1980 -- has unhappy memories of this period. And Brazilians have no wish to return to policies that destroyed their economy.

     Remember, the Germans became the foremost foes of inflation in Europe in the twentieth century after suffering grievously with hyperinflation.

     This is one reason why the Brazilian real is a better bet going forward than the dollar. No people who have been through hyperinflation want to repeat the experience.

     Given these prospects, the crisis has handed us an opportunity. Buy Brazil... Sell the dollar.

Happy Investing,

Recent gains in rubber may be about to wane. Rubber has posted gains of over 40% in the past four months, but now tire manufacturers, the largest consumers of rubber, are feeling a weakness in demand.

Global demand for new tires is on pace to plunge nearly -7% this year, the greatest decline in more than three decades.

Some analysts are predicting a -35% drop in the price of rubber, from $1,500 per ton to about $1,000 per ton.

-- Bloomberg

Recent Articles

Skin in the Game: Another Lesson Courtesy of Bernie Madoff
By Amy Calistri
April 18, 2009

How much of his own money did Bernie Madoff have invested in the asset management arm of his company, Bernard Madoff Investment Securities LLC? Not a dime -- and for obvious reasons. Madoff knew his operation was a Ponzi scheme. After all, he set it up that way. When you poison the water, you're hardly the first one in line for a drink at the well. But avoiding a poisoned investment scheme is just one reason why investors should want insiders investing right along side them.

Read On...

How Just Three Letters Can Juice Your Gains By a Factor of Five
By Amy Calistri
April 14, 2009

There is a special asset class made up of the strongest companies in the world. In almost every respect, they represent the best of the best. And right now, U.S. investors have the opportunity to make five times the gains -- by just knowing three letters.

Read On...