Tag Archives: Brazil

Brazilian Army Ordered To “Restore Order” In Rio De Janeiro, by Tyler Durden

Things have been dicey in Brazil for quite some time, and they may be getting dicier. From Tyler Durden at zerohedge.com:

With public spending on police and social services collapsing amid Brazil’s worsening economic crisis, violent crime has crept back up in Rio de Janeiro, a city widely recognized for its favelas – urban hillside slums teeming with violence, drugs and prostitution, according to Bloomberg.

And ahead of an October election where President Michel Temer will try to win his first full term in office, the president is trying to send in the army to seize control of the city’s streets and restore order to an increasingly lawless town.

President Michel Temer issued a decree on Friday putting an Army general in charge of Rio’s security forces, including the state’s civilian police. The intervention, which requires congressional approval, will last until the end of the year, according to the decree.

“Our prisons will no longer be offices for thieves, our public squares party halls for organized crime,” Temer said after signing the decree.

“I know it’s an extreme measure but many times Brazil requires extreme measures to put things in order.”

But as is often the case with Brazilian politics, Temer has a plausible ulterior motive: By sending in the army, he might create enough of a distraction to avoid voting on an unpopular pension bill because Brazilian law conveniently prohibits making constitutional changes during times of military crisis.

Temer told Reuters that the intervention wouldn’t halt negotiations over pension reform or stop a vote on the plan, which is deeply unpopular with the country’s retirees, who stand to see their benefits cut.

Meanwhile, crime in the city has erased nearly a decade of progress, climbing back to its highest level since 2009. Temer’s decision is the first time the military has intervened in public affairs since the former military dictatorship ended in the mid-1980s and the country returned to democracy.

To continue reading: Brazilian Army Ordered To “Restore Order” In Rio De Janeiro

Will Brazil Be the Next Hotspot for Independence Movements? by Michael Krieger

Three wealthy southern Brazilian states are making noises about secession. From Michael Krieger at libertyblitzkrieg.com:

If you’ve read my work over the past several weeks, you’ve probably noticed an increased fascination with secession/independence movements around the world. I think we’re at the very early stages of this developing trend, which will see nation-states across the world fracture for a variety of reasons. The historical significance of the political changes we’re about to live through cannot be overstated. As I wrote in last month’s piece, The Future Will Be Decentralized:

To conclude, I recognize that I’m making a huge call here. I think the way human beings organize their affairs will experience the most significant paradigm level shift we’ve seen in the Western world since the end of the European feudal system hundreds of years ago. That’s how significant I think this shift will be. There are two key things that need to happen for this to occur. The first is technological innovation, and that’s already happening. The second is increased human consciousness. As Thoreau noted, in order for us to have greater self-determination we need to be ready for it. Are we ready? I think we’re getting there.

While extremely significant, the Catalan independence movement is just the tip of the iceberg when it comes to a global drive toward political decentralization. For example, just today I came across another potential secessionist hotspot in an unexpected place, Brazil.

Bloomberg reports:

Inspired by the separatist vote in Catalonia, secessionists in three wealthy southern Brazilian states are redoubling their efforts to break away from the crisis-battered nation.

Residents of Rio Grande do Sul, Santa Catarina and Parana states are being called to vote in an informal plebiscite on Oct. 7 on whether they want independence. Organizers are also urging residents of the three states to sign a legislative proposal for each of their regional assemblies that would call for a formal, binding referendum. The non-profit group “The South is My Country”aims to mobilize a million voters in 900 out of the region’s 1,191 cities.

To continue reading: Will Brazil Be the Next Hotspot for Independence Movements?

Brazil’s Easy-Money Problem, by Lucas Vaz

From Lucas Vaz, cobdencentre.org:

Brazil is undergoing what is considered its worst economic crisis in seventy years, and there is usually no agreement when it comes to the causes of this situation. President Rousseff and the Labor Party say that it was the corollary of the “International Crisis,” a ghost of the 2008 depression created in their minds. The reality, however, is different. Since ex-president Lula Da Silva of the Labor Party entered office in 2003, the government has clung to the typical Keynesian project of growth-by-government-spending. Interest rates were lowered constantly, the amount of loans grew to an unprecedented level, savings per capita dropped, and government spending continued to grow.

For the advocates of government intervention, the country’s economy was heaven on earth. It should be of no surprise that Paul Krugman, the defender of America’s Quantitative Easing, said that Brazil was not a vulnerable country. However, those policies so strongly defended by some economists and by bureaucrats led the country toward the terrible situation in which it is now.

From the Brazilian government’s point of view, it could hardly get any worse: the country is facing an economic depression that is likely to last at least two more years, the country’s rating was downgraded to junk by Standard & Poor’s, and a corruption scandal may lead to the impeachment of the country’s president, Dilma Rousseff. We must recognize, however, that even though this was the result of the government’s action, it simply put in practice the most prevalent ideologies of the country, which is a mixture of Marxism in politics and in the universities with Keynesianism in economics. This national ideology praises, in general, a complete dependence of the people on the government. The fact that “Brazil’s tax burden already amounts to 36 per cent of GDP” is held with pride by professors and economists throughout the country, who spread the word that public policies will create jobs and contribute to people’s welfare.

Brazil and the Austrian Business Cycle Theory

In order to grasp what is happening to Brazil, and to understand why some economists have long ago predicted the current disaster, it is crucial to understand Austrian business cycle theory, since it yields a concrete critique of government’s involvement with currency and credit expansion — two factors that the Brazilian government used as tools for economic growth — and its misuse is what generated the crisis.

As Mises pointed out, “the cyclical fluctuations of business are not an occurrence originating in the sphere of the unhampered market, but a product of government interference with business.”

Indeed, those “boom-bust” cycles, as the one that happened in Brazil, are generated by monetary interventionin the market in the form of bank credit expansion. Thus, they are an outcome of central planning and government intervention, the very opposite of a free market.

To continue reading: Brazil’s Easy-Money Problem


Brazil Heads for Worst Recession Since 1901, by David Biller

The financial markets appear to be grasping that the world economy is heading down the tubes. At the front of the line: Brazil. From David Biller at bloomberg.com:

Brazil’s economy will contract more than previously forecast and is heading for the deepest recession since at least 1901 as economic activity and confidence sink amid a political crisis, a survey of analysts showed.

Latin America’s largest economy will shrink 2.95 percent this year, according to the weekly central bank poll of about 100 economists, versus a prior estimate of a 2.81 percent contraction. Analysts lowered their 2016 growth forecast for 13 straight weeks and estimate the economy contracted 3.71 percent last year.

Brazil’s policy makers are struggling to control the fastest inflation in 12 years without further hamstringing a weak economy. Finance Minister Nelson Barbosa, who took the job in December, has faced renewed pressure to moderate austerity proposals aimed at bolstering public accounts and avoiding further credit downgrades. Impeachment proceedings and an expanding corruption scandal have also been hindering approval of economic policies in Congress.

To continue reading: Brazil Heads for Worst Recession Since 1901

Brazil Releases Shocking GDP “Obituary”: “It’s Mutated Into An Outright Depression,” Goldman Exclaims, by Tyler Durden

Is Brazil the condor in the coal mine? SLL started talking global depression a year ago; now it’s arrived in Brazil. From Tyler Durden at zerohedge.com:

To be sure, we haven’t exactly been shy about characterizing Brazil’s economic malaise as more akin to a depression than a recession. Here are a few representative headlines:

Depression Tracker: Brazil Braces For Big Week Of Bad Data
Depression Tracker: Unemployment Soars In Latin America’s Most Important Economy
Brazil’s Economy Slides Into Depression, And Now Olympians Will Be Swimming In Feces [refer to original article to access links]

The problem, you’re reminded, is that Brazil is in the midst of a dramatic economic downturn that’s left the country to suffer through the worst inflation-growth outcome (i.e. stagflation) in more than a decade. Unemployment and inflation are soaring (annual headline IPCA inflation at 10.28%, unemployment at 7.9% in August, up from just 4.7% a year earlier) while output is plunging (IBC-Br monthly real GDP indicator down 6.1% Y/Y in September) and the market is losing confidence in the government’s ability to end a political stalemate on the way to shoring up the fiscal books and hitting primary surplus targets. Last week’s arrest of prominent lawmaker Delcidio Amaral in connection with the ongoing Carwash investigation didn’t help.

Thanks to the above mentioned IBC-Br monthly indicator (which showed an economy in “free fall” to quote Barclays) we already knew Q3 was going to be bad on the GDP front. But this is Brazil we’re talking about, which means that as bad as consensus is, there’s always the distinct possibility that the actual numbers will be far worse than expected and that’s exactly what happened on Tuesday.

Real GDP fell 1.7% Q/Q and 4.5% Y/Y while Q2’s already abysmal -1.9% contraction was revised down to -2.1%.

All of those prints missed expectations and the headline number was worse than all but three estimates from the 44 economists Bloomberg surveyed.

To continue reading: Brazil’s ‘Depression’

Brazil’s Disastrous Debt Dynamics Could “Create Contagion” For Emerging Markets, Barclays Warns, by Tyler Durden

From Tyler Durden at zerohedge.com:

Last week, we got the latest round of abysmal economic data out of Brazil. To summarize: GDP is in “free fall mode” (to quote Barclays), inflation hit double digits for the first time in over a decade, and unemployment soared to 7.9% in August, up sharply from just 4.3% a year earlier.

Put simply: it’s a full on economic meltdown.

The situation is made immeasurably worse by the country’s seemingly intractable political quagmire. The standoff between President Dilma Rousseff (who has been accused of cooking the fiscal books) and House Speaker Eduardo Cunha (who has been implicated in a kickback scheme tied to Petrobras) has led to a veritable stalemate that’s made it exceedingly difficult for Rousseff and her embattled finance minister Joaquim Levy to push through badly needed austerity measures.

Rousseff scored a victory on the austerity front on Wednesday when lawmakers approved her veto of a bill that would have raised retirement payments alongside the minimum wage, but this is an uphill battle and while incremental wins may be enough to give the beleaguered BRL some temporary respite, the medium- to long-term outlook is abysmal.

As Brazil continues to muddle through what has become a stagflationary nightmare, Barclays is out with a fresh look at the country’s debt dynamics and unsurprisingly, the picture isn’t pretty.

The road ahead depends on fiscal policy, Barclays begins, and that, given the current dynamic, is not a good thing. “Even if politics were uncomplicated and policy unconstrained, Brazil would still face enormous challenges adjusting to far less supportive local and global conditions,” the bank notes, referencing the now familiar laundry list of EM problems including slumping commodity prices, lackluster demand from China, the yuan deval (bye, bye trade competitiveness), and the incipient threat of a Fed hike and thus an even stronger USD.

“Investors are also grappling with the prospect of a prolonged, unsustainable fiscal policy framework,” Barclays adds.

To continue reading: Brazil’s Disastrous Debt Dynamics Could “Create Contagion” For Emerging Markets


Petrobras’s Dangerous Debt Math: $24 Billion Owed in 24 Months, by Jonathan Levin and Peter Millard

The debt contraction slowly, but surely, gathers steam. From Jonathan Levin and Peter Millard at bloomberg.com:

The sovereign is weak, too, but investors are counting on it

Petrobras has options in crisis, just not palatable ones

The debt clock is ticking down at Brazil’s troubled oil giant, Petrobras. Next up: $24 billion of repayments over 24 months.

That’s a towering hurdle for a company that hasn’t generated free cash flow for eight years and whose borrowing rates are soaring. Annual debt servicing costs have doubled to 20.3 billion reais ($5.4 billion) in the past three years.

The delicate task of managing the massive $128 billion mound of debt accumulated by Petroleo Brasileiro SA — 84 percent of it in foreign currencies — falls to the two banking veterans parachuted atop the company earlier this year, CEO Aldemir Bendine, 51, and Chief Financial Officer Ivan Monteiro, 55. The pair came from the state-controlled Banco de Brasil SA to contain the damage from the biggest corruption scandal in the country’s history.

While prosecutors continue to grind away at years of suspicious dealings, Act II for the boys from the Bank of Brazil will further test their mettle. The challenge of Petrobras’s runaway debt, which has grown four-fold in five years, has been exacerbated by low oil prices, a weak currency and the Brazilian government’s own fiscal travails.

“If you considered them to be totally independent and there were no chance of any kind of government support, I think the risk of default would certainly be there in a big way,” said Jason Trujillo, an Atlanta-based fixed-income analyst at Invesco Ltd.

Petrobras total debt has quadrupled in five years

Petrobras is not without options, but they tend to be either politically unpalatable or unattractive to the marketplace. Bendine is actively trying to peddle off minority stakes in the Rio de Janeiro-based oil producer’s pipeline and gas station units, among others, but that plan is behind schedule and faces fierce opposition from the oil industry’s most powerful union.

Other alternatives are also running up against resistance from one interest group or another. The only source of comfort for many bondholders is the belief the Brazilian government would stop at nothing to save the country’s biggest company — though, even at that, Trujillo said markets are “lessening the amount of implied government support.”

To continue reading: Petrobras’s Dangerous Debt Math

China Slowdown, “Global Turbulence” Trigger Collapse of Export Orders for German Equipment Makers, by Wolf Richter

The Dow Jones Industrial Average was up 165 points today. Meanwhile in the real world of global business, thing are getting worse, as Wolf Richter documents virtually every day. Today from Richter, at wolfstreet.com:

“Ripples are now spreading to other key markets.”

It hasn’t hit overall German exports yet. Year-to-date through August, total exports are up 6.6% from last year and are expected to set another record by year-end. Exuberance in Germany’s well-oiled export machinery still reigns.

But beneath the surface, German plant and machinery makers are getting slammed by the recessions in Russia and Brazil, the slowdown in China that officially still doesn’t exist, and the “turbulence” in the global markets, according to a report today by the German Engineering Federation VDMA.

The association represents over 3,100 mostly medium-sized companies in the capital goods industry. Mechanical engineering is Germany’s forte. Many of the companies are world leaders. They cover the “entire process chain” in the mechanical engineering sector, according to the VDMA, including:

Associated tools and components, of process, production, manufacturing, drive-train and automation engineering, office and information technology, software, and product-related services, i.e. from components to plants, from system suppliers and system integrators through to service providers.

They employ over 1 million workers that develop and produce “key technologies for the global market,” with 76% of their revenues derived from exports. Alas, about 42% of these exports are headed to developing economies, including Russia, Brazil, and particularly China.

These economies are now in trouble. And for German plant and equipment makers, things have come unglued. In September, total orders plunged 13% year-over-year. While domestic business edged up 1%, export orders plummeted 18%.

The export crash wasn’t a one-month blip. For the first nine months, overall orders dropped 1%. While domestic orders rose 2%, and export orders from the Eurozone jumped 13%, orders from outside the Eurozone dropped 7%. Hidden in the numbers is the recent deterioration in export orders: Over the three-month period between July and September (as domestic orders rose 8%), total export orders fell 6%, topped off by the 18% plunge in September.

To continue reading: Collapse of Export Orders for German Equipment Makers

Herd Extinct, by Robert Gore

The crowd never thinks. People are only comfortable in a pack, and they’re most comfortable in one that’s racing off a cliff.

The Golden Pinnacle

Herd animals herd because there is safety in numbers. Even if the wolves or lions attack, they’re only going to get a small percentage of the herd. Such attacks even have an evolutionary advantage: they eliminate sick or weak members. Those who think humans are not herd animals labor under such vast misconceptions that they are beyond the reach of SLL.

One herd, Wall Street-Washington economists, surpass wildebeests and sheep. Their behavior, because it is so uniform, can easily be described. Membership in one of two subspecies is required: Keynesians or monetarists. Both have long histories of predictions that didn’t predict and policy remedies that didn’t remedy, but they all believe because they all believe. Intellectual foundations this shaky increase individual and group insecurity, so they base their work on the same set of statistics emanating from the government. The government’s assumptions, methodologies, and conclusions are never questioned, except by outcasts from the herd. After all, those assumptions, methodologies, and conclusions come from the herd itself.

The instinctive defensive tactics of the herd are the consensus and the wavering straight line. Economists are well aware of the expectations and predictions of other economists, and tend to cluster tightly around a given consensus. Occasionally an economist will deviate by a quarter or a half of a percentage point from the consensus, instead of the usual range of a tenth of a percent either way. It is thought by those who study these matters that this exaggerated and ostentatious display of independence can, if done only occasionally, make the individual stand out and thus promote advancement within the herd. Or perhaps it’s to attract a mate. Further study is required.

The wavering straight line projects the most recent past into the future. It is considered good form not to make perfectly linear projections, thus the “wavering.” The standard projection will be: We (as herd animals, plural pronouns are preferred) see GDP increasing from 2.2 to 2.4 percent this quarter. Or: We see inflation moderating from .3 to .2 percent. It is also considered good form to make projections that show increases in desirable variables and decreases in undesirable variables. What is not good form is to predict a clean break, a clearly nonlinear outcome, especially if it can be characterized as negative (e.g., the economy is headed into recession). Such a prediction will lead to expulsion from the herd, unless the prediction is correct, in which case the predictor will be killed.

The herd has called for an imminent “lift off” in the US economy, and it has been doing so for six years. During that time the US government has issued unprecedented amounts of debt (Keynesianism), the Federal Reserve has engaged in unprecedented debt monetization and interest rate suppression (monetarism), and the US has been unable to achieve even one year of the 3 percent annual growth that used to be routine. The herd has responded by either calling for more debt, monetization, and suppression, or positing that for some reason there have been structural changes in the US economy that have led to “secular stagnation.” The herd has not explored the possibility that all that debt, monetization, and suppression are part of the problem rather than the solution. Herds never question their own articles of faith.

However, just as the more astute and aware sheep and wildebeests will sense the wolves and lions stalking the herd, a few of the economists sense something amiss. Slow growth may not give way to lift off, but rather recession, or worse. Ominous portents are piling up.

Assurances have been given that the carnage in natural resources will remain contained, echoing assurances made in 2006 and 2007 concerning housing and mortgage finance. However, there has been no V-shaped recovery in oil, natural gas, copper, coal, fertilizer components, zinc, nickel, and other natural resources; the prices of many are still going down. Producers are reluctantly concluding that no happy outcomes are in the offing. Projects are being shelved and inventories and other assets dumped on the market at whatever prices they can fetch. Glencore, the Swiss mining company, has halted production at two huge African copper mines and pledging to sell up to $10 billion to cut its debt. It’s no sure thing that the company will survive; the exploding premiums on credit default swap (CDS) protection for its debt indicate substantial credit-market doubt.

Cutting debt has become all the rage. If you wanted to put together a fracking firm, now would be the time to do so. Prime drilling rigs and properties are available cheap as debt incurred when oil was $100 a barrel weighs heavily now that oil is in the forties (“Shale Drillers Turn to Asset Sales as Early Swagger Wanes,” by Bradley Olson, SLL, 9/11/15). Oil and gas producer Samson Resource Corp., midwifed by private equity firm KKR, just filed for bankruptcy. KKR and its partners will take a $4.1 billion hit, not chump change even for KKR. And so the not-contained carnage in natural resources ripples out in all directions. The losses inflicted on creditors are just one of the more obvious ripples.

The debt-fueled Chinese “miracle” is over. China was the engine of global demand on the way up; it’s at the epicenter of debt contraction on the way down. It was the dream of perpetual Chinese hyper-growth that led so many companies to take on debt and ramp up capital spending and production. China has built infrastructure and whole cities on spec, debt-funded malinvestment on command and control steroids. Even communists have their “uh oh” moments, when they realize that something has to give. Let a thousand, or a million, or a billion, debts contract. China’s demand is dropping like a stone and it is exporting goods—steel, aluminum, and diesel—that for years it imported. Everyone knows that its claimed 7 percent growth is fiction, but nobody knows what the real number is. Lurking within the state-dominated banking system is a lot of rancid debt. The cherry on the sundae: last year the government promoted a margin-fueled stock bubble that has now burst.

Not surprisingly, the money that flowed into China from trade surpluses and foreign investment has reversed as well, pressuring the yuan’s exchange value. In a stark illustration of the Command and Control Futility Principle (governments and central banks can control one, but not all variables in a multi-variable system), China needs to lower the yuan’s value to remain competitive in global trade, but needs to raise its value to keep capital from fleeing. It recently undertook a token devaluation against the dollar that precipitated global financial panic, but at the same time it has been selling some of its hoard of US Treasury debt to buy yuan to support its value. The Chinese government has made schizophrenia official policy because it is impotent against the great global debt contraction now underway. It feels compelled to do something because governments always do something, invariably making matters worse.

The Chinese ramifications aren’t ripples; they’re shockwaves. Brazil, its economy grown dependent on exports to China, has entered recession; had its debt rating knocked down to below investment grade; seen its currency make new lows almost daily, and has been rocked by a scandal implicating much of its elite—including President Dilma Rousseff, whose approval rating is a single digit—and the national oil company, Petrobras, upon whose massive debt, much of it dollar-denominated, traders are making book on bankruptcy. Brazil is the poster child for many China-dependent emerging market nations.

Will the world pull out of this debt contraction? Will plunging high-yield, equity, commodity, and emerging market currency markets reverse course? Can governments and central banks save the day? Will the economic tsunami miss US shores? Not a chance, not a chance, not a chance, and not a chance, no matter how many mainstream economists swear otherwise on their stacks of Keynes and Friedman.

World trade volumes and shipping rates are going from new lows to new lowers. In credit markets, the interest spread between what the US Treasury and bank borrowers of Eurodollars pay (a measure of bank risk) is growing, junk bond yields are rising, CDS spreads are widening, and default rates are notching up, tolling bells for other markets, especially equity markets. (The same things happened in 2007; the following year was not a good one for equities). Stock markets have sold off since the head of the world’s most important central bank put a dovish spin on her announcement that free money would not be terminated; the black magic no longer works.

In the US, second quarter S&P earnings growth was negative, even while corporations spent 108 percent of their free cash flow on dividends and buybacks (“Why Stocks Are Sliding: For The First Time Since 2009 Spending On Buybacks Surpasses Free Cash Flow,” by Tyler Durden, SLL, 9/23/15). Nothing offers a connect-the-dots illustration better than industrial bellwether Caterpillar, which makes many of the machines used around the world to extract minerals and build buildings and infrastructure. Today, after 33 straight months of declining year-over-year sales, it announced it will lay off 10,000 workers.

While the broad contours of what’s to come are visible, the details will only emerge over time. There is one certainty. When things have gotten considerably worse, a panicked cry will sound from the economist herd: Nobody could have seen this coming! It is to be hoped that it sounds just before they run off a cliff, extinguishing the species.


TGP_photo 2 FB




Rousseff Coup Could Sink Brazil, Emerging Markets, from Shock Exchange

From Shock Exchange via zerohedge:

Rousseff Coup Could Sink Brazil, Emerging Markets

Brazil’s President Dilma Rousseff’s approval rating has plummeted to 8% amid the country’s worst recession in two decades. Her job is at risk too. Earlier this week opponents filed a petition to impeach Rousseff due to allegations of corruption by former president Luiz Inacio Lula da Silva at oil giant Petrobras of nearly $2 billion:

This week opponents of Ms Rousseff, incensed by allegations that “pixulecos” mostly involving ruling coalition politicians have cost Petrobras at least R$6bn (US$1.5bn), took their campaign to congress by filing a petition for impeachment with the speaker of the lower house Eduardo Cunha … The petition from Mr [Helio] Bicudo, which was backed by the opposition in congress, marks the start of what could be a long process to try to topple the former Marxist guerrilla only nine months into her second four-year term.

Rousseff – hand-picked by Lula da Silva to succeed him – appears to be caught up in da Silva’s backdraft. Opposition parties also claim she violated Brazil’s fiscal responsibility law when she doctored government accounts to allow more public spending prior to the October election last year. Rousseff in turn described the attempt to use Brazil’s economic crisis as an opportunity to seize power a modern day coup.

Inopportune Time For A Coup

Petrobras In Dire Straits

Political turmoil could not have come at a worst time. The Petrobras debacle has been a point of contention for the populace. While the elite profited from bribes and kickbacks at the state-owned oil giant, Petrobras is laying off workers and cutting supplier contracts in order to stem cash burn.

And those efforts may still not be enough to stave off bankruptcy. With $134 billion in debt – $90 billion of it dollar-denominated – Petrobras is the world’s most-indebted oil company. With oil prices 60% below their Q2 2014 peak, Petrobras will likely crumble under its debt load.

Budget Requires All Hands On Deck

Brazil’s fiscal picture is not much better. The economy contracted nearly 2% in Q2 and the Brazilian real has depreciated against the U.S. dollar by nearly 40% over the past year. That said, the country will find it difficult to grow revenues amid declining commodities prices. Including interest payments, the country’s budget deficit was projected to grow to 8%-9% of GDP, prompting S&P to downgrade the Brazil to junk status:

To continue reading: Rousseff Coup Could Sink Brazil