Newsletters
On storms and calmness, waiting for next round
January 25, 2012

Untitled Document

If an ET had landed on earth in January 2012, he would not believe that not that long ago we were facing the end of the world, or so it appeared based on the stock market, the riots, and the headlines on the main newspapers. After Christmas, all problems seemed to have vanished and by last Friday stocks were up 4.6% since the beginning of the year.

The measures undertaken by the European authorities by the end of the year helped a lot, providing the necessary liquidity to the financial system and allowing Spain and Italy to borrow at cheaper rates. Everybody was tired of volatility, suffering some kind of a “bear fatigue” and looking desperately for a reason to react.

I don’t want to ruin the party or the optimism but the truth is that the measures undertaken in Europe solved- temporally - the liquidity problems, but the potential solvency problems remained untouched. The Greek tragedy is an ongoing problem. We just had one more weekend of tiring negotiations without a resolution. There is a deadline, though, and that is March, 20, 2012, so at that time a resolution will come, one way or the other. In Portugal the 10 year borrowing rate reached 14% last week; Italy and Spain are trying to implement measures to balance the budget but we all know that in the short run such measures will make things worse by reducing growth and government revenues. Germany is still showing good economic results helped by the weakening EURO, but the future doesn’t look so bright. Last week, the World Bank declared that Europe is in a recession and Egan Jones cut Germany’s rating from AAA to AA. For those who enjoy currency speculation it might be a good bet to expect further depreciation of the euro.

This reminded me of a quote from Ruddinger Dornbusch:

“The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought, and that's sort of exactly the Mexican story. It took forever and then it took a night."

In the United States, there were, for the most part, strong economic reports, and the earnings season, although being the weakest in the last couple of years, has been not that bad. That also helped the stocks on their ride up. This week GDP will be announced and the estimate is 3% annualized. Not bad, mainly if we consider how difficult 2011 was. Another important report was the existing home sales that showed an increase, meaning the inventory is coming down, which is good news. More significant for the economy, however, will be the report regarding new home sales, to be released Thursday the 26th. On the other side there is no indication of price recovering as shown by the Case Schiller index. In New York, news that the bonus season in Wall Street will not be good didn’t help the real estate market. Demand is still weak except for the Brazilians that are buying in Miami like there is no tomorrow.

All in all we are still on a risk-on, risk-off scenario. Last week, without bad news from Europe, was risk-on. This week started as risk-off with the European crisis back to front stage.

The electoral season in the US is full of surprises. Mitt Romney left New Hampshire thinking he had made history, winning Iowa and New Hampshire and arrived in South Carolina thinking he was about to grab another victory, the third in a row. In two days everything changed: on Thursday he learned that he did not in fact win Iowa and on Saturday Newt Gingrich won South Carolina!

The Republican nomination now seems like a long and widening road. The joke was that alcohol sales increased substantially on Saturday in Washington, after Gingrich’s victory: the Republicans drinking scotch to cope with the news and the democrats drinking champagne to celebrate. No news would be better for Obama that having Newt Gingrich as his opponent, and the Republican “establishment” knows that. Gingrich won with the help of the born-again and evangelical Christians and because he presented himself as more conservative than Romney. The next battlefield is in Florida where 60% of the electorate declare themselves as conservatives.

Meanwhile in Brazil everything is okay, thank you for asking….The President is popular and has high rates of approval. The Government promised a fiscal surplus in 2011 and delivered and will probably do it again in 2012. Inflation is a little above the target range but nobody seems to think that 7% is high. Again I don’t want to be the one who ruins the party, but we should know by now that complacency today might become trouble in the future. Despite the decline of the capital flows for the developing countries, Brazil is still receiving positive inflows. The structural problems have not been addressed, but with so many things to celebrate, who cares?

November 23, 2015
Much ado about nothing
October 27, 2015
Brazil, we can only pray (or hope)
August 18, 2015
Looking back, looking forward
June 30, 2015
Lack of good news
April 14, 2015
What if...
February 24, 2015
What to expect in 2015
November 17, 2014
The American conundrum or just plain stupidity?
October 27, 2014
What is next?
September 09, 2014
Lessons we should have learned
August 12, 2014
US and Brazil: 2014, what to expect next
June 26, 2014
Headwinds ahead but still optimistic
April 26, 2014
Roller Coaster
March 14, 2014
Brazil in perspective
February 07, 2014
Stay the course. Change the course.
January 17, 2014
Diversification. Or not.
November 25, 2013
Who buys a US$ 500 pillow?
October 02, 2013
Disturbing
September 03, 2013
What a mess...
July 31, 2013
Of Protests and Stocks
June 19, 2013
Betting in the future
April 30, 2013
Nowhere else to go
March 26, 2013
Cyprus: not enough to stop the US market
February 25, 2013
The Sequester
January 23, 2013
2013: what is ahead for investments
December 07, 2012
Brazil: uncertainty and mixed signals
November 05, 2012
It is not about the economy!
September 20, 2012
The Country is better off
July 05, 2012
The New Normal
May 30, 2012
Half empty, half full
April 30, 2012
How to restore prosperity
April 21, 2012
Brazil became poorer
February 27, 2012
Romney, Obama and the American Imbroglio
December 22, 2011
Happy Holidays!
November 23, 2011
Impasse and Paralysis
October 24, 2011
The rally has legs. Or not
September 23, 2011
Preparing for the crisis
August 24, 2011
Kicking the can down the road: is there an end in sight?
July 24, 2011
Can the politicians be rational?
June 24, 2011
Global Economy: where are the world leaders bringing us?