Some ramblings on Brazil - Part I - Recent Past

Hello everyone. 

Happy Holidays! I'm currently in Rio enjoying the break under 30-degree weather (well, it's actually raining at the moment) rather than semi-freezing in London (to be honest the weather has been great this year).

As I take a break from meeting family & friends, eating good food, and preparing classes for my upcoming course at Cambridge, I sat down and started thinking a little about the current economic situation of Brazil and my humble predictions for the near future and I thought that this would make an interesting post to share. I'll start with a quick overview of the recent past. On the next post, I will talk more about some of the economic bottlenecks and my view on what is going to happen. I hope it is not too long! 

My biggest concern is that Brazil is quickly approaching a ceiling given its current structure. I'm very skeptical about whether the country can sustain 4-5% growth or not and I am seriously worried that the burst of the current bubble is just around the corner. Anyway, here is my take on the near past:

Following years of bad macroeconomic policies in the early 90s, the Brazilian Social Democrats party (the PSDB) finally put the house in order and pushed through some needed economic reforms (breaking up inefficient state monopolies, budgetary expenditure checks and balances, etc.). These reforms are really what made the "growth miracle" seen under former president Lula's Workers party (the PT) possible, riding the good international climate and the benefits of the sudden emergence of a large set of consumers enjoying better economic conditions. The country had given up so many growth opportunities before sorting out its inflation problem that a huge pent-up potential was unleashed after the Real plan, the privatization of major companies, and the improvement of the international situation after the late 90s financial crises.

To Lula's merit and contrary to many people's opinions (including mine), he didn't messed up with the economy and carried on the same sensible policies implemented by the PSDB. His party was strongly against the Real stabilization plan, the fiscal responsibility law, and the banking reforms (to mention just a few), which are now touted as the ones that enabled Brazil to withstand the nasty effects of the crisis. I'm not even going to talk about the large corruption schemes that have taken place after Lula stepped into power. What makes me the saddest is that he could have achieved so much more and squandered the opportunity to implement structural change at a time when the global climate was very favorable.

Unfortunately, if you look at the reforms that Brazil desperately needs to shift up a gear, nothing has really happened in the past 10 years. Labor, pension and tax law reforms are major bottlenecks of growth and will stifle any chance of sustainable long term growth beyond 3-4% a year. All of these changes need constitutional reforms that are very difficult to pass through parliament, specially under Brazil's crazy multi-party political system. Lula decided not to fight to push them through, opting to making minor changes through regular legislation, and even those were mostly a waste. His successor, Dilma Roussef, appears to be following the same path as well.

Nonetheless, here we are: Brazil is the current darling of markets. Dozens of large companies are trying to enter the country, the expansion of consumer credit is booming, and it will host the 2014 World Cup and 2016 Summer Olympic Games.

Things look great, but now what? Stay tuned for the next post!

Aren't people overreacting?

I was reading Jim ONeill's weekly analysis (Chairman of GSAM) and enjoyed his putting in perspective the European crisis:

"... in 2011, the change in China’s nominal GDP in US$ will be the equivalent of creating three new Greek economies. In the context of the above question and what is important this week, I realized that, along with the other three BRIC nations, the probable change in the US$ value of their combined GDP in 2012 is likely to be close to $2 trillion. They will effectively create the equivalent of another Italy.

 This is what the BRIC countries can do to help the world, and especially troubled Europe, way more than any specific steps to invest in European beleaguered bonds."

No wonder people get so excited with emerging markets' potential. This is truly where economic growth is nowadays, both in percentage and absolute values, and is / will be one of the key macro trends for years to come.

Luck or Skill? Paulson & Co. edition

I've just read on the FT that John Paulson (who made billions betting on falling US housing market prices in 2008) has warned of 25% redemptions in his $30bi AUM fund, following losses of more than 40% so far this year.

My MSc. dissertation was on whether technical analysis can generate abnormal returns or it is onlu due to "luck"- i.e. out of many possible combinations you are bound to find one that will have excellent results.

I usually use Warren Buffet as an example during my classes on market efficiency but maybe Paulson will be interesting as well. Maybe his profits back in 2008 were simply luck and shouldn't be expected to persist in the future?

The Size of the Greek Problem Over Time

The image says it all:

History of Corporations

It's been ages since I posted anything. Moving to a new job in a new country while still trying to catchup with my debt to my co-authors is not easy! My apologies to all. Once I'm settled (moving date is August 1st) I hope to get back on track.

In any case, I found this very nice article on the history of corporations that I found very interesting.

More and more I believe that all MBAs should have a history-cum-law course. It would probably overlap a lot with Ethics and maybe Strategy courses but I am sometimes amazed by the lack of historical knowledge on previous crises and the inner workings of a modern corporation.

Have a nice summer!

The Importance of Being Honest

This is a great article by E. Derman and Paul Wilmott on  how we should be careful with our models. Here are their suggestions at the end,

• I will remember that I didn't make the world and that it doesn't satisfy my equations.
• Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.
• I will never sacrifice reality for elegance without explaining why I have done so. Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.
• I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension. 

It is so easy to get lost in the mathematics of models that we often see papers completely out of touch with reality...

Life Must Be Tough for Some People

It must be really hard to be a real estate agent in Florida...

Another Interesting Graph

One of interesting (and bad) features of this recession in the US is the much larger increases in unemployment. This graph here from calculatedrisk.com is interesting:

Not only employment fell by more than other recessions, but it is been taking longer than others to recover.

There and Back Again

The usually great Emmanuel Derman has a nice description of how the financial crisis turned into a "real economy" crisis. For all incoming students of the Capital Markets course, this is one of the things we'll discuss in class:

° After the financial crisis everyone got scared about the future and stopped buying the crap they don't really need.

° The companies that make the crap people don't really need, anticipating a decline, laid off people, sometimes preemptively.

° The laid-off people then had to stop buying not only crap they don't really need but some of the things they actually do need.

° That affected the companies who make things people really need, and so they laid off people too.

° If everybody would just start buying stuff they don't really need then pretty soon everyone would be able to buy the stuff they really need.

Even will all the talk of the emergence of the BRICs The world economy stilldepends a lot on a healthy US economy. The last round of indicators showed that the sky is more cloudy than it was last quarter. Will the US come up with another large stimulus package? Is this going to rattle ond markets or are we still going to see the low yields observed today?

Not as bad as it seems...

Personally I think that the likelihood of any sovereign default of Spanish bonds is much lower than thought by the financial press. If you're read the FT it feels like Spain will follow the path of Greece really soon, when in my opinion, the situation in the UK is not much better.

Anyway, a friend of mine (Jason Sturgess) sent me this picture below that is really interesting to show the linkages between EU countries. While Greece's overall impact is very small, with Spain things have a much bigger magnitude.

Exciting Day

Today I finally got the teach the first case study I've written:
  
Volkswagen AG: Valuation in 2009

This is a case on multiples valuation based on Volkswagen around on May 2009, right at the peak of the crisis.

I think the session went well and students enjoyed themselves. Hope I'm right!

Profits

I still think that the US Treasury might make a profit on assets it bought during the crisis:

Martin Wolf @ IESE

Today we had Martin Wolf giving a special lecture at IESE on  "Development and Globalization after the Crisis". His daily column on the Financial Times is very good and interesting, I recommend it to everyone. It was nice to meet him in person, but it is a shame that I don't have the slides of his presentation to show. It was also very good.

In summary, he is still very worried with the recovery of developed economies in the future. The fiscal outlook looks bleak for US/Europe and that the recovery can only be sustained if the private sector can replace public spending.