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Brazil Exemplifies Global Instability

March 29th, 2016 by

Less than a decade ago, Brazil was one of the darlings of the investing world. It was supposedly the next great emerging market, on par with India, China, and others. Fittingly, it joined the BRICS (Brazil, Russia, India, China, South Africa) alliance of major EM players and garnered worldwide prestige by securing the role of host for the 2014 World Cup soccer tournament and this summer’s upcoming 2016 Olympic Games in Rio de Janeiro.

However, this attractive veneer can no longer cover the country’s sordid economic underbelly.

Brazil Bloated With Corruption

Photo: Roberto Stuckert Filho.

Photo: Roberto Stuckert Filho.

Brazilian lawmakers, with the help of Brazil’s Bar Association, continue their protracted impeachment proceedings against President Dilma Rousseff (pictured, left). She is at the heart of a major corruption scandal that was rewarding contractors (and the criminal organizations behind them) with greatly inflated compensation for infrastructure projects in the construction and energy sectors.

The same cloud hangs over the head of Ms. Rousseff’s predecessor and mentor, Luiz Inacio Lula da Silva. During his tenure, Rousseff was head of Petrobras, the country’s huge state-owned oil corporation. Petrobras was one of the first dominoes to fall in the uncovering of the years-long regime of graft, bribery, and corruption.

Over the preceding decade, Brazil’s economy has ridden the wave of the commodities boom. The largest economy in Latin America benefited from record-high commodity prices, as its economy is heavily based on the export of raw materials and other natural resources. This bubble allowed the corruption and graft to thrive. Similarly, the preparations for the World Cup saw an inordinate number of stadiums built, costing the country’s taxpayers billions even though these facilities are now likely to remain mostly idle.

Still Using Band-Aids

As the rapid run-up in the commodities market abated around 2013, all of the hot air rushed out of the inflated Brazilian economy. Like Russia, Brazil tumbled from grace to become one of the most embattled large economies in the world. It exemplified the capital flight from emerging markets.

Nonetheless, Brazil’s major stock exchange, the Ibovespa, has been among the world’s best-performing stock markets this year. So far in 2016, the index has advanced an eye-popping 18% in spite of the widespread economic degradation and social unrest across the country.

IBOV 3-month price chart. Source: Google Finance

IBOV 3-month price chart. Source: Google Finance

What does this tell us? It’s yet another example of how the equities markets are not a rational or reliable gauge of actual economic health. For instance, even as the U.S. economy remained mired in a stagnant recovery over 2014 and 2015, the stock markets rallied to all-time highs. This is basically what we’re seeing in Brazil now, with a clear disconnect between the fledgling economy and rallying stocks.

brazilPresident Rousseff’s impeachment drama continues to drag on at the same time. She has dismissed the accusations against her as simply a “coup attempt,” and refuses to step down. She tried to appoint Lula da Silva (whose hands are just as dirty) into her cabinet recently as a means to obstruct ongoing investigations against him (and herself, by extension) with official immunity. The country’s Supreme Court blocked the move. Moreover, if Rousseff is indeed impeached, her likely successor has legal problems of his own.

Should we be surprised at the corruption, cover-ups, and subsequent stock market irrationality? Hardly. This story is seen to varying degrees across the global landscape. It simply exemplifies the unstable and unethical state of the world economic order.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.